CHINA GREENFRESH GROUP CO., LTD. 中國綠寶集團有限公司* (Incorporated in the Cayman Islands with limited liability) Stock code: 6183 GLOBAL OFFERING Sole Sponsor Sole Global Coordinator Joint Bookrunners and Joint Lead Managers * For identification purposes only IMPORTANT IMPORTANT: If you are in any doubt about any of the contents in this prospectus, you should obtain independent professional advice. CHINA GREENFRESH GROUP CO., LTD. 中國綠寶集團有限公司 * (Incorporated in the Cayman Islands with limited liability) GLOBAL OFFERING Number of Offer Shares : Number of International Placing Shares : Number of Hong Kong Public Offer Shares Offer Price : : Nominal Value Stock Code : : 150,000,000 Shares (subject to the Over-allotment Option) 135,000,000 Shares comprising 110,000,000 New Shares and 25,000,000 Sale Shares (subject to reallocation and the Over-allotment Option) 15,000,000 New Shares (subject to reallocation) Not more than HK$5.18 per Offer Share, plus brokerage fee of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% (payable in full on application in Hong Kong dollars and subject to refund) US$0.01 per Share 6183 Sole Sponsor Essence Corporate Finance (Hong Kong) Limited Sole Global Coordinator Essence International Securities (Hong Kong) Limited Joint Bookrunners and Joint Lead Managers Essence International Securities (Hong Kong) Limited Haitong International Securities Company Limited Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and Hong Kong Securities Clearing Company Limited take no responsibility for the contents in this prospectus, 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 in this prospectus. A copy in this prospectus, having attached thereto the documents specified in the paragraph headed “Documents Delivered to the Registrar of Companies and Available for Inspection” in Appendix VI to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required by Section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission of Hong Kong and the Registrar of Companies in Hong Kong take no responsibility for the contents in this prospectus or any of the other documents referred to above. The Offer Shares have not been and will not be registered under the U.S. Securities Act or any state securities laws of the United States and may not be offered, sold, pledged, or transferred within the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and in accordance with any applicable U.S. securities law. The Offer Price is expected to be fixed by an agreement between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters) on the Price Determination Date. The Price Determination Date is expected to be on or about Thursday, 11 June 2015 or such other date or time as may be agreed between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters) but in any event, not later than Saturday, 13 June 2015. The Offer Price will be not more than HK$5.18 per Offer Share and is expected to be not less than HK$4.58 per Offer Share, unless otherwise announced. Applicants for the Offer Shares are required to pay, on application, the maximum Offer Price of HK$5.18 for each Offer Share together with brokerage of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005%, subject to refund if the Offer Price should be lower than HK$5.18 (the maximum Offer Price). The Sole Global Coordinator (for itself and on behalf of the other Underwriters), with the consent of our Company (for ourselves and on behalf of the Selling Shareholders), may reduce the indicative Offer Price range below that as stated in this prospectus (which is HK$4.58 to HK$5.18) at any time prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. In such event, our Company will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the last day for lodging applications under the Hong Kong Public Offering, cause to be published in South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese) an announcement and to be posted on the website of the Stock Exchange (www.hkexnews.hk) and on the website of our Company (www.china-greenfresh.com) of such change. Further details are set out in the section headed “Structure of the Global Offering” in this prospectus. If, for whatsoever reason, the Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters) are unable to reach an agreement at or prior to Saturday, 13 June 2015 or such other date or time as may be agreed between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters), the Global Offering will not become unconditional and will lapse immediately. In such event, our Company will issue an announcement to be published in South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese). Prospective investors of the Global Offering should note that the Global Offering will not proceed if the Sole Global Coordinator (for itself and on behalf of the other Hong Kong Underwriters) terminates the obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement after any of the events set out in the section headed “Underwriting – Underwriting Arrangements and Expenses – Hong Kong Underwriting Agreement – Grounds for termination” in this prospectus occurs prior to 8:00 a.m. on the Listing Date. It is important that you refer to the section headed “Underwriting” in this prospectus for further details. Prior to making an investment decision, prospective investors should carefully consider all of the information set out in this prospectus, including, without limitation, the risk factors set out in the section headed “Risk Factors” in this prospectus. * For identification purposes only 8 June 2015 EXPECTED TIMETABLE (Note 1) If there is any change in the following expected timetable of the Global Offering, we will issue an announcement in Hong Kong to be published in English in South China Morning Post and in Chinese in Hong Kong Economic Journal and to be posted on the website of our Company at www.china-greenfresh.com and the website of the Stock Exchange at www.hkexnews.hk. Latest time to complete electronic applications under the HK eIPO White Form service through the designated website www.hkeipo.hk (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11:30 a.m. on Thursday, 11 June 2015 Application lists of the Hong Kong Public Offering open (Note 3) . . . . . . . . . . . . . . . . . 11:45 a.m. on Thursday, 11 June 2015 Latest time for lodging WHITE and YELLOW Application Forms and to give electronic application instructions to HKSCC (Note 4) . . . . . . . . . . . . 12:00 noon on Thursday, 11 June 2015 Latest time to complete payments For HK eIPO White Form applications by effecting internet banking transfer(s) or PPS payment transfer(s) . . . . . . . . . . . . . 12:00 noon on Thursday, 11 June 2015 Application lists of the Hong Kong Public Offering close (Note 3) . . . . . . . . . . . . . . . 12:00 noon on Thursday, 11 June 2015 Expected Price Determination Date (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 11 June 2015 Announcement of • the Offer Price; • the indication of the level of interest in the International Placing; • the level of applications in the Hong Kong Public Offering; • the basis of allotment of Hong Kong Public Offer Shares under the Hong Kong Public Offering; • the number of Offer Shares reallocated, if any, between the Hong Kong Public Offering and the International Placing to be published in English in South China Morning Post and in Chinese in Hong Kong Economic Journal and on the website of our Company at www.china-greenfresh.com and the website of the Stock Exchange at www.hkexnews.hk on or before . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 17 June 2015 Results of allocation in the Hong Kong Public Offering will be available at www.tricor.com.hk/ipo/result with “search by ID” function from . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 17 June 2015 –i– EXPECTED TIMETABLE (Note 1) Announcement of results of allotment of the Hong Kong Public Offering (with successful applicants’ identification document numbers, where applicable) available through a variety of channels as described in the section headed “How to Apply for the Hong Kong Public Offer Shares – Publication of results” in this prospectus from . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 17 June 2015 Despatch/collection of share certificates and/or e-Auto Refund payment instructions/refunds cheques on or before (Notes 6, 7, 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 17 June 2015 Dealings in the Shares on the Main Board of the Stock Exchange expected to commence on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:00 a.m. on Thursday, 18 June 2015 Notes: 1. All dates and times refer to Hong Kong local dates and times, except as otherwise stated. Details of the structure of the Global Offering, including its conditions, are set out in the section headed “Structure of the Global Offering” in this prospectus. 2. You will not be permitted to submit your application to the HK eIPO White Form Service Provider through the designated website at www.hkeipo.hk after 11:30 a.m. on the last day for submitting applications. If you have already submitted your application and obtained an application reference number from the designated website prior to 11:30 a.m., you will be permitted to continue the application process (by completing payment of the application monies) until 12:00 noon on the last day for submitting applications, when the application lists close. 3. If there is a “black” rainstorm warning or a tropical cyclone warning signal number 8 or above in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Thursday, 11 June 2015, the application lists will not open or close on that day. Further information is set out in the section headed “How to Apply for the Hong Kong Public Offer Shares – Effect of bad weather conditions on the opening of the application lists” in this prospectus. 4. Applicants who apply for the Hong Kong Public Offer Shares by giving electronic application instructions to HKSCC should refer to the section headed “How to Apply for the Hong Kong Public Offer Shares – Applying by giving electronic application instructions to HKSCC via CCASS” in this prospectus. 5. Please note that the Price Determination Date, being the date on which the Offer Price is to be determined, is expected to be on or about Thursday, 11 June 2015 and, in any event, not later than Saturday, 13 June 2015. If, for any reason, the Offer Price is not agreed between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters), the Global Offering will not proceed and will lapse. Notwithstanding that the Offer Price may be less than the maximum offer price of HK$5.18 per Share, applicants must pay the maximum offer price of HK$5.18 per Share at the time of application, plus brokerage of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005%, but will be refunded the surplus application monies, without interest, as provided in the section headed “How to Apply for the Hong Kong Public Offer Shares” in this prospectus. 6. Share certificates for the Offer Shares are expected to be issued on Wednesday, 17 June 2015 but will only become valid certificates of title at 8:00 a.m. on the Listing Date provided that (i) the Global Offering has become unconditional in all respects and (ii) neither of the Underwriting Agreements has been terminated. If the Hong Kong Public Offering does not become unconditional or either of the Underwriting Agreements is terminated, we will make an announcement as soon as possible. 7. e-Auto Refund payment instructions/refund cheques will be issued in respect of wholly or partially unsuccessful applications pursuant to the Hong Kong Public Offering and also in respect of wholly or partially successful applications in the event that the final Offer Price is less than the price payable on application. Part of the applicant’s Hong Kong identity card number or passport number, or, if the applicant is made by joint applicants, part of the Hong Kong identity card number or passport number of the first named applicant, provided by the applicant(s) may be printed on the refund cheque, if any. Such data would also be transferred to a third party for refund purposes. Your banker may require verification of an applicant’s Hong – ii – EXPECTED TIMETABLE (Note 1) Kong identity card number or passport number before encashment of the refund cheque. Inaccurate completion of an applicant’s Hong Kong identity card number or passport number may lead to delay in encashment of or may invalidate the refund cheque. 8. Uncollected share certificates and refund cheques will be despatched by ordinary post at the applicants’ own risk to the addresses specified in the relevant Application Forms. Further information is set out in the section headed “How to Apply for the Hong Kong Public Offer Shares – Despatch/Collection of share certificates and refund monies” in this prospectus. For details of the structure of the Global Offering, including its conditions, please see the sections headed “Underwriting”, “Structure of the Global Offering” and “How to Apply for Hong Kong Public Offer Shares” in this prospectus. It is important that prospective investors should note that the Sole Global Coordinator (for itself and on behalf of the other Underwriters) is entitled to terminate the Underwriting Agreements by notice in writing to us upon the occurrence of any of the events set out in the section headed “Underwriting – Underwriting Arrangements and Expenses – Hong Kong Underwriting Agreement – Grounds for termination” in this prospectus at any time up to 8:00 a.m. on the Listing Date. Such events include, without limitation, any act of God, war, riot, public disorder, civil commotion, fire, flood, explosion, epidemic, terrorism, strike or lockout. It is important that prospective investors should refer to the section headed “Underwriting” in this prospectus for further details. You should rely only on the information contained in this prospectus and the related Application Forms to make your investment decision. Our Company has not authorised anyone to provide you with information that is different from what is contained in this prospectus and the related Application Forms. Any information or representation not made in this prospectus and the related Application Forms must not be relied upon by you as having been authorised by our Company, the Sole Sponsor, the Sole Global Coordinator, the Joint Bookrunners, the Underwriters, their respective directors or affiliates of any of them or any other person or parties involved in the Global Offering. – iii – CONTENTS IMPORTANT NOTICE TO INVESTORS This prospectus is issued by us solely in connection with the Global Offering and does not constitute an offer to sell or a solicitation of an offer to buy any security other than the Offer Shares offered by this prospectus pursuant to the Global Offering. This prospectus may not be used for the purpose of, and does not constitute, an offer or invitation in any other jurisdiction or in any other circumstances. No action has been taken to permit a public offering of the Offer Shares or the distribution in this prospectus in any jurisdiction other than Hong Kong. You should rely only on the information contained in this prospectus and the related Application Forms to make your investment decision. We have not authorised anyone to provide you with information that is different from what is contained in this prospectus and the related Application Forms. Any information or representation not contained or made in this prospectus and the related Application Forms must not be relied on by you as having been authorised by us, the Sole Sponsor, the Sole Global Coordinator, the Joint Bookrunners, the Underwriters, any of their respective directors or any other person or party involved in the Global Offering. Page Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i ............................................................... iv Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ................................................ 28 Forward-looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ............................................................ 33 ........................... 60 ........................ 63 Directors and Parties involved in the Global Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 .................................................... 71 ....................................................... 73 Laws and Regulations of the Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Contents Glossary of Technical Terms Risk Factors Waivers from Strict Compliance with the Listing Rules Information about this Prospectus and the Global Offering Corporate Information Industry Overview – iv – CONTENTS Page ............................................ 103 ............................................................... 125 ........................................... 229 Relationship with our Controlling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 ................................................... 242 Substantial Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 ........................................................... 247 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Future Plans and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 Cornerstone Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 Structure of the Global Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 How to Apply for the Hong Kong Public Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 ............................ I-1 .................... II-1 History and Corporate Structure Business Directors and Senior Management Connected Transactions Share Capital Appendix I – Accountants’ Report of the Group Appendix II – Unaudited Pro Forma Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 Appendix III – Property Valuation Appendix IV – Summary of the Constitution of the Company and Cayman Islands Companies Law . . . . . . . . . . . . . . IV-1 Appendix V Statutory and General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . – Appendix VI – V-1 Documents delivered to the Registrar of Companies and available for inspection . . . . . . . . . . . . . . . . . . . . . . . VI-1 –v– SUMMARY This summary aims to give you an overview of the information contained in this prospectus. As it is a summary, it does not contain all the information that may be important to you. You should read this prospectus in its entirety before you decide to invest in the Offer Shares. There are risks associated with any investment. Some of the particular risks in investing in the Offer Shares are set out in the section headed “Risk Factors” in this prospectus. You should read that section carefully before you decide to invest in the Offer Shares. OVERVIEW We are a leading integrated supplier of edible fungi products in the PRC. We are also a manufacturer of processed food products such as canned food and other processed food products in the PRC. According to Euromonitor, our independent market consultant, we were the largest producer of king trumpet mushroom and the seventh largest supplier of button mushroom in the PRC in terms of production volume in 2013 with a market share of 2.5% and 0.6% in 2013, respectively. Our edible fungi business operations are vertically integrated, covering the cultivation and sales of fresh edible fungi produce as well as the manufacturing and sales of various processed edible fungi products. Such integrated business model distinguishes us from other fresh and processed edible fungi suppliers in the PRC, most of which are mainly engaged in part or parts of the value chain of cultivation, processing and sales of edible fungi. In addition, we are currently engaged in canned food trading business through Greenfresh HK. During the Track Record Period, we were engaged in trading operations in the PRC through Minhui Trading. We discontinued such trading operations as we disposed of Minhui Trading in 2012. As at the Latest Practicable Date, our products were primarily marketed under our core brands and . We commenced our operations since 1995, when Fujian Greenfresh Foods first started manufacturing canned food in Zhangzhou, Fujian province. The long history of our operations and strong recognition of our brands are key factors in our success, for which we have received various awards and certifications. COMPETITIVE STRENGTHS We believe that the following competitive strengths, which are described in the section headed “Business – Our Competitive Strengths” from page 127 in this prospectus, have allowed us to achieve sustainable growth and profitability and maintain our leading position in the fresh edible fungi produce market and enable us to compete effectively in the processed food products market in the PRC: • vertically integrated business model with cost effective operations • leading position in the fresh edible fungi produce market in the PRC with strong brand recognition and high product quality • nationwide and extensive distribution and sales network across the PRC • strong research and development capabilities with the ability to develop new products • experienced management team with a proven track record to lead our development –1– SUMMARY STRATEGIES We intend to achieve sustainable growth in sales and profit and further strengthen our leading position in the fresh edible fungi produce industry by implementing the following strategies, which are described in the section headed “Business – Our Strategies” from page 131 in this prospectus: • further strengthen our leading market position through expansion of our cultivation and production capacity and improvement of operational efficiency • further expand the breadth and depth of our distribution and sales network across the PRC • increase recognition and awareness of our brands by increasing marketing and promotional activities • diversify our product offerings and develop new products • pursue appropriate strategic acquisition opportunities OUR PRODUCTS We are principally engaged in the cultivation and sales of fresh edible fungi produce and manufacturing and sales of processed food products. As at the Latest Practicable Date, our products were mainly categorised into two series, namely (i) fresh edible fungi produce consisting of king trumpet mushroom, button mushroom and straw mushroom; and (ii) processed food products consisting of canned food such as canned edible fungi, canned vegetables and canned fruit, and other processed food products such as brined mushroom, preserved vegetables and dried mushroom. We offer our products to the market primarily under our core brands and . For details of our principle products offered in the market, please refer to the section headed “Business – Our Products” from page 137 in this prospectus. CUSTOMERS, DISTRIBUTION AND SALES NETWORK Consistent with market practice, we sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers in the PRC which manufacture canned edible fungi. We sell our canned food to trading companies in the PRC, which then on-sell our products to overseas distributors in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. A majority of our canned food are produced under OEM arrangements and labeled with brands and logos of overseas distributors or retailers while the remaining is produced and marketed under our own brand. We sell our other processed food products to distributors in the PRC, which then on-sell our products to sub-distributors and processed mushroom manufacturers. We sell other processed food products under our own brand. For the three years ended 31 December 2012, 2013 and 2014, sales to our largest customer accounted for 9.5%, 7.8% and 8.0%, respectively, of our total revenue. For the same periods, our five largest customers combined accounted for 28.5%, 23.0% and 29.2%, respectively, of our total revenue. We have an extensive nationwide distribution and sales network in the PRC consisting primarily of distribution channels operated by our distributors, processed mushroom manufacturers and trading companies. As at 31 December 2014, our products were sold in over 19 provinces, autonomous region and municipalities across the PRC. –2– SUMMARY OUR CULTIVATION AND PRODUCTION We employ two kinds of cultivation methods, namely industrial cultivation and traditional cultivation for our fresh edible fungi produce. We strategically locate our cultivation facilities of our fresh edible fungi produce in different regions in the PRC which are in the proximity of local major agricultural product markets. As at the Latest Practicable Date, we had established eight cultivation facilities for our fresh edible fungi produce, including (i) three king trumpet mushroom facilities and one button mushroom and straw mushroom facility in Zhangzhou, Fujian province; (ii) one king trumpet mushroom facility in Dandong, Liaoning province; (iii) one king trumpet mushroom facility in Changzhou, Jiangsu province; and (iv) two button mushroom facilities in Chengdu, Sichuan province. The aggregate land area covers approximately an area of 1.1 million sq.m. We entered into various lease agreements with the relevant Villagers’ Committees to lease the farmland and other properties at our button mushroom cultivation facilities in Chengdu, Sichuan province and button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province. Please see the section headed “Business – Cultivation Facilities” from page 165 in this prospectus for further details. Our own employees are responsible for the cultivation of king trumpet mushroom at our cultivation facilities. We outsource the cultivation service of our button mushroom and straw mushroom to local farmers at our button mushroom cultivation facilities in Chengdu, Sichuan province and button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province. Please see the section headed “Business – Cultivation Facilities” from page 165 in this prospectus for further details. As at the Latest Practicable Date, we had established two production facilities for our processed food products in Zhangzhou, Fujian province. The aggregate production facilities cover approximately an aggregate land area of 23,000 sq.m., with an annual designed production volume of 26,220 tonnes. Our production and sales of some of our products are subject to seasonality fluctuations due to our customers’ purchase patterns and weather conditions for traditional cultivation. Please see the section headed “Business – Seasonality” from page 156 in this prospectus for further details. RAW MATERIALS AND SUPPLIERS Our raw materials primarily include (i) cultivation materials such as strains, sawdust, bran, dregs of beans, corncob, straw and cow dung for fresh edible fungi produce; (ii) fresh produce of edible fungi, vegetables and fruit for processed food products; and (iii) packaging materials. For the sensitivity analysis on the impact of raw materials fluctuation, please refer to the section headed “Financial Information – Description of Selected Statements of Profit or Loss Items – Cost of Sales” from page 266 in this prospectus. All of our raw materials are procured in the PRC, with a majority being procured at the location of the cultivation facilities. For the three years ended 31 December 2012, 2013 and 2014, purchases from our largest supplier accounted for 10.4%, 3.4% and 4.7%, respectively, of our total purchases of raw materials. For the same periods, our five largest suppliers combined accounted for 26.1%, 16.4% and 22.5%, respectively, of our total purchases of raw materials. –3– SUMMARY PRE-IPO INVESTMENTS Pursuant to three investment agreements dated 8 October 2010, 15 October 2010 and 18 October 2010 respectively, Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively agreed with Mr. Zheng Songhui to invest in 1,500 shares, 3,000 shares and 3,000 shares of par value of US$1.00 each, representing 3%, 6% and 6% of the then issued share capital of our Company at the time of its incorporation at a consideration of RMB9 million, RMB18 million and RMB18 million, respectively. Each of Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa is a private investor and an Independent Third Party. Pursuant to a share subscription agreement dated 5 November 2012, COFCO Fund subscribed for 4,054 shares of nominal value of US$1.00 each in the capital of the Company at an aggregate issue price in U.S. dollars equivalent to RMB60 million. COFCO Fund is an Independent Third Party. The Shares held by COFCO Fund will be counted towards the public float after the Listing for purpose of Rule 8.08 of the Listing Rules. For more details on the Pre-IPO Investors and their respective Pre-IPO Investments, please refer to the section headed “History and Corporate Structure – Pre-IPO Investments” in this prospectus. CONTROLLING SHAREHOLDERS INFORMATION Immediately after completion of the Capitalisation Issue and the Global Offering, Song Rising, Grand Ample and Absolute Bright will be legally and beneficially interested in an aggregate of approximately 56.66% of the Shares in issue (assuming the Over-allotment Option is not exercised and without taking into account any options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme). Song Rising and Grand Ample are directly and wholly owned by Mr. Zheng Songhui while Absolute Bright is directly and wholly owned by Ms. Zheng Yangyu, the daughter of Mr. Zheng Songhui. Accordingly, Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright will together be considered as our Controlling Shareholders upon Listing. Grand Ample is an investment holding company, and the only asset of which is the shares of the Company. Save as disclosed in this prospectus and except for their respective interests in our Company, each of the Controlling Shareholders confirms that he/she/it does not hold or conduct any business which competes, or is likely to compete, either directly or indirectly, with our Group’s business upon Listing. The Directors believe that our Group is capable of carrying on its business independently from the Controlling Shareholders and/or their respective close associates after the Listing. Please refer to the section headed “Relationship with our Controlling Shareholders” in this prospectus for more details. PRE-IPO SHARE OPTION SCHEME We have conditionally adopted the Pre-IPO Share Option Scheme. Assuming all of the options outstanding under the Pre-IPO Share Option Scheme as at the Latest Practicable Date are exercised in full, but not taking into account any Shares which may be allotted and issued upon the exercise of (i) the Over-allotment Option or (ii) any option which may be granted under the Share Option Scheme, this will have a dilutive effect on (i) the shareholdings of the Shareholders of approximately 4.76%; and (ii) earnings per Share of approximately 4.76%. The principal terms of the Pre-IPO Share Option Scheme are summarised in “Statutory and General Information – D. Pre-IPO Share Option Scheme” in Appendix V to this prospectus. –4– SUMMARY RISK FACTORS Our operations involve certain risks, many of which are beyond our control. The list below sets out the major risk factors in relation to our operations: • Changes in consumer tastes, preferences and perceptions may have a material and adverse effect on our business, results of operations and financial condition. • Our results of operations are subject to biological asset fair value adjustments, which can be highly volatile and are subject to a number of assumptions. • We rely on independent third-party distributors and independent third-party trading companies to sell our products. Any changes in our relationships with our distributors or trading companies may have a material and adverse effect on our sales, results of operations and financial condition. • We have limited control over the practice and manner of the sales by our distributors and trading companies, and the sub-distributors, retailers or overseas distributors of our distributors and trading companies. If any of our distributors or trading companies fails to distribute our products in a timely manner or in accordance with the terms of our distribution or sales agreements or the applicable PRC laws and regulations, or at all, our reputation, brands’ image, financial condition and results of operations may be materially and adversely affected. • We may be affected by the changes in or cessation of preferential tax treatment which may have an adverse effect on our financial condition and results of operations. • We do not enter into long-term agreements with our raw material suppliers and therefore our cultivation or production costs and schedules, financial condition and results of operation may be adversely affected if we are unable to secure supply. A detailed discussion of the aforesaid and other risk factors is set out in the section headed “Risk Factors” from page 33 in this prospectus. You should carefully consider the information contained therein before making any investment decision in relation to our Shares. –5– SUMMARY MATERIAL NON-COMPLIANCE During the Track Record Period, we had certain historical material non-compliance incidents: (i) we were not in strict compliance with the applicable PRC social insurance contribution and housing fund provident regulations; (ii) we acquired certain collectively-owned land use rights without the approval of relevant authorities or without going through land expropriation process of the local government; (iii) we occupied and continued to use the collectively-owned land use rights for certain land for non-agricultural purposes, which is prohibited by the applicable laws and regulations; and (iv) we failed to obtain the construction works planning permit and the construction works commencement permit before our certain construction. For further details, please refer to the sections headed “Business – Properties”, “Business – Non-compliance”, “Risk Factors – Non-compliance with PRC employee social welfare contribution regulations could lead to the imposition of fines or penalties”, “Risk Factors – We are subject to potential adverse consequences due to our lack of valid land use right and building ownership in respect of certain properties we occupied in the PRC” and “Risk Factors – Defects related to certain properties leased by us may materially and adversely affect our ability to use such properties” from pages 198, 224, 45, 46 and 48, respectively in this prospectus. SUMMARY OF KEY OPERATING INDICATORS The following table sets forth our sales volume, average selling price and revenue by product category of our continuing operations for the periods indicated: Year ended 31 December 2012 Fresh edible fungi produce King trumpet mushroom . . . Button mushroom and straw mushroom. . . . . . Processed food products Canned food . . . . . . . . Other processed food products Sales volume Average selling price kilogram RMB 2013 Revenue Sales volume RMB’000 kilogram Average selling price RMB 2014 Revenue Sales volume RMB’000 kilogram Average selling price Revenue RMB RMB’000 . . . 14,489,404 9.4 135,640 23,578,925 8.3 196,306 26,627,647 7.5 199,272 . . . 9,487,268 6.1 57,644 12,963,630 7.4 96,117 22,545,685 7.8 175,860 . . . 20,414,666 . . . 4,801,521 8.2 13.7 166,483 17,235,682 65,661 3,241,680 7.5 15.3 129,208 16,406,498 49,859 4,094,680 7.6 11.2 124,690 45,843 Total/Overall . . . . . . . . . . . 49,192,859 8.6 425,428 57,019,917 8.3 471,490 69,674,510 7.8 545,665 SUMMARY OF HISTORICAL FINANCIAL INFORMATION The following tables present a summary of our financial information during the Track Record Period and should be read in conjunction with our financial information included in the Accountants’ Report set out in Appendix I to this prospectus, including the notes thereto. –6– SUMMARY Summary consolidated statements of profit or loss information Year ended 31 December 2012 RMB’000 CONTINUING OPERATIONS Revenue . . . . . . . . . . . . . . . . . Changes in fair value of biological assets less cost to sell . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . Business tax and auxiliary charges . . . . . . . . . . . . 2013 % of revenue from continuing operations 2014 % of revenue from continuing operations RMB’000 % of revenue from continuing operations RMB’000 . . 425,428 100.0% 471,490 100.0% 545,665 100.0% . . . . 97,883 (399,685) 22.9% (93.9%) 146,667 (442,022) 31.1% (93.7%) 211,122 (550,393) 38.8% (100.9%) . . (1,807) (0.4%) (920) (0.2%) (924) (0.2%) Gross profit . . . . . . . . . . . . . . . . . 121,819 28.6% 175,215 37.2% 205,470 37.7% Other income . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . 5,808 (5,897) (18,235) 1.4% (1.4%) (4.3%) 6,849 (6,914) (17,582) 1.4% (1.5%) (3.7%) 9,947 (6,083) (30,800) 1.8% (1.1%) (5.7%) Profit from operations . . . . . . . . . . . . 103,495 24.3% 157,568 33.4% 178,534 32.7% Finance costs . . . . . . . . . . . . . . . . . (1,678) (0.4%) (3,735) (0.8%) (1,194) (0.2%) Profit before tax . . . . . . . . . . . . . . . 101,817 23.9% 153,833 32.6% 177,340 32.5% Income tax expense . . . . . . . . . . . . . . (10,610) (2.5%) (6,047) (1.3%) (2,252) (0.4%) Profit for the year from continuing operations . . . . . . . . 91,207 21.4% 147,786 31.3% 175,088 32.1% DISCONTINUED OPERATION Profit for the year from discontinued operation . . . . . . . . . . . 9,850 2.3% – – – – Profit for the year . . . . . . . . . . . . . . . 101,057 23.7% 147,786 31.3% 175,088 32.1% –7– SUMMARY Summary consolidated statements of financial position information As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 Non-current assets . . . . . . . . . . . . . . . . . . . . . 154,590 176,670 187,434 Current assets . . . . . . . . . . . . . . . . . . . . . . . . . 253,143 385,881 625,878 Current liabilities . . . . . . . . . . . . . . . . . . . . . . 101,357 48,566 54,536 Net current assets . . . . . . . . . . . . . . . . . . . . . . 151,786 337,315 571,432 Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,376 513,985 758,776 Summary consolidated cash flow information Year ended 31 December Net cash generated from operating activities . . . Net cash used in investing activities. . . . . . . . . . Net cash (used in)/generated from financing activities . . . . . . . . . . . . . . . . . . . . Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of the year. . . . . . . . . . . . . . . . . . . Cash and cash equivalents at the end of the year . . . . . . . . . . . . . . . . . . . . –8– 2012 2013 2014 RMB’000 RMB’000 RMB’000 93,239 (42,067) 84,898 (51,362) 171,223 (57,582) (23,115) 14,023 68,031 28,057 47,559 181,672 79,231 107,288 154,847 107,288 154,847 336,519 SUMMARY Key financial ratios As at or for the year ended 31 December 2012 2013 2014 Liquidity ratios Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . Quick ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.3 7.9 7.4 11.5 11.0 Capital adequacy ratios Gearing ratio . . . . . . . . . . . . . . . . . . . . . . . . . Net debt to equity ratio . . . . . . . . . . . . . . . . . . 21.5% Net cash 3.9% Net cash 2.4% Net cash Profitability ratios Return on equity . . . . . . . . . . . . . . . . . . . . . . . Return on assets . . . . . . . . . . . . . . . . . . . . . . . 29.8% 22.4% 28.8% 26.3% 23.1% 21.5% Note: Please refer to the section headed “Financial Information – Key Financial Ratios” in this prospectus for information on calculation of these ratios. Gross profit and gross profit margin The following table sets forth the gross profit and gross profit margin by product category of our continuing operations after and before fair value adjustment of biological assets for the years indicated: Year ended 31 December 2012 after fair value adjustment King trumpet mushroom . Button mushroom and straw mushroom . . . Canned food . . . . . . Other processed food products . . . . . . . 2013 before fair value adjustment after fair value adjustment 2014 before fair value adjustment after fair value adjustment before fair value adjustment Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin RMB’000 % RMB’000 % RMB’000 % RMB’000 % RMB’000 % RMB’000 % . 52,783 38.9% 51,477 38.0% 82,936 42.2% 83,860 42.7% 84,003 42.2% 79,784 40.0% . . 19,520 29,924 33.9% 18.0% 18,849 29,924 32.7% 18.0% 50,062 26,548 52.1% 20.5% 46,980 26,548 48.9% 20.5% 95,642 22,222 54.4% 17.8% 91,346 22,222 51.9% 17.8% . 21,399 32.6% 21,399 32.6% 16,589 33.3% 16,589 33.3% 4,527 9.9% 4,527 9.9% 37.8% 197,879 36.3% 123,626 Business tax and auxiliary charges . . . . (1,807) Total/Overall . . . . . . 121,819 29.1% 121,649 N/A (1,807) 28.6% 119,842 28.6% 176,135 N/A (920) 28.2% 175,215 –9– 37.4% 173,977 N/A (920) 37.2% 173,057 36.9% 206,394 N/A (924) 36.7% 205,470 N/A (924) N/A 37.7% 196,955 36.1% SUMMARY Our gross profit increased from RMB121.8 million for the year ended 31 December 2012 to RMB175.2 million for the year ended 31 December 2013 and further to RMB205.5 million for the year ended 31 December 2014, representing a CAGR of 29.9% over the period. Such increases were primarily the result of an increase in the revenue generated from the sales of our king trumpet mushroom, button mushroom and straw mushroom during the Track Record Period. For the three years ended 31 December 2012, 2013 and 2014, our gross profit margin were 28.6%, 37.2% and 37.7%, respectively. We recorded our gross profit after fair value adjustment of our biological assets, i.e. king trumpet mushroom, button mushroom and straw mushroom. The gross profit of the biological assets after fair value adjustment included the realised gain of the biological assets sold during the respective financial year plus the unrealised gain/(loss) of the biological assets as at the end of the respective financial year while the gross profit of the biological assets before fair value adjustment represented the realised gain of the biological assets sold during the respective financial year, which led to the differences of gross profit and gross profit margin after and before the fair value adjustment of biological assets. Biological assets Our biological assets consist of edible fungi, which were independently valued by JLL, a firm of independent qualified professional valuers not connected with us, which has appropriate qualifications and experiences in valuation of biological assets. JLL conducted the physical inspection for the health condition, quality and quantity of our biological assets as at 31 December 2014. The valuation of our biological assets as at 31 December 2011, 31 December 2012 and 31 December 2013 by JLL was performed retrospectively by relying on the accuracy and reliability of historical data of biological assets provided by us. The valuation conducted by JLL is subject to the caveat that JLL relied substantially on the accuracy, completeness and reasonableness of the various assumptions and other data provided by us in preparation of the valuation report. Please refer to the sections headed “Risk Factors – Our results of operations are subject to biological asset fair value adjustments, which can be highly volatile and are subject to a number of assumptions” and “Financial Information – Valuation of Biological Assets – Key Assumptions and Inputs” on pages of 34 and 316, respectively in this prospectus. Our biological assets were stated at fair value less costs to sell as at the valuation dates. The following table sets forth the value of our biological assets as at the dates indicated: As at 31 December At the beginning of the year . . . . . . Increases due to plantation . . . . . . . Gain from changes in fair value less costs to sell. . . . . . . . . . . . . . . . . Decreases due to harvest . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 ......... ......... 48,240 135,518 47,691 211,283 91,949 225,134 ......... ......... 97,883 (233,950) 146,667 (313,692) 211,122 (434,498) 47,691 91,949 93,707 At the end of the year . . . . . . . . . . . . . . . . . . . – 10 – SUMMARY The following table sets forth the realised and unrealised fair value gains on our biological assets and net profits from continuing operations excluding unrealised fair value gains during years indicated: Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 Fair value change of biological assets – realised . . . . . . . . . . . . . . . . . . . . . . . . . . . – unrealised . . . . . . . . . . . . . . . . . . . . . . . . . 82,419 15,464 125,463 21,204 181,706 29,416 Net profits from continuing operations excluding unrealised fair value gains . . . . . . . 75,743 126,582 145,672 Taxation According to the Notice Issued by Ministry of Finance and State Administration of Taxation of the PRC in Relation to the Scope of Corporate Income Tax Preferential Treatment Policy Applicable to Agricultural Products Which Have Undergone Primary Processing (Trial)《財政部國家稅務總局關於發 佈享受企業所得稅優惠政策的農產品初加工範圍(試行)的通知》, incomes of enterprises arising from the primary processing of agricultural produce are exempt from the PRC EIT. The cultivation and trading of mushroom by certain of our PRC subsidiaries, namely Greenfresh Ecological Agriculture, Greenfresh Biological Technology, Shengtai Agricultural Development and Jingxiang Foods were recognised as primary processing of agricultural produce and obtained the exemption from the PRC EIT during the Track Record Period. In particular, Greenfresh Ecological Agriculture and Greenfresh Biological Technology were exempted from the PRC EIT for the years ended 31 December 2012, 2013 and 2014, Shengtai Agricultural Development was exempted from the PRC EIT for the years ended 31 December 2013 and 2014, and Jingxiang Foods was exempted from the PRC EIT for the year ended 31 December 2014. Therefore, our effective tax rate from continuing operations for the three years ended 31 December 2012, 2013 and 2014 was 10.4%, 3.9% and 1.3% respectively. The decrease in our effective tax rate from continuing operations was mainly due to the increase in the proportion of our revenue contributed by our PRC subsidiaries that enjoyed the preferential tax treatment. We are required to file the applications for the exemption of the PRC EIT to the relevant regulatory authority every year so as to obtain approvals for such exemption. If we fail to satisfy the requisite requirements for entitlement to the waiver of the PRC EIT in the future or if there is any change in the existing PRC policy relating to preferential tax treatments applicable to us, we may no longer be entitled to the preferential tax treatments currently enjoyed by us. Our revenue generated from production and sales of canned food is subject to the PRC EIT at a rate of 25.0%. – 11 – SUMMARY RECENT DEVELOPMENTS Subsequent to the Track Record Period and up to the Latest Practicable Date, there had not been material changes to our principal business, which remained to include the cultivation and sales of fresh edible fungi produce and the manufacturing and sales of processed food products. As far as we are aware, there had not been material changes in the overall economic and market conditions in the edible fungi and processed food product industries in the PRC that would otherwise have materially and adversely affected our business operations or financial condition. Subsequent to the Track Record Period and up to the Latest Practicable Date, the competition in the edible fungi market continued to be intense. The rankings in terms of production volume of China’s king trumpet mushroom and button mushroom were not available at the Latest Practicable Date. Our business continued to grow for the four months ended 30 April 2015. The sales volume of our king trumpet mushroom, button mushroom and straw mushroom, canned food and other processed food products for the four months ended 30 April 2015 was 9,561 tonnes, 16,027 tonnes, 4,409 tonnes and 625 tonnes, respectively. The average selling price of our king trumpet mushroom, button mushroom and straw mushroom, canned food and other processed food products for the four months ended 30 April 2015 was RMB6.5 per kilogram, RMB7.0 per kilogram, RMB7.3 per kilogram and RMB10.6 per kilogram, respectively. In February 2015, we entered into lease agreement with the lessor to lease certain facilities in Zhangzhou, Fujian province. We use such facilities as Zhangpu (No. 4) facility for the cultivation of king trumpet mushroom with a designed annual cultivation capacity of 1,332 tonnes. Subsequent to the Track Record Period and up to the Latest Practicable Date, we had not experienced any significant change of our pricing policy and there had been no material change in costs of raw materials compared to the same period in 2014. The consolidated net profit of our Group for the year ending 31 December 2015 will be affected by a forecasted increase in administrative expenses as a result of (i) the recognition of the expenses related to the issuance of share options under the Pre-IPO Share Option Scheme for 2015; and (ii) the recognition of a portion of listing expenses to be charged to our profit or loss for 2015 as further discussed in the paragraph “Listing Expenses” below. Our Directors expect a decrease in the forecasted gross profit margin of our Group for the year ending 31 December 2015 primarily due to the forecasted decrease in the gross profit margin of our processed food products as a result of the forecasted increase in the cost of raw materials to produce our processed food products for 2015. The gross profit margin of our fresh edible fungi produce is forecasted to be stable for the year ending 31 December 2015 compared to that of the year ended 31 December 2014. DIVIDEND POLICY During the Track Record Period, our Company did not declare any dividends to our then shareholders. Holders of the Shares will be entitled to receive any dividends we declare pro rata according to the amounts paid up or credited as paid up on the Shares. The payment and the amount of any dividends will be at the discretion of our Directors. Our Directors currently intend to recommend dividends of around 30.0% of our net profit available for distribution to the Shareholders in the foreseeable future subject to, among others, the factors described in detail in the section headed “Financial Information – Dividend Policy” from page 312 in this prospectus. – 12 – SUMMARY OFFER STATISTICS We expect to issue 125,000,000 new Shares under the Global Offering. Based on the Offer Price of HK$4.58 per Share Based on the Offer Price of HK$5.18 per Share Market capitalisation of our Shares (1) . . . . . . . . . . . HK$2,290 million HK$2,590 million Unaudited pro forma adjusted net tangible assets per Share (2) . . . . . . . . . . . . . HK$3.00 HK$3.14 Notes: 1. The calculation of the market capitalisation of our Shares is based on 500,000,000 Shares in issue immediately after completion of the Capitalisation Issue and the Global Offering but does not take into account of any Shares which may be allotted and issued upon the exercise of the over-allotment Option or any options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme or any Shares which may be allotted and issued or repurchased by our Company pursuant to the general mandate to issue shares and the repurchase mandate. 2. The unaudited pro forma adjusted net tangible assets per Share has been prepared with reference to certain estimation and adjustment. The adjustment does not take into account the surplus arising from the revaluation of our property interests amounting to RMB23.6 million. The revaluation surplus was not incorporated in our financial statements for the year ended 31 December 2014. If the valuation surplus was recorded in our financial statements, an additional annual depreciation expense and amortisation charges of prepaid land lease payments would be charged by approximately RMB511,000. Please refer to Appendix II to this prospectus for further details. USE OF PROCEEDS Net proceeds of the Global Offering will be approximately HK$566.9 million, assuming an Offer Price of HK$4.88 (being the mid-point of the Offer Price range) and assuming that the Over-allotment Option is not exercised. We currently intend to apply these net proceeds for the following purposes: • Approximately 31.1%, or HK$176.3 million will be used for developing the Guangxi Biological Technology Food Industry Park; • Approximately 37.7%, or HK$213.7 million will be used for developing the Zhangzhou Biological Technology Food Industry Park; • Approximately 25.7%, or HK$145.7 million will be used for acquiring two king trumpet mushroom cultivation facilities in China; • Approximately 1.1%, or HK$6.3 million will be used for acquiring laboratory and testing equipment for the purpose of expansion of our king trumpet mushroom research and development laboratory in Zhangzhou, Fujian province; • Approximately 1.1%, or HK$6.3 million will be used for the construction of mushroom garden as the science education base affiliated to our China Edible Fungi Scientific Museum at our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province; and • Approximately 3.3% or HK$18.6 million will be used for working capital and other general corporate purpose. Please refer to the section headed “Future Plans and Use of Proceeds” in this prospectus for more details. – 13 – SUMMARY SELLING SHAREHOLDERS The Global Offering initially consists of 150,000,000 Shares, of which 25,000,000 Shares are being sold by the Selling Shareholders under the International Placing. We estimate that the net proceeds to the Selling Shareholders from the Sale Shares (after deduction of proportional underwriting fees and estimated expenses payable by our Selling Shareholders in relation to the Global Offering, and assuming an offer price of HK$4.88 per Offer Share, being the mid-point of the indicative Offer Price range) will be approximately HK$112.4 million. Our Company will not receive any of the proceeds from the sale of the Sale Shares. LISTING EXPENSES We incurred listing expenses of RMB11.0 million for the year ended 31 December 2014 which was recognised as administrative expenses. We expect to incur further listing expenses of approximately RMB27.0 million including the underwriting commission and other fees in relation to the New Share (assuming an Offer Price of HK$4.88 per Offer Share, being the mid-point of the Offer Price range), out of which RMB7.6 million will be recognised as administrative expenses and RMB19.4 million will be charged against equity upon successful listing under the relevant accounting standards. We do not believe the remaining expenses will have a material impact on our results of operations. NO MATERIAL ADVERSE CHANGES Our Directors have confirmed that, up to the date in this prospectus, save as disclosed in the paragraph headed “Listing Expenses” above, there has been no material adverse change in our financial or trading position since 31 December 2014, the end of period reported in the Accountants’ Report set out in Appendix I to this prospectus, and there has been no event since 31 December 2014 which would materially affect the information shown in the Accountants’ Report set out in Appendix I to this prospectus. – 14 – DEFINITIONS In this prospectus, the following expressions shall have the meanings set out below unless the context requires otherwise. Certain other terms are explained in the section “Glossary of technical terms”. “Absolute Bright” Absolute Bright Limited (全亮有限公司), a limited liability company incorporated under the Laws of the Republic of Seychelles and is wholly-owned by Ms. Zheng Yangyu, daughter of Mr. Zheng Songhui “affiliate(s)” any other person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified person “Application Forms” WHITE Application Form(s), YELLOW Application Form(s) and GREEN Application Form(s) or, where the context so requires, any of them “Articles of Association” or “Articles” the Articles of Association of our Company, conditionally adopted by us on 27 May 2015, which shall become effective on the Listing Date and as amended, supplemented and otherwise modified from time to time, a summary of which is set out in Appendix IV to this prospectus “associate(s)” has the meaning ascribed thereto under the Listing Rules “Board of Directors” or “Board” the board of Directors of our Company “Business Day” a day (other than a Saturday, a Sunday or public holiday) on which banks in Hong Kong are normally open for banking business to the public “BVI” the British Virgin Islands “CAGR” compounded annual growth rate “Capitalisation Issue” the issue of Shares to be made upon capitalisation of certain sums standing to the credit of the share premium account of our Company as referred to in the section headed “Statutory and General Information – A. Further Information about our Company – 3. Written Resolutions of the Shareholders ” in Appendix V to this prospectus “Cayman” the Cayman Islands – 15 – DEFINITIONS “CCASS” the Central Clearing and Settlement System established and operated by HKSCC “CCASS Clearing Participant” a person admitted to participate in CCASS as a direct clearing participant or a general clearing participant “CCASS Custodian Participant” a person admitted to participate in CCASS as a custodian participant “CCASS Investor Participant” a person admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation “CCASS Operational Procedures” the Operational Procedures of HKSCC in relation to CCASS, containing the practices, procedures and administrative requirements relating to operations and functions of CCASS, as from time to time in force “CCASS Participant” a CCASS Clearing Participant, a CCASS Custodian Participant or a CCASS Investor Participant “China” or “PRC” the People’s Republic of China, excluding, except the context otherwise requires and for purposes in this prospectus, Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan “Circular No. 37” the Notice of the SAFE on Relevant Issues concerning Foreign Exchange Administration Relating to Domestic Residents’ Offshore Investment and Financing and Round-Trip Investment through Special Purpose Vehicles (including its appendices) (國家外匯管理局關於境內居民 通過特殊目的公司境外投融資及返程投資外匯管理有關 問題的通知), which became effective on 4 July 2014 and replaced Circular No. 75 “Circular No. 75” the Notice of the SAFE on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies (國家外匯管理局關 於境內居民通過境外特殊目的公司融資及返程投資外匯 管理有關問題的通知), which was replaced by Circular No. 37 on 4 July 2014 “COFCO Fund” 中糧(北京)農業產業股權投資基金(有限合夥)(COFCO (Beijing) Agricultural Industrial Equity Investment Fund (A Limited Partnership)*), a limited partnership established under the law of the PRC – 16 – DEFINITIONS “COFCO Shareholders’ Agreement” the shareholders’ agreement dated 6 February 2013 between COFCO Fund, our Company, Song Rising, Sunny Foods, Ms. GUO XUEYAN, Mr. Chan Kin Wa, Riemann Investment and Mr. Zheng Songhui, details of which are set out in the section headed “History and Corporate Structure – Pre-IPO Investments – Investment of COFCO Fund” in this prospectus “COFCO Subscription Agreement” the share subscription agreement dated 6 November 2012 between COFCO Fund, our Company, Song Rising and Mr. Zheng Songhui in relation to the investment in our Company by COFCO Fund, details of which are set out in the section headed “History and Corporate Structure – Pre-IPO Investments – Investment of COFCO Fund” in this prospectus “Companies Law” the Companies Law (as revised) of the Cayman Islands, as amended, supplemented or otherwise modified from time to time “Companies Ordinance” the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) which came into effect on 3 March 2014 as amended, supplemented or otherwise modified from time to time “Companies Ordinance (Miscellaneous Provisions)” Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong) which came into effect on 3 March 2014 as amended, supplemented or otherwise modified from time to time “Company”, “the Company” or “our Company” CHINA GREENFRESH GROUP CO., LTD. (中國綠寶集 團有限公司*), an exempt company incorporated in the Cayman Islands with limited liability on 28 March 2011 “connected person(s)” has the meaning ascribed thereto under the Listing Rules “connected transaction(s)” the transactions specified in Rule 14A.13 of the Listing Rules “Controlling Shareholder(s)” has the meaning ascribed thereto under the Listing Rules, and in the context of the Company, means Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright “Corporate Governance Code” the Corporate Governance Code as set out in Appendix 14 to the Listing Rules – 17 – DEFINITIONS “CSRC” China Securities Regulatory Commission of the PRC (中華 人民共和國證券監督管理委員會) “Deed of Indemnity” the deed of indemnity dated 27 May 2015 and executed by our Controlling Shareholders in favour of our Company (for itself and as trustee for its subsidiaries) with particulars set out in the section headed “Statutory and General Information – F. Other Information – 1. Estate Duty, Tax and Other Indemnity” in Appendix V to this prospectus “Deed of Non-Competition” the deed of non-competition dated 27 May 2015 and entered into by our Controlling Shareholders in favour of our Company with particulars set out in the section headed “Relationship with Our Controlling Shareholders – Deed of Non-competition” in this prospectus “Director(s)” or “Board of Directors” director(s) or the board of directors of our Company, respectively “EIT” enterprise income tax “EIT Law” the Enterprise Income Tax Law of the PRC (中華人民共和 國企業所得稅法) which came into effect on 1 January 2008 “Empire Foods” Empire Foods Ltd, a limited liability company incorporated in the BVI on 23 June 2011 and a direct wholly owned subsidiary of our Company “Euromonitor” Euromonitor International Limited “Fujian Greenfresh Foods” 福建綠寶食品集團有限公司 (Fujian Greenfresh Foods Group Company Limited*), formerly named as 漳州市龍海 綠寶食品有限公司, a limited liability company established in the PRC on 3 November 1995 and is 100% held by Jingxiang Foods, and an indirect wholly owned subsidiary of our Company “Global Offering” the Hong Kong Public Offering and the International Placing “Grand Ample” Grand Ample Limited, a limited liability company incorporated in the BVI on 2 January 2014 and is wholly owned by Mr. Zheng Songhui, an executive Director and our Controlling Shareholder – 18 – DEFINITIONS “Grand Ample Shareholders’ Agreement” the shareholders’ agreement dated 9 June 2014 between Grand Ample, COFCO Fund, our Company, Song Rising, Sunny Foods, Ms. GUO XUEYAN, Mr. Chan Kin Wa, Riemann Investment and Mr. Zheng Songhui, details of which are set out in the section headed “History and Corporate Structure – Reorganisation – (h) Investment made by Grand Ample” in this prospectus “Grand Ample Subscription Agreement” the share subscription agreement dated 9 June 2014 between Grand Ample, our Company, Song Rising and Mr. Zheng Songhui in relation to the investment in our Company by Grand Ample, details of which are set out in the section headed “History and Corporate Structure – Reorganisation – (h) Investment made by Grand Ample” in this prospectus “GREEN Application Form(s)” the application form(s) to be completed by the HK eIPO White Form Service Provider “Greenfresh Biological Technology” 遼寧綠寶生物技術有限公司 (Liaoning Greenfresh Biological Technology Company Limited*), a limited liability company established in the PRC on 9 April 2012 and is 100% held by Greenfresh Ecological Agriculture, and an indirect wholly owned subsidiary of our Company “Greenfresh Ecological Agriculture” 綠寶生態農業(漳州)有限公司 (Greenfresh Ecological Agriculture (Zhangzhou) Company Limited*), a limited liability company established in the PRC on 24 November 2009 and is 100% held by Fujian Greenfresh Foods, and an indirect wholly owned subsidiary of our Company “Greenfresh HK” China Green Group Co., Limited (中國綠寶集團有限公 司), formerly named as China Greenfresh Group Co., Limited (中國綠寶集團有限公司), a limited liability company incorporated in Hong Kong on 25 February 2011 and is 100% held by Empire Foods, and an indirect wholly owned subsidiary of our Company “Group”, “our Group”, “our”, “us” or “we” our Company and our Subsidiaries, or where the context so requires, in respect of the period before our Company became the holding company of its present subsidiaries, such subsidiaries as if they were subsidiaries of our Company at the relevant time – 19 – DEFINITIONS “HK eIPO White Form” the application for Hong Kong Public Offer Shares to be issued in the applicant’s own name by submitting applications online through the designated website of HK eIPO White Form at www.hkeipo.hk “HK eIPO White Form Service Provider” the HK eIPO White Form service provider designated by us, as specified on the designated website of HK eIPO White Form at www.hkeipo.hk “HKSCC” Hong Kong Securities Clearing Company Limited “HKSCC Nominees” HKSCC Nominees Limited, a wholly-owned subsidiary of HKSCC “HK$” or “HK dollars” or “Hong Kong dollars” and “cents” Hong Kong dollars and cents respectively, the lawful currency of Hong Kong “Hong Kong” or “HK” The Hong Kong Special Administrative Region of the PRC “Hong Kong Share Registrar” Tricor Investor Services Limited “Hong Kong Public Offer Shares” the 15,000,000 Shares being initially offered for subscription at the Offer Price pursuant to the Hong Kong Public Offering (subject to adjustment as described in the section headed “Structure of the Global Offering” in this prospectus) “Hong Kong Public Offering” the offering by the Company of the Hong Kong Public Offer Shares for subscription by members of the public in Hong Kong at the Offer Price and on the terms and conditions described in this prospectus and the Application Forms “Hong Kong Stock Exchange” or “Stock Exchange” The Stock Exchange of Hong Kong Limited “Hong Kong Underwriter(s)” the underwriter(s) of the Hong Kong Public Offering as listed in the section headed “Underwriting – Hong Kong Underwriters” in this prospectus “Hong Kong Underwriting Agreement” the conditional Hong Kong underwriting agreement dated 5 June 2015 relating to the Hong Kong Public Offering and entered into between our Company, the Controlling Shareholders, the executive Directors, the Sole Sponsor, the Sole Global Coordinator and the Hong Kong Underwriters – 20 – DEFINITIONS “Independent Third Party(ies)” a person or company which is not connected with (within the meaning of the Listing Rules) any directors, chief executives or substantial shareholders of the Company, any of its subsidiaries or any of their respective associates according to the meaning ascribed to them by the Listing Rules “International Placing” the conditional placing of the International Placing Shares for and on behalf of our Company, to professional, institutional and other investors at the Offer Price, as further described in the section headed “Structure of the Global Offering” in this prospectus “International Placing Shares” the 135,000,000 Shares comprising 110,000,000 New Shares and 25,000,000 Sale Shares offered for subscription pursuant to the International Placing (subject to adjustment and the Over-allotment Option as described in the section headed “Structure of the Global Offering” in this prospectus) “International Underwriter(s)” the underwriter(s) of the International Placing, who are expected to enter into the International Underwriting Agreement to underwrite the International Placing “International Underwriting Agreement” the conditional underwriting agreement expected to be entered into on or about the Price Determination Date, between our Company, the Selling Shareholders, the Controlling Shareholders, the executive Directors, the Sole Sponsor, the Sole Global Coordinator and the International Underwriters in respect of the International Placing “Jingxiang Foods” 漳州景翔食品有限公司 (Zhangzhou Jingxiang Foods Company Limited*), a wholly foreign owned enterprise established in the PRC on 24 December 2001 and is 100% held by Greenfresh HK, and an indirect wholly owned subsidiary of our Company “JLL” Jones Lang LaSalle Corporate Appraisal and Advisory Limited, the property valuer and biological assets valuer “Joint Bookrunners” Essence International Securities (Hong Kong) Limited and Haitong International Securities Company Limited “Joint Lead Managers” Essence International Securities (Hong Kong) Limited and Haitong International Securities Company Limited – 21 – DEFINITIONS “Latest Practicable Date” 1 June 2015, being the latest practicable date for ascertaining certain information in this prospectus prior to its publication “Listing” listing of the Shares on the Main Board of the Stock Exchange “Listing Committee” the listing committee of the Stock Exchange “Listing Date” the date on which dealings in the Shares commence on the Main Board of the Stock Exchange “Listing Rules” the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, as amended or supplemented from time to time “Main Board” the main board of the Stock Exchange “Memorandum of Association” or “Memorandum” the memorandum of association of our Company conditionally adopted on 27 May 2015, as amended from time to time, a summary of which is contained in Appendix IV to this prospectus “Minhui Hong Kong” Minghui Trading (Hong Kong) Co. Limited (閩輝工貿 (香港)有限公司), a limited liability company incorporated in Hong Kong on 22 March 2010 and immediately after the Reorganisation, it will not form part of our Group “Minhui Trading” 漳州市龍海閩輝工貿有限公司 (Zhangzhou Longhai Minhui Trading Company Limited*), a limited liability company established in the PRC on 21 November 1994 and immediately after the Reorganisation, it will not form part of our Group “Minority Shareholders” Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa “Minority Shareholders’ Investment Agreements” collectively, the agreement dated 8 October 2010 between Riemann Investment and Mr. Zheng Songhui; the agreement dated 15 October 2010 between Ms. GUO XUEYAN and Mr. Zheng Songhui; and the agreement dated 18 October 2010 between Mr. Chan Kin Wa and Mr. Zheng Songhui in relation to the investments in our Company by the Minority Shareholders, details of which are set out in the section headed “History and Corporate Structure – Pre-IPO Investments – Investments of the Minority Shareholders” in this prospectus – 22 – DEFINITIONS “Mr. Zheng Songhui” our founder, chairman, chief executive officer and an executive Director, and our Controlling Shareholder “New Shares” the new Shares initially being offered for subscription by our Company at the Offer Price under the Global Offering “Offer Price” the final Hong Kong dollar price per Offer Share (exclusive of brokerage, SFC transaction levy and Stock Exchange trading fee) of not more than HK$5.18 per Share and expected to be not less than HK$4.58 per Share, at which the Offer Shares are to be subscribed for and issued pursuant to the Hong Kong Public Offering and the International Placing, to be determined in the manner further described in the section headed “Structure of the Global Offering” in this prospectus “Offer Shares” the Hong Kong Public Offer Shares and the International Placing Shares together with, where relevant, any additional Shares to be issued pursuant to the exercise of the Over-allotment Option “Over-allotment Option” the option granted by the Company to the International Underwriters, exercisable by the Sole Global Coordinator (for itself and on behalf of the other International Underwriters), with the prior written consent of the Company, pursuant to which the Company may be required to allot and issue up to an aggregate of 22,500,000 additional Offer Shares, representing 15% of the initial size of the Global Offering, to cover over-allocations in the International Placing as described in the section headed “Structure of the Global Offering” in this prospectus “PBOC” People’s Bank of China (中國人民銀行), the central bank of the PRC “PRC” the People’s Republic of China, and for the purpose of this prospectus only, excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan “PRC Government” or “the Government” the government of the PRC, including all governmental subdivisions (including provincial, municipal and other regional or local government entities) and instrumentalities thereof, or, where the context requires, any of them – 23 – DEFINITIONS “Predecessor Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) prior to its repeal and replacement on the 3 March 2014 by the Companies Ordinance and the Companies Ordinance (Miscellaneous Provisions) “Pre-IPO Share Option Scheme” the Pre-IPO share option scheme conditionally adopted by the Company on 27 May 2015, a summary of the terms and conditions of which are set out in the section headed “Statutory and General Information – D. Pre-IPO Share Option Scheme” in Appendix V to this prospectus “Price Determination Agreement” the agreement to be entered into among our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (on behalf of the Underwriter(s)) on the Price Determination Date to record and fix the Offer Price “Price Determination Date” the date on which the Offer Price will be fixed for the purposes of the Global Offering expected to be on or about Thursday, 11 June 2015 but no later than Saturday, 13 June 2015 “Regulation S” Regulation S under the Securities Act “Reorganisation” the reorganisation arrangements undergone by our Group in preparation for the Listing “Riemann Investment” Riemann Investment Holdings Limited, a limited liability company incorporated in Samoa on 7 May 2007 and is 50% held by Ms. Huang Qianping and 50% by Mr. Fu Sixing, each an Independent Third Party “RMB” Renminbi, the lawful currency of the PRC “SAFE” the State Administration of Foreign Exchange of the PRC (中華人民共和國國家外匯管理局) “SAFE Regulations” the regulations published by SAFE, as amended and supplemental or otherwise modified from time to time “SAIC” the State Administration for Industry & Commerce of the PRC (中華人民共和國國家工商行政管理總局) “Sale Shares” the Shares to be offered for sale by the Selling Shareholders at the Offer Price under the Global Offering – 24 – DEFINITIONS “SAT” the State Administration of Taxation of the PRC (中華人民 共和國國家稅務總局) “Securities Act” the U.S. Securities Act of 1933, as amended from time to time “Selling Shareholders” Mr. Chan Kin Wa and Ms. GUO XUEYAN “SFC” or “Securities and Futures Commission” the Securities and Futures Commission of Hong Kong “SFO” or “Securities and Futures Ordinance” the Securities and Futures Ordinance, (Chapter 571 of the Laws of Hong Kong), as amended and, supplemented or otherwise modified from time to time “Share Option Scheme” the share option scheme conditionally adopted by our Company on 27 May 2015, a summary of the terms and conditions of which are set out in the section headed “Statutory and General Information – E. Share Option Scheme” in Appendix V to this prospectus “Shareholder(s)” holder(s) of our Share(s) “Shares” ordinary shares with nominal value US$0.01 each in the share capital of our Company “Shengtai Agricultural Development” 漳州盛泰農業開發有限公司 (Zhangzhou Shengtai Agricultural Development Company Limited*), a limited liability company established in the PRC on 26 August 2011 and is 100% held by Fujian Greenfresh Foods, and an indirect wholly owned subsidiary of our Company “Sole Global Coordinator” Essence International Securities (Hong Kong) Limited “Sole Sponsor” Essence Corporate Finance (Hong Kong) Limited “Song Rising” Song Rising Co., Ltd, a limited liability company incorporated in the BVI on 21 February 2011 and is wholly-owned by Mr. Zheng Songhui, an executive Director and our Controlling Shareholder “sq.m.” square meters “Stabilising Manager” Essence International Securities (Hong Kong) Limited – 25 – DEFINITIONS “Stock Borrowing Agreement” the stock borrowing agreement which is expected to be entered into on or about the Price Determination Date between Song Rising and the Sole Global Coordinator pursuant to which the Sole Global Coordinator may borrow up to 22,500,000 Shares from Song Rising for the purpose of covering over-allocations in the International Placing “Subsidiary(ies)” has the meaning ascribed thereto under the Listing Rules “Substantial Shareholder(s)” has the meaning ascribed thereto under the Listing Rules “Sunny Foods” Sunny Foods Co., Ltd, a limited liability company incorporated in the BVI on 21 February 2011 and is wholly-owned by Mr. Zheng Tianming, an executive Director “Takeovers Code” the Code on Takeovers and Mergers issued by the SFC as amended, supplemented or otherwise modified from time to time “Track Record Period” the period comprising the financial years ended 31 December 2012, 2013 and 2014 “Underwriters” collectively, the Hong Kong Underwriters and the International Underwriters “Underwriting Agreements” collectively, the Hong Kong Underwriting Agreement and the International Underwriting Agreement “U.S.” or “United States” the United States of America, its territories, its possessions and all areas subject to its jurisdiction “US$” or “U.S. dollars” United States dollars, the lawful currency of the United States of America “Villagers’ Committee” in relation to a village, the committee which is established pursuant to the Organisation Law of the Villagers’ Committees of PRC (中華人民共和國村民委員會組織法) and which customarily (i) handles communal and public welfare affairs of the village, (ii) manages the collectively-owned farm land and other collectively-owned properties, and (iii) undertakes services in respect of production and coordination of related activities within the village “WHITE Application Form(s)” the application form(s) for use by the public who require(s) such Hong Kong Public Offer Shares to be issued in the applicant’s or applicants’ own name(s) – 26 – DEFINITIONS “Xinghui Trading” 漳州市龍海星輝工貿有限公司 (Zhangzhou Longhai Xinghui Trading Company Limited*), a limited liability company established in the PRC on 25 March 2005 and immediately after the Reorganisation, it will not form part of our Group “YELLOW Application Form(s)” the application form(s) for use by the public who require(s) such Hong Kong Public Offer Shares to be deposited directly into CCASS “Zhangzhou Greenfresh” 綠鮮食品(漳州)有限公司 (Greenfresh Foods (Zhangzhou) Company Limited*), a limited liability company established in the PRC on 11 January 1999, and is 100% held by Fujian Greenfresh Foods, and an indirect wholly owned subsidiary of our Company “%” per cent. Unless otherwise specified, all references to any shareholding in our Company in this prospectus assumes no allotment or issue of any Shares upon the exercise of any options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme or the exercise of the Over-allotment Option. Certain amounts and percentage figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures preceding them. In this prospectus, if there is any inconsistency between the Chinese names of the entities, authorities, organisations, institutions or enterprises established in China or the awards, certificates given in China and their English translations, the Chinese language version shall prevail. English translation of company names in Chinese or another language which are marked with “*” is for identification purpose only. – 27 – GLOSSARY OF TECHNICAL TERMS This glossary contains certain definitions of technical terms used in this prospectus as they relate to us and as they are used in this prospectus in connection with our business or us. Some of these definitions may not correspond to standard industry definitions. “brining” the act or process involving the immersion of food products in citric acid and/or salt water to preserve the food for a long period of time “button mushroom” agaricus bisporus (雙孢菇), commonly known as button mushroom, is a type of edible mushroom with a short thick stalk and a cap in white or brown colors “Circulation” in respect of rural land, means a farmer household that has the land contracted management right assigns its land contracted management right (or land use right) to other farm households or economic organisation by means of sub-contracting, leasing, interchanging with other farmer households, transferring or other methods in compliance with the applicable law “Contracting” in respect of rural land, means the contract-letting party grants the rural land to the contracting party by entering into a land contracting management contract, so that the contracting party could use, operate, manage the land, dispose of the products generated on the land and make profits, provided that the contracted land shall be used for agricultural purposes “Contracted management right” in respect of rural land, means the right that the contracting party of the rural land is entitled to occupy, use, make profit from the contracted land and partial right to dispose the contracted land in accordance with the applicable law “Contracting party” in respect of rural land, means the family-based farmer households within a collective economic organisation, which have the right to contract the land of the collective economic organisation in which they belong to “Contract-letting party” in respect of rural land, means the village collective economic organisation, villagers’ committee or villagers’ group, which has the right to enter into a land contracted management contract, award the land of its own collective economic organisation to the contracting party for operation and use, and supervise the use of the contracted land – 28 – GLOSSARY OF TECHNICAL TERMS “dehydration” the act or process involving drying of vegetables by artificial means “enokitake” also known as golden needle mushroom or lily mushroom (金針菇), is a type of mushroom with firm, white, shiny caps “FDA” the Food and Drug Administration of the United States “GB” Guobiao (國標), the Chinese national standard issued by the SAC (Standardisation Administration of China) (國家 標準化管理委員會) which constitute the basis for product testing which products must undergo during the CCC (中國 強制性產品認証) certification “HACCP” Hazard Analysis Critical Control Point, a management system in which food safety is addressed through the analysis and control of biological, chemical and physical hazards from raw materials production, procurement and handling, to manufacturing, distribution and consumption of the finished product “ISO” acronym for a series of quality management and quality assurance standards published by the International Organisation for Standardisation, a non-government organisation based in Geneva, Switzerland, for assessing the quality systems of business organisations “ISO9001” a standard and guideline relating to quality management systems, and represents an international consensus on good quality management practices. ISO9001:2008 is the current version of ISO9001 “ISO14001” a management system which addresses environmental management through the identification and control of environmental impact and constantly improvement of environmental performance. ISO14001:2004 is the current version of ISO14001 “king trumpet mushroom” pleurotus eryngii (杏鮑菇), commonly known as king trumpet mushroom, is a type of edible mushroom with thick, meaty white stem and a small tan cap “Morchella esculenta” also known as morel mushroom (羊肚菌), is a type of mushroom with a large yellowish sponge with large pits and ridges raised on a large white stem – 29 – GLOSSARY OF TECHNICAL TERMS “mu” an area unit used in China, equals to approximately 667 sq.m. “mycelium” the vegetative part of an edible fungi, consisting of a mass of branching and thread-like hyphae “OEM” acronym for “original equipment manufacturer” “pasteurising” the act or process of heating liquid to a specific temperature for a specific period of time in order to kill bacteria “straw mushroom” volvariella volvacea, commonly known as straw mushroom (草菇), typically has mushroom caps and pink spore prints on it “tonne” metric ton, a metric unit of weight – 30 – FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, including, but without limitation to, the words and expressions such as “aim”, “estimate”, “expect”, “believe”, “plan”, “intend”, “anticipate”, “may”, “seek”, “will”, “would” and “could” and the negative of these words or other similar expressions or statements, in particular, in the sections headed “Business”, “Financial information” and “Future plans and use of proceeds” in this prospectus in relation to future events, business or other performance and development, the future development of our Group’s industry and the future development of the general economy of our Group’s key markets and globally. These statements are based on numerous assumptions regarding our Group’s present and future business strategy and the environment in which our Group will operate in the future. These forwardlooking statements reflecting our Group’s current views with respect to future events are not a guarantee of future performance and are subject to certain risks, uncertainties and assumptions, including the risk factors described in this prospectus and the following: • our Group’s business and operating strategies and our Group’s ability to implement such strategies; • our Group’s capital expenditure and expansion plans; • our Group’s ability to further develop and manage our Group’s expansion projects as planned; • our Group’s operations and business prospects; • various business opportunities that our Group may pursue; • our Group’s financial position; • the availability and costs of bank loans and other forms of financing; • our Group’s dividend policy; • the regulatory environment of our Group’s industry in general; • the performance and future developments of our Group’s industry; • changes in competitive conditions and our Group’s ability to compete under these conditions; and • other factors beyond our Group’s control. One or more of these risks may materialise and various underlying assumptions may prove incorrect. – 31 – FORWARD-LOOKING STATEMENTS Subject to the requirements of the applicable laws, rules and regulations, we do not have any obligation to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus might not occur in the way we expect, or at all. Accordingly, you should not place undue reliance on any forwardlooking information. All forward-looking statements contained in this prospectus are qualified by reference to the cautionary statements set out in this section. In this prospectus, statements of or references to the intentions of our Company or any of the Directors are made as at the date in this prospectus. Any such intentions may potentially change in light of future developments. – 32 – RISK FACTORS The Global Offering and the investment in our Shares involve certain risks. You should carefully consider all of the information set out in this prospectus, including, but not limited to, the risks and uncertainties described in the following risk factors when considering making an investment in our Shares being offered in the Global Offering. Our operations involve certain risks, many of which are beyond our control. You should pay attention to the fact that we are a company incorporated in the Cayman Islands, our business is located in the PRC and we are governed by a legal and regulatory environment that may differ in some respects from that which prevails in other countries or jurisdictions. Our business, financial condition and results of operations could be materially and adversely affected by any of the risks and uncertainties described below. The trading price of our Shares may decline due to any of the risks and uncertainties and you may lose all or part of your investment. RISKS RELATING TO OUR BUSINESS Changes in consumer tastes, preferences and perceptions may have a material and adverse effect on our business, results of operations and financial condition. Food manufacturing industry is subject to changes in consumer tastes, preferences and perceptions. Our business and financial performance depends on factors which may affect the level and pattern of consumer spending in the PRC. These factors include consumer preference and tastes, consumer confidence, consumer income and consumer perceptions of the safety and quality of our products. Any changes in consumer preferences and tastes, or a decline in consumer confidence or consumer income could result in lower sales of our products, put pressure on pricing or lead to increased levels of selling and promotional expenses, which could have an adverse effect on our sales and profits. Our continued growth and success depends in part on the popularity of our fresh edible fungi produce and processed food products and our ability to anticipate changes in consumer tastes, preferences, perceptions and spending habits at any time and to offer, on a timely basis, new products that meet consumer tastes, preferences and perceptions. Shifts in consumer tastes, preferences and perceptions away from our fresh produce and processed food products to other kinds of food products may adversely affect our business. In addition, consumers in the PRC are increasingly becoming conscious of food safety and quality and impact on health. If we are not able to anticipate and react quickly and effectively to changes in consumer tastes, preferences and perceptions, or if consumers lose confidence in the safety and quality of our products, the demand for our products may decrease, and our business, results of operations and financial condition may be materially and adversely affected. – 33 – RISK FACTORS Our results of operations are subject to biological asset fair value adjustments, which can be highly volatile and are subject to a number of assumptions. Being a company principally engaged in the cultivation and supply of fresh edible fungi produce, a significant portion of our assets are biological assets. Our biological assets comprise king trumpet mushroom, button mushroom and straw mushroom. Our historical results of operations had been affected by biological asset fair value adjustments on our fresh edible fungi produce. For the three years ended 31 December 2012, 2013 and 2014, our results of operations were positively affected by gains arising from changes in fair value less costs to sell of biological assets of RMB97.9 million, RMB146.7 million and RMB211.1 million, respectively. Changes in fair value less costs to sell of biological assets represent fair value gains/losses on our biological assets and gains/losses from the sales of edible fungi less the costs of selling. We expect that our results of operations will continue to be affected by these biological asset fair value adjustments. For details on the biological asset fair value adjustments, please refer to the sections headed “Financial Information – Significant Accounting Policies, Judgements and Estimates”, “Financial Information – Certain Items of Consolidated Statements of Financial Position – Biological Assets” and “Financial Information – Valuation of Biological Assets” in this prospectus. The fair value of our biological assets at the end of each reporting period was determined by an independent professional valuer. The independent professional valuer conducted the physical inspection for the health condition, quality and quantity of our biological assets as at 31 December 2014. The valuation of our biological assets as at 31 December 2011, 31 December 2012 and 31 December 2013 by the independent professional valuer was performed retrospectively by relying on the accuracy and reliability of historical data of biological assets such as sales volume, selling prices and costs to sell provided by us. The independent professional valuer conducted market research, checked academic materials and considered our internal control over inventory systems for the accuracy and reliability of these historical data. In applying these valuation methods, the independent professional valuer has relied on a number of assumptions. The key assumptions and inputs for determining the fair value of our biological assets include the following: • Two kinds of cultivation methods have been employed, namely industrial cultivation and traditional cultivation for edible fungi fresh produce. Industrial cultivation method is applied to produce king trumpet mushroom and part of button mushroom. Traditional cultivation method is principally applied to produce button mushroom. • The sales volume of edible fungi as at valuation dates was calculated based on historical harvest and sales records. • The weighted average market price of edible fungi was adopted. The weighted average market price was calculated based on the historical selling prices of king trumpet mushroom and button mushroom. • Costs to sell which include direct raw material, direct labour, labour service and leasing which were calculated based on historical data. The fair value of the biological assets could be affected by, among others, the accuracy of those assumptions. The valuation conducted by the independent professional valuer is subject to the caveat that the independent professional valuer relied substantially on the accuracy, completeness and reasonableness of the various assumptions and other data provided by us in preparation of the valuation report. While these assumptions as adopted in the valuation process have been in line with the actual results, we cannot assure you that there will be no significant deviation in the future. We cannot assure – 34 – RISK FACTORS you that the fair value gains on our biological assets will not decrease in the future. Any decrease in the fair value of our biological assets may have a material and adverse effect on our profitability, overall financial condition and results of operations. In addition, we cannot assure you that the upward adjustments and gains recognised on our biological assets will generate cash inflow for our operations in the future. As a result, when evaluating our results of operations and profitability, you should consider our profits and profit margins without taking into account the effects of these biological asset fair value adjustments. We rely on independent third-party distributors and independent third-party trading companies to sell our products. Any changes in our relationships with our distributors or trading companies may have a material and adverse effect on our sales, results of operations and financial condition. We rely on independent third-party distributors and independent third-party trading companies to sell our products. We sell our fresh edible fungi produce primarily through distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. We sell our canned food to trading companies in the PRC, which then on-sell our products to overseas distributors in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. We sell our other processed food products to distributors in the PRC, which then on-sell our products to sub-distributors and processed mushroom manufacturers. For each of the three years ended 31 December 2012, 2013 and 2014, sales to distributors and trading companies represented 88.2%, 84.9% and 80.6% of our revenue from continuing operations, respectively. As we mainly sell and distribute our products through distributors and trading companies, any one of the following events could cause fluctuations or declines in our revenue and could have an adverse effect on our business, financial condition and results of operations: • reduction, delay or cancellation of orders from one or more of our distributors or trading companies; • selection or increased sales by our distributors or trading companies of our competitors’ products; • our failure to renew distribution agreements or sales agreements and maintain relationships with our existing distributors or trading companies; and • inability to timely identify and appoint additional or replacement distributors or trading companies upon the loss of one or more of our distributors or trading companies. We may not be able to compete successfully against the larger and better-funded sales and marketing campaigns of some of our current or future competitors, especially if these competitors provide more favorable arrangements with their distributors or trading companies. We cannot assure you that we will not lose any of our distributors or trading companies to our competitors in the future, which may cause us to lose some or all of our favorable arrangements with such distributors or trading companies and may even result in the termination of our relationships with such distributors or trading companies. In addition, we may not be able to successfully manage our distributors or trading companies and the cost of any consolidation or further expansion of our distribution and sales network may exceed the revenue generated from these efforts. Furthermore, if the sales volumes of our products to our consumers are not maintained at a satisfactory level, our distributors or trading companies may not place orders for new products from us, may decrease the quantity of their usual orders or may ask for discount on the purchase – 35 – RISK FACTORS price. The occurrence of any of these factors could result in a significant decrease in the sales volume of our products and therefore materially and adversely affect our business, financial condition and results of operations. We have limited control over the practice and manner of the sales by our distributors and trading companies, and the sub-distributors, retailers or overseas distributors of our distributors and trading companies. If any of our distributors or trading companies fails to distribute our products in a timely manner or in accordance with the terms of our distribution or sales agreements or the applicable PRC laws and regulations, or at all, our reputation, brands’ image, financial condition and results of operations may be materially and adversely affected. We mainly sell our fresh edible fungi produce and processed food products through our distributors or trading companies. As such, the performance of, and the ability of our distributors and trading companies to distribute our products, uphold our brands, expand their businesses and sales network are crucial to the future of our growth. Due to the large number of our distributors and trading companies and the size of the market, it is difficult to monitor all aspects of our distributors’ and trading companies’ practices extensively and substantively. We have no ownership or managerial control over any of our third-party distributors or trading companies. Even though we have direct contractual relationships with our distributors and trading companies, we cannot assure you that our distributors and trading companies will at all times strictly adhere to the terms and conditions under the respective distribution or sales agreements or that they will not compete with each other for market share in respect of our products. In addition, we cannot assure you that our distributors and trading companies will at all times strictly adhere to the PRC laws and regulations, including the laws and regulations relating to food safety, product quality and intellectual property rights, and maintain the required licences and permits to distribute our products. For more details on the applicable PRC laws and regulations, please see the section headed “Laws and Regulations of the Industry” in this prospectus. As we do not have any contractual relationship with sub-distributors, retailers or overseas distributors who contract with and operate under our distributors and trading companies, we rely on our sales personnel to monitor their sales practices. As a result, our control over the ultimate retail sales of our products is limited. Furthermore, we may not be able to monitor our distributors’ or trading companies’ inventory level in the event that our distributors or trading companies decide to accumulate our products as inventory. We cannot assure that all our products sold to distributors or trading companies are subsequently sold to end customers and the sales of our products truly reflect the market demands. If any of our distributors or trading companies fails to distribute our products in a timely manner or in accordance with the terms of our distribution or sales agreements or the applicable PRC laws and regulations, or at all, our brand and reputation and consumers’ perception of our products could also be tarnished and our business, financial condition and results of operations may be materially and adversely affected. We may be affected by the changes in or cessation of preferential tax treatment which may have an adverse effect on our financial condition and results of operations. Under the EIT Law, enterprises in the PRC are generally subject to a uniform 25% enterprise income tax rate on their worldwide income. Certain of our PRC subsidiaries which are recognised as primary processing of agricultural produce, namely Greenfresh Ecological Agriculture, Greenfresh Biological Technology, Shengtai Agricultural Development and Jingxiang Foods were exempted from the EIT in the PRC during the Track Record Period under the EIT Law. For other subsidiaries, under the EIT Law and its – 36 – RISK FACTORS implementation regulations, the standard tax rate of the PRC entities was 25% during the Track Record Period. There is no assurance that these preferential enterprise income tax rate will continue to apply to our subsidiaries. Any removal, loss, suspension or reduction of such preferential tax treatment may have an adverse effect on our financial condition and results of operation. We do not enter into long-term agreements with our raw material suppliers and therefore our cultivation or production costs and schedules, financial condition and results of operation may be adversely affected if we are unable to secure supply. The key raw materials required for the cultivation of fresh edible fungi produce include strains, sawdust, bran, dregs of beans, corncob, straw and cow dung. The major raw materials for manufacturing of our processed food products include fresh produce of edible fungi, vegetables and fruit. We procure all of our raw materials in the PRC. We do not enter into any long-term supply agreements with our raw material suppliers as we intend to take advantage of the flexibility in the contractual relationship with our suppliers. We select our new suppliers based on an internal evaluation procedure which contains a stringent set of criteria, including quality, price, service, quality control, production capability and credibility. We will only appoint supplier who can satisfy all our internal selection criteria. Each of our suppliers is subject to our annual evaluation of quality of the raw materials supplied. For more details, please see the section headed “Business – Raw Materials and Suppliers” and “Business – Quality Control” in this prospectus. However, we cannot assure you that we will be able to seek satisfactory supplier, or our suppliers will be able to supply the required raw materials to our satisfaction in a timely manner or that they will not significantly increase the prices at the time of our purchases. If we are unable to secure supply, or if we cannot pass the increase in the costs of raw materials on to our customers, our cultivation or production costs, cultivation or production volume and schedule, financial condition and results of operations may be materially and adversely affected. We are dependent on our contractual arrangements with the Villagers’ Committees and the individual farmers in respect of cultivation of our button mushroom and straw mushroom. We work closely with the Villagers’ Committees and individual farmers for the operation of our button mushroom and straw mushroom cultivation facilities. We entered into lease agreements with the respective Villagers’ Committees in respect of the agricultural lands or properties where our button mushroom and straw mushroom cultivation facilities are located. We cannot assure you that the respective Villagers’ Committees would renew such lease agreements with us upon expiry. In such events, if we are unable to secure new lease agreements on commercially viable terms with the Villagers’ Committees for the suitable agricultural lands or properties, we may not be able to satisfy orders from our customers for our button mushroom and straw mushroom, and accordingly, our business, financial condition and results of operations may be materially and adversely affected. We also entered into production contracting management contracts (生產承包管理合同) with individual farmers to apply traditional cultivation method to produce button mushroom and straw mushroom under our management and supervision. There is no assurance that the individual farmers will comply with the terms of the relevant production contracting management contracts and provide the requisite labour services. In the event of such non-compliance and we are not able to obtain the alternative labour services at competitive prices or at all, our business, financial condition and results of operations will be materially and adversely affected. – 37 – RISK FACTORS Any safety problems relating to our raw materials could adversely affect our reputation, our brands’ image, our ability to sell our products and our financial performance. The quality of our products could be adversely affected if our raw materials are spoiled, contaminated or tampered with. Contamination of our raw materials may occur during their production, transportation or distribution due to reasons unknown to us or out of our control. Some of our raw materials may also contain harmful chemicals or substances of which we are not aware due to adulteration by our suppliers. Such raw materials may not be suitable for human consumption and may cause undesirable side effects to our consumers. We cannot assure you that our suppliers will not intentionally or inadvertently contaminate our raw materials or provide us with substandard raw materials. We have measures in place to control the quality of our raw materials, however, we cannot assure you that we will be able to detect defective raw materials in every circumstance. For further details of our quality control measures on our raw materials, please refer to the section headed “Business – Quality Control – Raw materials quality control” in this prospectus. Any failure to detect defective raw materials could adversely affect the quality of our products. We could be required to recall certain of our products and subject to product liability claims, adverse publicity, and investigation and imposition against us of penalties by relevant authorities, resulting in increased costs and any of these events could have a material and adverse impact on our reputation, brands’ image, business, financial condition, results of operations and prospects. Furthermore, food safety scandals occurred in the PRC in recent years may negatively influence consumer perception and demand for our products, which could in turn adversely affect our results of operations. Delays in delivery or poor handling by third party logistics providers may adversely affect our sales, our reputation and our brands’ image. We rely on third party logistics providers to provide transportation services for the distribution of our products to our customers when we are responsible for the transportation according to the relevant distribution or sales agreements. Delivery disruptions by our logistics providers may occur for various reasons beyond our control, including transportation bottlenecks, earthquakes and other natural disasters, labour strikes and political events and could lead to delayed or lost deliveries. In addition, poor handling by the logistics providers could also cause damage to our products. If our products are not delivered to our customers on time, or are delivered damaged, we may have to pay compensation and could lose business as well as suffer harm to our reputation. As a result, delay in getting a product to market for any reason, including transportation disruption or bad weather, may result in reduced sales and adversely affect our results of operations. We are required to adhere to national health and safety standards, and in the event that we are unsuccessful at meeting these standards, our business, results of operation and brands’ image would be materially and adversely affected. We cannot guarantee that our procedures, safeguards and training will be completely effective in meeting all relevant health and safety requirements and preventing all contaminations. A failure to meet relevant government requirements or any instance of contamination could occur in our operations or those of our customers or suppliers. This could result in fines, suspension of operations, loss of production permits, and in more extreme cases, criminal proceedings against our Company and our management. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance. – 38 – RISK FACTORS We are subject to the food safety laws and regulations of the PRC. Please refer to the section headed “Laws and Regulations of the Industry” in this prospectus for more information concerning the relevant food safety laws and regulations. In light of recent food safety concerns in China, there may be stringent enforcement of food safety rules and regulations and implementation of new food safety rules and regulations. In the event that the government increases the stringency of such laws, our production and distribution costs may increase, and we may be unable to pass these additional costs on to our customers. We may fail to continuously develop new products or our new products may not be successful which may have an adverse effect on our business, results of operations and financial condition. The fresh edible fungi industry in the PRC is a fragmented industry with a large number of players. In light of the fragmented nature and volatile environment, we will need to continuously develop and launch new products in order to respond to consumers’ demand and maintain our competitiveness and market share. Whilst we have in the past successfully developed, promoted and achieved market acceptance for our products, we cannot assure you that we will be able to continuously develop new products or our new products in the future will attract sufficient consumer demand or gain sufficient market share to be profitable. In addition, whilst we have adopted and will continue to adopt strict quality control procedures, we cannot assure you that our products in the future will continue to be of high quality. Failure to recover development, production and marketing costs of unsuccessful new products or maintain the high quality of our products in the future could adversely affect our business, results of operations and financial condition. We may encounter difficulties in expanding our distribution and sales network, which may limit our growth prospects and, in turn, have an adverse effect on our business, financial condition and results of operations. As part of our business strategy, we plan to expand our distribution and sales network to grow our business. However, the success of our expansion plan is subject to, among other things, the following factors: • the existence and availability of suitable regions and locations for expansion of our distribution and sales network; • other ability to negotiate favorable cooperation terms with our distributors and trading companies; • the availability of adequate management and financial resources; • the availability of suitable distributors and trading companies; • competition from local competitors; • our ability to hire, train and retain skilled personnel; and • the adaptation of our logistics and other operational and management systems to an expanded distribution and sales network. – 39 – RISK FACTORS Accordingly, we cannot give assurance that we will be able to achieve our expansion goals or effectively integrate any new distributors into our existing network. If we encounter difficulties in expanding our distribution and sales network, our growth prospects may be limited, which could in turn have an adverse effect on our business, financial condition and results of operations. We are exposed to the credit risk of our distributors, processed mushroom manufacturers and trading companies. If our distributors, processed mushroom manufacturers and trading companies default on their payments to us, our profitability, cash flow and financial position may be materially and adversely affected. We are exposed to the credit risk of some of our distributors, processed mushroom manufacturers and trading companies who are granted credit terms of up to 45 days. Should our customers experience cash flow difficulties or face possibilities of liquidation due to deterioration in their business performance or financial position, our profitability, cash flow and financial position may be materially and adversely affected as our customers may default on their payments to us. As at 31 December 2012, 2013 and 2014, our average trade receivables turnover days of continuing operations were approximately 34 days, 34 days and 35 days, respectively. Please refer to the section headed “Business – Credit control” in this prospectus for details on our credit policy. In the event that any material portion of such trade receivables becomes bad debt and cannot be collected by us, our operations and financial condition may be adversely affected. In addition, in the event that our trade receivables could not be collected timely, we may need to finance our working capital requirement by internal resources or borrowings, and any increase in interest rate may adversely affect our financial position due to increase in finance costs. Unfavourable fluctuations in the prices of or shortages in raw materials may adversely affect our profitability and financial performance. Our cultivation and production volume and cultivation and production costs are dependent on our ability to source raw materials at acceptable prices and maintain a stable and sufficient supply of raw materials. If we are unable to obtain raw materials in the quantities and of a quality that we require, our volume or quality of production and revenue may be adversely affected. If our suppliers are affected by natural disasters, adverse weather conditions, infectious diseases, pest infestations, disruptions in transportation infrastructure or other inclement factors, the supply of raw materials from these suppliers may be adversely affected, and we may not be able to locate alternative supplies of raw materials in sufficient quantities, of suitable quality or at an acceptable price, which may consequently have an adverse effect on our business, results of operations and financial condition. Our cost of raw materials accounted for approximately 56.9%, 48.8% and 43.7% of our cost of sales for the three years ended 31 December 2012, 2013 and 2014, respectively. Raw materials we use in our production are subject to price volatility caused by external conditions, such as market supply and demand, climate and changes in governmental policies. Should there be any shortage in the supply of, or upsurge in market demand for, our raw materials or the occurrence of other unforeseen circumstances such as adverse weather conditions or natural disasters, it may lead to an increase in the prices of such raw materials and/or reduction in our production output. In addition, there is no assurance that we will be able to pass the increase in prices of our raw materials on to our customers. Hence, any increases in our raw material costs that we are unable to pass on to our customers may adversely affect our profitability, business operations and financial performance. – 40 – RISK FACTORS Our business, reputation and brands’ image may be adversely affected by product liability claims, consumer complaints or adverse publicity in relation to our products. We may be subject to product liability claims if our products are found to be unfit for consumption. Products may be rendered unfit for consumption due to contamination of ingredients, whether intentional or not, delay in delivery, poor handling, packaging rupture, poor condition of storage facilities of suppliers, distributors or retailers, or unauthorised tampering by distributors, retailers or third parties during the transit of products. The occurrence of such problems may result in recalls of our products and significant damage to our brand reputation. During the Track Record Period and up to the Latest Practicable Date, we did not record product recall and had not received any material complaints or product liability claims from our customers due to quality defects. However, we cannot assure you that such incidents will not occur in the future. We may incur legal liabilities and have to compensate consumers for any loss or damage they suffer in respect of valid product liability claims and, in addition, we may also be subject to administrative or other government sanctions or penalties. In addition, adverse publicity from these types of concerns, whether valid or not, may discourage customers from purchasing our products. If customers lose confidence in our brand, we may experience long term declines in our sales, which may have an adverse effect on our business, results of operation and financial condition. Our workers are subject to risks of serious injury caused by the use of production machinery and equipment, which may result in a material and adverse effect on our business, results of operations and financial condition. We use machinery and equipment such as industrial mixing, rolling and compressing machines and cutting equipment, which are potentially dangerous in our operations. Any significant accident caused by the use of such equipment or machinery could interrupt our operations and result in legal and regulatory liabilities. During the Track Record Period and up to the Latest Practicable Date, we had not had any incidents, claims or complaints which had materially and adversely affected our operations. However, we cannot guarantee that we will not encounter significant cost, legal or regulatory liabilities as a result of personal injury of our employees in the future. In accordance with relevant PRC labour laws and regulations, we provide our employees with a social welfare scheme covering work injury insurance, amongst others. However, our work injury insurance may not sufficiently cover, or cover at all, losses and liabilities we may encounter in respect of personal injury of our employees. Therefore we may incur significant cost which could materially and adversely affect our business, results of operations and financial condition. – 41 – RISK FACTORS The prices of our products may fluctuate, which may adversely affect our profitability and results of operations. We are exposed to business risks arising from changes in the prices of our products resulting from the ever-changing market force of supply and demand. The other factors include, inter alia, environmental regulations, weather conditions and diseases. Our Group has little control over these conditions and factors. During the Track Record Period, the average selling prices of our king trumpet mushroom per kilogram were RMB9.4, RMB8.3 and RMB7.5 for the three years ended 31 December 2012, 2013 and 2014, respectively. During the Track Record Period, the average selling prices of our button mushroom and straw mushroom per kilogram were RMB6.1, RMB7.4 and RMB7.8 for the three years ended 31 December 2012, 2013 and 2014, respectively. During the Track Record Period, the average selling prices of our canned food products per kilogram were RMB8.2, RMB7.5 and RMB7.6 for the three years ended 31 December 2012, 2013 and 2014, respectively. During the Track Record Period, the average selling prices of our other processed food products per kilogram were RMB13.7, RMB15.3 and RMB11.2 for the three years ended 31 December 2012, 2013 and 2014, respectively. If the price of our products decreases or the cost of raw materials increases, it may adversely affect our revenue, profit and results of operations. In the event any of our licenses or approvals are revoked, not renewed or not extended, our business operations and financial condition may be materially and adversely affected. In accordance with the applicable PRC laws and regulations, we have obtained various licenses and permits, including without limitation, the Edible Fungi Strains Production and Operation Permit (食用菌 菌種生產經營許可證), the National Industrial Goods Production Permit (全國工業產品生產許可證), in order to carry on the business of food production and processing in the PRC. For details on our licenses and permits, please refer to the section headed “Business – Licenses, Permits and Certificates” in this prospectus. In the event any of the above licenses and permits is revoked, not renewed or not extended, we may not be able to carry on the business of food production and processing in the PRC. During the Track Record Period, our operations have not been materially affected due to any of the above circumstances. However, we cannot assure you that any of the above circumstances will not occur in the future, which may materially and adversely affect our business operations, production and financial performance. In addition, our customers may lose confidence in us and we may face a decline in the number of orders for our products which in turn could materially and adversely affect our business, results of operations and financial condition. – 42 – RISK FACTORS Disruption of operations at cultivation facilities or production facilities may materially and adversely affect our business operations and financial performance. Our ability to stably and efficiently produce fresh edible fungi and processed food products at our cultivation facilities and production facilities, respectively, is critical to our success. As at the Latest Practicable Date, we had established eight cultivation facilities for our fresh edible fungi produce, including three king trumpet mushroom facilities and one button mushroom and straw mushroom facility in Zhangzhou, Fujian province, one king trumpet mushroom facility in Dandong, Liaoning province, one king trumpet mushroom facility in Changzhou, Jiangsu province and two button mushroom facilities in Chengdu, Sichuan province. As at the Latest Practicable Date, we had established two production facilities for our processed food products in Zhangzhou, Fujian province. Damage or disruption to our operations at our cultivation facilities and production facilities can result from the following factors, among others: • utility supply disruptions, terrorism, strikes or other force majeure events; • adverse weather conditions; • forced closing or suspension of our cultivation facilities and production facilities; • major disease outbreaks at or around our cultivation facilities and production facilities; • pollution of underground water resources; • failure to comply with applicable regulations and quality assurance guidelines; • labour disputes affecting our employees; • interruption of the information technology systems that facilitate the management of our cultivation facilities and production facilities; • accidents in the processing plants, including major equipment failures or fires, which may result in suspension of operations, property damage, severe personal injuries or even fatalities; and • other production or distribution problems, including limitations to production capacity due to regulatory requirements, changes in the types of products produced or physical limitations that could impact continuous supply. During the Track Record Period and up to the Latest Practicable Date, we did not experience any material disruptions to our cultivation facilities and production facilities. However, we cannot assure you that the events and factors mentioned above or any other events will not occur and result in a material disruption to the operations at our cultivation facilities and production facilities in the future. If we fail to take adequate steps to mitigate the likelihood or potential impact of such events or factors, or to effectively respond to such events or factors if they occur or materialise, our business, results of operations and financial condition may be materially and adversely affected. – 43 – RISK FACTORS The occurrence of natural disasters or adverse weather conditions may materially and adversely affect our business and financial performance. Our business operations are susceptible to natural disasters and adverse weather conditions such as droughts, floods and earthquakes, and environmental hazards. The occurrence of any of the above events in or in close proximity to our cultivation facilities, and/or the facilities of our suppliers from whom we purchase necessary raw materials used in our products may cause a reduction in our production output, or cause delay and/or increased costs in our procurement of raw materials. Although our business operations had not been materially affected by the occurrence of any natural disasters or adverse weather conditions during the Track Record Period, there can be no assurance that these events will not occur in the future. The occurrence of any circumstances above may have a material and adverse effect on our business, prospects and financial performance. We are exposed to possible infringements of our intellectual property rights, which may materially and adversely affect our sales, reputation, business operations and financial performance. Our fresh edible fungi produce and processed food products are produced and marketed in the PRC and . We believe that our success relies, in part, on under our registered trademarks, such as our ability to protect and use our trademarks. Please refer to the sections headed “Business – Intellectual Property Rights” and “Statutory and General Information – Further Information about our Business – 2. Intellectual Property of the Group” in Appendix V to this prospectus for more information on our intellectual property rights. We were not aware of any violations or infringements of our intellectual property rights during the Track Record Period and as at the Latest Practicable Date. However, there can be no assurance that our intellectual property rights will not be infringed upon and that measures taken by us to protect our trademarks and patents will be adequate to prevent trademark infringement, product imitation and counterfeiting by others. In the event that third parties infringe upon our intellectual property rights under our brand names, we may face great difficulties and costly litigation in order to fully protect our intellectual property rights, which may in turn affect our profitability. In the event that we are unsuccessful in policing the violation of our intellectual property rights, the availability of counterfeit goods in the market may affect consumers’ perception of our product quality and reduce the demand for our products, which may adversely affect our brand reputation and financial performance. One of our pending trademark applications, “蘑購城 MOGOUCITY” is used by the website “蘑購城 MOGOUCITY” (http://mogou.junbaike.com/) as its logo. The website is owned and operated by Shanghai Junwei Network Technology Company Limited (上海菌緯網絡科技有限公司), an Independent Third Party, which was established by Mr. Li Minpei (李閩培), an employee of the Group, together with certain of Mr. Li Minpei’s friends. We are not currently using the trademark “蘑購城 MOGOUCITY” for commercial purpose as we are still in the process of applying for its registration with the Trademark Office of the Administration for Industry and Commerce of the PRC. Upon the request of the Group, Shanghai Junwei Network Technology Company Limited had issued a written confirmation letter confirming that such trademark is designed and owned by the Group and upon registration of the trademark, it will obtain written authorisation from the Group for the use of the trademark or cease to use the same at the Group’s direction. Taking into account the confirmation letter, as well as the promotional benefits to the Group and its brands and products, the Group had no objection to Shanghai Junwei Network Technology Company Limited to use the logo “蘑購城 MOGOUCITY” in its website. However, we cannot assure you that Shanghai Junwei Network Technology Company Limited would not violate or – 44 – RISK FACTORS infringe our trademark right upon the registration of trademark “蘑購城 MOGOUCITY” which in turn may adversely affect our sales, reputation, business operations and financial performance. For more details, please refer to the section headed “Business – Intellectual Property Rights”. Over the years, we have accumulated knowledge and experience in relation to the cultivation method, process and formula of cultivation materials of edible fungi which is part of our proprietary technical know-how. Thus, effective protection of proprietary information and technical know-how in our business operations is critical to our business. As certain of our proprietary information and know-how is not patented, we are vulnerable to unauthorised disclosure of such proprietary information to our competitors, which may adversely affect our business. Non-compliance with PRC employee social welfare contribution regulations could lead to the imposition of fines or penalties. In accordance with relevant PRC labour laws and regulations, we are required to contribute to certain employee social welfare schemes including social insurance contribution and housing provident fund. However, during the Track Record Period, we were not in strict compliance with the requisite contribution requirements for some of our PRC employees. During the Track Record Period, six of our PRC subsidiaries had not been making contributions in full to the social welfare schemes for our employees. As at the Latest Practicable Date, two of our PRC subsidiaries did not register with the relevant housing provident fund authority and make housing provident fund contributions for all the employees of such PRC subsidiaries. For the three years ended 31 December 2012, 2013 and 2014, the total outstanding amount payable by us in relation to social welfare schemes was RMB318,000, RMB420,000 and RMB733,000, respectively. We believe that such amount of social welfare scheme contribution will not have material adverse impacts on our Group’s business and operations. For the three years ended 31 December 2012, 2013 and 2014, the total outstanding amount of housing provident fund payable by us was RMB467,000, RMB646,000 and RMB706,000, respectively. We believe that the outstanding housing provident fund contribution will not have material adverse impacts on our Group’s business and operations. For non-compliance of social insurance laws and regulations before 1 July 2011, pursuant to the Interim Regulations Concerning the Levy of Social Insurance Fees (社會保險費徵繳暫行條例) promulgated on and effective from 22 January 1999, the relevant social security authority may order an enterprise to pay the outstanding contributions within a prescribed time limit. If an enterprise fails to do so at the expiration of the time limit, in addition to the outstanding contributions, a late-payment fine of 0.2% per day from the date when the amount became overdue may be imposed. For non-compliance of social insurance laws and regulations on or after 1 July 2011, pursuant to the Social Insurance Law of the PRC (中華人民共和國社會保險法) promulgated on 28 October 2010 and effective as at 1 July 2011, employers are required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, workplace injury insurance and maternity insurance. If the employer does not pay the full amount of social insurance contribution as scheduled, the social insurance contribution collection institution shall order it to make the payment or make up the difference within a prescribed period and impose a daily surcharge equivalent to 0.05% of the overdue payment from the date when the payment is overdue. If payment is not made within the prescribed period, the relevant administration department shall impose a fine in an amount of between one to three times of the overdue payment. – 45 – RISK FACTORS The maximum amount of late charges which may potentially be imposed on our Group as a result of non-compliance with the requirements of social insurance contributions is estimated to be RMB41,000, RMB71,000 and RMB125,000 for the three years ended 31 December 2012, 2013 and 2014, respectively. For non-compliance of housing provident fund laws and regulations, pursuant to the Regulations on Administration of Housing Fund (住房公積金管理條例) as amended on and effective from 24 March 2002, enterprises are obliged to pay and deposit housing provident fund for their employees in full amount within a prescribed time limit. If an enterprise fails to deposit the housing provident fund within the time limit or underpays the fund for its employees in accordance with the aforesaid regulations, the competent department may order it to open an account for housing provident fund for its employees within a prescribed time period. If the enterprise fails to do so at the expiration of the time limit, a penalty ranging from RMB10,000 to RMB50,000 may be imposed. For more details, please see the section headed “Business – Non-compliance” in this prospectus. We cannot assure you that we will not be subject to the penalties by the relevant PRC authorities for our past non-compliance. Any such penalties imposed on us could have an adverse effect on our cash flow, business operation and our reputation. We are subject to potential adverse consequences due to our lack of valid land use right and building ownership in respect of certain properties we occupied in the PRC. Fujian Greenfresh Foods acquired a parcel of collectively-owned land with a total site area of approximately 3,570 sq.m. from Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province, and obtained the collectively-owned land use right certificate of Long Ji Yong (2012) No. JD0009. However, the acquisition had not been through the land expropriation process of the local government and the collectively-owned land use rights thereunder were used for non-agricultural purposes which is prohibited by the relevant applicable laws and regulations in the PRC. For the same reason, Fujian Greenfresh Foods’ ownership to certain buildings with an aggregate gross floor area of approximately 1,832 sq.m. constructed on such parcel of land is defective even though Fujian Greenfresh Foods obtained the building ownership certificate of Long Fang Quan Zheng Zi Di No. 20131392. In addition, Fujian Greenfresh Foods acquired a parcel of collectively-owned land with a total site area of approximately 6,406 sq.m. from transferors including among others Minhui Trading, and obtained the collectively-owned land use right certificate of Long Ji Yong (2012) No. JD0010. However, the acquisition had not been through land expropriation process of the local government and the collectively-owned land use rights thereunder were used for non-agricultural purpose, which is prohibited by the relevant applicable laws and regulations in the PRC. For the same reason, Fujian Greenfresh Foods’ ownership to certain buildings with an aggregate gross floor area of approximately 4,082 sq.m. constructed on such parcel of land is defective even though Fujian Greenfresh Foods obtained the building ownership certificates of Long Fang Quan Zheng Zi Di No. 20131391. These parcels of collectively-owned land are mainly used by the Group for the production of our processed food products, warehousing, office and ancillary purposes. According to the relevant applicable laws and regulations, Fujian Greenfresh Foods may be required to vacate from or demolish the buildings and ancillary facilities on the land for which it is not fully entitled to the collectively-owned land use rights or the building ownership. As advised by our PRC legal adviser, Fujian Greenfresh Foods, as a transferee of the acquisitions of the collectively-owned land, will not be subject to any monetary penalties. – 46 – RISK FACTORS These parcels of collectively-owned land have been approved by the People’s Government of Fujian Province to be expropriated and the Longhai Municipal Land Resources Bureau (龍海市國土資源局) is in the process of converting such land from collectively-owned land into state-owned construction land. On 8 May 2015, Fujian Greenfresh Foods executed the transaction confirmation letter (成交確認書) with the Longhai Municipal Land Resources Bureau (龍海市國土資源局) regarding the purchase of the land use right attached to these parcels of land. In light of the transaction confirmation letter, Fujian Greenfresh Foods has won the bidding of such parcel of land at a price of RMB2.28 million, and it shall enter into a land use right grant contract with the Longhai Municipal Land Resources Bureau before 8 May 2016. Accordingly, our PRC legal adviser is of the view that there is no legal impediment for our Group to enter into the land use right grant contract with the relevant authority before the specified time. We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province to replace our current production facilities for processed food products. We expect to commence commercial production in January 2016. In the event that the relevant authority orders us to vacate from or demolish the buildings and ancillary facilities on the land before January 2016, the operations carried on such parcels of collectively-owned land will be affected. Our Directors envisage that we will be able to subcontract our sales orders to third party subcontractors. Our estimated net profit lost as a result of business interruption on the operations on such parcels of collectively-owned land through subcontracting our sales orders to third party subcontractors is approximately RMB2.0 million, based on and with reference to the historical net profit contributed by such two parcels of collectively-owned land for the financial year ended 31 December 2014 and the difference in net profit margins between production by our Group and subcontracting to third party subcontractors. However, we cannot assure you that we will be able to subcontract our sales orders to third party subcontractors in a timely manner or under commercially reasonable terms. If we are unable to locate third party subcontractors in a timely manner or under commercially reasonable terms, our business operations and financial position may be materially and adversely affected. In addition, during the Track Record Period, Zhangzhou Greenfresh had not obtained the construction works planning permit and the construction works commencement permit for certain buildings with an aggregate gross floor area of approximately 6,642 sq.m. Pursuant to the Urban and Rural Planning Law of the PRC, Zhangzhou Greenfresh is subject to a maximum penalty of RMB542,000, representing 10% of the construction costs of the relevant buildings, due to the failure to obtain the construction works planning permit. Pursuant to the Administrative Measures on the Construction Works Commencement Permit, Zhangzhou Greenfresh is subject to a maximum penalty of RMB100,000, representing 2% of the construction contract price of the relevant buildings, due to the failure to obtain the construction works commencement permit. We have obtained both of the construction works planning permit and the construction works commencement permit for such buildings in January 2015. However, we cannot assure you that we will not be subject to the penalties by the relevant PRC authorities for our past non-compliance. Any such penalties imposed on us could have an adverse effect on our cash flow, business operations and our reputation. For more information of the title defects of the properties we owned or occupied, please refer to the section headed “Business – Properties” in this prospectus. For more information on the applicable laws and regulations on collectively-owned land and the land expropriation process, please refer to the section headed “Laws and Regulations of the Industry – Laws and Regulations relating to the Use, Acquisition and Lease of Collectively-owned Land”. – 47 – RISK FACTORS Defects related to certain properties leased by us may materially and adversely affect our ability to use such properties. As at the Latest Practicable Date, we had leased ten parcels of land used for industrial purpose in Fujian province and Liaoning province, among which, seven parcels are state-owned land, three parcels are collectively-owned land. Among the seven parcels of state-owned land, two factory buildings located in Dandong, Liaoning province with the gross floor area of 19,290 sq.m. leased by Greenfresh Biological Technology for king trumpet mushroom cultivation are constructed without obtaining all the construction works planning permit and construction works commencement permit. According to the relevant PRC laws, the competent governmental authorities may order that such buildings be dismantled and impose penalties on the person who constructed the building. In this regard, our occupation and use of the buildings will be materially adversely affected if the competent governmental authorities order the building to be dismantled. Among the seven parcels of leased state-owned land, Zhangzhou Greenfresh funded the construction of buildings with a gross floor area of 4,426 sq.m. for the production of canned food on a parcel of leased land without obtaining the construction works planning permit and the construction works commencement permit prior to the commencement of construction. As a result, pursuant to the Urban and Rural Planning Law of the PRC, Zhangzhou Greenfresh may be subject to a maximum penalty of RMB367,000, representing 10% of the construction costs of the relevant buildings, due to the failure to obtain the construction works planning permit. Pursuant to the Administrative Measures on the Construction Works Commencement Permit, Zhangzhou Greenfresh may also be subject to a maximum penalty of RMB73,400, representing 2% of the construction contract price of the relevant buildings, due to the failure to obtain the construction works commencement permit. In terms of the three parcels of collectively-owned land, Fujian Greenfresh Foods leased two parcels of land from Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province and Zhangzhou Greenfresh leased one parcel of land from Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province, for an aggregate land area of 7,691 sq.m. for warehousing and ancillary purposes required for the production of processed food products on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, amongst other purposes. According to the applicable laws of the PRC, any collectively-owned land for agricultural purpose shall not be sold, transferred or leased for non-agricultural purpose. As the buildings constructed on the aforesaid three parcels of land are primarily used for non-agricultural purpose such as warehouse, ancillary facilities and office, the competent land authority may order that such non-compliance should be rectified, impose penalties, and confiscate the illegal income derived from such lease. In the event that the lessors are ordered to rectify the non-compliance and we are required by the relevant authorities to relocate our operations carried thereunder, the operations carried on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, will be affected. We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province to replace our current production facilities for processed food products. We expect to commence commercial production in January 2016. In the event that the relevant authority orders the lessors to rectify the non-compliance before January 2016, our Directors envisage that we will be able to subcontract our sales orders to third party subcontractors. Our estimated net profit lost as a result of business interruption on the operations on such parcels of collectively-owned land through subcontracting our sales orders to third party subcontractors is approximately RMB2.0 million, based on and with reference to the historical net profit contributed by – 48 – RISK FACTORS such two parcels of collectively-owned land for the financial year ended 31 December 2014 and the difference in net profit margins between production by our Group and subcontracting to third party subcontractors. However, we cannot assure you that we will be able to subcontract our sales orders to third party subcontractors in a timely manner or under commercially reasonable terms. If we are unable to locate third party subcontractors in a timely manner or under commercially reasonable terms, our business operations and financial position may be materially and adversely affected. Production and sales of some of our products are subject to seasonality fluctuations. Production and sales of some of our products are subject to seasonality fluctuations. During the Track Record Period, we experienced seasonality fluctuations in our production and sales due to our customers’ purchase patterns and weather conditions for traditional cultivation. According to our experience, industrial cultivation is not affected by weather cycles (such as hot summers and cold winters) so the production of king trumpet mushroom are all year round as all of our king trumpet mushroom are under industrial cultivation. Our prices of king trumpet mushroom tend to increase around the Christmas and Chinese New Year holiday period (usually during December, January and February of each year) and therefore our revenue from sales of king trumpet mushroom tends to be higher accordingly in those periods. Our production volume of button mushroom and straw mushroom is affected by weather cycles as the majority of our button mushroom and straw mushroom are under traditional cultivation. Due to the habit of button mushroom and straw mushroom, the peak season of production of button mushroom is from October to May of the following year and the peak season of production of straw mushroom is June and September. As such, the sales of button mushroom and straw mushroom will be generated only during such periods. Due to their seasonality, we accept the orders from trading companies and purchase various types of vegetables and fruit for the production of processed food products in accordance with the respective seasonal availability of the various raw materials. We purchase fresh produce of vegetables and fruit from local suppliers in Fujian province which source these vegetables and fruit in Fujian province, Guangdong province and Guangxi Zhuang Autonomous Region. We manufacture the processed food products during the harvesting season of the various vegetables and fruit and deliver the products according to the schedules set out in the relevant sales contracts entered into with trading companies. Our sales and operating results for any particular period will not necessarily be indicative of our results for the full year or future periods, and our interim results may not proportionally reflect our annual results. Our insurance may not sufficiently cover, or may not cover at all, losses and liabilities we may encounter. We have purchased insurance for our motor vehicles. We have not maintained insurance for our cultivation and production facilities and other properties or fixed assets. The lack of insurance coverage exposes us to risks associated with our business, including damages, liabilities or losses we may incur in the course of our business, which may be significant. Any uninsured occurrences of loss or damage to our cultivation and production facilities and other properties or fixed assets may result in the disruption of our business operations, our Group incurring substantial costs and the diversion of resources, which may have a material and adverse effect on our business, financial position and results of operations. Moreover, there are certain losses for which insurance is not available in the PRC on commercially practicable terms, such as losses suffered due to business interruptions, earthquakes, typhoons, flooding, war or civil disorder. If we are held responsible for any such damages, liabilities or losses due to insufficiency or unavailability of insurance, there could be a material adverse effect on our business, financial position and results of operations. See the section headed “Business – Insurance” in this prospectus for further details. – 49 – RISK FACTORS Our future success depends on the continuing services of certain key personnel and our ability to attract and retain talented personnel. Our continued success is significantly dependent on the continuing services of our senior management and other key personnel and their expertise and experience. For more details on our Directors and senior management, please refer to the section headed “Directors and Senior Management” in this prospectus. Our Directors and senior management have extensive experience in the edible fungi and processed food products industry. Our chairman, Mr. Zheng Songhui and Mr. Zheng Tianming, both of whom have joined our Group since November 1995, have about 20 years of management and operational experiences in our Group. If one or more of the members of our senior management team are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be adversely affected. Our future success is further dependent upon our ability to attract and retain personnel who have the necessary experience and expertise. If we cannot recruit and retain the employees necessary to maintain our operations, our capabilities may be limited which could reduce our profitability and limit our ability to grow. RISKS RELATING TO OUR INDUSTRY The fresh edible fungi and processed food products industries we operate in are fragmented with a large number of players. The fresh edible fungi and processed food products industries we operate in are characterised as fragmented with a large number of players and we compete with a number of existing PRC domestic and international fresh and processed fungi manufacturers, as well as potential new entrants to the market. Some of our competitors may have, in comparison to us, lower costs of operation, greater expertise and more extensive technical capabilities, greater resources to invest in product development and customer support, longer operating histories, greater pricing flexibility and name recognition, larger customer bases and/or stronger technical and professional teams. In addition, more specialised manufacturers with greater financial resources may enter our market in the future. Our ability to compete successfully in the industry depends on various factors, including our reputation, brands’ image, high quality products, vertically integrated production capabilities and strong relationships with our customers. We cannot assure you that we will be able to compete effectively against current and future competitors. Intensified competition may result in price reduction of our products, a decrease in our profit margins, loss of market share and increased difficulty in market penetration, which may have a material and adverse effect on our business, prospects, financial condition and results of operation. If the fresh edible fungi and processed food products markets do not grow at a rate as we expect, or at all, or if we fail to keep pace with consumer preferences and demands, our business, results of operation and financial condition may be adversely affected. Our growth depends, to a significant extent, on the continued growth in the demand for our products, such as king trumpet mushroom, button mushroom, straw mushroom and canned food and other processed food products. Any future reduced demand or any downturn in the relevant sectors may materially and adversely affect our sales and profitability. Furthermore, we are subject to the changing consumer preferences and demands. If there is a change in market preference or if we fail to keep pace with these changes, we may not be able to achieve the growth as expected and our business and financial condition may be adversely affected. – 50 – RISK FACTORS Consumer concerns about the safety and quality of fresh edible fungi and processed food products may adversely affect the sales of our products and our financial performance. Consumer demand may be affected by factors such as negative publicity resulting from the publication of industry findings, research reports or health concerns concerning food safety of products produced in the fresh edible fungi and processed food products industries or the PRC in general. Adverse publicity and news about the safety and quality of domestically produced food products, and counterfeiting and imitation of food products are widespread practices in the PRC. Although we had not been affected by any safety or quality concerns on fresh edible fungi or processed food products or any actual or alleged counterfeiting or imitation of fungi products during the Track Record Period and up to the Latest Practicable Date, we cannot assure you that these events will not occur in the future. Such complaints and negative publicity, regardless of their merits, may lead to a loss of consumer confidence, reduction in the demand for our products, and consequently our business operations, financial performance and prospects may be adversely affected. Changes in existing food hygiene laws may expose us to additional costs for compliance and affect our business operations. As a manufacturer of products intended for direct human consumption, we are subject to extensive governmental laws and regulations in relation to food hygiene in the PRC and other countries to which we distribute our products. For instance, the PRC food hygiene laws require all enterprises engaged in the production of food products to obtain food production license for each of their production facilities. They also set out hygiene standards with respect to food and food additives, packaging and containers, information to be disclosed on packaging as well as hygiene requirements for food production and sites, facilities and equipment used for the transportation and sale of food. Failure to comply with food hygiene laws in the PRC or other jurisdictions in which we distribute our products may result in fines, suspension of operations, loss of food production licenses and, in more extreme cases, criminal proceedings against us and our management. Any of these events will have an adverse impact on our production, business, results of operations and financial condition. There can be no assurance that the PRC government or the governmental authorities of other jurisdictions in which we distribute or sell our products through sub-distributors and retailers will not impose additional or stricter laws or regulations on food hygiene in the future, providing for stricter and more comprehensive monitoring and regulation of food manufacturers and distributors in areas including, but not limited to, food production and distribution, which may lead to an increase in our costs of complying with such regulations. We may be unable to pass these additional costs on to our customers, which may result in an adverse effect on our results of operations. We are subject to environmental regulations and may be exposed to liability and potential costs for environmental compliance. Our operations are subject to national, provincial and local environmental laws, rules and regulations which, among other things, require manufacturers to conduct an environmental impact assessment before engaging in new construction projects, pay fees in connection with activities that discharge waste materials, properly manage and dispose of hazardous substances, and impose fines and other penalties on activities that threaten the environment. Any violation of these regulations may result in fines, criminal sanctions, shutdown of our facilities and obligation to take corrective measures. There is no assurance that we will not incur future obligations or material liabilities relating to environmental laws and regulations. – 51 – RISK FACTORS Further, the government may adopt more stringent environmental regulations and there is no assurance that we will be in full compliance with these regulatory requirements at all times. Due to the possibility of unanticipated regulatory developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in environmental regulations, we may be required to incur additional capital expenditures to, among other things, install, replace, upgrade or supplement our equipment relating to pollution control and the use, storage, handling and disposal of hazardous materials and chemicals, or make operational changes to limit any adverse impact or potential adverse impact on the environment in order to comply with new environmental protection laws and regulations. If such costs become prohibitively expensive, we may be forced to modify, curtail or cease certain aspects of our business operations. The outbreak of infectious diseases may materially and adversely affect our business and financial performance. The outbreak of infectious diseases, including without limitation, Ebola Virus Disease, avian influenza (H5N1, H7N9 and H10N8), Severe Acute Respiratory Syndrome (“SARS”), influenza A (H1N1) and/or other infectious diseases within the vicinity of our cultivation bases or processing facilities or in the PRC, if uncontrolled, may have an adverse effect on business sentiments and the environment. In addition, if any of our employees, our customers or our suppliers, is affected by the outbreak of infectious diseases, our business operations may be suspended or disrupted, and the amount of our customers’ orders and our supply of raw materials may be adversely affected. In addition, public transportation may be disrupted by the outbreak of public health issues, which may result in the restriction of our ability to arrange delivery of our products to our customers in the PRC. Although our business operations had not been materially affected by the occurrence of any of the above circumstances during the Track Record Period and up to the Latest Practicable Date, there can be no assurance that these events may not occur in the future. The occurrence of any circumstances above may have a material and adverse effect on our business, prospects and financial performance. RISKS RELATING TO DOING BUSINESS IN THE PRC Uncertainties with respect to the PRC legal system could have an adverse effect on our business and operations. Our business is conducted, and our operations are located, mostly in the PRC. Our business in the PRC is subject to PRC laws and regulations applicable to foreign investment in the PRC. The PRC legal system is a civil law system based on written statutes. Unlike in the common law system, prior cases have limited precedential value in deciding subsequent cases in the civil law legal system. Additionally, PRC written statutes are often principle oriented and require detailed interpretations by the enforcement bodies for their application and enforcement. When the PRC government started its economic reforms in 1978, it began to build a comprehensive system of laws and regulations to regulate business practices and the overall economic order of the country. The PRC has made significant progress in the promulgation of laws and regulations dealing with business and commercial affairs of various participants of the economy, involving foreign investment, corporate organisation and governance, commercial transactions, taxation and trade. However, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have an adverse effect on our business and operations. Additionally, given the involvement of different enforcement bodies of the relevant rules and regulations and the non-binding nature of prior court decisions and administrative rulings, the interpretation and enforcement of PRC laws and regulations involve significant uncertainties under the current legal environment. – 52 – RISK FACTORS Changes in economic, political, legal and social developments and conditions in the PRC and policies adopted by the PRC government may adversely affect our business results of operation and financial condition. All of our operating assets are located in the PRC, and our business operation is mostly located in the PRC. Accordingly, our business, financial condition, results of operations and prospects are, to a significant degree, subject to the economic, political and social developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC Government’s economic reforms have emphasised the independence of enterprises, the use of market mechanism, and the improvement of corporate governance, the PRC Government continues to exercise significant control in regulating industry developments, allocating resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. While the economy of the PRC has experienced significant growth over the past decade, growth has been uneven, both geographically and among various sectors of the economy. The PRC Government has implemented various measures to guide the allocation of resources. While some of these measures may benefit the overall economy of the PRC, they may have a negative effect on us. For example, our financial results may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Any changes in the PRC economic, political and social conditions may have a material adverse effect on our present and future operations. The PRC Government’s control over the conversion of foreign exchange may have a material adverse effect on your investment and limit our ability to utilise our cash effectively. The PRC Government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from the SAFE or its local branch is required where Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC Government may also at its discretion restrict access in the future to foreign currencies for current account transactions. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency-denominated obligations. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our Shareholders. In addition, since substantial amount of our future cash flow from operations will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to purchase goods and services outside of the PRC or otherwise fund our business activities that are conducted in foreign currencies. – 53 – RISK FACTORS Dividends paid to our Hong Kong subsidiary might not qualify for the reduced PRC withholding tax rate under the special arrangement between Hong Kong and the PRC, which may result in a material adverse effect on our financial condition. Under the EIT Law and its implementation regulations, PRC-sourced income of foreign enterprises that are “non-PRC resident enterprises” that do not have an establishment or place of business in the PRC or, despite the existence of such establishment or place in the PRC, the relevant income is not actually connected with such establishment or place in the PRC, such as dividends paid by a PRC subsidiary to its overseas parent, is generally subject to a 10% withholding tax unless the jurisdiction of such foreign enterprises has a tax treaty with the PRC that provides a different withholding arrangement. Pursuant to a special arrangement between Hong Kong and the PRC, the withholding tax rate is lowered to 5% if a Hong Kong resident enterprise is qualified as the beneficial owner and owns more than 25% of a PRC company distributing the dividends. However, according to the Circular of the State Administration of Taxation on Printing and Issuing the Administrative Measures for Non-resident Individuals and Enterprises Regarding Favourable Treatment Under Taxation Treaties (for Trial Implementation) (國家稅務總局關於印發《非居民享受稅收協議待遇管理辦法(試行)》的通知), which was issued by the SAT on 24 August 2009 and became effective on 1 October 2009, the 5% withholding tax rate does not automatically apply and approvals from competent local tax authorities are required before an enterprise can enjoy any benefits under the relevant taxation agreements or treaties. Moreover, according to the Notice of the State Administration of Taxation on the Issues Concerning the Application of the Dividend Clauses of Tax Agreements (國家稅務總局關於執行稅收協定股息條款有關問題的通 知) issued by the SAT on 20 February 2009, if the main purpose of an offshore arrangement is to obtain preferential tax treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate for which an offshore entity would otherwise be eligible. There is no assurance that the PRC tax authorities will grant approvals on the 5% withholding tax rate on dividends paid by our PRC subsidiaries and received by our subsidiary in Hong Kong. If dividends paid to our Hong Kong subsidiary do not qualify for the reduced PRC withholding tax rate, this may result in a material adverse effect on our financial condition. We may be treated as a PRC tax resident enterprise under the EIT law, which may result in our PRC-sourced income, dividends payable by us to our foreign investors and gains on the sale of our Shares being subject to PRC withholding taxes and may have a material adverse effect on the value of your investment. Under the EIT Law and its implementation regulations, PRC-sourced income of foreign enterprises that are “non-PRC resident enterprises” that do not have an establishment or place of business in the PRC or, despite the existence of such establishment or place in the PRC, the relevant income is not actually connected with such establishment or place in the PRC, is generally subject to a 10% withholding tax unless the jurisdiction of such foreign enterprises has a tax treaty with the PRC that provides a different withholding arrangement. Dividends paid by a PRC subsidiary to its overseas parent and any gain realised on the transfer of shares by such investors will be also subject to 10% PRC income tax if such dividends payment or gain is regarded as income derived from sources within the PRC. – 54 – RISK FACTORS If we are considered a “PRC resident enterprise”, it is unclear whether the dividends we pay with respect to our Shares, or the gain you may realise from the transfer of our Shares, would be treated as income derived from sources within the PRC and be subject to PRC tax. It is unclear whether, if we are considered a “PRC resident enterprise”, our Shareholders would be able to claim the benefit of income tax treaties or agreements entered into between the PRC and other countries or regions. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our foreign Shareholders who are not within the PRC, or if you are required to pay PRC income tax on the transfer of your Shares, the value of your investment in your Shares may be materially and adversely affected. We may be treated as a PRC tax resident enterprise under the EIT law, which may result in our worldwide income being subject to PRC taxes and have a material adverse impact on our profitability. Under the EIT Law, if an enterprise incorporated outside the PRC has its “de facto management bodies” within the PRC, such enterprise may be treated as a “PRC resident enterprise” for tax purposes and be subject to an enterprise income tax rate of 25% on its global income. “De facto management body” is defined as a body that has significant and overall management and control over the business, personnel, accounts and properties of an enterprise. In April 2009, the SAT promulgated a circular to clarify certain criteria for the determination of the “de facto management bodies” for Chinese-invested companies registered abroad. These criteria include: (i) the enterprise’s day-to-day operational management is primarily exercised in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or subject to approval by organisations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders’ meeting minutes are located or maintained in the PRC; and (iv) 50% or more of voting board members or senior executives of the enterprise habitually reside in the PRC. In July 2011 and January 2014, the SAT further issued administrative rules regarding administrative procedures for recognising the “PRC resident enterprise” status of a Chinese-invested company registered abroad. According to the aforesaid SAT circulars, a Chinese-invested company registered abroad may either apply for “PRC resident enterprise” status with the in-charge PRC tax authority in the place where its major Chinese investor is located and the application will be subject to approval of competent PRC tax authorities, or be recognised as a “PRC resident enterprise” by competent PRC tax authorities. In this regard, there are uncertainties in whether a Chinese-invested company registered abroad would be treated as a PRC resident enterprise before obtaining the relevant approval from competent PRC tax authorities. However, there have been no official implementation rules regarding the determination of the “de facto management bodies” for foreign enterprises which are not controlled by PRC enterprises (including companies like ourselves). We cannot assure you that we will not be considered a PRC resident enterprise for PRC EIT purposes and be subject to the uniform 25% enterprise income tax on our global incomes. If we are treated as a “PRC resident enterprise”, we will be subject to the PRC income taxes on our global income, which may have a material adverse effect on our profitability and distributable profit to our Shareholders. – 55 – RISK FACTORS We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange regulations, which may have a material adverse impact on our business and financial condition. SAFE issued Circular No. 37 which became effective on 4 July 2014 and replaced the previous Circular No. 75. Circular No. 37 requires “PRC residents”, including PRC individuals and enterprises, to register with SAFE or its local branches in relation to their direct establishment or indirect control of an offshore special purpose vehicle. An offshore special purpose vehicle is an offshore entity used for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents must update their foreign exchange registrations with SAFE when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, share transfers or exchanges, or mergers or divisions. If any shareholder holding interest in an offshore special purpose vehicle, who is a “PRC resident” as determined by Circular No. 37, fails to fulfill the required foreign exchange registration with the local SAFE branches, the PRC subsidiaries of that offshore special purpose vehicle may be prohibited from distributing their profits and dividends to their offshore parent company or from carrying out other subsequent cross-border foreign exchange activities, and the offshore special purpose vehicle may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions. We may not be fully informed of the identities of all our shareholders or beneficial owners who are “PRC residents”, and we cannot provide any assurance that all of our shareholders and beneficial owners who are “PRC residents” will comply with our request to make, obtain or update any applicable registrations or comply with other requirements required by the Circular No. 37 or other related rules in a timely manner. If any of our shareholders who is a “PRC resident” as determined by Circular No. 37 fails to fulfill the required foreign exchange registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and dividends to us or from carrying out other subsequent cross-border foreign exchange activities. We may also be restricted in our ability to contribute additional capital to our PRC subsidiaries, which may adversely affect our business and have a material adverse effect on our financial condition. PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the net proceeds from the Global Offering to make additional capital contributions or loans to our PRC subsidiaries. As an offshore entity, any capital contributions or loans that our Company makes to our PRC subsidiaries, including from the net proceeds from the Global Offering, are subject to PRC regulations. For example, any of our loans to our PRC subsidiaries cannot exceed the difference between the total amount of investment our PRC subsidiaries are approved to make under relevant PRC laws and the registered capital of these PRC subsidiaries (if applicable), and such loans must be registered with a local branch of SAFE. In addition, our capital contributions to our PRC subsidiaries must be approved by MOFCOM or its local counterpart. We cannot assure you that we will be able to obtain these approvals on a timely basis, or at all. If we fail to obtain such approvals, our ability to make equity contributions or – 56 – RISK FACTORS provide loans to our PRC subsidiaries or to fund their operations may be adversely affected. In turn, this may adversely affect our ability to use the net proceeds from the Global Offering as planned, and adversely impact our PRC subsidiaries’ liquidity and ability to fund their working capital and meet their obligations and commitments. As a result, this may have a material adverse effect on our overall business, financial condition and results. It may be difficult to effect service of process upon us or our Directors or senior management who reside in the PRC or to enforce non-PRC judgments in the PRC against us. Substantially all of our assets and the assets of our Directors are located in the PRC. Therefore, it may not be possible for investors to effect service of process upon us or those persons inside the PRC, including our Directors or senior management. The PRC has not entered into treaties or arrangements providing for the recognition and enforcement of judgments made by courts of most other jurisdictions. On 14 July 2006, the Supreme People’s Court of the PRC and the Hong Kong government signed the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned 《 ( 最高人民法院關於內地與香港特別行政區法院相互認 可和執行當事人協議管轄的民商事案件判决的安排》). Under such arrangement, where any designated people’s court of the PRC or any designated Hong Kong court has made an enforceable final judgment requiring payment of money in a civil and commercial case pursuant to a choice of court agreement in writing by the parties, any party concerned may apply to the relevant people’s court of the PRC or Hong Kong court for recognition and enforcement of the judgment. The arrangement came into effect on 1 August 2008, but the outcome and enforceability of any action brought under the arrangement is still uncertain. In addition, the PRC is not a party to any treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, most other Western countries or Japan, and therefore enforcement in the PRC of judgments of a court in any of these jurisdictions may be difficult or impossible. RISKS RELATED TO THE GLOBAL OFFERING There has been no public market for our Shares prior to this Global Offering, and the liquidity, market price trading volume of our Shares may be volatile. There has been no public market for our Shares prior to this Global Offering. We have applied for the listing of and permission to deal in our Shares on the Stock Exchange. However, even if approved, being listed on the Stock Exchange does not guarantee that an active trading market for our Shares will develop following the Global Offering or that our Shares will always be listed and traded on the Stock Exchange. We cannot assure you that an active public trading market for our Shares will develop or be sustained. The Offer Price for our Offer Shares will be determined by our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the Underwriters) and may differ significantly from the market price for our Shares following the Global Offering. We cannot assure you that the market price of our Shares will not decline below the final Offer Price. – 57 – RISK FACTORS The price and trading volume of our Shares may be highly volatile. Factors such as variations in our revenue, earnings and cash flows, and announcements of new investments, strategic alliances and/or acquisitions, fluctuations in market prices for our products and services or fluctuations in market prices for comparable companies could cause the market price of our Shares to change substantially. Any such developments may result in large and sudden changes in the volume and price at which our Shares will trade. In addition, the Stock Exchange has experienced substantial price and volume fluctuations from time to time that are not related to the operating performance of any particular company. These fluctuations may also materially and adversely affect the market price of our Shares. Investors for our Shares may face difficulties in protecting their interests under Cayman Islands law, which may provide different remedies to minority shareholders when compared with the laws of Hong Kong or other jurisdictions. Our corporate affairs are governed by, among other things, the Articles of Association, the Companies Law and the common law of the Cayman Islands. The rights of Shareholders to take action against our Directors, actions by minority shareholders and the fiduciary responsibilities of our Directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands and the Articles of Association. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The laws of the Cayman Islands relating to the protection of the interests of minority shareholders differ in some respects from those in Hong Kong and other jurisdictions. Such differences mean that the remedies available to our minority Shareholders may be different from those they would have under the laws of Hong Kong or other jurisdictions. For detailed information, please refer to the section headed “Summary of the Constitution of the Company and Cayman Islands Companies Law” in Appendix IV to this prospectus. Our historical dividend payments should not be taken as an indication of our future dividend policy or our payment of dividends in the future. We may distribute dividends by way of cash or by other means that we consider appropriate. A decision to declare and pay any dividends would require the approval of the Board and will be at their discretion. The Board will review our dividend policy from time to time in light of various factors such as our results of operations, our cash flows, our financial conditions, our Shareholders’ interests, general business conditions and strategies, our capital requirements, the payment by our subsidiaries of cash dividends to us and other factors the Board may deem relevant in determining whether dividends are to be declared and paid. For more details on our dividend policy, please see the section headed “Financial Information – Dividend Policy” in this prospectus. During the Track Record Period, our Company did not declare any dividends to our then shareholders. The absence of dividend payments during the Track Record Period should not be regarded as an indication of our future dividend policy or our payment of dividends in the future. – 58 – RISK FACTORS Any future issuance of our Shares may dilute the investor’s shareholding in our Company. Any future capital issuance to expand our business or otherwise may lead to the dilution of investors’ shareholding in our Company. We may also issue additional Shares pursuant to our Pre-IPO Share Option Scheme and Share Option Scheme. We may need to raise additional funds in the future to finance expansion of or new developments relating to our existing operations or new acquisitions. If additional funds are raised through the issuance of new equity or equity-linked securities of our Company other than on a pro-rata basis to the existing Shareholders, the percentage ownership of such Shareholders in our Company may be reduced or such new securities may confer rights and privileges that take priority over those conferred by our Offer Shares. Purchasers of our Shares may experience dilution in the net tangible asset book value per share of their Shares if we issue additional Shares or securities convertible into Shares in the future at a price which is lower than the net tangible asset book value per Share. Any future offerings or sales of our Shares could materially and adversely affect their prevailing market price. Any future offerings or sales of our Shares by us or other Shareholders in the public market, or the perception that such offerings or sales could occur, may negatively impact the market price of our Shares. Please refer to the section headed “Underwriting” in this prospectus for details of restrictions that may apply to future sales of our Shares. Following the expiration of their respective lock-up periods, the market price of our Shares may decline as a result of future sales of substantial amounts of our Shares or other securities relating to our Shares (including the issuance of new Shares pursuant to the exercise of share options granted by us) or the perception that such sales or issuances may occur. We cannot predict what effect, if any, any perception or actual occurrence of such significant future sale will have on the market price of our Shares. You should read the entire prospectus carefully (including the risks disclosed) and we strongly caution you not to place any reliance on any information in press articles, other media and/or research analyst reports regarding us, our business, our industry and the Global Offering. You should read the entire prospectus carefully and rely solely upon the information in this prospectus in making your investment decisions regarding the Shares. You should note that undue reliance should not be placed on any forward looking statements contained in this prospectus which may not occur in the way we expect or may not materialise at all as set out in the section headed “Forward-looking Statements” in this prospectus. There has been prior to the publication in this prospectus, and there may be subsequent to the date in this prospectus but prior to the completion of the Global Offering, press, media and/or research analyst coverage regarding us, our business, our industry and the Global Offering. We do not accept any responsibility for the accuracy or completeness of the information in such press articles, other media and/or research analyst reports nor the fairness or appropriateness of any forecasts, views or opinions expressed by the press, other media and/or research analysts regarding the Shares, the Global Offering, our business, our industry or us. We make no representation as to the appropriateness, accuracy, completeness or reliability of any such information, forecasts, views or opinions expressed or any such publications. To the extent that such statements, forecasts, views or opinions are inconsistent or conflict with the information in this prospectus, we disclaim them. Accordingly, prospective investors are cautioned to make their investment decisions on the basis of the information in this prospectus only and should not rely on any other information. – 59 – WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES In preparation for the Global Offering, our Company has sought the following waivers from strict compliance with the relevant provisions of the Listing Rules and exemptions from the relevant provisions of the Companies Ordinance (Miscellaneous Provisions). MANAGEMENT PRESENCE IN HONG KONG Pursuant to Rule 8.12 of the Listing Rules, an issuer must have a sufficient management presence in Hong Kong. This normally means that at least two of the executive Directors must be ordinarily resident in Hong Kong. Given that our business and operation are primarily located, managed and conducted in the PRC, it would be practically difficult and commercially unnecessary for us to relocate two of our executive Directors to Hong Kong. Accordingly, our Company has applied to the Stock Exchange for, and the Stock Exchange has granted, a waiver from compliance with the requirements under Rule 8.12 of the Listing Rules on the following conditions: (a) our Company will appoint two authorised representatives pursuant to Rule 3.05 of the Listing Rules, namely, Ms. Zheng Ruyan, an executive Director, the joint company secretary and the chief financial officer of our Company, and Ms. Ng Wing Shan, our Company’s joint company secretary, who will jointly act as our Company’s principal channel of communication with the Stock Exchange. Ms. Ng Wing Shan is ordinarily resident in Hong Kong. Each of the authorised representatives will be available to meet with the Stock Exchange in Hong Kong within a reasonable time frame upon the request of the Stock Exchange and will be readily contactable by telephone, facsimile and email. Each of the two authorised representatives is authorised by the Board to communicate on behalf of our Company with the Stock Exchange; (b) our Company has been registered as a non-Hong Kong company under Part 16 of the Companies Ordinance, and Ms. Ng Wing Shan has been authorised to accept service of legal process and notice in Hong Kong on behalf of our Company; (c) each of our Company’s authorised representatives has means to contact all members of the Board (including the independent non-executive Directors) and of the senior management team promptly at all times as and when the Stock Exchange wishes to contact them or any of them for any matters. To enhance the communication between the Stock Exchange, the authorised representatives and the Directors, our Company will implement a number of policies whereby (i) each Director shall provide (if available) his/her mobile phone numbers, residential phone numbers, office phone numbers, fax numbers and email addresses to the authorised representatives; (ii) in the event that such Director expects to travel and be out of office, he/she shall provide the phone number of the place of his/her accommodation to the authorised representatives; and (iii) all the Directors and authorised representatives will provide (if available) their respective mobile phone numbers, residential phone numbers, office phone numbers, fax numbers and email addresses to the Stock Exchange. Our Company shall promptly inform the Stock Exchange of any changes to the contact details of the authorised representatives of the Company and the Directors; – 60 – WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES (d) Essence Corporate Finance (Hong Kong) Limited has been appointed as our Company’s compliance adviser, pursuant to Rule 3A.19 of the Listing Rules, to provide our Company with professional advice on continuing obligations under the Listing Rules, and to act at all times, in addition to the two authorised representatives of our Company, as our Company’s additional channel of communication with the Stock Exchange for the period commencing on the Listing Date and ending on the date on which our Company complies with Rule 13.46 of the Listing Rules and publishes our annual report in respect of the first full financial year commencing after the Listing Date. The contact person of the compliance adviser will be fully available to answer enquiries from the Stock Exchange; (e) each of the Directors (including independent non-executive Directors) not ordinarily resident in Hong Kong has confirmed that he/she possesses or can apply for valid travel documents to visit Hong Kong and would be able to meet with the Stock Exchange in Hong Kong upon reasonable notice; and (f) our Company will also appoint other professional advisers (including its legal advisers in Hong Kong) after the Listing to assist our Company in addressing any enquiries which may be raised by the Stock Exchange and to ensure that there will be prompt and effective communication with the Stock Exchange. We believe that the above-mentioned arrangements will ensure that all members of the Board will be promptly informed of any matters raised by the Stock Exchange and that disclosure of information and communication with the Stock Exchange will be made on a timely basis. JOINT COMPANY SECRETARIES Pursuant to Rule 8.17 of the Listing Rules, an issuer must appoint a company secretary who satisfies Rule 3.28 of the Listing Rules. Rule 3.28 of the Listing Rules provides that an issuer must appoint as its company secretary an individual who, by virtue of his/her academic or professional qualifications or relevant experience, is, in the opinion of the Stock Exchange, capable of discharging the functions of a company secretary. We have appointed Ms. Zheng Ruyan as one of our joint company secretaries. Ms. Zheng Ruyan does not possess the qualification as stipulated in Rule 3.28 of the Listing Rules, and therefore she does not meet all the requirements under Rule 3.28 and Rule 8.17 of the Listing Rules. We have appointed Ms. Ng Wing Shan, who possesses the qualification required under Rule 3.28, to act as another joint company secretary to provide assistance to Ms. Zheng Ruyan for an initial period of three years from the Listing Date so as to fully comply with the requirements set forth under Rules 3.28 and 8.17 of the Listing Rules. Ms. Ng Wing Shan will work closely with Ms. Zheng Ruyan to jointly discharge duties and responsibilities as joint company secretaries and assist Ms. Zheng Ruyan to acquire the relevant experience as required under Rule 3.28 of the Listing Rules. In addition, we will ensure Ms. Zheng Ruyan has access to relevant training and support to familiarise herself with the Listing Rules and the duties required for a company secretary of a company listed on the Stock Exchange. – 61 – WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES We have applied to the Stock Exchange for, and the Stock Exchange has granted, a waiver under and in respect of Rule 3.28 and Rule 8.17 of the Listing Rules. The waiver is valid for an initial period of three years from the Listing Date. Upon the expiry of such three-year period, the Stock Exchange will re-evaluate the experience of Ms. Zheng Ruyan to consider whether she will then have acquired the relevant experience within the meaning of Rule 3.28 and Rule 8.17 of the Listing Rules and decide whether a further waiver will be necessary. For further details about Ms. Zheng Ruyan’s qualifications and experience, please refer to the section headed “Directors and Senior Management – Directors – Executive Directors” in this prospectus. – 62 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS IN THIS PROSPECTUS This prospectus, for which our Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Companies Ordinance (Miscellaneous Provisions), the Securities and Futures (Stock Market Listing) Rules (Chapter 571V of the Laws of Hong Kong) and the Listing Rules for the purpose of giving information to the public with regard to us. Our Directors, having made all reasonable enquires, confirm that to the best of their knowledge and belief, the information contained in this prospectus is accurate and complete in all material aspects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this prospectus misleading. UNDERWRITING This prospectus is published solely in connection with the Hong Kong Public Offering which forms part of the Global Offering. For applicants under the Hong Kong Public Offering, this prospectus and the Application Forms set out the terms and conditions of the Hong Kong Public Offering. The Listing is sponsored by the Sole Sponsor. The Hong Kong Public Offering will be fully underwritten by the Hong Kong Underwriters under the terms of the Hong Kong Underwriting Agreement and is subject to the agreement to the Offer Price between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters). The Global Offering is managed by the Sole Global Coordinator. The International Placing will be fully underwritten by the International Underwriters under the terms of the International Underwriting Agreement. For further information about the Underwriters and the underwriting arrangements, please refer to the section headed “Underwriting” in this prospectus. DETERMINATION OF THE OFFER PRICE The Offer Shares are being offered at the Offer Price which will be determined by the Sole Global Coordinator (for itself and on behalf of the other Underwriters) and our Company (for ourselves and on behalf of the Selling Shareholders) on or around Thursday, 11 June 2015 (Hong Kong time) or such later time as may be agreed between the Sole Global Coordinator (for itself and on behalf of the other Underwriters) and our Company, but in any event no later than Saturday, 13 June 2015 (Hong Kong time). If, for any reason, the Offer Price is not agreed among our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters), the Global Offering will not proceed. RESTRICTIONS ON OFFER AND SALE OF OFFER SHARES No action has been taken to permit a public offering of the Offer Shares or the distribution in this prospectus and/or the related Application Forms in any jurisdiction other than Hong Kong. Accordingly, this prospectus may not be used for the purpose of, and does not constitute, an offer or invitation, nor is it calculated to invite or solicit offers in any jurisdiction or in any circumstances in which such an offer or invitation is not authorised or to any person to whom it is unlawful to make such an offer or invitation. The distribution in this prospectus and the offering of the Offer Shares in other jurisdictions are subject to restrictions and may not be made except as permitted under the securities laws of such jurisdiction pursuant to registration with or an authorisation by the relevant securities regulatory authorities or an exemption therefrom. In particular, the Offer Shares have not been offered and sold, and will not be offered or sold, directly or indirectly in the U.S., except in compliance with the relevant laws and regulations of such jurisdiction. – 63 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING SELLING SHAREHOLDERS Name of the Selling Shareholders Number of Sale Shares Mr. Chan Kin Wa Ms. GUO XUEYAN 19,572,366 Shares 5,427,634 Shares Details of the Selling Shareholders are set out under the section headed “Appendix V – Statutory and General Information – Particulars of the Selling Shareholders” in this prospectus. INFORMATION ON THE GLOBAL OFFERING The Offer Shares are offered to the public in Hong Kong for subscription solely on the basis of the information contained and the representations made in this prospectus and the related Application Forms. No person is authorised in connection with the Global Offering to give any information or to make any representation not contained in this prospectus, and any information or representation not contained in this prospectus must not be relied upon as having been authorised by our Company, the Selling Shareholders, the Sole Global Coordinator, the Joint Bookrunners, the Sole Sponsor, the Underwriters, any of their respective directors, agents or advisers or any other person involved in the Global Offering. Each person acquiring the Offer Shares will be required, and is deemed by his acquisition of the Offer Shares, to confirm that he is aware of the restrictions on offers of the Offer Shares described in this prospectus and that he is not acquiring, and has not been offered any Offer Shares in circumstances that contravene any such restrictions. Prospective applicants for Offer Shares should consult their financial advisers and take legal advice, as appropriate, to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective applicants for the Offer Shares should inform themselves as to the relevant legal requirements of applying for the Offer Shares and any applicable exchange control regulations and applicable taxes in the countries of their respective citizenship, residence or domicile. APPLICATION FOR LISTING OF THE SHARES ON THE STOCK EXCHANGE We have applied to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, our Shares in issue and to be issued as mentioned in this prospectus (including any Shares which may be issued pursuant to the exercise of the Over-allotment Option or options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme). No part of our Shares is listed on or dealt in on any other stock exchange and no such listing or permission to list is being or currently proposed to be sought in the near future. HONG KONG REGISTER OF MEMBERS AND STAMP DUTY All Shares issued by us pursuant to applications made in the Hong Kong Public Offering will be registered on our branch register of members to be maintained in Hong Kong by Tricor Investor Services Limited, our Hong Kong Share Registrar. Our principal register of members will be maintained in the Cayman Islands by our Company’s principal share registrar, Codan Trust Company (Cayman) Limited. Dealings in Shares registered in our Hong Kong Share Registrar will be subject to Hong Kong stamp duty. Only Shares registered on our Hong Kong register of members can be traded on the Stock Exchange. – 64 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING PROFESSIONAL TAX ADVICE RECOMMENDED If you are unsure about the taxation implications of subscribing for or purchasing, holding or disposing of or dealing in the Offer Shares, you should consult your professional advisers. None of the Company, the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator, the Joint Bookrunners, the Underwriters, their respective directors and any other person involved in the Global Offering accepts responsibility for any tax effects on, or liability of, any person or holders of Shares resulting from subscribing for, purchasing, holding or disposing of or dealing in the Offer Shares. OVER-ALLOTMENT OPTION AND STABILISATION Details of the arrangements relating to the Over-allotment Option and the related stabilisation exercise are set out in the section headed “Structure of the Global Offering” in this prospectus. STOCK BORROWING ARRANGEMENT For the purpose of covering over-allocations in the International Placing, the Stabilising Manager, in its capacity as stabilising manager, may borrow up to 22,500,000 Shares from Song Rising, equivalent to the maximum number of Shares to be issued on a full exercise of the Over-allotment Option, under the Stock Borrowing Agreement. Such stock borrowing arrangement will be in compliance with Rule 10.07(3) of the Listing Rules. PROCEDURE FOR APPLICATION FOR THE HONG KONG PUBLIC OFFER SHARES The procedure for application for the Hong Kong Public Offer Shares is set out in the section headed “How to Apply for the Hong Kong Public Offer Shares” in this prospectus and on the relevant Application Forms. STRUCTURE OF THE GLOBAL OFFERING Details of the structure of the Global Offering, including conditions of the Global Offering, are set out in the section headed “Structure of the Global Offering” in this prospectus. SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS If the Stock Exchange grants the listing of, and permission to deal in, the Shares on the Stock Exchange and we comply with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares on the Stock Exchange or such other date HKSCC chooses. Investors should seek the advice of their stockbroker or other professional advisers for details of those settlement arrangements as such arrangements will affect their rights, interest and liabilities. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second business day after any trading day. All necessary arrangements have been made for the Shares to be admitted to CCASS. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. – 65 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING COMMENCEMENT OF DEALINGS IN THE SHARES Dealings in the Shares on the Stock Exchange are expected to commence at 9:00 a.m. on Thursday, 18 June 2015. The Shares will be traded in board lots of 1,000 Shares each. ROUNDING Unless otherwise stated, all the numerical figures are rounded to one decimal place. Any discrepancies in any table or chart between totals and sums of amounts listed therein are due to rounding. LANGUAGE If there is any inconsistency between this prospectus and the Chinese translation in this prospectus, this prospectus shall prevail. Translated English names of Chinese laws and regulations, governmental authorities, departments, entities (including certain of our subsidiaries), institutions, natural persons, facilities, certificates, titles and the like included in this prospectus and for which no official English translation exists are unofficial translations for identification purposes only. In the event of any inconsistency, the Chinese name prevails. EXCHANGE RATE CONVERSION Solely for your convenience, this prospectus contains translations of certain Renminbi amounts into Hong Kong dollars, of Renminbi amounts into U.S. dollars and of Hong Kong dollars into U.S. dollars at specified rates. Unless we indicate otherwise, the translation of Renminbi into Hong Kong dollars, of Renminbi into U.S. dollars and of Hong Kong dollars into U.S. dollars, and vice versa, in this prospectus as at the Latest Practicable Date was made at the following rate: RMB0.80 to HK$1.00 RMB1.00 to US$0.16 HK$1.00 to US$0.13 No representation is made that any amounts in Renminbi, Hong Kong dollars or U.S. dollars can be or could have been at the relevant dates converted at the above rates or any other rates or at all. – 66 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING DIRECTORS Name Residential Address Nationality Executive Directors: Zheng Songhui (鄭松輝) Room 102, No. 297 Bing Lang Dong Li Siming District, Xiamen Fujian Province, PRC Chinese Zheng Tianming (鄭天明) Qiao Shan No. 107, Qiaoshan Village Yancuo Town, Longhai Fujian Province, PRC Chinese Zheng Ruyan (鄭如燕) Unit 1510, No.9 Jinzhong Road Huli District, Xiamen Fujian Province, PRC Chinese 1-4-0404, Yuan No. 10, Dongbai Street Guangqu Road Beijing, PRC Chinese Mak Hing Keung Thomas (麥興強) 4/F, Cherry Court, 12 Tai Hang Road Tai Hang, Hong Kong Canadian Lou Robert Hsiu-sung (樓秀嵩) 5/F, No. 8, 176 Xiang, Siwei Road 18 Lin, Qunxian Li Daan District, Taipei Chinese Cheng Hiu Yung (鄭曉勇) Flat 4, 30/F Block H, Kam Ho House Phase 5, Kam Fung Court Ma On Shan, New Territories Hong Kong Chinese Non-executive Director: Zhang Lin (張琳) Independent Non-executive Directors: For further information regarding our Directors, please refer to the section headed “Directors and Senior Management” in this prospectus. – 67 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING PARTIES INVOLVED IN THE GLOBAL OFFERING Sole Sponsor Essence Corporate Finance (Hong Kong) Limited 39/F, One Exchange Square Central Hong Kong Sole Global Coordinator Essence International Securities (Hong Kong) Limited 39/F, One Exchange Square Central Hong Kong Joint Bookrunners and Joint Lead Managers Essence International Securities (Hong Kong) Limited 39/F, One Exchange Square Central Hong Kong Haitong International Securities Company Limited 22/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Co-lead Manager SBI China Capital Financial Services Limited Unit A2, 32/F, United Centre 95 Queensway Hong Kong Legal advisers to the Company As to Hong Kong law Jun He Law Offices Suite 3701-10, 37/F Jardine House 1 Connaught Place Central Hong Kong As to Cayman Islands and British Virgin Islands laws Walkers Suite 1501-1507 Alexandra House 18 Chater Road Central Hong Kong – 68 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING As to PRC law Jun He Law Offices 25/F, Tower 3 Jing An Kerry Centre 1228 Middle Yan’an Road Shanghai 200040 The PRC Legal advisers to the Sole Sponsor and the Underwriters As to Hong Kong law DLA Piper Hong Kong 17/F, Edinburgh Tower The Landmark 15 Queen’s Road Central Hong Kong As to PRC law Jingtian & Gongcheng Law Firm Suite 1202-1204, K. Wah Centre 1010 Huaihai Road (M) Xuhui District Shanghai 200031 The PRC Auditors and reporting accountants RSM Nelson Wheeler 29th Floor, Caroline Centre 28 Yun Ping Road Causeway Bay Hong Kong Property valuer and biological assets valuer Jones Lang LaSalle Corporate Appraisal and Advisory Limited 6/F, Three Pacific Place 1 Queen’s Road East, Admiralty Hong Kong Internal control consultant RSM Nelson Wheeler Consulting Limited 29th Floor, Caroline Centre 28 Yun Ping Road Causeway Bay Hong Kong – 69 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING Independent market consultant Euromonitor International Limited 60-61 Britton Street London EC1M 5UX Property Inspection Institute Fujian Bo Hai Engineering Technology Co., Ltd (福建博海工程技術有限公司) Building No. 2, Chixing Industrial Region Xindian Town, Jin’an District, Fuzhou Fujian Province The PRC Receiving bank Industrial and Commercial Bank of China (Asia) Limited 33/F, ICBC Tower 3 Garden Road Central Hong Kong Selling Shareholders Mr. Chan Kin Wa Ms. GUO XUEYAN – 70 – CORPORATE INFORMATION Registered office Cricket Square Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands Headquarters and principal place of business in the PRC 8th Floor, Building No. 10 Guanyinshan Business Center Siming District, Xiamen China Place of business in Hong Kong 18/F, Tesbury Centre 28 Queen’s Road East Wanchai Hong Kong Website address www.china-greenfresh.com (this website address and its contents do not form part of this prospectus) Joint company secretaries Ms. Zheng Ruyan Unit 1510, No.9 Jinzhong Road Huli District, Xiamen Fujian Province, PRC Ms. Ng Wing Shan 18/F, Tesbury Centre 28 Queen’s Road East Wanchai Hong Kong (associate member of the Hong Kong Institute of Chartered Secretaries and the Institute of Chartered Secretaries and Administrators in the United Kingdom) Authorised representatives Ms. Zheng Ruyan Unit 1510, No.9 Jinzhong Road Huli District, Xiamen Fujian Province, PRC Ms. Ng Wing Shan 18/F, Tesbury Centre 28 Queen’s Road East Wanchai Hong Kong – 71 – CORPORATE INFORMATION Principal banker Agricultural Bank of China (Longhai Branch) 13/F, Gong Shang Building No.45 Ziguang Road, Shima Town, Longhai Fujian Province, PRC Audit committee Mr. Mak Hing Keung Thomas (Chairman) Mr. Lou Robert Hsiu-sung Mr. Cheng Hiu Yung Remuneration committee Mr. Cheng Hiu Yung (Chairman) Mr. Mak Hing Keung Thomas Mr. Zheng Songhui Nomination committee Mr. Zheng Songhui (Chairman) Mr. Lou Robert Hsiu-sung Mr. Cheng Hiu Yung Principal share registrar and transfer office Codan Trust Company (Cayman) Limited Cricket Square Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands Hong Kong branch share registrar and transfer office Tricor Investor Services Limited Level 22 Hopewell Centre 183 Queen’s Road East Hong Kong Compliance adviser Essence Corporate Finance (Hong Kong) Limited 39/F, One Exchange Square Central Hong Kong – 72 – INDUSTRY OVERVIEW Certain information and statistics relating to the industry in which our Group operates provided in this section have been derived from official government sources. Our Directors believe that the sources of the information in this “Industry Overview” section are appropriate sources for such information, and Our Group has taken reasonable care in extracting and reproducing such information. Our Directors have no reason to believe that such information is materially false or misleading, and no fact has been omitted that would render such information materially false or misleading. However, the information has not been independently verified by Our Directors, the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator, the Joint Bookrunners, the Underwriters, or any other party involved in the Global Offering and no representation is given as to its accuracy. Certain information and statistics are extracted from the Euromonitor Report. The information extracted from the Euromonitor Report reflects an estimate of the market’s size and performance from publicly available secondary sources and trade survey analysis of the opinions and perspectives of leading industry players, and is prepared primarily as a market research tool. The information extracted from the Euromonitor Report should not be viewed as a basis for investments provided by Euromonitor and references to the Euromonitor Report should not be considered as Euromonitor’s opinion as to the value of any security or the advisability of investing in the Company. While reasonable care has been taken in the extraction, compilation and reproduction of such information and statistics by the Company, none of the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator, the Joint Bookrunners, the Underwriters, their respective affiliates, directors or advisers, nor any party involved in the Global Offering including Euromonitor International Limited have independently verified such information and statistics directly or indirectly derived from official government publications, and such parties do not make any representation as to their accuracy. The information and statistics may not be consistent with other information and statistics compiled by other parties. SOURCES OF INFORMATION Report conducted by Euromonitor Euromonitor is an Independent Third Party market research company providing trade and strategy research to support corporate strategic review, new business planning, product and brand management, competitive strategies and informed supply chain views, along with 80 countries’ industry data and over 200 countries’ macro information and consumer trend information. Euromonitor was commissioned by our Group to prepare the Euromonitor Report in respect of the king trumpet mushroom, button mushroom and canned vegetables and fruit categories in the PRC for the period from 2009 to 2013 and the projection from 2014 to 2018. For the avoidance of doubt, king trumpet mushroom, button mushroom and canned vegetables and fruit categories in this section refer to the following, respectively: Pleurotus eryngii (杏鮑菇) (also commonly known as king trumpet mushroom) Pleurotus eryngii is a type of edible mushroom with a thick meaty white stem and a small tan cap (in young specimens). King trumpet mushroom in this section includes fresh, frozen, dried, salted, preserved and canned variants. – 73 – INDUSTRY OVERVIEW Agaricus bisporus (雙孢菇) (also commonly known as button mushroom) Agaricus bisporus refers to the edible mushroom that is with a short thick stalk and a cap in white or brown colors. It is the most common type of mushroom. Button mushroom in this section includes fresh, frozen, dried, salted, preserved and canned variants. Canned vegetables and fruit • Canned/preserved vegetables in this section refer to processed vegetables (single type and mixed) such as peas, corn, mushrooms, bamboo shoots, asparagus, water chestnuts, chilis, cow peas, carrots and olives, which are sold in cans, glass jars, and aluminium/retort packaging, excluding tomatoes, beans or pickled vegetables. • Canned fruit in this section refer to an aggregation of preserved and stewed fruit packaged in metal cans, glass jars, and bricks/cups typically containing apples, mandarin oranges, cherries, peaches, pineapples, cocktails, pears, longgan, lychee, compote, coconuts and the like. We have paid a fee of approximately RMB339,200 for the Euromonitor Report, which we believe reflects market rates. Our Directors are of the view that the payment of the fee does not affect the fairness of conclusions in the Euromonitor Report. Information disclosed in this prospectus which is attributable to Euromonitor has been extracted from the Euromonitor Report, which was prepared in the ordinary course of business of Euromonitor, and published with the consent of Euromonitor. Euromonitor is not an official government source for such information, but the Sole Sponsor and the Directors have exercised reasonable care in reproducing such information and have no reasonable grounds to believe that any such information being included in this prospectus is untrue. Research Methodology Euromonitor prepared the Euromonitor Report based on a robust view and independent market assessment for China’s edible fungi and canned vegetables and fruit market categories. Euromonitor utilised various sources including but not limited to government statistics, industry reports, industry associations’ publications, public information and financials of industry players, and existing data from Euromonitor’s passport database. The primary research involved reviewing information sourced from store visits undertaken by local analysts in the PRC and trade interviews conducted with organisations including manufacturers, distributors and retailers in the industry, as well as trade associations for their opinions and insights. All primary and secondary sources of data and information were collated, cross-checked and analysed to ensure a robust research feed for analysis and to build industry consensus to the extent possible with the final data. – 74 – INDUSTRY OVERVIEW The Euromonitor Report includes both historical and forecast information on the edible fungi and canned vegetables and fruit industry in the PRC, which has been quoted in this prospectus. Euromonitor adopted its standard practice of both quantitative and qualitative forecasting in terms of projecting the market size by production volume, on the basis of an in-depth review of the historical development trend of the markets. This review was cross-checked with established industry figures and trade interviews where available. In compiling and preparing the research, Euromonitor also adopted certain assumptions and relied on other secondary and primary sources of information while making projections for the forecast period of 2014-2018 for the edible fungi and canned vegetables and fruit industry in the PRC, including the following: (i) the overall political environment in the PRC and globally will remain stable; (ii) disposable income of the urban population and the gross income of the rural population in the PRC will continue to increase at a steady pace; (iii) the economic environment in the PRC will remain stable; (iv) consumers’ consumption behaviours in the PRC will not alter significantly; and (v) the social environment in the PRC will remain stable. Based on the above, our Directors are satisfied, and the Sole Sponsor concurs, that the disclosure of future projections and industry data included in this section is not misleading. Our Directors confirmed that, as at the Latest Practicable Date, after taking reasonable care, there had been no adverse change in the market information since the date of the Euromonitor Report which may qualify, contradict or have an impact on the information in this section. Except as otherwise noted, all of the data and forecasts contained in this section are derived from the Euromonitor Report. CHINA MACRO ECONOMY OVERVIEW The PRC economy has experienced dynamic growth in the past 30 years and economic stimulus policies recently implemented by the Chinese Government have continued to boost economic growth. With the increasing trend towards urbanisation, income levels for both urban and rural residents increased every year from 2009 to 2013. According to the National Bureau of Statistics of China, the per capita disposable income for urban residents increased from RMB17,174.7 in 2009 to RMB26,955.1 in 2013, representing a CAGR of 11.9%, while the per capita annual net income of rural residents in the PRC increased from RMB5,153.2 in 2009 to RMB8,895.9 by 2013, representing a CAGR of 14.6%. The increase in income and greater purchasing power fuelled the middle-to-upper-end consumer goods sectors, allowing Chinese consumers to trade up on purchases, and give more attention to the safety, quality, raw materials as well as the health and nutrition for food consumption, including mushroom. – 75 – INDUSTRY OVERVIEW The total retail sales of consumer goods in the PRC recorded a growth at a value CAGR of 15.7% from 2009 to 2013. Consumer Price Index (“CPI”) in the PRC recorded a low point in 2009 and experienced a strong rebound in 2011, as domestic consumption was driven up by PRC government’s stimulus package. Since 2012, CPI growth rate has sustained at around 1% to 2%. Given the slowed-down but overall steady trends of China’s robust macro economy, it is fair to predict that CPI would sustain its growth at around 1% to 2% in the coming years. The following chart illustrates the CPI in the PRC from January 2009 to November 2014. CPI 108 106 104 102 100 98 96 94 2009 January Source: 2010 January 2011 January 2012 January 2013 January 2014 January National Bureau of Statistics of the PRC EDIBLE FUNGI MARKET SIZE IN THE PRC According to the China Edible Fungi Association, China’s edible fungi production volume grew from approximately 20.2 million tonnes in 2009 to approximately 31.3 million tonnes in 2013, representing a CAGR of 11.5% from 2009 to 2013. Nearly 90% of total output of edible fungi was consumed domestically. These edible fungi products primarily include fresh edible fungi produce, dried mushrooms, salted mushrooms and canned edible fungi. Canned edible fungi are mainly for exportation, accounting for approximately 60% of China’s total edible fungi exports. It is estimated that China’s edible fungi production volume will grow from 34.6 million tonnes in 2014 to 48.9 million tonnes in 2018, representing a CAGR of 9.1%. King Trumpet Mushroom Supply Since 2009, China’s production volume of king trumpet mushrooms has been growing at annual rate of above 20%. According to the China Edible Fungi Association, industrial production accounted for more than 50% of China’s total production of king trumpet mushroom. Zhangzhou, Fujian province, was home to approximately 75 large industrial king trumpet mushroom producers in 2013 with a combined daily output of approximately 280 tonnes or annual output of 100,000 tonnes. Zhangzhou has become one of the largest king trumpet mushroom producing areas in China. According to the Euromonitor Report, production volume of king trumpet mushroom in the PRC exceeded 924,000 tonnes in 2013, increased by 26.8% from 2012. It is expected that the production volume of king trumpet mushroom will increase from approximately 1.1 million tonnes in 2014 to approximately 1.8 million tonnes in 2018, representing a CAGR of 13.6%. – 76 – INDUSTRY OVERVIEW The following chart demonstrates the production volume of king trumpet mushroom in the PRC from 2009 to 2013 and its forecast from 2014 to 2018. 2,000 45% 39.4% 1,800 40% 1,600 35% 28.4% 1,400 30% 26.8% 1,200 25% 24.2% 1,000 15.4% 800 600 1,066.7 400 200 0 15.5% 421.0 523.0 2010 2011 729.3 1,232.5 20% 13.2% 10.9% 1,414.3 924.5 1,601.2 1,776.5 2009 15% 10% 5% 328.0 2012 2013 2014E 2015E King Trumpet Mushroom Production Volume – ’000 tonnes Source: 14.8% 2016E 2017E 2018E 0% Year-on-year Growth % China Edible Fungi Association, Euromonitor’s estimates from trade interviews and desk research. King Trumpet Mushroom Demand It is an industry norm to categorise king trumpet mushroom into three grades, namely top-graded, second-graded and lower-graded. It is common to grade king trumpet mushroom largely based on the factors such as size, form and intactness though there are variations about the grading standards in different regions in the PRC. The wholesale price of top-graded king trumpet mushroom was at approximately RMB30 per kilogram or above in 2012 which was notably higher than that of second graded and lower-graded king trumpet mushroom. According to the Euromonitor Report, approximately 80.0% of king trumpet mushroom produced by the top five leading producers of king trumpet mushroom as identified in the Euromonitor Report, including Fujian Greenfresh Foods, is top-graded king trumpet mushroom. According to the Euromonitor Report, given Fujian Greenfresh Foods was the largest producer of king trumpet mushroom in terms of production volume in 2013 with a market share of 2.5% in 2013, Fujian Greenfresh Foods was also a leading producer of top-graded king trumpet mushroom in terms of production volume and market share in 2013. Domestic sales of king trumpet mushroom increased at a CAGR of 27.6%, from 309,500 tonnes in 2009 to 820,400 tonnes in 2013, while production grew nearly 30% annually during the same period. Due to the under-supply of top-graded mushroom and over-supply of lower quality king trumpet mushroom, there was an imbalance between production volume and sales volume. This was in large part attributable to the entry of a large number of smaller sized producers since 2012 that however lowered the average product quality. It is estimated that within years, the supply-demand of king trumpet mushroom sector will become more balanced and that the sales volume of king trumpet mushroom will increase from less than 1.0 million tonnes in 2014 to approximately 1.7 million tonnes in 2018, representing a CAGR of 14.7%. – 77 – INDUSTRY OVERVIEW The following chart demonstrates the sales volume of king trumpet mushroom in the PRC from 2009 to 2013 and its forecast from 2014 to 2018. 1,800 40% 35.0% 1,600 1,400 35% 28.5% 30% 1,200 22.8% 24.5% 1,000 25% 18.3% 17.5% 15.8% 800 11.4% 600 970.5 400 200 0 397.6 495.2 2010 2011 668.3 1,140.2 1,320.1 820.4 1,510.6 15% 10% 1,682.2 5% 309.5 2009 2012 2013 2014E 2015E King Trumpet Mushroom Domestic Sales Volume – ’000 tonnes Source: 20% 14.4% 2016E 2017E 2018E 0% Year-on-year Growth % China Edible Fungi Association, Euromonitor’s estimates from trade interviews and desk research. Historical Price Trend of King Trumpet Mushroom and Raw Materials The price of king trumpet mushroom was historically affected by various factors, including among others, industrial production, seasonality in cultivation and consumer habits. Prices of king trumpet mushroom are generally higher from July to September, and are usually the highest at the beginning of the year. According to the Ministry of Agriculture’s national agricultural product wholesale price information website (pfscnew.agri.gov.cn), the national average wholesale price for king trumpet mushroom increased sharply in 2009 from approximately RMB9 per kilogram to approximately RMB13 per kilogram. In December 2011, wholesale prices of king trumpet mushroom reached a record high level of approximately RMB23 per kilogram. From 2009 to 2011, demand for king trumpet mushroom was robust, and mainly came from food service consumption in high-end restaurants, as well as family consumption in first-tier cities, and thus product quality was generally good. Consumption volume expanded rapidly, while production capacity had yet to be stretched. As a result, price stayed high. In 2012, as industrial production pushed up the total output dramatically whilst market demand remained robust, wholesale prices of king trumpet mushroom were overall stable in 2012. In 2013, wholesale prices during the peak season hovered around RMB9 per kilogram and spiked in January and February of 2014 to above RMB10 per kilogram. The average wholesale prices of king trumpet mushroom throughout the rest of 2014 stablised at approximately RMB7 per kilogram or above and experienced a trend parallel to 2013 with less fluctuation. The wholesale prices of king trumpet mushroom were not available as at the Latest Practicable Date. Market demand for high-quality top-grade and premium king trumpet mushroom remained high and prices for high-end king trumpet mushroom were largely unchanged over the recent years. Premium king trumpet mushroom from Gutian, Fujian province, recorded wholesale prices of up to RMB20 per kilogram, while those for top-grade king trumpet mushroom achieved as high as RMB50 per kilogram. – 78 – INDUSTRY OVERVIEW The main raw materials for growing king trumpet mushroom include strains, bran, dregs of beans, corncob, corn powder and sawdust, which are all agricultural by-products or organic wastes. These materials are consistently at low cost and easily accessible. Due to the fragmented nature of agricultural by-products, there lacks robust price information recorded or centralised within the agricultural systems, and therefore raw materials price information is unavailable. The following chart demonstrates the average monthly wholesale price of king trumpet mushroom in the PRC from January 2014 to January 2015: Wholesale Price RMB/ 12 kilogram 10 8 6 4 Ja 0 n14 Fe b1 M 4 ar -1 A 4 pr -1 M 4 ay Ju 14 n14 Ju l-1 A 4 ug -1 Se 4 p1 O 4 ct -1 N 4 ov -1 D 4 ec -1 Ja 4 n15 2 Source: Ministry of Agriculture’s national agricultural product wholesale price information website (pfscnew.agri.gov.cn) Button Mushroom Supply The production of button mushroom largely depends on individual growers, who contributed to nearly 90% of the total production volume. Industrial production volume only constitutes 10% of the total button mushroom production volume. The remaining output was from semi-industrial production at mushroom factories. In order to facilitate the button mushroom market, the relevant local governments work with the villagers’ committees to establish button mushroom production bases near major cultivation areas as platforms of pricing, trading, logistics and market information, and to build up connections for individual growers and edible fungi companies which provide strains and technical support as well as purchasing final products from individual growers. According to the Euromonitor Report, China’s total production of button mushroom was approximately 2.3 million tonnes in 2013, increased by approximately 4.0% from 2012. The total button mushroom production volume increased at a CAGR of 1.1% from 2009 to 2013. It is estimated that the total button mushroom production volume will increase from approximately 2.4 million tonnes in 2014 to approximately 2.7 million tonnes in 2018, representing a CAGR of 3.2%. – 79 – INDUSTRY OVERVIEW The following chart demonstrates the production volume of button mushroom in the PRC from 2009 to 2013 and its forecast from 2014 to 2018. 3,000 15% 11.4% 2,500 10% 4.2% 4.0% 2,000 2,462.1 2,181.0 3.2% 2.8% 5% 2,696.0 0% 2,276.3 1.3% 1,500 3.8% 3.1% 2,373.0 2,188.3 2,447.1 2,539.6 2,622.0 2,210.0 1,000 -5% 500 -10% -11.1% 0 2009 2010 2011 2012 2013 2014E 2015E 2016E Button Mushroom Production Volume – ’000 tonnes Source: 2017E 2018E -15% Year-on-year Growth % China Edible Fungi Association, Euromonitor’s estimates from trade interviews and desk research. Button Mushroom Demand Overall, the button mushroom sector experienced an estimated high sales-to-production ratio in the period from 2009 to 2013. The joint cooperative model involving production bases, edible fungi companies and individual growers is widely adopted and ensures centralised inventory management and sales management to maintain turnover. The total button mushroom sales volume slightly increased from approximately 2.1 million tonnes in 2009 to approximately 2.2 million tonnes in 2013, representing a CAGR of 1.1%. It is estimated that the total sales volume of button mushroom will increase from approximately 2.3 million tonnes in 2014 to approximately 2.6 million tonnes in 2018, representing a CAGR of 3.3%. The following chart demonstrates the sales volume of button mushroom in the PRC from 2009 to 2013 and its forecast from 2014 to 2018. 3,000 10% 7.7% 8% 2,500 6% 4.2% 2,000 4.0% 2,215.5 3.2% 3.8% 3.4% 2.9% 1,500 2,316.8 2,124.1 2,303.5 2,125.6 4% 2% 1.3% 2,376.2 2,466.8 2,550.0 2,625.0 2,150.9 0% -2% 1,000 -4% -6% 500 -8% -8.3% 0 2009 2010 2011 2012 2013 2014E Button Mushroom Domestic Sales Volume – ’000 tonnes Source: 2015E 2016E 2017E 2018E -10% Year-on-year Growth % China Edible Fungi Association, Euromonitor’s estimates from trade interviews and desk research. – 80 – INDUSTRY OVERVIEW Historical Price Trend of Button Mushroom and Raw Material According to the Ministry of Agriculture’s national agricultural product wholesale price information website (pfscnew.agri.gov.cn), wholesale prices of button mushroom have been steadily on the rise since 2009, from approximately RMB5 per kilogram to RMB8 per kilogram to approximately RMB10 per kilogram to RMB14 per kilogram, reached a peak in 2012 and then declined since 2013 to approximately RMB8 per kilogram to RMB11 per kilogram. In 2013, prices in the Northern China market flowed within the range of RMB5 per kilogram to RMB9 per kilogram. However, in coastal regions such as Jiangsu and Zhejiang provinces, where climate affects the production, price variations can be up to RMB10 per kilogram within a year. In 2013, prices in the Southern China market ranged from RMB8 per kilogram to RMB18 per kilogram. In 2014, the wholesale price of button mushroom in national average further levelled out to between RMB6 per kilogram and RMB10 per kilogram, but exhibited greater stability than previous years. The wholesale prices of button mushroom were not available as at the Latest Practicable Date. The main raw materials for the production of button mushroom include straw and cow dung, both of which are agricultural by-products or organic waste. These materials are consistently cheap with easy access. The entire production is also a waste recycling process that lowers the cost of button mushroom. Due to the fragmented nature of agricultural by-products, there lacks robust price information recorded or centralised within the agricultural systems, and therefore raw materials price information is unavailable. The following chart demonstrates the average monthly wholesale price of button mushroom in the PRC from 2011 to 2014. Wholesale Price 18 RMB/ kilogram 16 14 12 2011 10 2012 8 2013 6 2014 4 2 Month 0 1 Source: 2 3 4 5 6 7 8 9 10 11 12 Ministry of Agriculture’s national product wholesale price information website (pfscnew.agri.gov.cn) – 81 – INDUSTRY OVERVIEW DRIVERS OF EDIBLE FUNGI MARKET According to the Euromonitor Report, the PRC edible fungi market is primarily driven by the following major drivers: • improved health awareness among consumers in pursuit of dietary nutrition. Improved living standards, higher disposable income and improved health awareness drive Chinese consumers to increase spending in edible fungi, which is characterised with high nutritional value, green sources, freshness, eco-friendly and pollution-free features. • great growth potentials of mushroom consumption in food service and modern retail channels. In 2013, China’s food service industry generated RMB2,539.2 billion in sales revenue, an increase by 9% compared to 2012. Demand for high-quality edible fungi as dish ingredients in restaurants continues to grow. In addition, sales of edible fungi have recorded vibrant growth in retail channels such as hypermarkets, supermarkets and online retailers. • efforts of central and local governments to encourage development of value-added agriculture. The PRC central government issued the No. 1 file of “Several Opinions on Comprehensively Deepening Rural Reform and Accelerating the Promotion of Agricultural Modernisation” in 19 January 2014, which emphasises the development and advancement of modern agriculture. The development of the edible fungi industry is part of such advancement. Local governments in some major producing regions, such as Gaomi, Shandong province; Mudanjiang, Heilongjiang province; Gutian, Fujian province, provide leading mushroom producing companies in the local market with incentives as favourable land use policy, funding support and brand certification. Leading mushroom producing companies, recommended by county- or city-level agriculture authorities, are eligible to apply for provincial-level project funds which can be used to build agricultural zones, agricultural product wholesale markets and logistics centres. Government funding also helps the formation of agricultural clusters and raise the level of mechanisation in farming, which also drives the income growth for farmers. FUTURE OPPORTUNITIES The PRC edible fungi market demonstrates high growth potential in edible fungi consumption per capita. As consumers become more health conscious with more nutrition intake, edible fungi consumption is expected to grow in the future. Industrial production, which involves maturing mechanisation, full-process automation and digital management, will be more widely used in the edible fungi cultivation. In the future, major mushroom-producing regions are expected to continue the commitment to building modern warehousing and logistics facilities, cold chains, agro-commodities wholesale markets and distribution centres. In addition, large size edible fungi companies will attempt to expand to both upstream and downstream industries such as mushroom processing, food service and agricultural by-product to make full use of the resources of mushroom growing, to increase profitability and expand their distribution networks. – 82 – INDUSTRY OVERVIEW THREATS AND CHALLENGES OF EDIBLE FUNGI MARKET According to the Euromonitor report, the PRC edible fungi market has following major challenges for future development: • labour-intensive industry with relatively low investment in research and technology development. Overall, China’s edible fungi industry is still in a developing stage and is currently in a state of labour-intensive and experimental production. Major industrial production regions are in different stages of development, lacking a consolidated planning and development strategy at national level. Low levels of mechanisation restrain production efficiency and supply of high-quality species. As a result, many species are inconsistent in quality especially among the large number of middle-to-small scaled producers. • overcapacity impedes profitability of certain mushroom species. For example, enokitake (金針 菇) has experienced sharp price declines in recent years as a result of over-industrialisation and surging output, resulting in the huge losses and even shutdown of many mushroom manufacturers. Some companies previously specialising in enokitake have shifted their attention to king trumpet mushroom in 2013 and therefore the number of producers of king trumpet mushroom increased dramatically from 2012 to 2013, which however declined the overall king trumpet mushroom quality, which led to a temporary imbalance between demand and supply. In the future, those companies with low mechanisation and quality issues will be likely eliminated from the market. • the PRC Government’s anti-corruption regulations curbing the consumption for expensive mushroom in high-end restaurants. The central government’s tightened rules to restrain extravagance have adversely affected the sale of high-end restaurants, including premium dishes and the food ingredients. High-end food service demand for premium fresh mushroom produce would be affected correspondingly. COMPETITIVE LANDSCAPE AND NATURE OF COMPETITION King trumpet mushroom According to China Edible Fungi Association, there were more than 500 industrial producers of king trumpet mushroom in the PRC as at the end of 2013 with small and medium sized new entrants. Entry barriers and the competitiveness largely lie in product quality, research and development, manufacturing equipment, branding as well as the capital. – 83 – INDUSTRY OVERVIEW The five largest producers in aggregate produced almost 10% of China’s total king trumpet mushroom by production volume in 2013. Amongst the top five players of king trumpet mushroom, Fujian Greenfresh Foods and Lvya (Jiangsu) Mushroom Co., Ltd. run with a complete supply chain by consolidating growing, production, and processing, research and development and distribution. Fujian Greenfresh Foods was ranked the first in terms of production volume in 2013, with an annual output of approximately 23,300 tonnes, or 2.5% share of China’s total king trumpet mushroom production volume. The rankings in terms of production volume of China’s king trumpet mushroom were not available at the Latest Practicable Date. The Company was generally positioned above the industry average. According to the Company, it recorded a sales volume of king trumpet mushroom of approximately 14,489 tonnes, 23,579 tonnes and 26,628 tonnes for the three years ended 31 December 2012, 2013 and 2014 respectively. For the same periods, the Company’s average selling price of king trumpet mushroom was RMB9.4 per kilogram, RMB8.3 per kilogram and RMB7.5 per kilogram respectively. The table below sets out the top five leading producers of king trumpet mushroom in terms of production volume in 2013. Top Five Leading Players of King Trumpet Mushroom by Production Volume in China, 2013 2013 Ranking Production Volume Company Name Share % Listed Company ’000 Tonnes 1 2 Others Fujian Greenfresh Foods Lianyungang Xiangru Mushroom Co., Ltd. Lvya (Jiangsu) Mushroom Co., Ltd. Shandong Baoyi Biotechnology Co., Ltd. Lvyuan Yongle Mushroom Technology Co., Ltd. – Total – 3 4 5 Source: 23.3 2.5% No 18.5 16.5 16.5 2.0% 1.8% 1.8% No No No 15.0 834.7 1.6% 90.3% No 924.5 100.0% Euromonitor’s estimates from trade interviews and desk research. Notes: (1) The market share data reported above has been determined via a fieldwork program consisting of desk research and trade interviews. While audited data was available for some of the companies, they typically do not break the revenue numbers into the relevant categories which were covered in this study. For these companies as well as those companies that are included in the market shares but are not publicly listed, we have estimated the market shares based on estimates provided by various trade sources (i.e. not just the companies themselves) and seeking a consensus on these estimates as much as possible. (2) The rankings were based on estimates of companies’ production volume of king trumpet mushroom in the year 2013. – 84 – INDUSTRY OVERVIEW Button Mushroom The button mushroom market in China is fairly fragmented, mainly due to a large number of independent growers. By 2013, the nation only registered less than 40 large-scale industrial producers for button mushroom. Amongst the top ten largest producers, the industrial mushroom growers in aggregate accounted for approximately 9% share of China’s total button mushroom production volume. Fujian Greenfresh Foods was ranked the seventh in China by a production volume of approximately 14,400 tonnes of button mushroom in 2013. The rankings in terms of production volume of China’s button mushroom were not available at the Latest Practicable Date. According to the Company, it recorded a sales volume of button mushroom and straw mushroom of approximately 9,487 tonnes and 12,964 tonnes and 22,546 tonnes for the three years ended 31 December 2012, 2013 and 2014 respectively. For the same periods, the Company’s average selling price of button mushroom and straw mushroom was RMB6.1 per kilogram, RMB7.4 per kilogram and RMB7.8 per kilogram respectively. The table below sets out the top ten leading producers of button mushroom in terms of production volume in 2013. Top Ten Leading Players of Button Mushroom by Production Volume in China, 2013 2013 Ranking Production Volume Company Name Share % Listed Company ’000 Tonnes 1 10 Others Jiangsu Yuguan Modern Agricultural S&T Co., Ltd. Shanxi Yuhao Mushroom Planting and Manufacturing Co., Ltd. Liaoning Pastoral Industry Co., Ltd. Shandong Jisheng Food Co., Ltd Shandong Jiufa Edible Fungus Co., Ltd. Jilin Jiaohe Heitu Baiyun Mushroom Co., Ltd. Fujian Greenfresh Foods Shandong Fubang Mushroom Co., Ltd. Shandong Fanglv Agriculture Technology Co., Ltd. Shandong Qisheng Mushroom Co., Ltd. – Total – 2 3 4 5 6 7 8 9 Source: 45.0 2.0% No 30.0 21.5 20.0 18.0 1.3% 0.9% 0.9% 0.8% No No No No 15.0 14.4 14.0 0.7% 0.6% 0.6% No No No 12.0 7.8 2,078.6 0.5% 0.3% 91.3% No No 2,276.3 100.0% Euromonitor’s estimates from trade interviews and desk research. – 85 – INDUSTRY OVERVIEW Notes: (1) The market share data reported above has been determined via a fieldwork program consisting of desk research and trade interviews. While audited data was available for some of the companies, they typically do not break the revenue numbers into the relevant categories which were covered in this study. For these companies as well as those companies that are included in the market shares but are not publicly listed, we have estimated the market shares based on estimates provided by various trade sources (i.e. not just the companies themselves) and sought a consensus on these estimates as much as possible. (2) The rankings were based on estimates of companies’ production volume of button mushroom in the year 2013. CANNED VEGETABLES AND FRUIT MARKET Production volume of canned vegetables and fruit increased from 1.7 million tonnes in 2009 to 2.1 million tonnes in 2013, representing a CAGR of 4.6%. Canned vegetables and fruit is a typical export-oriented industry. China’s export of canned products was booming when it came to be a WTO member in 2001. Among canned food manufacturers, those in Fujian, Guangdong and Shandong provinces have led the upward trend. It is estimated that the production volume of canned vegetables and fruit will increase from approximately 2.1 million tonnes in 2014 to 2.5 million tonnes in 2018, representing a CAGR of 3.7%. Export of certain categories of canned vegetables and fruit has dropped since 2011, primarily due to the imposition of trade barriers by certain countries such as the European Union countries and Canada and competitions from other countries. According to comtrade.un.org sources, total export volume of canned vegetables and fruit continued to grow, with an increase from approximately 1.7 million tonnes in 2009 to approximately 2.1 million tonnes in 2013. The following chart demonstrates the production volume of canned vegetables and fruit in the PRC from 2009 to 2013 and its forecast from 2014 to 2018. 3,000 12% 10.9% 2,500 10% 2,465.8 2,000 2,002.6 1,500 2,280.5 1,916.2 1,929.3 8% 2,372.2 6% 3.9% 3.8% 1,000 500 2,068.5 2,130.4 2,200.1 3.3% 3.0% 3.3% 3.7% 4.0% 4% 2% 1,728.6 0.7% 0 2009 2010 2011 2012 2013 2014E 2015E Canned Fruit and Vegetable Production Volume – ’000 tonnes Source: 2016E 2017E 2018E 0% Year-on-year Growth % China Customs Year Book, http://comtrade.un.org/, Euromonitor’s estimates from trade interviews and desk research. – 86 – INDUSTRY OVERVIEW Demand and supply of raw materials of canned vegetables and fruit The raw materials of canned vegetables and fruit produced by Fujian Greenfresh Foods cover a wide range of various vegetables and fruit. The raw materials of the major canned vegetables and fruit products are mushroom, Ma bamboo shoots and lychee. In general, market price of mushroom has been overall in a stable but downwards trend in recent years. This is mostly due to the continued industrialisation of production of many mushroom varieties, which leads to economy of scale of production and helps bring down average prices. However, for certain mushroom varieties such as enoki (or needle mushroom), mass industrialisation by under-qualified producers has hurt the product quality and lowered average price, and even led to the overcapacity. Market price of Ma bamboo shoots is in a general upward trend since 2008. Some of the major production areas, such as Zhangzhou, Fujian province and Yingde, Guangxi Zhuang Autonomous Region established production bases in recent years to better manage productivity and product quality, which effectively raised the average selling price of Ma bamboo shoots. Back in 2008, average wholesale price of Ma bamboo shoots was below RMB1 per kilogram. The following years saw constant price increase to around RMB1.5 per kilogram in 2012. In 2013, price was flat due to the increased supplies caused by the alternating rainy and sunny climate, which boosted Ma bamboo growing. However in 2014, the continued rainy weather inhibited Ma bamboo growth and supply was cut to half of that in 2013. As a result, wholesale price increased by 30% to approximately RMB2 per kilogram. Due to the limited number and high concentration of major production areas, price of Ma bamboo shoots still show signs of volatility, and is also subject to climatic changes. Lychee sees significant production in provinces such as Fujian in China. Market price of lychee has been a bit unstable in recent years. On one hand, domestic demand for fresh lychee as well as overseas demand for canned lychee grow robustly over the years. On the other hand, supply is not as stable and is subject to multiple factors, including climatic changes, timing of fruiting, and growers’ incentives (to expand or to cut planting areas and yields), which are typical amongst many fruit categories. These factors in aggregate led to price drops or price hikes in specific years. For example, in 2012, wholesale price of lychee climbed by 30.0% to approximately RMB20 per kilogram or above. In 2014, wholesale price of lychee levelled out from historical high to approximately RMB10 per kilogram. Nevertheless, the price trends vary with production regions and lychee varieties. For leading production regions such as Yunxiao, Fujian Province, local planters have been optimising its product varieties so as to maintain price stability as well as profit margin. – 87 – INDUSTRY OVERVIEW Drivers of Canned Vegetables and Fruit Market According to the Euromonitor Report, the canned vegetables and fruit market is primarily driven by favourable environment in the PRC domestic market. With the rise in living standards and the quickening work pace of modern society, canned vegetables and fruit are gaining popularity due to their convenience and ensured safety. Through sealing and sterilisation technology, food safety is guaranteed while nutritional value is maintained. Domestic consumers are expected to accept canned food as part of their daily diet in the near future. In addition, major canned food manufacturers are dedicated to explore domestic market by exploring alternative channels, such as western restaurants, dessert shops and bakeries, with an effort to find future opportunities in the domestic market. Besides, leading canned food manufacturers are dedicated to consumer education, in order to build consumer perception of canned food as healthy and with less preservatives and additives. The canned vegetables and fruit market is also driven by recovering export market and the emerging export destination. The total canned vegetables and fruit exports in 2013 experienced a slight growth of approximately 3.3% compared to 2012. Steady growth in exports of canned edible fungi, bamboo shoots and lychee will also encourage manufacturers to increase production. Moreover, there are emerging markets in Russia, Southeastern Asia and Latin America, which are expected to drive the production of canned vegetables and fruit. Future opportunities, threats and challenges of canned vegetables and fruit Market According to the Euromonitor Report, the canned vegetables and fruit market presents more opportunities with the new package materials, For example, fruit and vegetables packaged in aluminium film bags (鋁膜包裝), the newly launched soft packages have the potential to capture a large and emerging consumer base in the domestic market. In addition, flavoured canned vegetables and fruit are more competitive in the markets and provide a greater variety to consumers. A growing number of manufacturers have applied flavouring and seasoning to many products, such as canned edible fungi and asparagus. Better customisation on canned flavours has significantly strengthened the competitiveness of canned vegetables and fruit exports. Canned vegetables and fruit also offer a variety of materials for culinary, which are not only convenient in preservation and usage, but are also accessible regardless of seasonality in supplies. During the Annual Conference of the Canned Food Industrial Association in 2013, it was proposed that canned vegetables and fruit manufacturers should cooperate with chained restaurants. The development of such relationship would facilitate domestic sales of canned vegetables and fruit. According to the Euromonitor Report, the canned vegetables and fruit market faces the threats and challenges in quality control and international trade barriers and intensified competition. Canned vegetables and fruit manufacturing involves the following stages i.e., canning, sealing, sterilisation, examination, and stock of products. The sterilisation process of low acid canned food and acidified canned food (such as canned edible fungi, canned peach) is especially hard to control. There were a number of cases in recent years in which the Chinese canned vegetables and fruit failed the Food and Drug Administration test by the United States, as well as quality standards in other export destination countries. Overseas demand for canned vegetables and fruit was also largely impacted by international trade barriers such as European Union’s anti-dumping against China-produced canned oranges in 2008 and the United States’ anti-dumping against China-produced canned edible fungi from 2005 to 2009. In addition, along with the appreciation of Chinese currency as well as the rising labour cost, China’s exports of canned food also experienced intensified competition from other countries. – 88 – LAWS AND REGULATIONS OF THE INDUSTRY REGULATORY OVERVIEW This section sets out summaries of certain aspects of the laws, rules, regulations, government and industry policies and requirements, which are relevant to our Group’s operations and business in the PRC. LAWS AND REGULATIONS RELATING TO FOREIGN INVESTMENT Wholly Foreign-Owned Enterprise Law The establishment procedures, approval procedures, registered capital requirement, foreign exchange restriction, accounting practices, taxation and labour matters with respect to wholly foreign-owned enterprises are governed by the Wholly Foreign-Owned Enterprise Law of the PRC 《 ( 中華人民共和國外資 企業法》), which was promulgated by the Standing Committee of the National People’s Congress of the PRC (“NPC”) on 12 April 1986 and amended on 31 October 2000, and the Implementation Rules under the Wholly Foreign-Owned Enterprise Law 《 ( 中華人民共和國外資企業法實施細則》), which was promulgated by the State Council on 12 December 1990 and amended on 12 April 2001 and was partly amended by Decision of the PRC State Council on Repealing and Amending Some Administrative Regulations (2014) 《 ( 國務院關於廢止和修改部分行政法規的決定(2014)》) on 19 February 2014. Catalog for Guidance on Foreign Investments in Industries (2015 edition) 《 ( 外商投資產業指導目錄》 2015修訂) (“Catalog 2015”) Catalog 2015 was promulgated by the National Development and Reform Commission (“NDRC”) and Ministry of Commerce of the PRC (“MOFCOM”) on 10 March 2015 and came into effect on 10 April 2015. Catalog 2015 contains three genres, catalog of industries in which foreign investment is encouraged, catalog of industries in which foreign investment is restricted, catalog of industries in which foreign investment is prohibited. For industries not mentioned in the Catalogue of Industries, they are deemed to be catalog of industries in which foreign investment is permissible. Among our principal business segments, the plantation, processing of the fruit, vegetables, edible fungi are not mentioned in the Catalog 2015, and therefore shall be classified as permissible catalog. Approval on Foreign Invested Projects Pursuant to the Decision on the Reform of Investment System 《 ( 關於投資體制改革的決定》) promulgated by the State Council on 16 July 2004, the central government of the PRC has the power to determine whether the approval and/or filing system applies to a specific investment. Accordingly, the State Council released the Investment Project Catalogue Approved by the Government (2004 Edition) 《 ( 政府核准 的投資項目目錄(2004年本)》(“Government Approval Catalog 2004”) on 16 July 2004. On 2 December 2013, the State council amended Government Approval Catalog 2004 and released the Investment Project Catalogue Approved by the Government (2013 Edition) 《 ( 政府核准的投資項目目錄(2013年本)》 (“Government Approval Catalog 2013”); on 31 October 2014, the State Council amended the Government Approval Catalog 2013 and released Government Approval Catalog 2014. Under the Government Approval Catalog 2014, any enterprise engaged in an enterprise investment projects that falls in one or more listed items therein is subject to approvals of central government or competent local government (as the case may be). Enterprise investment projects other than those listed in the Governmental Approvals Catalog 2014 should be filed with the competent administrative department of the government. – 89 – LAWS AND REGULATIONS OF THE INDUSTRY On 17 May 2014, NDRC promulgated the Administrative Measures for Approval and Filing of Foreign Investment Projects 《 ( 外商投資項目核准和備案管理辦法》). Pursuant to the Administrative Measures, the Chinese controlled encouraged foreign invested projects under the Catalogue for Guidance on Foreign Investment Industries with total investment (including capital addition) of US$300 million or above shall be approved by the NDRC, and the Chinese controlled encouraged foreign invested projects with total investment (including capital increase) of less than US$300 million shall be approved by the local government. Except for the aforesaid projects, the encouraged foreign invested projects are only subject to filing with the competent government authorities. LAWS AND REGULATIONS RELATING TO AGRICULTURE Agriculture The Agriculture Law of the PRC 《 ( 中華人民共和國農業法》) was promulgated by Standing Committee of the National People’s Congress on 2 July 1993 and amended on 28 December 2002, on 27 August 2009 and on 28 December 2012. The law is enacted with a view to consolidating and strengthening the position of agriculture as the foundation of the national economy. The main objective in developing agriculture includes enhancing the quality and efficiency of agriculture as a whole, ensuring the supply and quality of agricultural products and gradually bringing about the modernisation of agriculture. The system of registration or license shall be applied in respect of the production and operation of the means of agricultural production as seeds, pesticides, veterinary medicines, fodder and feed additives, fertilisers and farm machines. Governments at all levels shall establish a sound system for the safe use of the means of agricultural production while manufactures and sellers of the same shall be responsible for the quality of the products they manufacture and sell. Edible Fungi On 27 March 2006, Ministry of Agriculture of the PRC promulgated the Measures for the Administration of Cultures of Edible Fungi 《 ( 食用菌菌種管理辦法》), which was further amended on 31 December 2013, 25 April 2014 and 29 April 2015. The measures mainly govern the activities in relation to the selection of varieties of edible fungi, production, operation, application, management of the cultures of edible fungi. Pursuant to the measures, cultures are divided into three grades: stock cultures, original cultures and cultivars. Any entity and individual engaging in the production of cultures shall obtain the Permit of Production and Operation of Cultures of the Edible Fungi, whereas the entity or individual which only engages in the operation of cultivars may not be required to obtain the said Permit but shall file with the competent agricultural authority. Meanwhile, the operator shall be equipped with relevant knowledge about cultures, have appropriate equipment and facilities to store the cultures. – 90 – LAWS AND REGULATIONS OF THE INDUSTRY LAWS AND REGULATIONS RELATING TO FOOD INDUSTRY Food safety On 28 February 2009, the Food Safety Law of the PRC 《 ( 中華人民共和國食品安全法》) (the “Food Safety Law”) was promulgated by the Standing Committee of the NPC and took effective on 1 June 2009, and on 20 July 2009 the Implementing Regulations for the Food Safety Law of the PRC 《 ( 中華人民共和 國食品安全法實施條例》) were promulgated by the State Council of the PRC. The Food Safety Law and its implementation regulations require that: (1) food producers and distributors should apply for the food production licenses and food distribution licenses, respectively, however, a food producer who has obtained a food production licenses does not need to obtain a food distribution license for selling the food produced by itself at its production facilities; (2) food production and operation should comply with food-safety standards and certain other requirements and food producers should not purchase or use raw food materials, food additives or food related products which do not meet food-safety standards; (3) each food producer or distributor should establish and maintain a personnel health management system. Any person who engages in food production or distribution is required to take a physical examination each year and obtain health certificate prior to working; (4) food producers should check the licenses and food eligibility certification documents of their suppliers before purchasing raw food materials, food additives and food-related products from them and food producing enterprise should establish a record system for its procurement and pre-delivery inspection and ensure the records should be authentic and be reserved for at least two years; and (5) the packages of pre-packed food should bear labels which explicitly show the information including the name, specifications, net content, date of production, list of ingredients or components, producer’s name, address and contact information, shelf life, product standard code, storage conditions, the general name of the food additives used in the national standards, category number of the food production license, and other content acquired by laws, regulations or food safety standards. The Food Safety Laws requires the establishment of a food recall system by the food producer and distributor. When a food producer discovers that its food product does not comply with food safety standards, it shall immediately stop production, recall the food on the market, notify the relevant producers, distributors and consumers, and keep the record of the recall and notification. When a food distributor discovers that the food it distributes does not comply with food safety standards, it shall immediately stop distributing such food, notify the relevant producers, sub-distributors and consumers, and keep the record of the cessation of distribution and the notification. The food producers shall take measures to safely recall and destroy the affected food, and report the treatment of the recalled food to the competent quality supervision administration. – 91 – LAWS AND REGULATIONS OF THE INDUSTRY In the event of any breach of the Food Safety Law, relevant authorities may confiscate any illegal gains and food products, issue warnings and impose rectification orders and monetary penalties ranging from two to ten times the value of the products illegally produced and distributed, as well as revoke the food safety certificate and impose criminal liability in severe cases. License for food production In accordance with provisions of the Regulations on the Administration of Production License for Industrial Products of the PRC 《 ( 中華人民共和國工業產品生產許可證管理條例》), which was promulgated by the State Council of the PRC and came into effect on 1 September 2005 and the Implementing Measures for the Regulations on the Administration of Production License for Industrial Products of the PRC 《 ( 中華人民共和國工業產品生產許可證管理條例實施辦法》) which were promulgated by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC (“GAQSIQ”) and came into effect on 1 August 2014, the PRC implements a production license system in respect of the manufacturing of important industrial products, including meat, beverage, rice, wine and other food directly affecting human health; GAQSIQ and its local counterparties are responsible for the nationwide or local administration of production license for industrial products. Food distribution permits According to the Measures for the Supervision and Administration of Food Safety in the Distribution Sector 《 ( 流通環節食品安全監督管理辦法》) and the Administrative Measures for Food Distribution Permits 《 ( 食品流通許可證管理辦法》) both issued by the SAIC and became effective on 30 July 2009, food safety in the distribution sector is subject to the supervision and administration of SAIC and its local counterparties. Food distributors are required to obtain Food Distribution Permits before applying for business licenses. A food distribution permit is valid for three years and may be renewed by filing an application within 30 days prior to the expiration date. LAWS AND REGULATIONS RELATING TO PRODUCT QUALITY Product quality law In accordance with the Product Quality Law of the PRC 《 ( 中華人民共和國產品質量法》) promulgated on 22 February 1993 and was subsequently amended on 8 July 2000, producers are liable for the quality of the products they produce. Where anyone produces or sells products that do not comply with the relevant national or industrial standards safeguarding the health and safety of the persons and property, the relevant authority will order such person to suspend the production or sales, confiscate the products, impose a fine of an amount higher than the value of the products and less than three times of the value of the products, confiscate illegal gains (if any) as well as revoke the business license in severe cases. Where the activities constitute a crime, the offender will be prosecuted. – 92 – LAWS AND REGULATIONS OF THE INDUSTRY Agricultural products quality safety law According to the Agricultural Products Quality Safety Law of the PRC 《 ( 中華人民共和國農產品質 量安全法》), which was promulgated by the standing committee of the National People’s Congress and became effective on 1 November 2006, producers of agricultural products shall use chemical products in a appropriate manner and avoid contaminating agricultural production sites. Agricultural producers shall also ensure that the preservatives, additives and other chemicals used in the process of the packaging, preservation, storage and transportation of agricultural products shall conform to the relevant mandatory technical specifications set forth by the PRC government. Product liabilities Manufacturers and distributors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General Principles of the Civil Laws of the PRC 《 ( 中華人民 共和國民法通則》), which became effective on 1 January 1987 and amended on 27 August 2009 and the Law on the Protection of Consumer Rights and Interests of the PRC 《 ( 中華人民共和國消費者權益保護 法》), which became effective on 1 January 1994 and was amended on 27 August 1999 and 25 October 2013, the manufacturers and distributors will be held liable for losses and damages suffered by consumers caused by the defective products manufactured or distributed by them. Where the liability is attributable to the manufacturer, the seller has the right to recover such compensation from the manufacturer after it makes compensation to the consumer. Under the above-mentioned laws and regulations, manufacturers are required to ensure that products meet the requirements for safeguarding human health and safety, and safety of assets, failing to do so will lead to a series of penalties, including the suspension of production and sale, confiscation of the products and earnings, imposition of fines, revocation of business licenses, and/or even criminal liabilities. In addition, if the products cause personal injuries or other form of torts, the manufacturers and distributors of the products may be subject to tort liability. LAWS AND REGULATIONS RELATING TO FOREIGN EXCHANGE Foreign exchange administration The Regulation on the Administration of Settlement, Sale and Payment of Foreign Exchange 《 ( 結匯、 售匯及付匯管理規定》) governs foreign exchange transactions of foreign invested enterprises, which was promulgated by the People’s Bank of China on 20 June 1996 and became effective on 1 July 1996. According to the regulation, foreign invested enterprises are permitted to convert after-tax dividends into foreign exchange and to remit such foreign exchange from their bank accounts in the PRC. Foreign invested enterprises may also effect payments for current account items without approval of the SAFE , with valid receipts and proof of the relevant transactions. However, prior approval from SAFE is required for foreign exchange conversions for capital account items, including direct investments and capital contributions. – 93 – LAWS AND REGULATIONS OF THE INDUSTRY Under the Foreign Currency Administration Rules of the PRC 《 ( 中華人民共和國外匯管理條例》) which was promulgated by the State Council and amended on 14 January 1997 and on 1 August 2008, and various regulations issued by SAFE, RMB may be converted into foreign currencies without approval for the purpose of current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of RMB into other currencies for capital account items, such as direct investments, loans, security investments and repatriation of investments, however, is still subject to the approval of SAFE or its competent local branches. Under Foreign Currency Administration Rules of the PRC, enterprises may only buy, sell or remit foreign currencies at those banks authorised to conduct foreign exchange business after providing valid commercial documents and relevant supporting documents and, in the case of capital account item transactions, obtaining approval from SAFE or its competent local branches. Capital investments by enterprises outside of the PRC are also subject to limitations, which include approvals by MOFCOM, SAFE and NDRC, or their respective competent local branches. In accordance with the Notice on Reforming the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-invested Enterprises 《 ( 國家外匯管理局關於改革外商投資 企業外匯資本金結匯管理方式的通知》) issued by SAFE on 30 March 2015, which became effective on 1 June 2015, foreign-invested enterprises are allowed to settle their foreign exchange capital on a discretionary basis. A foreign-invested enterprise shall truthfully use its capital for its own operational purposes within its business scope, and may make domestic equity investment with the settled foreign exchange amount. SAFE conducts the verification and inspection on the foreign-invested enterprises, and may disqualify a foreign-invested enterprise that commits grave or malicious irregularities from discretionary settlement of foreign exchange. On 19 November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment 《 ( 國家外匯管理局關於進一步改進和調 整直接投資外匯管理政策的通知》, the “Circular No. 59”), which became effective on 17 December 2012. The Circular No. 59 substantially amends and simplifies the current foreign exchange procedure. According to the Circular No. 59, the opening of various foreign exchange accounts for direct investment no longer requires SAFE’s approval or verification, and purchase and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign invested enterprise no longer requires SAFE’s approval. Dividend distribution The principal laws governing dividend distributions by our PRC Subsidiaries include the PRC Company Law 《 ( 中華人民共和國公司法》), which was promulgated on 29 December 1993 and became effective on 1 July 1994 and was subsequently amended on 25 December 1999, 28 August 2004 and 27 October 2005 and on 28 December 2013. Dividend distribution by a wholly foreign-owned enterprises (“WFOE”) is further governed by the Wholly Foreign-Owned Enterprise Law of the PRC 《 ( 中華人民共 和國外資企業法》), which was promulgated on 12 April 1986 and revised on 31 October 2000 and its Implementation Regulations 《 ( 中華人民共和國外資企業法實施細則》) promulgated on 12 December 1990 and revised on 12 Apri1 2001 and 19 February 2014. – 94 – LAWS AND REGULATIONS OF THE INDUSTRY PRC companies may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting principles. In addition, PRC companies, are required to set aside each year at least 10% of their after-tax profit based on PRC accounting principles to their statutory general reserves funds until the cumulative amount of such reserve fund reaches 50% of their registered capital. These reserves are not distributable as cash dividends. Furthermore, a WFOE in the PRC may also be required to set aside individual funds for employee welfare, bonuses and development, at the discretion of such PRC companies and as stipulated in their articles of association. These reserves or funds are not distributable as dividends. Circular No. 75 and Circular No. 37 On 21 October 2005, the SAFE promulgated the Notice of the SAFE on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies 《 ( 國家外匯管理局關於境內居民通過境外特殊目 的公司融資及返程投資外匯管理有關問題的通知》) (the “Circular No. 75”). According to the Circular No. 75 and the following related implementation rules issued by the SAFE, a PRC domestic resident legal person or a PRC domestic resident natural person is required to effect foreign exchange registration with the local foreign exchange bureau, when such domestic residents use its/his/her enterprise assets or interests in the PRC to establish or take control of a special purpose company (“SPV”) abroad, and its/his/her domestic enterprises receive round-trip investments from funds raised by such SPV controlled by domestic residents. On 4 July 2014, the SAFE promulgated the Notice of the SAFE on Relevant Issues concerning Foreign Exchange Administration Relating to Domestic Residents’ Offshore Investment and Financing and Round-Trip Investment through Special Purpose Vehicles 《 ( 國家外匯管理局關於境內居民通過特殊 目的公司境外投融資及返程投資外匯管理有關問題的通知》) (the “Circular No. 37”), which replaced the Circular No. 75. The requirement for conducting foreign exchange registration of round-trip investments by a PRC domestic resident through SPV is still retained. The Circular No. 37 narrows the scope of registrable offshore SPVs, to the extent that only those (first level) offshore SPVs that are directly established or controlled by domestic residents shall be registered. In addition, the scope of the change registration is limited to the change of information in relation to the domestic individual resident, and the capital increase, decrease, equity transfer or swap, etc., by domestic individual resident. Failure to comply with the registration procedures of Circular No. 37 may result in penalties and sanctions, including the imposition of restrictions on the ability of the Offshore SPV’s PRC subsidiary to distribute dividends to its overseas parent. – 95 – LAWS AND REGULATIONS OF THE INDUSTRY LAWS AND REGULATIONS RELATING TO INTELLECTUAL PROPERTY RIGHTS Trademark Law As required by the Trademark Law of the PRC 《 ( 中華人民共和國商標法》), which became effective on 1 March 1983 and was amended on 27 October 2001 and 30 August 2013 and Regulation for the Implementation of Trademark Law of the PRC 《 ( 中華人民共和國商標法實施條例》), which was promulgated on 3 August 2002 and was amended on 29 April 2014 and came into effect on 1 May 2014, the Trademark Office of the SAIC (the “Trademark Office”) shall be responsible for the registration and administration of trademarks throughout the country; the Trademark Review and Adjudication Board of the SAIC shall be responsible for hearing trademark disputes. Registered trademarks refer to trademarks that have been approved and registered by the Trademark Office, which include commodity trademarks, service trademarks, collective marks and certification marks. The trademark registrant shall enjoy an exclusive right to use the trademark, which shall be protected by law. Any mark in the form of word, graphic, alphabet, number, 3D (three-dimension) mark, color combination or the combination of these elements that can distinguish the commodities of the natural person, legal person or other organisations from those of others can be registered as a trademark. Trademark for which an application is filed for registration shall be as distinctive as to be distinguishable, and shall not go against the legitimate right previously obtained by others. A trademark registrant is entitled to tag the words “Registered Trademark” or a sign indicating that it is registered. Patent Law Patents in the PRC are mainly protected under the Patent Law of the PRC 《 ( 中華人民共和國專利 法》), which was promulgated by the Standing Committee of the NPC on 12 March 1984 and amended on 4 September 1992, 25 August 2000 and 27 December 2008, and its implementation rules 《 ( 中華人 民共和國專利法實施細則》), which was promulgated by the State Council on 15 June 2001 and amended on 28 December 2002 and 9 January 2010. The Patent Law of the PRC and its implementation rules provide for three types of patents, “invention”, “utility model” and “design”. “Invention” refers to any new technical solution relating to a product, a process or improvement thereof; “utility model” refers to any new technical solution relating to the shape, structure, or their combination of a product, which is suitable for practical use; and “design” refers to any new design of the shape, pattern, color or the combination of any two of them of a product, which creates an aesthetic feeling and is suitable for industrial application. The duration of a patent right for “invention” is 20 years, and the duration of a patent right for “utility model” or “designs” is 10 years, from the date of application. LAWS AND REGULATIONS RELATING TO TAXATION Enterprise income tax (“EIT”) According to the PRC EIT Law, which was promulgated on 16 March 2007 and became effective from 1 January 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform rate of 25%. The Regulation on the Implementation of Enterprise Income Tax Law of the PRC 《 ( 中華人 民共和國企業所得稅法實施條例》) (the “EIT Rules”) was promulgated on 6 December 2007 and became effective from 1 January 2008. – 96 – LAWS AND REGULATIONS OF THE INDUSTRY Under the EIT Law, enterprises are classified as either “resident enterprises” or “non-resident enterprises”. Enterprises established under foreign law with “de facto management bodies” outside the PRC but have an establishment or place of business in the PRC, or which do not have an establishment or place of business in the PRC but have income originating from China are considered as “non-resident enterprises”, which shall pay income tax at the rate of 10% in relation to the income originating from China unless a tax treaty benefit can be claimed. Enterprises established under the laws of foreign countries or regions whose “de facto management organisation” located within the PRC territory are considered as “resident enterprises,” and thus generally be subject to the enterprise income tax at the rate of 25% on their global income. The implementing rules of the EIT Law define “de facto management” as “bodies that substantially carry out comprehensive management and control on the business operation, employees, accounts and assets of enterprises”. Moreover, pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income 《 ( 內地和香港特別行政區關於對所得稅免雙重徵稅和防止偷漏稅的安排》), a PRC resident enterprise which distributes dividends to its Hong Kong shareholders should pay income tax according to PRC law, however, if the beneficiary of the dividends is a Hong Kong resident enterprise, which directly holds no less than 25% equity interests of the aforesaid enterprise (i.e. the dividend distributor), the tax levied shall be 5% of the distributed dividends. If the beneficiary is a Hong Kong resident enterprise, which directly holds less than 25% equity interests of the aforesaid enterprise, the tax levied shall be 10% of the distributed dividends. Meanwhile, Circular of the State Administration of Taxation on the Interpretation and the Determination of the “Beneficial Owners” in the Tax Treaties (《 國家稅務總局關於如何理解和認定稅收協定中「受益所有人」的通知》) has stipulated some factors that are unfavorable to the determination of “beneficial owner”. Pursuant to the PRC EIT Law and the EIT Rules, income from equity investment between qualified resident enterprises such as dividends and bonuses, which refers to investment income derived by a resident enterprise from direct investment in another resident enterprise, is tax-exempt income. Value added tax (“VAT”) According to the Provisional Regulations on Value-added Tax of the PRC 《 ( 中華人民共和國增值稅 暫行條例》), which was promulgated by the State Council and came into effect on 1 January 1994 and amended on 10 November 2008 and came into effect on 1 January 2009 and the Detailed Rules for the Implementation of the Provisional Regulations on Value-added Tax of the PRC (Revised in 2011) 《 ( 中華 人民共和國增值稅暫行條例實施細則(2011年修訂)》), which was promulgated by the Ministry of Finance and the SAT on 15 December 2008 and amended on 28 October 2011 and came into effect on 1 November 2011 (collectively, the “VAT Law”), all enterprises and individuals that engage in the sale of goods, the provision of processing, repair and replacement services, and the importation of goods within the territory of the PRC must pay value-added tax. According to the Circular of the Ministry of Finance and the State Administration of Taxation on the Application of Low Value-added Tax Rate and Simplified Method to Certain Goods 《 ( 財政部、國家稅務 總局關於部分貨物適用增值稅低稅率和簡易辦法徵收增值稅政策的通知》) (the “VAT Notice”), and the Notice of the Ministry of Finance and the State Administration of Taxation on Issuing the Explanatory Notice on the Scope of Agricultural Products Subject to Taxation 《 ( 財政部、國家稅務總局關於印發 〈農業產品徵稅範圍註釋〉的通知》), the value-added tax rate is 13% for taxpayers that sell or import goods such as agricultural products (which refers to primary plant and animal products including grains, – 97 – LAWS AND REGULATIONS OF THE INDUSTRY vegetables, livestock and poultry products). The value-added tax rate is 17% for taxpayers that sell or import goods that are not specifically listed in the VAT Law and VAT Notice, or provide processing, repairs and replacement services. LAWS AND REGULATIONS RELATING TO ENVIRONMENTAL PROTECTION Certain PRC environmental laws and regulations are applicable to our production, mainly including the PRC Environmental Protection Law 《 ( 中華人民共和國環境保護法》), Law of the PRC on the Prevention and Control of Water Pollution 《 ( 中華人民共和國水污染防治法》), Law of the PRC on the Prevention and Control of Atmospheric Pollution 《 ( 中華人民共和國大氣污染防治法》), Law of the PRC on the Prevention and Control of Pollution from Environmental Noise 《 ( 中華人民共和國環境噪聲污染防治法》), Law of the PRC on the Prevention and Control of Environmental Pollution by Solid Waste 《 ( 中華人民共和國固體廢物 污染環境防治法》) and the PRC Environmental Impact Assessment Law 《 ( 中華人民共和國環境影響評價 法》), which establishes the legal framework for environmental protection in the PRC. The Law on Appraising of Environment Impact of the PRC 《 ( 中華人民共和國環境影響評價法》), which was promulgated by the Standing Committee of the NPC and became effective on 1 September 2003, the Administration Rules on Environmental Protection of Construction Projects 《 ( 建設項目環境保 護管理條例》), which was promulgated by the State Council and became effective on 29 November 1998, and the Measures for the Administration of Examination and Approval of Environmental Protection Facilities of Construction Projects 《 ( 建設項目竣工環境保護驗收管理辦法》), which was promulgated by the State Environmental Protection Administration of the PRC and became effective on 1 February 2002, require enterprises planning construction projects to engage qualified professional institution to provide assessment reports on the environmental impact of such projects. The assessment reports must be approved by the competent environmental protection authorities prior to commencement of any construction work. Enterprises shall file an application for examination and acceptance of the environmental protection facilities upon the completion of the construction project. A construction project may be formally put into production or use only if the corresponding environmental protection facilities have passed the acceptance examination. According to the List of Systematic Management on Construction Projects Impact Assessment (the “List”) 《 ( 建設項目環境影響評價分類管理名錄》), promulgated by the Ministry of Environmental Protection and became effective on 1 October 2008, the State has implemented the classification management system based on the project’s impact on the environment. Construction enterprises shall, in accordance with the classification of the List, respectively submit the environmental impact assessment report, the environmental impact report form or fill the environmental impact registration form. Pursuant to the Regulations on the Environment Protect of Fujian Province 《 ( 福建省環境保護條 例》) promulgated by the People’s Congress of Fujian Province on 5 July 1995 and amended on 20 January 2002 and 31 March 2012, construction projects shall be subject to environmental impact assessment in accordance with the laws and regulations of the PRC. Facilities for the prevention and control of pollution in a construction project shall be designed, built and put into construction and use together with the principal part of the project. For enterprises discharging pollutants shall obtain the pollutant emission license and discharge pollutants accordingly as well. – 98 – LAWS AND REGULATIONS OF THE INDUSTRY LAWS AND REGULATIONS RELATING TO LABOUR Employment contracts According to the Labour Law of the PRC 《 ( 中華人民共和國勞動法》) promulgated on 5 July 1994 and effective on 1 January 1995, enterprises and institutions shall establish and perfect their system of work place safety and sanitation and strictly abide by state rules and standards on work place safety. Labour safety and sanitation facilities shall comply with statutory standards. Enterprises and Institutions shall provide employees with a safe work place and sanitation conditions which are in compliance with relevant laws and regulations of labour protection. The Employment Contract Law of the PRC 《 ( 中華人民共和國勞動合同法》) was promulgated by the Standing Committee of NPC on 29 June 2007 and came into effect on 1 January 2008 and was amended on 28 December 2012. In order to implement the Employment Contract Law, Implementing Regulations of the Labour Contract Law of the PRC 《 ( 中華人民共和國勞動合同法實施條例》) was promulgated by the PRC State Council on 18 September 2008. The Employment Contract Law is primarily aimed at regulating employee/employer rights and obligations, including matters with respect to the establishment, performance and termination of labour contracts. The newly amended Employment Contract Law which became effective on 1 July 2013 imposes more stringent requirements on labour dispatch and more stringent penalties on unlawful labour dispatch practices. According to the amendments, the number of dispatched workers that hired by an employer may not exceed a certain percentage of the total number of employees and the dispatched workers can only engage in temporary, auxiliary or substitutive work. The amended Labour Contract Law also requires contract workers doing the same work as full-time employees receive the same compensation. In the event that an employer has caused a dispatched worker to suffer damages, the labour dispatch entity and the employer shall jointly and severally bear compensation liability to such worker. The Pilot Measures for Management on Employment Filing of Fujian Province 《 ( 福建省勞動用工 備案管理試行辦法》), which was promulgated by the Bureau of Human Resources and Social Security of Fujian Province and came into effects on 8 April 2009, requires that the enterprises employing labours shall make filings with regard to the execution, revision (only referring to changing the term of the employment contract), renewal, rescission, and termination of the employment contract. The measures stipulate three types of filings, the initial filing, filing for changes, and filing for deregistration, all of which shall be recorded in the Employment Filing Manual. The filing shall include the description of the employer, the employees, the employment contracts and the collective contracts. Employee funds As required under the Regulation of Insurance for Labour Injury 《 ( 工傷保險條例》), which was promulgated on 20 December 2010 and became effective on 1 January 2011, the Provisional Measures for Maternity Insurance of Employees of Corporations 《 ( 企業職工生育保險試行辦法》), implemented on 1 January 1995, the Decisions on the Establishment of a Unified Programme for Old-Aged Pension Insurance of the State Council 《 ( 國務院關於建立統一的企業職工基本養老保險制度的決定》), issued on 16 July 1997, the Decisions on the Establishment of the Medical Insurance Programme for Urban Workers of the State Council 《 ( 國務院關於建立城鎮職工基本醫療保險制度的決定》), promulgated on 14 December 1998, the Unemployment Insurance Measures 《 ( 失業保險條例》), promulgated on 22 January 1999, and the Social Insurance Law of the PRC 《 ( 中華人民共和國社會保險法》), implemented on 1 July 2011, enterprises are obliged to provide their employees in the PRC with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, labour injury insurance and medical insurance. – 99 – LAWS AND REGULATIONS OF THE INDUSTRY Enterprises must apply for social insurance registration with local social insurance agencies and pay premiums for their employees. If an enterprise fails to pay the required premiums on time or in full amount, the authorities in charge will demand the enterprise to settle the overdue amount within a stipulated time period and impose a 0.05% overdue fine. If the overdue amount is still not settled within the stipulated time period, an additional fine with an amount of three to five times of the overdue amount will be imposed. According to the Regulation on Management of Housing Accumulation Fund 《 ( 住房公積金管理條 例》), which was promulgated by the State Council on 3 April 1999, became effective on the same day and was amended on 24 March 2002, enterprises must register with the competent managing center for housing accumulation funds and, upon the examination by such managing center of housing accumulation fund, complete procedures for opening an account at the relevant bank for the deposit of employees’ housing accumulation funds. Employers are required to contribute, on behalf of their employees, to housing accumulation funds. The payment is required to be made to local administrative authorities. Any employer who fails to contribute may be fined and ordered to make good the deficit within a stipulated time limit. LAWS AND REGULATIONS RELATING TO MERGER AND ACQUISITION Under the Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors in the PRC 《 ( 關於外國投資者併購境內企業的規定》) (the “M&A Rules”), which was issued by the MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, SAT, SAIC, CSRC and SAFE on 8 August 2006, effective on 8 September 2006 and further amended on 22 June 2009 by the MOFCOM, a foreign investor is required to obtain necessary approvals when (i) a foreign investor acquires equity in a domestic non-foreign invested enterprise (the “domestic enterprises”) thereby converting it into a foreign-invested enterprise, or subscribes for new equity in a domestic enterprise via an increase of registered capital thereby converting it into a foreign-invested enterprise; or (ii) a foreign investor establishes a foreign-invested enterprise which purchases and operates the assets of a domestic enterprise, or which purchases the assets of a domestic enterprise and injects those assets to establish a foreign-invested enterprise. According to Article 11 of the M&A Rules, where a domestic company or enterprise, or domestic natural person, through an overseas company legally established or controlled by it/him/her, acquires a domestic company which is related to or connected with it/him/her, approval from MOFCOM is required. LAWS AND REGULATIONS RELATING TO THE USE, ACQUISITION AND LEASE OF COLLECTIVELY-OWNED LAND Acquisition of Collectively-owned Land Pursuant to the Land Administration Law of the PRC 《 ( 中華人民共和國土地管理法》) (“Land Administration Law”) promulgated on 25 June 1986, effective on 1 January 1987 and as amended on 29 December 1988, 29 August 1998 and 28 August 2004, all land in the PRC is either state-owned or collectively-owned, depending on the location of the land. All land in the urban areas of a city or town is state-owned, and all land in the suburban areas of a city or town and rural area is, unless otherwise specified by law, collectively-owned. The land use right of collectives shall not be granted, transferred or leased for non-agricultural constructions, except in the case of legal transfer of the land that conforms to the general plan for the utilisation of land and legally obtained by enterprises due to bankruptcy or acquisition. – 100 – LAWS AND REGULATIONS OF THE INDUSTRY In particular, an entity may not directly acquire the collectively-owned land from the owners of the collectively-owned land (i.e. peasants collectives). Any entity or individual that needs a parcel of land for a particular construction project shall apply for the use of state-owned land for construction. The State Council and the provincial government has the power to approve the expropriation of the collectively-owned land and the government of municipality or county should pay the compensation to the peasants concerned, such that the land is converted from collectively-owned land into state-owned construction land. Subsequently, the entity or individual may acquire the state-owned land through a bidding, auction and listing procedure. According to the Provisions on Transfer of the Use Right of State-owned Construction Land through Bidding, Auction and Listing 《 ( 招標拍賣掛牌出讓國有建設用地使用權規 定》), promulgated on 9 May 2002, effective on 1 July 2002 and as amended on 1 November 2007, the transfer of business land for industrial, commercial, tourism, entertainment and commercial residential building purposes and the transfer of a land parcel that has more than two potential users shall be transferred by means of bidding, auction or listing. Any individual or entity within the territory of the PRC may apply to participate in the bidding, auction and listing. The land administration department of municipality or county shall determine the base bid or base price in accordance with the land appraisal and the government's industrial policy. The base bid or price shall not be lower than the minimum standard specified by the State. If the bidder’s construction plan of the land is in compliance with the requirements prescribed in the announcement published by the competent land administration and it offers the highest price in the bidding, such bidder would win the bidding. The entity or individual which wins the bidding through the bidding process should enter into the grant contract of land use right contract with the land administration department and pay grant fees and other charges to the government for the grant of land use right. After the aforementioned formalities are completed, the entity or individual will obtain the land use right of the state-owned land accordingly. The following flow chart illustrates the proper steps that should be taken to acquire the use right of state-owned construction land through bidding, auction and listing: Government expropriates collectively-owned land and the land ownership is converted from collectively owned to state owned. Land administration department publishes the announcement for the bidding, auction and listing of a parcel of land. The bidders submit the required documentation within the time limit prescribed in the announcement. The entity obtains the land use right of the state-owned land. Land administration department enters into a grant contract of land use right with the winning bidder and the winning bidder pays the grant fees and other charges. The bidder who offers the highest price and is in compliance with the requirements required by the announcement would win the bidding. – 101 – LAWS AND REGULATIONS OF THE INDUSTRY Lease of Collectively-owned Land Lease of collectively-owned land for industrial purpose Pursuant to the Land Administration Law, the land use right owned by collectives shall not be granted, transferred or leased for non-agricultural construction, except in the case of legal transfer of the land that conforms to the general plan for the utilisation of land and legally obtained by enterprises due to bankruptcy or acquisition. Circulation of rural land According to the Law on the Contracting of Rural Land of the PRC 《 ( 中華人民共和國農村土地承 包法》), which was promulgated on 29 August 2002 and became effective on 1 March 2003 and as amended on 27 August 2009, and Measures for the Administration of Circulation of Rural Land Contracted Management Right 《 ( 農村土地承包經營權流轉管理辦法》), which was promulgated on 19 January 2005 and became effective on 1 March 2005, members (i.e. the farmer-households) of a collective economic organisation in rural areas have the right to contract (承包) the rural land awarded by their collective economic organisation. The farmer-households of the collective economic organisation, as the contractors (承包人), are entitled to acquire the contracted management right of rural land from the contract-letting party (發包人) (i.e. the villagers’ committee or the collective economic organisation). Moreover, if an entity or an individual, who is not a member of the collective economic organisation, intends to contract the collectively-owned land, such entity or individual shall obtain the prior consent of at least two-thirds of the members of the villagers’ conference or of the representatives of villagers, and the contract shall be submitted to the people’s government of the town for approval. As provided by the Measures for the Administration of Circulation of Rural Land Contracted Management Right 《 ( 農村土地承包經營權流轉管理辦法》), the rural land contracted management right lawfully obtained by a contractor may be circulated by way of subcontracting, leasing, interchanging (i.e. the exchange of the contracted management right of one parcel of rural land for another parcel of rural land), transferring and farmer-households may entrust the contract-letting party or intermediary organisation to circulate the contracted management right of rural land. A contractor or the contract-letting party may sign a written circulation contract with the lessee and such circulation contract shall be filed with the rural land contracting management authority of the relevant village or town. By way of example, the following flow chart illustrates the proper steps that should be taken to lease a parcel of collectively-owned land for agricultural purposes: Farmer-households contract the land from the contractletting party. Farmer-households entrust the contractletting party to circulate the land they contracted. – 102 – An entity leases The lease is filed the collectively- with the competent owned land from the authorities of contract-letting party. the village or town. HISTORY AND CORPORATE STRUCTURE OUR ORIGIN AND HISTORY Mr. Zheng Songhui, our founder, chairman of our Board, the chief executive officer and an executive Director, founded our Group in the mid-1990s. The source of funding in founding our Group came from the personal financial resources of Mr. Zheng Songhui accumulated from his previous furniture manufacturing and processing business before tapping into the fresh and processed food industry. For further details of the background information of Mr. Zheng Songhui, please refer to the section headed “Directors and Senior Management – Directors – Executive Directors” in this prospectus. OUR BUSINESS DEVELOPMENT The following is a summary of our Group’s key business development milestones: Year Key business development milestones 1995 Fujian Greenfresh Foods was established. 1996 We built an agricultural raw material production base covering an area of 1,500 mu. 1999 Zhangzhou Greenfresh was established. 2003 Our research and development department was established to focus on the innovation of edible fungi products. 2004 Our trial cultivation base was established to cooperate with farmers to engage in the production of king trumpet mushroom and button mushroom. 2005 We strengthened our cooperation with farmers to expand the production area of king trumpet mushroom and button mushroom products. 2007 We began to develop and market a series of products including fresh produce, dried food and frozen food. 2009 Greenfresh Ecological Agriculture was established and the planning for edible fungi products outside Fujian Province was finalised. 2010 We established an edible fungi innovation base with the characteristics of a vertically integrated production chain. 2011 Greenfresh Business School was established. We were recognised as a Top Ten Chinese Canned Food Enterprise for Exports of 2011 (2011年度中國罐 頭(出口)十強企業) and National Agricultural Industrialisation Key Leading Enterprise (農業產業化國家重點龍頭企業). 2012 Our brand 名商標). was recognised as Well-known Trademark in China (中國馳 – 103 – HISTORY AND CORPORATE STRUCTURE Year Key business development milestones 2014 We entered into strategic cooperation agreements with COFCO Wo Mai Wang Co., Ltd. (中糧我買網有限公司) and COFCO Industrial Food Import and Export Co., Ltd. (中糧工業食品進出口有限公司), affiliates of COFCO Fund, in November 2014. We are entitled to priority rights in selling our edible fungi products through the e-commerce platform and distribution channels operated by them respectively. OUR CORPORATE DEVELOPMENT Details of the establishment and the major changes in equity in the major operating members of our Group during the Track Record Period are set out below: Subsidiaries as at the Latest Practicable Date 1. Fujian Greenfresh Foods Fujian Greenfresh Foods is a wholly-owned subsidiary of our Company and is principally engaged in the business of investment holding and canned food manufacturing. Fujian Greenfresh Foods was established in the PRC on 3 November 1995 as a limited liability company with a registered capital of RMB1,680,000, of which RMB1,344,000, RMB168,000 and RMB168,000 were respectively contributed in cash by Mr. Zheng Songhui, his wife, Ms. Zheng Huizhen and his father, Mr. Zheng Zhixiang. Upon its establishment, Fujian Greenfresh Foods was held as to 80% by Mr. Zheng Songhui, 10% by Ms. Zheng Huizhen and 10% by Mr. Zheng Zhixiang respectively. In May 2002, as part of their own respective investment restructurings, Ms. Zheng Huizhen transferred her 10% equity interest in Fujian Greenfresh Foods to Ms. Ji Lina, an Independent Third Party, at a consideration of RMB168,000. Mr. Zheng Zhixiang transferred his 10% equity interest in Fujian Greenfresh Foods to Mr. Zheng Songhui at a consideration of RMB168,000. Upon completion of the said share transfers, Fujian Greenfresh Foods was held as to 90% by Mr. Zheng Songhui and 10% by Ms. Ji Lina. In January 2005, the registered capital of Fujian Greenfresh Foods was increased to RMB4,000,000, with the capital increase of RMB2,320,000 contributed in cash by Mr. Zheng Songhui. Upon completion of the said capital increase, Fujian Greenfresh Foods was held as to 95.8% by Mr. Zheng Songhui and 4.2% by Ms. Ji Lina. In May 2005, by reason of her own investment decision, Ms. Ji Lina transferred her 4.2% equity interest in Fujian Greenfresh Foods to Ms. Cai Xiaoning at a consideration of RMB168,000. Ms. Cai Xiaoning is an Independent Third Party. Upon completion of the said share transfer, Fujian Greenfresh Foods was held as to 95.8% by Mr. Zheng Songhui and 4.2% by Ms. Cai Xiaoning respectively. In March 2006, the registered capital of Fujian Greenfresh Foods was increased to RMB15,000,000, with the capital increase of RMB10,600,000 and RMB400,000 contributed in cash by Mr. Zheng Songhui and Ms. Cai Xiaoning respectively. Upon completion of the said capital increase, Fujian Greenfresh Foods was held as to 96.2% by Mr. Zheng Songhui and 3.8% by Ms. Cai Xiaoning. – 104 – HISTORY AND CORPORATE STRUCTURE In October 2006, the registered capital of Fujian Greenfresh Foods was increased to RMB27,000,000, with the capital increase of RMB12,000,000 contributed in cash by Mr. Zheng Songhui. Upon completion of the said capital increase, Fujian Greenfresh Foods was held as to 97.9% by Mr. Zheng Songhui and 2.1% by Ms. Cai Xiaoning. In December 2006, the registered capital of Fujian Greenfresh Foods was increased to RMB38,000,000, with the capital increase of RMB11,000,000 contributed in cash by Mr. Zheng Songhui. Upon completion of the said capital increase, Fujian Greenfresh Foods was held as to 98.5% by Mr. Zheng Songhui and 1.5% by Ms. Cai Xiaoning. In March 2008, the registered capital of Fujian Greenfresh Foods was increased to RMB50,000,000, with the capital increase of RMB10,068,000 and RMB1,932,000 contributed in cash by Mr. Zheng Songhui and Ms. Cai Xiaoning respectively. Upon completion of the said capital increase, Fujian Greenfresh Foods was held as to 95% by Mr. Zheng Songhui and 5% by Ms. Cai Xiaoning. In December 2009, the registered capital of Fujian Greenfresh Foods was increased to RMB68,000,000, with the capital increase of RMB17,100,000 and RMB900,000 contributed in cash by Mr. Zheng Songhui and Ms. Cai Xiaoning respectively. Upon completion of the said capital increase, Fujian Greenfresh Foods was held as to 95% by Mr. Zheng Songhui and 5% by Ms. Cai Xiaoning. In November 2010, by reason of her own investment decision, Ms. Cai Xiaoning transferred her 5% equity interest in Fujian Greenfresh Foods to Mr. Zheng Songhui at a consideration of RMB3,400,000. Upon completion of the said share transfer, Fujian Greenfresh Foods was held as to 100% by Mr. Zheng Songhui. In May 2011, as part of his investment restructuring, Mr. Zheng Songhui transferred his 5% equity interest in Fujian Greenfresh Foods to Mr. Zheng Tianming at a consideration of RMB3,400,000. Upon completion of the said share transfer, Fujian Greenfresh Foods was held as to 95% by Mr. Zheng Songhui and 5% by Mr. Zheng Tianming respectively. In September 2012, as part of the Reorganisation, Mr. Zheng Songhui and Mr. Zheng Tianming transferred their 95% and 5% equity interests in Fujian Greenfresh Foods to Jingxiang Foods at a consideration of RMB65,550,000 and RMB3,450,000 respectively. Upon completion of the said share transfers, Fujian Greenfresh Foods was held as to 100% by Jingxiang Foods. 2. Zhangzhou Greenfresh Zhangzhou Greenfresh is a wholly-owned subsidiary of our Company and is principally engaged in manufacturing of canned food. Zhangzhou Greenfresh was established in the PRC on 11 January 1999 as a limited liability company with a registered capital of RMB7,000,000, of which RMB4,900,000 was contributed partly in cash and partly in the form of machinery and factory properties by Longhai Greenfresh Canned Foods Company Limited* (龍海市綠寶食品罐頭有限公司) (“Longhai Canned Foods”) and RMB2,100,000 was contributed in cash by Mr. Dai Guanglong, an Independent Third Party. At the time of the establishment of Zhangzhou Greenfresh and until October 2010. Longhai Canned Foods was held as to 90% by Mr. Zheng Songhui and 10% by Mr. Zheng Tianming. Upon its establishment, Zhangzhou Greenfresh was held as to 70% by Longhai Canned Foods and 30% by Mr. Dai Guanglong respectively. – 105 – HISTORY AND CORPORATE STRUCTURE In April 2006, to simplify our corporate structure, Longhai Canned Foods transferred its 70% equity interest in Zhangzhou Greenfresh to Fujian Greenfresh Foods at a consideration of RMB4,900,000. Upon completion of the said share transfer, Zhangzhou Greenfresh was held as to 70% by Fujian Greenfresh Foods and 30% by Mr. Dai Guanglong. In July 2011, Mr. Dai Guanglong, by reason of his own investment decision, transferred his 30% equity interest in Zhangzhou Greenfresh to Fujian Greenfresh Foods at a consideration of RMB2,100,000. Upon completion of the said share transfer, Zhangzhou Greenfresh was held as to 100% by Fujian Greenfresh Foods. According to the initial articles of association of Zhangzhou Greenfresh adopted upon its establishment, 15% of the initial registered capital of Zhangzhou Greenfresh should be contributed within three months from the date of issue of the business license and the remaining 85% should be contributed within one year from the date of issue of the business license. According to the capital verification report of Zhangzhou Greenfresh the remaining 85% of the initial registered capital of Zhangzhou Greenfresh was fully contributed by 23 February 2005. The date of contribution was not in compliance with the requirements under the initial articles of association of Zhangzhou Greenfresh. On 9 August 2012, 龍海巿對外貿易經濟合作局 (Bureau of Foreign Trade and Economic Cooperation of Longhai*) issued a confirmation letter confirming that the delay in contribution and the change in method of contribution of the initial registered capital of Zhangzhou Greenfresh had been rectified and shareholders of Zhangzhou Greenfresh would not be subject to any liability therefor and the irregularities would not affect the legal establishment and valid existence of Zhangzhou Greenfresh. Since the initial registered capital of Zhangzhou Greenfresh had been fully contributed, and Zhangzhou Greenfresh had passed the annual examination by 漳州市工商行政管理局 (Administration for Industry & Commerce of Zhangzhou) and has also obtained valid business license issued by 漳州市工商行政管理局 (Administration for Industry & Commerce of Zhangzhou) as well as the said confirmation letter issued by 龍海巿對外貿易經濟合作局 (Bureau of Foreign and Trade Economic Cooperation of Longhai*), our PRC legal adviser is of the view that the delay in contribution and the change in method of contribution of the initial registered capital had no material adverse impact on the valid continuity of Zhangzhou Greenfresh. Save for the aforesaid, our PRC legal adviser has confirmed that all the share transfers and capital increases in respect of Zhangzhou Greenfresh had completed the necessary legal procedures, and obtained the approvals of, and has been duly registered with, the relevant responsible authorities. 3. Jingxiang Foods Jingxiang Foods is a wholly-owned subsidiary of the Company and is an investment holding company. Jingxiang Foods was established in the PRC as a wholly foreign-owned limited liability company on 24 December 2001 with registered capital of US$120,000, which was contributed in cash by Mr. Alex Wong. Pursuant to a trust deed dated 20 December 2001, Mr. Alex Wong, who is a US national, held the equity interests in Jingxiang Foods on trust for Mr. Zheng Songhui as to 85% and Mr. Zheng Tianming as to 15%. All the funds and capital for the establishment of Jingxiang Foods came from Mr. Zheng Songhui and Mr. Zheng Tianming. The trust arrangement between Mr. Alex Wong as trustee on the one hand and Mr. Zheng Songhui and Mr. Zheng Tianming as beneficiaries on the other hand had been made in order to enjoy the administrative convenience in favour of foreign investments. Save for the said trust arrangement, Mr. Alex Wong is an Independent Third Party. – 106 – HISTORY AND CORPORATE STRUCTURE In June 2011, as part of the Reorganisation, Mr. Alex Wong transferred his 100% equity interest in Jingxiang Foods to Greenfresh HK at a consideration of US$120,000. Upon completion of the said share transfer, Jingxiang Foods was held as to 100% by Greenfresh HK. In January 2013, the registered capital of Jingxiang Foods was increased to US$9,620,000 with the increase in capital of US$9,500,000 contributed in cash by Greenfresh HK. In June 2014, the registered capital of Jingxiang Foods was increased to US$13,620,000 with the increase in capital of US$4,000,000 contributed in cash by Greenfresh HK. According to the initial articles of association of Jingxiang Foods adopted upon its establishment, 15% of the initial registered capital of Jingxiang Foods should be contributed within 90 days from the date of issue of the business license and the remaining 85% should be contributed by 24 December 2002. According to a reply letter issued by 龍海巿對外貿易經濟合作局 (Bureau of Foreign and Trade Economic Cooperation of Longhai*), the deadline for contribution of the remaining 85% of the initial registered capital was extended to 30 June 2004. According to the capital verification report of Jingxiang Foods, the remaining 85% of the initial registered capital of Jingxiang Foods was fully contributed by 28 February 2005. The date of contribution was not in compliance with the requirements under the initial articles of association and the said reply letter. 龍海巿對外貿易經濟合作局 (Bureau of Foreign and Trade Economic Cooperation of Longhai*) issued a confirmation letter confirming that the delay in contribution of the initial registered capital of Jingxiang Foods had been rectified and the shareholder of Jingxiang Foods would not be subject to any liability therefor. Since the initial registered capital of Jingxiang Foods had been fully contributed by 28 February 2005, Jingxiang Foods had passed the annual examination by 漳州市工商行政管理局 (Administration for Industry & Commerce of Zhangzhou), it has also obtained valid foreign investment license issued by the Fujian people’s government, the business license issued by 漳州市工商行政管理局 (Administration for Industry & Commerce of Zhangzhou), and the said confirmation letter issued by 龍海巿對外貿易經濟合作局 (Bureau of Foreign and Trade Economic Cooperation of Longhai*). Our PRC legal adviser is of the view that the delay in contribution of the initial registered capital had no material adverse impact on the valid continuity of Jingxiang Foods. Save for the aforesaid, our PRC legal adviser has confirmed that all the share transfers and capital increases in respect of Jingxiang Foods had completed the necessary legal procedures, and obtained the approvals of and has been duly registered with the relevant responsible authorities. 4. Greenfresh Ecological Agriculture Greenfresh Ecological Agriculture is a wholly-owned subsidiary of our Company and is a company principally engaged in investment holding and edible fungi cultivation. It was established in the PRC on 24 November 2009 as a limited liability company with a registered capital of RMB1,000,000, of which RMB950,000 was contributed in cash by Fujian Greenfresh Foods and RMB50,000 was contributed in cash by Ms. Cai Xiaoning respectively. Upon its establishment, Greenfresh Ecological Agriculture was held as to 95% by Fujian Greenfresh Foods and 5% by Ms. Cai Xiaoning respectively. In July 2010, the registered capital of Greenfresh Ecological Agriculture was increased to RMB5,000,000, with the capital increase of RMB4,750,000 and RMB250,000 contributed in cash by Fujian Greenfresh Foods and Ms. Cai Xiaoning respectively. Upon completion of the said capital increase, Greenfresh Ecological Agriculture was held as to 95% by Fujian Greenfresh Foods and 5% by Ms. Cai Xiaoning. – 107 – HISTORY AND CORPORATE STRUCTURE In November 2010, Ms. Cai Xiaoning transferred her 5% equity interest in Greenfresh Ecological Agriculture to Fujian Greenfresh Foods at a consideration of RMB250,000. Upon completion of the said share transfer, Greenfresh Ecological Agriculture was held as to 100% by Fujian Greenfresh Foods. In May 2011, the registered capital of Greenfresh Ecological Agriculture was increased to RMB30,000,000, with the capital increase of RMB25,000,000 contributed in cash by Fujian Greenfresh Foods. 5. Shengtai Agricultural Development Shengtai Agricultural Development is a wholly-owned subsidiary of our Company and is principally engaged in trading of processed food. It was established in the PRC on 26 August 2011 as a limited liability company with a registered capital of RMB500,000 contributed in cash by Greenfresh Ecological Agriculture. Upon its establishment, Shengtai Agricultural Development was held as to 100% by Greenfresh Ecological Agriculture. In June 2012, Greenfresh Ecological Agriculture transferred its 100% equity interest in Shengtai Agricultural Development to Fujian Greenfresh Foods at a consideration of RMB500,000. Upon completion of the said share transfer, Shengtai Agricultural Development was held as to 100% by Fujian Greenfresh Foods. 6. Greenfresh Biological Technology Greenfresh Biological Technology is a wholly-owned subsidiary of our Company and is principally engaged in edible fungi cultivation. It was established in the PRC on 9 April 2012 as a limited liability company with a registered capital of RMB5,000,000 contributed in cash by Greenfresh Ecological Agriculture. Upon its establishment, Greenfresh Biological Technology was held as to 100% by Greenfresh Ecological Agriculture. Subsidiaries Disposed of in 2011 and during the Track Record Period 1. Xinghui Trading Xinghui Trading was established in the PRC on 25 March 2005 as a limited liability company. Immediately before its disposal in July 2011, Xinghui Trading had no material operations and was held as to 80% by Fujian Greenfresh Foods and 20% by Mr. Yang Wenhui, an Independent Third Party. As part of the Reorganisation, Fujian Greenfresh Foods disposed of its 80% equity interest in Xinghui Trading to Mr. Yang Wenhui, an Independent Third Party. For further details of the disposal of Xinghui Trading, please refer to “Reorganisation – (c) Disposal of Xinghui Trading, Minhui Trading and Minhui Hong Kong” in this section below. 2. Minhui Trading and Minhui Hong Kong Minhui Trading was established in the PRC on 21 November 1994 as a limited liability company. Minhui Hong Kong was incorporated in Hong Kong on 22 March 2010 as a limited liability company. Immediately before its disposal in June 2012, Minhui Trading was principally engaged in canned food trading business in the PRC and was held as to 100% by Fujian Greenfresh Foods, while Minhui Hong Kong was a dormant company and was held as to 100% by Minhui Trading. As part of the Reorganisation, – 108 – HISTORY AND CORPORATE STRUCTURE Fujian Greenfresh Foods disposed of its 80% and 20% equity interests in Minhui Trading, and hence Minhui Hong Kong, which was a wholly-owned subsidiary of Minhui Trading, to Ms. Zheng Yanhua and Mr. Zheng Qiujian, both Independent Third Parties. For further details of the disposal of Minhui Trading and Minhui Hong Kong, please refer to “Reorganisation – (c) Disposal of Xinghui Trading, Minhui Trading and Minhui Hong Kong” in this section below. REORGANISATION The following chart sets out the shareholding and corporate structure of our Group immediately before the implementation of the Reorganisation: (a) Mr. Zheng Songhui 95% 100% Zhangzhou Greenfresh (PRC) 100% (b) Mr. Zheng Tianming Mr. Alex Wong 5% 100% Fujian Greenfresh Foods Jingxiang Foods (PRC) (PRC) (Note) 100% Shengtai Agricultural Development Greenfresh Ecological Agriculture (PRC) (PRC) 80% 100% Xinghui Trading Minhui Trading (PRC) (PRC) 100% Minhui Hong Kong (Hong Kong) Note: Mr. Alex Wong held the equity interests in Jingxiang Foods on trust for Mr. Zheng Songhui as to 85% and Mr. Zheng Tianming as to 15%. In preparation for the Global Offering, we carried out a series of restructuring steps for the purpose of establishing and streamlining our corporate structure for the Listing and to facilitate our growth and expansion strategy. The principal steps involved in the Reorganisation are summarised below: (a) Incorporation of Song Rising, Sunny Foods, Greenfresh HK, the Company and Empire Foods On 21 February 2011, Song Rising was incorporated with limited liability in the BVI with an authorised share capital of US$50,000 divided into 50,000 shares with a par value of US$1.00 each. On the same day, 50,000 shares with a par value of US$1.00 each were allotted and issued to Mr. Zheng Songhui. As a result, Song Rising became directly and wholly-owned by Mr. Zheng Songhui. On 21 February 2011, Sunny Foods was incorporated with limited liability in the BVI with an authorised share capital of US$50,000 divided into 50,000 shares with a par value of US$1.00 each. On the same day, 50,000 shares with a par value of US$1.00 were allotted and issued to Mr. Zheng Tianming. As a result, Sunny Foods became directly and wholly-owned by Mr. Zheng Tianming. – 109 – HISTORY AND CORPORATE STRUCTURE On 25 February 2011, Greenfresh HK was incorporated with limited liability in Hong Kong with an authorised share capital of HK$10,000 divided into 10,000 shares with a par value of HK$1.00 each. At the time of its incorporation, 7,000 shares, 1,500 shares, 600 shares, 600 shares and 300 shares with a par value of HK$1.00 each were allotted and issued to Mr. Zheng Songhui, Mr. Zheng Tianming, Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment respectively. As a result, Greenfresh HK became held as to 70% by Mr. Zheng Songhui, 15% by Mr. Zheng Tianming, 6% by Ms. GUO XUEYAN, 6% by Mr. Chan Kin Wa and 3% by Riemann Investment respectively. Save for his/her/its shareholding in our Company, each of Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment is an Independent Third Party. On 28 March 2011, our Company was incorporated as an exempted company with limited liability in the Cayman Islands with an authorised share capital of US$50,000 divided into 50,000 shares with a par value of US$1.00 each. Upon its incorporation, 1 share with a par value of US$1.00 was allotted and issued to Close Subscribers (Cayman) Limited, the initial subscriber, and was transferred to Song Rising on the same day. On the same day, an additional 34,999 shares, 7,500 shares, 3,000 shares, 3,000 shares and 1,500 shares with a par value of US$1.00 each were allotted and issued to Song Rising, Sunny Foods, Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment respectively. Following which, the Company became held as to 70% by Song Rising, 15% by Sunny Foods, 6% by Ms. GUO XUEYAN, 6% by Mr. Chan Kin Wa and 3% by Riemann Investment respectively. According to a trust deed dated 18 February 2011 (the “2011 Trust Deed”) between Mr. Zheng Tianming as trustee and Mr. Zheng Songhui as beneficiary 5,000 shares of a par value of US$1.00 each, representing 10% of the then issued share capital of the Company legally held by Sunny Foods was held on trust for Mr. Zheng Songhui. The trust arrangement was established as Mr. Zheng Tianming and Mr. Zheng Songhui believed at the material time it would be more convenient to have one of the minority shareholders (namely Sunny Foods) to hold more than 10% of the shareholding in the Company. The subscriptions for shares by the Minority Shareholders upon the incorporation of our Company was part of their investments in our Group. For further details of the investments by the Minority Shareholders, please refer to “Pre-IPO Investments – Investments of the Minority Shareholders” in this section. On 23 June 2011, Empire Foods was incorporated with limited liability in the BVI with an authorised share capital of US$50,000 divided into 50,000 shares with a par value of US$1.00 each. On the same day, 50,000 shares with a par value of US$1.00 were allotted and issued to our Company. As a result, Empire Foods became directly and wholly-owned by our Company. (b) Acquisition of Greenfresh HK by Empire Foods Pursuant to five instruments of transfer all dated 19 December 2011, Empire Foods acquired 7,000 shares, 1,500 shares, 600 shares, 600 shares and 300 shares of a par value of HK$1.00 each of Greenfresh HK, representing 100% of the issued share capital of Greenfresh HK, from its then existing shareholders, namely Mr. Zheng Songhui, Mr. Zheng Tianming, Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment, at cash considerations of HK$7,000, HK$1,500, HK$600, HK$600 and HK$300 respectively. The acquisition had been properly and legally settled, and completed with the register of members of Greenfresh HK updated on 19 December 2011. Upon completion of the aforesaid share transfers, Greenfresh HK became a directly and wholly-owned subsidiary of Empire Foods. – 110 – HISTORY AND CORPORATE STRUCTURE (c) Disposal of Xinghui Trading, Minhui Trading and Minhui Hong Kong Pursuant to a share transfer agreement dated 8 July 2011, Fujian Greenfresh Foods disposed of its 80% equity interest in Xinghui Trading to Mr. Yang Wenhui, an Independent Third Party, at a cash consideration of RMB4,800,000, which was determined with reference to the then registered capital of Xinghui Trading. The disposal had been properly and legally settled and completed. Upon completion of the aforesaid disposal on 13 July 2011, Fujian Greenfresh Foods ceased to hold any interest in Xinghui Trading. Immediately before the disposal, Xinghui Trading had no material operations and our Group disposed of Xinghui Trading to streamline its corporate structure and focus on its principal business activities of production and sales of edible fungi and processed edible fungi. Pursuant to two share transfer agreements both dated 21 June 2012, Fujian Greenfresh Foods disposed of its 80% and 20% equity interests in Minhui Trading, and hence Minhui Hong Kong, which was wholly owned by Minhui Trading, to Ms. Zheng Yanhua and Mr. Zheng Qiujian, both Independent Third Parties, at considerations of RMB1,000,000 and RMB4,000,000 respectively, which were determined with reference to the then registered capital of Minhui Trading. The disposal had been properly and legally settled and completed. Upon completion of the aforesaid disposals on 25 June 2012, Fujian Greenfresh Foods ceased to hold any interest in Minhui Trading and hence Minhui Hong Kong. Minhui Trading was principally engaged in trading business in the PRC and Minhui Hong Kong was a dormant company immediately before disposal. Our Group disposed of Minhui Trading and Minhui Hong Kong as the trading business was less profitable as well as to focus on its principal business activities of production and sales of edible fungi and processed edible fungi. (d) Establishment of Greenfresh Biological Technology On 9 April 2012, Greenfresh Biological Technology was established in the PRC with an initial registered capital of RMB5,000,000 by Greenfresh Ecological Agriculture. (e) Acquisition of Jingxiang Foods by Greenfresh HK Pursuant to a share transfer agreement dated 8 June 2011, Greenfresh HK acquired 100% equity interest in Jingxiang Foods from Mr. Alex Wong at cash consideration of US$120,000, which was determined with reference to the then registered capital of Jingxiang Foods. The transfer had been properly and legally settled and completed. Upon completion of the aforesaid equity transfer on 6 August 2011, Jingxiang Foods became a directly wholly-owned subsidiary of Greenfresh HK. (f) Acquisition of Fujian Greenfresh Foods by Jingxiang Foods Pursuant to two share transfer agreements both dated 26 September 2012, Jingxiang Foods acquired 95% and 5% equity interests in Fujian Greenfresh Foods from Mr. Zheng Songhui and Mr. Zheng Tianming at cash considerations of RMB65,550,000 and RMB3,450,000 respectively. The said considerations were determined with reference to the then registered capital of Fujian Greenfresh Foods. The transfers had been properly and legally settled and completed. Upon completion of the aforesaid acquisitions on 14 August 2012, Fujian Greenfresh Foods became a directly wholly-owned subsidiary of Jingxiang Foods. – 111 – HISTORY AND CORPORATE STRUCTURE (g) Investment made by COFCO Fund Pursuant to a share subscription agreement dated 5 November 2012, COFCO Fund subscribed for 4,054 shares of US$1.00 each of our Company at an aggregate issue price in U.S. dollars equivalent to RMB60 million. The issue price was determined based on arm’s length negotiations with regard to our Group’s financial condition and results of operations. Upon completion of the aforesaid subscription, the Company was then held as to approximately 64.74% by Song Rising, 13.88% by Sunny Foods, 7.50% by COFCO Fund, 5.55% by Ms. GUO XUEYAN, 5.55% by Mr. Chan Kin Wa and 2.78% by Riemann Investment respectively. For further details of the investment of COFCO Fund, please refer to the sub-section headed “Pre-IPO Investments” in this section. (h) Investment made by Grand Ample Pursuant to a share subscription agreement dated 9 June 2014 (the “Grand Ample Subscription Agreement”), Grand Ample subscribed for 3,425 shares of US$1.00 each of our Company at an aggregate issue price in U.S. dollars equivalent to RMB70.9 million. The issue price was determined based on arm’s length negotiations with regard to our Group’s financial condition and results of operations. Incidental to the Grand Ample Subscription Agreement, on 9 June 2014, Grand Ample, our Company, Mr. Zheng Songhui and Song Rising and the other then existing shareholders of our Company (namely COFCO Fund, Sunny Foods, Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment) entered into a shareholders’ agreement (the “Grand Ample Shareholders’ Agreement”). Neither the Grand Ample Subscription Agreement nor the Grand Ample Shareholders’ Agreement provided any special rights in favour of Grand Ample. The investment was properly and legally settled and completed on 2 July 2014. Upon completion of the aforesaid subscription, the Company was then held as to approximately 60.89% by Song Rising, 13.05% by Sunny Foods, 7.05% by COFCO Fund, 5.96% by Grand Ample, 5.22% by Ms. GUO XUEYAN, 5.22% by Mr. Chan Kin Wa and 2.61% by Riemann Investment respectively. We utilised the investment proceeds of Grand Ample for business development, working capital and other corporate purposes. As at the Latest Practicable Date, the net proceeds from the investment of Grand Ample had been fully utilised. At the time of the investment, Grand Ample was wholly owned by Ms. Ng Man Ching, who is a private investor and an Independent Third Party. By reason of her own investment decision, Ms. Ng Man Ching decided to dispose of her shareholding in Grand Ample and hence her investment in our Company. Pursuant to a share transfer agreement dated 10 December 2014, Ms. Ng Man Ching transferred 1 share of nominal value of US$1.00, representing the entire issued share capital in Grand Ample to Mr. Zheng Songhui at a consideration of RMB75,331,250 which was determined based on arm’s length negotiations with regard to the cost and the reasonable return of Ms. Ng Man Ching’s investment in our Company. The transfer was properly and legally settled and completed on 18 December 2014. Accordingly, Ms. Ng Man Ching ceased to have any interest in our Company, while the interest of Mr. Zheng Songhui increased by approximately 5.96% being the interest held by Grand Ample. Grand Ample is an investment holding company, and the only asset of which is the shares of the Company. – 112 – HISTORY AND CORPORATE STRUCTURE (i) Transfers to Absolute Bright and Termination of 2011 Trust Deed Transfer to Absolute Bright Pursuant to a deed of gift dated 6 November 2014, Song Rising transferred 1,750 shares of a par value of US$1.00 each of the Company, representing approximately 3.04% of the then issued share capital of the Company, to Absolute Bright at nil consideration. Absolute Bright is a company directly and wholly owned by Ms. Zheng Yangyu, daughter of Mr. Zheng Songhui, and the transfer was a gift granted by Mr. Zheng Songhui to his daughter. The transfer was properly and legally settled and completed on 7 November 2014. Termination of 2011 Trust Deed To simplify the shareholding structure, Mr. Zheng Songhui decided to terminate the trust arrangement under the 2011 Trust Deed as mentioned in step (a) above. Pursuant to an instrument of transfer dated 8 December 2014, Sunny Foods transferred 5,000 shares of a par value of US$1.00 each of the Company, representing approximately 8.7% of the issued share capital of our Company, to Song Rising at a consideration of US$5,000 based on the par value of the transferred shares. The transfer was properly and legally settled and completed on 8 December 2014. (j) Subdivision of Shares and Increase in Authorised Share Capital On 12 December 2014, the Company subdivided all its issued and unissued shares with par value of US$1.00 each into 100 Shares with par value of US$0.01 each and the authorised share capital of the Company was increased by US$19,900,000 to US$20,000,000 by the creation of an additional 1,990,000,000 Shares. – 113 – HISTORY AND CORPORATE STRUCTURE SHAREHOLDING AND CORPORATE STRUCTURE Our Shareholding and Corporate Structure after Completion of the Reorganisation but before the Global Offering The shareholding and corporate structure of our Group immediately after completion of the Reorganisation is set out as follows: Mr. Zheng Songhui Ms. Zheng Yangyu (Note 1) (Note 1) 100% 100% Song Rising Grand Ample Absolute Bright (BVI) (Note 1) (BVI) (Note 1) (Seychelles) (Note 1) 100% 66.55% 5.96% 3.04% Ms. Huang Qianping Mr. Zheng Tianming Mr. Fu Sixing 50% 50% 100% Sunny Foods Ms. GUO XUEYAN (BVI) Mr. Chan Kin Wa (Note 2) (Note 2) 5.22% 4.35% Riemann Investment COFCO Fund (Samoa) (Note 2) (PRC) (Note 3) 5.22% 2.61% 7.05% 100% Company (Cayman Islands) 100% Empire Foods (BVI) 100% Greenfresh HK (Hong Kong) offshore 100% onshore Jingxiang Foods (PRC) 100% Fujian Greenfresh Foods (PRC) 100% Zhangzhou Greenfresh (PRC) 100% 100% Shengtai Agricultural Development Greenfresh Ecological Agriculture (PRC) (PRC) 100% Greenfresh Biological Technology (PRC) Notes: (1) Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright are together directly or indirectly interested in 10% or more of the share capital of the Company. (2) Each of Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment is an Independent Third Party. Mr. Chan Kin Wa and Ms. GUO XUEYAN, as the Selling Shareholders, will respectively sell all and part of his/her Shares in the Global Offering. The Shares held by Ms. GUO XUEYAN and Riemann Investment are not subject to any lock-up arrangement and will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. (3) The Shares held by COFCO Fund will be subject to a six-month lock-up period after the Listing. COFCO Fund is an Independent Third Party. The Shares held by COFCO Fund will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. – 114 – HISTORY AND CORPORATE STRUCTURE Capitalisation Issue and Global Offering Conditional upon the creation of the Company’s share premium account as a result of the issue of the Offer Shares pursuant to the Global Offering, an amount of US$3,692,521 standing to the credit of the share premium account of the Company will be capitalised by applying such sum towards paying up in full at par a total of 369,252,100 Shares for allotment and issue to the then existing Shareholders. Our Shareholding and Corporate Structure after Completion of the Global Offering and the Capitalisation Issue The following chart sets out the shareholding and corporate structure of our Group immediately after completion of the Capitalisation Issue and completion of the Global Offering, assuming the Over-allotment Option is not exercised and there is no exercise of any options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme: Mr. Zheng Songhui (Note 1) Ms. Zheng Yangyu (Note 1) 100% 100% 100% Song Rising Grand Ample Absolute Bright (BVI) (Note 1) (BVI) (Note 1) (Seychelles) (Note 1) 49.91% 4.47% 2.28% Ms. Huang Qianping Mr. Zheng Tianming Mr. Fu Sixing 50% 50% 100% Sunny Foods (BVI) 3.26% Ms. GUO XUEYAN (Note 2) Riemann Investment COFCO Fund (Samoa) (Note 2) (PRC) (Note 3) 2.83% 1.96% 5.29% Other Public Shareholders 30% 100% Company (Cayman Islands) 100% Empire Foods (BVI) 100% Greenfresh HK (Hong Kong) offshore 100% onshore Jingxiang Foods (PRC) 100% Fujian Greenfresh Foods (PRC) 100% Zhangzhou Greenfresh (PRC) 100% 100% Shengtai Agricultural Development Greenfresh Ecological Agriculture (PRC) (PRC) 100% Greenfresh Biological Technology (PRC) Notes: (1) Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright are together directly or indirectly interested in 10% or more of the share capital of the Company. (2) Each of Ms. GUO XUEYAN and Riemann Investment is an Independent Third Party. The Shares held by Ms. GUO XUEYAN and Riemann Investment are not subject to any lock-up arrangement and will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. (3) The Shares held by COFCO Fund will be subject to a six-month lock-up period after the Listing. COFCO Fund is an Independent Third Party. The Shares held by COFCO Fund will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. – 115 – HISTORY AND CORPORATE STRUCTURE The following chart sets out the shareholding and corporate structure of our Group immediately after completion of the Capitalisation Issue and completion of the Global Offering, assuming the Over-allotment Option is fully exercised and there is no exercise of any options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme: Mr. Zheng Songhui (Note 1) Ms. Zheng Yangyu (Note 1) 100% 100% 100% Song Rising Grand Ample Absolute Bright (BVI) (Note 1) (BVI) (Note 1) (Seychelles) (Note 1) 47.76% 4.28% 2.19% Ms. Huang Qianping Mr. Zheng Tianming Mr. Fu Sixing 50% 50% 100% Sunny Foods (BVI) Ms. GUO XUEYAN Riemann Investment COFCO Fund (Samoa) (Note 2) (PRC) (Note 3) (Note 2) 3.12% 2.71% Other Public Shareholders 5.06% 1.87% 33.01% 100% Company (Cayman Islands) 100% Empire Foods (BVI) 100% Greenfresh HK (Hong Kong) offshore 100% onshore Jingxiang Foods (PRC) 100% Fujian Greenfresh Foods (PRC) 100% Zhangzhou Greenfresh (PRC) 100% 100% Shengtai Agricultural Development Greenfresh Ecological Agriculture (PRC) (PRC) 100% Greenfresh Biological Technology (PRC) Notes: (1) Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright are together directly or indirectly interested in 10% or more of the share capital of the Company. (2) Each of Ms. GUO XUEYAN and Riemann Investment is an Independent Third Party. The Shares held by Ms. GUO XUEYAN and Riemann Investment are not subject to any lock-up arrangement and will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. (3) The Shares held by COFCO Fund will be subject to a six-month lock-up period after the Listing. COFCO Fund is an Independent Third Party. The Shares held by COFCO Fund will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. – 116 – HISTORY AND CORPORATE STRUCTURE PRE-IPO INVESTMENTS Investments of the Minority Shareholders Pursuant to three agreements (the “Minority Shareholders’ Investment Agreements”) dated 8 October 2010, 15 October 2010 and 18 October 2010 respectively, Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively agreed with Mr. Zheng Songhui to invest in our Group. It was also agreed that our Group would undergo reorganisation such that our Company would be incorporated as the ultimate holding company of the then operating subsidiaries of our Group, and the investments of the Minority Shareholders would be by way of subscription of shares at par value upon incorporation of our Company such that Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa would subscribe at par value for 1,500 shares, 3,000 shares and 3,000 shares of par value of US$1.00 each, representing 3%, 6% and 6% of the then issued share capital of our Company at the time of its incorporation. Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa would pay to Mr. Zheng Songhui a consideration of RMB9 million, RMB18 million and RMB18 million respectively for acquisition of their respective investment. The said considerations were determined after arm’s length negotiation between each of the Minority Shareholders and Mr. Zheng Songhui after taking into consideration of the then estimated consolidated net profits of our Group for 2011. The considerations had been fully settled by end of 2012 after completion of acquisition of Fujian Greenfresh Foods by Jingxiang Foods in August 2012 as the final step of reorganisation contemplated under the Minority Shareholders’ Investment Agreements. Under the Minority Shareholders’ Investment Agreements, Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa were not given any special rights and they are not required to be subject to any lock-up arrangement after the Listing. Each of Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa is an Independent Third Party. Mr. Chan Kin Wa and Ms. GUO XUEYAN, as the Selling Shareholders, will respectively sell all and part of his/her Shares in the Global Offering. The Shares held by Riemann Investment and Ms. GUO XUEYAN will be counted towards the public float after the Listing for the purpose of Rule 8.08 of the Listing Rules. The following table summarises the details of the investments of the Minority Shareholders: Names of the Investors Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa Information of the Investors Each of Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa is a private investor and an Independent Third Party. Riemann Investment is held as to 50% by Ms. Huang Qianping and 50% by Mr. Fu Sixing, both are Independent Third Parties. Ms. GUO XUEYAN, Mr. Chan Kin Wa, Ms. Huang Qianping and Mr. Fu Sixing are personal friends of Mr. Zheng Songhui. Completion date and date of payment of consideration of the Investment 14 August 2012 (completion date); and 19 December 2012 (date of final payment of consideration) – 117 – HISTORY AND CORPORATE STRUCTURE Number of Shares Subscribed 1,500 shares, 3,000 shares and 3,000 shares of US$1.00 each in the capital of our Company (representing approximately 3%, 6% and 6% of the then issued share capital of our Company upon its incorporation) for Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively Amount of consideration RMB9 million, RMB18 million and RMB18 million paid to Mr. Zheng Songhui together with the subscription price of US$1,500, US$3,000 and US$3,000 credited to the share capital of our Company for Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively Number of Shares held by the Investors upon the Capitalisation Issue 9,786,183 Shares, 19,572,366 Shares and 19,572,366 Shares for Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively (representing approximately 2.61%, 5.22% and 5.22% of our issued share capital upon the Capitalisation Issue but without taking into account the new Shares to be issued pursuant to the Global Offering) (assuming the Over-allotment Option is not exercised and taking into no account of the Share which may be issued pursuant to the exercise of the options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme) Number of Shares held by the Investors upon the Capitalisation Issue and completion of the Global Offering 9,786,183 Shares, 14,144,732 Shares and nil Shares for Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively (representing approximately 1.96%, 2.83% and nil% of our issued share capital upon the Capitalisation Issue and completion of the Global Offering) (assuming the Over-allotment Option is not exercised and taking into no account of the Share which may be issued pursuant to the exercise of the options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme), as Mr. Chan Kin Wa and Ms. GUO XUEYAN will respectively sell all and part of his/her Shares as the Selling Shareholders Cost per Share paid by the Investors (taking into account the Capitalisation Issue) HK$1.16 (representing a discount of approximately 76.23% to the mid-point of the indicative offer price range of HK$4.58 to HK$5.18) Special Rights None of Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa enjoys any special rights – 118 – HISTORY AND CORPORATE STRUCTURE Use of Proceeds Save for the subscription price of US$1,500, US$3,000 and US$3,000 which were credited to the share capital of our Company, the considerations of RMB9 million, RMB18 million and RMB18 million were paid by Riemann Investment, Ms. GUO XUEYAN and Mr. Chan Kin Wa respectively to Mr. Zheng Songhui Investment of COFCO Fund On 5 November 2012, a share subscription agreement (the “COFCO Subscription Agreement”) was entered into by and among COFCO Fund, our Company, Song Rising and Mr. Zheng Songhui, pursuant to which COFCO Fund agreed to subscribe for 4,054 shares of US$1.00 each in the capital of our Company at an aggregate issue price in U.S. dollars equivalent to RMB60 million. The consideration for the investment was determined based on arm’s length negotiations with regard to our Group’s financial condition and results of operations. The investment was properly and legally settled and completed on 6 February 2013. Upon completion of the COFCO Subscription Agreement, COFCO Fund, our Company, Mr. Zheng Songhui, Song Rising and the other then existing shareholders of our Company (namely Sunny Foods, Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment) entered into a shareholders’ agreement (the “COFCO Shareholders’ Agreement”) which provides for certain special rights to be given to COFCO Fund. As one of the conditions precedent to the COFCO Subscription Agreement, on 6 February 2013, Song Rising (as mortgagor) entered into a share mortgage (the “Share Mortgage”) over 4,054 shares of nominal value of US$1.00 of our Company held by Song Rising in favour of COFCO Fund (as mortgagee) as security for the performance of the COFCO Subscription Agreement by Song Rising. Pursuant to the supplemental agreement dated 5 June 2013 to the COFCO Subscription Agreement and the supplemental agreement dated 5 June 2013 to the COFCO Shareholders’ Agreement, all the special rights granted to COFCO Fund and the Share Mortgage were terminated. Pursuant to the COFCO Subscription Agreement, any special rights granted to COFCO Fund under the COFCO Subscription Agreement and other transaction documents which are not permitted to survive upon Listing under applicable laws and rules, shall be discontinued upon our Company’s filing for its application for the Listing. Pursuant to the COFCO Shareholders’ Agreement, the COFCO Shareholders’ Agreement shall automatically terminate immediately upon the filing of the application for the Listing. The terms of the COFCO Subscription Agreement and the COFCO Shareholders’ Agreement did not impose any lock-up obligations over the Shares held by COFCO Fund upon Listing. However, COFCO Fund has separately voluntarily undertaken to our Company, the Sole Sponsor and the Sole Global Coordinator that, except pursuant to the Global Offering or any offer for sale contained in this prospectus, during the six-month period from the Listing Date, COFCO Fund would not dispose of or transfer any of the Shares held by it. COFCO Fund is an Independent Third Party. The Shares held by COFCO Fund will be counted towards the public float after the Listing for purpose of Rule 8.08 of the Listing Rules. – 119 – HISTORY AND CORPORATE STRUCTURE The following table summarises the principal terms of the COFCO Subscription Agreement and the COFCO Shareholders’ Agreement: * Name of the Investor 中糧(北京)農業產業股權投資基金(有限合夥) (COFCO (Beijing) Agricultural Industrial Equity Investment Fund (A Limited Partnership)*), a limited partnership established under the laws of the PRC Information of the Investor COFCO Fund is jointly established in the PRC by COFCO Group Limited, China Jianyin Investment Limited, Louis Dreyfus Commodities Asia Pte Ltd, Sumitomo Mitsui Banking Corporation Limited, Horley Investments Limited and COFCO Agricultural Industrial Investment Fund Management Co., Ltd., and is principally engaged in investment of private enterprises in agriculture and food industries and the related management and consulting services. Completion date and date of payment of consideration of the Investment 6 February 2013 Number of Shares Subscribed 4,054 shares of nominal value of US$1.00 each in our Company (representing approximately 7.50% of the then enlarged issued share capital of the Company upon completion of the investment on a fully-diluted basis) Aggregate issue price RMB60 million (U.S. dollars equivalent) Number of Shares held by the Investor upon the Capitalisation Issue and completion of the Global Offering 26,448,790 Shares ((i) representing approximately 7.05% of our issued share capital upon the Capitalisation Issue but without taking into account the new Shares to be issued pursuant to the Global Offering; and (ii) representing approximately 5.29% of our issued share capital upon the Capitalisation Issue and completion of the Global Offering respectively) (assuming the Over-allotment Option is not exercised and taking into no account of the Share which may be issued pursuant to the exercise of the options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme) Cost per Share paid by the Investors (taking into account the Capitalisation Issue) HK$2.87 (representing a discount of approximately 41.19% to the mid-point of the indicative offer price range of HK$4.58 to HK$5.18) for identification purposes only – 120 – HISTORY AND CORPORATE STRUCTURE Special Rights Certain special rights had been granted to COFCO Fund under the COFCO Subscription Agreement and the COFCO Shareholders’ Agreement. The special rights granted to COFCO Fund were (i) information and inspection rights; (ii) the rights of participation in the issuance of new securities; (iii) anti-dilution rights; (iv) co-sale rights and put right upon sales of shares by Song Rising; (v) protective rights requiring COFCO Fund’s prior approval for certain actions by our Group; (vi) nomination right for one director to the Board; and (vii) non-disposal undertaking by Song Rising. These special rights had been terminated pursuant to the supplemental agreements both dated 5 June 2013 to the COFCO Subscription Agreement and the COFCO Shareholders’ Agreement. Pursuant to the COFCO Subscription Agreement, any special rights granted to COFCO Fund under the COFCO Subscription Agreement and other transaction documents which are not permitted to survive upon Listing under applicable laws and rules, shall be discontinued upon our Company’s filing for its application for the Listing. Pursuant to the COFCO Shareholders’ Agreement, the COFCO Shareholders’ Agreement shall automatically terminate immediately upon filing of the application for the Listing. Ms. Zhang Lin, our non-executive Director, was appointed as a Director on 4 February 2013 pursuant to the nomination rights granted to COFCO Fund under the COFCO Shareholders’ Agreement. Upon Listing, Ms. Zhang Lin will be subject to re-election procedures as provided in the Articles of Association (and subject to the requirements of the Listing Rules) at the annual general meeting of our Company. For details of Ms. Zhang Lin, please refer to the section headed “Directors and Senior Management – Directors – Non-executive Director” in this prospectus. – 121 – HISTORY AND CORPORATE STRUCTURE Share mortgage As one of the conditions precedent to the COFCO Subscription Agreement, on 6 February 2013, Song Rising (as mortgagor) entered into a share mortgage over 4,054 shares of nominal value of US$1.00 of our Company held by Song Rising in favour of COFCO Fund (as mortgagee) as security for the performance of the COFCO Subscription Agreement by Song Rising. The said share mortgage had been terminated and released pursuant to the supplemental agreement dated 5 June 2013 to the COFCO Subscription Agreement. Use of Proceeds We utilised the investment proceeds of COFCO Fund for business development, working capital and other corporate purposes. As at the Latest Practicable Date, the net proceeds from the investment of COFCO Fund had been fully utilised. Sponsor’s Confirmation The Sole Sponsor has determined that the terms of the Pre-IPO Investments are under normal commercial terms and confirmed that the Pre-IPO Investments are in compliance with the Interim Guidance on Pre-IPO Investment issued the Stock Exchange on 13 October 2010 (as amended), Guidance Letters HKEx-GL44-12 (issued in October 2012) and HKEx-GL43-12 (issued in October 2012 and updated in July 2013). LEGAL COMPLIANCE Our PRC legal adviser has confirmed that all relevant approvals and permits in relation to the share transfers in respect of the PRC companies in our Group as described above had been obtained and the procedures involved had been carried out in accordance with PRC laws and regulations. M&A Rules According to the Provisions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors 《 ( 關於外國投資者併購境內企業的規定》) (the “M&A Rules”) jointly issued by the Ministry of Commerce of the PRC (the “MOFCOM”), the State-owned Assets Supervision and Administration Commission of the State Council, the SAT, the CSRC, the SAIC and the SAFE on 8 August 2006, effective as at 8 September 2006 and amended on 22 June 2009, a foreign investor is required to obtain necessary approvals when it (i) acquires the equity of a domestic enterprise so as to convert the domestic enterprise into a foreign-invested enterprise; (ii) subscribes the increased capital of a domestic enterprise so as to convert the domestic enterprise into a foreign-invested enterprise; (iii) establishes a foreign-invested enterprise through which it purchases the assets of a domestic enterprise and operates these assets; or (iv) purchases the assets of a domestic enterprise, and then invests such assets to establish a foreign-invested enterprise. The M&A Rules, among other things, further purport to require that an offshore special vehicle, or a special purpose vehicle, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals, shall obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange, especially in the event that the special purpose vehicle acquires shares of or equity interests in the PRC companies in exchange for the shares of offshore companies. – 122 – HISTORY AND CORPORATE STRUCTURE Our PRC legal adviser is of the opinion that since Jingxiang Foods had been established as a wholly-foreign owned enterprise before the M&A Rules were effective, the acquisition of Mr. Alex Wong’s 100% equity interest in Jingxiang Foods by Greenfresh HK does not fall within the scope of such acquisition of domestic company by foreign investor as stipulated under the M&A Rules. Our PRC legal adviser has further advised that, pursuant to Article 52 of the M&A Rules, the acquisition of 100% equity interest in Fujian Greenfresh Foods by Jingxiang Foods constituted an acquisition of a domestic company in China by a foreign-invested enterprise, which was subject to the Interim Provisions on the Domestic Investment of Foreign-funded Enterprises 《 ( 關於外商投資企業境內 投資的暫行規定》) (the “Re-investment Provisions”) issued by the Ministry of Foreign Trade and Economic Cooperation and the SAIC. Our PRC legal adviser has confirmed that the M&A Rules do not apply to the Reorganisation of our Group as described above, but do not exclude the possibility of new explanations or provisions to the M&A Rules issued by the MOFCOM, the CSRC or other PRC government authority in the future. Our PRC legal adviser further advised that the acquisition of 100% equity interest in Fujian Greenfresh Foods by Jingxiang Foods comply with the Re-investment Provisions, which does not require any approval from the CSRC, MOFCOM or other relevant PRC authorities. SAFE Registration in the PRC On 21 October 2005, SAFE promulgated the Circular No. 75. According to the Circular No. 75, a PRC domestic resident is required to effect foreign exchange registration with the local foreign exchange bureau, when such domestic resident uses its/his/her enterprise assets or interests in the PRC to establish or take control of a special purpose vehicle abroad, and its/his/her domestic enterprises receive round-trip investments from funds raised by such special purpose vehicle controlled by the domestic residents. As Mr. Zheng Songhui and Mr. Zheng Tianming are PRC residents within the scope of Circular No. 75, they should register with the local branch of SAFE. According to the Registration Form for PRC Residents to Engage in Overseas Investment 《 ( 境內居民個人境外投資外匯登記表》) issued by Fujian SAFE, Mr. Zheng Songhui and Mr. Zheng Tianming have completed the required procedures to register with Fujian SAFE under the then effective Circular No. 75. On 4 July 2014, SAFE promulgated Circular No. 37, which replaced Circular No. 75. The requirement for conducting foreign exchange registration of round-trip investments by a PRC domestic resident through a special purpose vehicle is still retained. As Mr. Zheng Songhui acquired 100% equity interest held by Ms. Ng Man Ching in Grand Ample pursuant to a share transfer agreement dated 10 December 2014, Mr. Zheng Songhui’s holding of the equity interest in Grand Ample is subject to the requirement of foreign exchange registration under the Circular No. 37. According to the Registration Form for PRC Residents to Engage in Overseas Investment 《 ( 境內居 民個人境外投資外匯登記表》) issued by Fujian SAFE, Mr. Zheng Songhui has completed the foreign exchange registration required by Circular No. 37 on 18 March 2015. – 123 – HISTORY AND CORPORATE STRUCTURE INTENDED LISTING IN TAIWAN We contemplated a listing (“Intended Listing in Taiwan”) of our securities on the Taiwan Stock Exchange (“TWSE”) and our sponsor for the Intended Listing in Taiwan (“Taiwan Sponsor”) made the requisite filings with TWSE in March 2014 in respect of the commencement of our consultation from the Taiwan Sponsor in respect of our intention of the Intended Listing in Taiwan. As advised by the Taiwan Sponsor at the relevant time, the Taiwan stock market was a comparatively attractive market for agricultural technology companies such as our Group to consider raising funds through an initial public offering. As part of the pre-listing preparation for the Intended Listing in Taiwan, and similar to other foreign issuers who wish to list on the TWSE, we were required to receive consultation from the Taiwan Sponsor for no less than six months before submitting the formal listing application to the TWSE. The Taiwan Sponsor, on behalf of our Company, made monthly filings in relation to the consultation received from the Taiwan Sponsor in preparation for the formal listing application to the TWSE. In May 2014, Taiwan Securities and Futures Bureau issued an official announcement in respect of its tightened policy stating that only those PRC companies invested in by Taiwanese nationals are qualified to be listed on the Taiwan stock markets. By taking full consideration of (i) the implementation of such tightened policy; (ii) the fact that our Group’s business was operated in the PRC; and (iii) the fact that the Controlling Shareholders of our Group were PRC nationals, we decided to terminate the proposed listing of our securities on the TWSE and seek a listing on the Stock Exchange instead. In October 2014, the Taiwan Sponsor notified the Taiwan Stock Exchange Corporation and the GreTai Securities Market in relation to the termination of the engagement between the Taiwan Sponsor and our Company with effect on the same date, and that the requisite monthly filings to Taiwan Stock Exchange Corporation in respect of the proposed listing would also cease. To date, our Company has not submitted any formal application for listing of our securities on the TWSE nor the GreTai Securities Market and there is no present intention to do so. We confirm that neither the TWSE nor the relevant authorities had raised any comments or concerns regarding the Intended Listing in Taiwan. The Taiwan Sponsor, being the principal channel of communication with the regulator, and the reporting accountants of the Intended Listing in Taiwan have confirmed that they had no disagreement with our Company and that there was no matter that needed to be brought to the attention of the regulators in Hong Kong with respect to the termination of the Intended Listing in Taiwan. By reason of the termination of the Intended Listing in Taiwan, the engagement between our Company and the Taiwan Sponsor also ceased. As the Taiwan Sponsor is not licensed to advise on listing applications on the Stock Exchange, we engaged the Sole Sponsor in respect of the Listing. Having performed necessary due diligence on the Intended Listing in Taiwan and having considered the above, save for the information as disclosed in this prospectus, the Sole Sponsor, itself not being licensed to advise on listing applications on the TWSE, is not aware of (a) any other matters relating to the Intended Listing in Taiwan that are relevant to the Listing and should reasonably be highlighted in this prospectus for investors to form an informed assessment; (b) any other matters relating to the Intended Listing in Taiwan that might have implications on the Company’s suitability for listing or on the accuracy and completeness of information disclosed in this prospectus; and (c) any other matters that ought to be brought to the attention of the regulators and the investors in Hong Kong in relation to the Intended Listing in Taiwan or the termination of the Company’s engagement with the Taiwan Sponsor. – 124 – BUSINESS OVERVIEW We are a leading integrated supplier of edible fungi products in the PRC. According to Euromonitor, we were the largest producer of king trumpet mushroom and the seventh largest supplier of button mushroom in the PRC in terms of production volume in 2013 with a market share of 2.5% and 0.6% in 2013, respectively. Our edible fungi business operations are vertically integrated, covering the cultivation and sales of fresh edible fungi produce as well as the manufacturing and sales of various processed edible fungi products. Such integrated business model distinguishes us from other fresh and processed edible fungi suppliers in the PRC, most of which are mainly engaged in part or parts of the value chain of cultivation, processing and sales of edible fungi. We are also a manufacturer of processed food products such as canned food and other processed food products in the PRC. In addition, we are currently engaged in canned food trading business through Greenfresh HK. As at the Latest Practicable Date, our products were primarily marketed under our core brands and , and are mainly categorised into two major series, namely (i) fresh edible fungi produce consisting of king trumpet mushroom, button mushroom and straw mushroom; and (ii) processed food products consisting of canned food such as canned edible fungi, canned vegetables, canned fruit, and other processed food products such as brined mushroom, preserved vegetables and dried mushroom. Our history can be traced back to 1995, when Fujian Greenfresh Foods first started manufacturing canned food in Zhangzhou, Fujian province. Our Group commenced commercial cultivation and sales of edible fungi in 2009. The long history of our operations and strong recognition of our brands are key factors in our success, for which we have received various awards and certifications, including Well-known Trademark in China (中國馳名商標) for our brand in 2012 by the SAIC, National Top Ten Innovative Brands of Canned Food of 2013 (2013年度全國罐頭食品十大創新品牌) in 2013 by China Canned Food Industry Association (中國罐頭工業協會), National Agricultural Industrialisation Key Leading Enterprise (農業產產業化國家重點龍頭企業) in 2011 and 2014 jointly by Ministry of Agriculture, National Development and Reform Commission, Ministry of Finance, Ministry of Commerce, PBOC, SAT, CSRC and All China Federation of Supply and Marketing Cooperatives (農業部、國家發展和改革委員會、財政部、商務部、中國人民銀行、國家稅務總局、中國證券監督 管理委員會和中華全國供銷合作總社), Top Ten Chinese Canned Food Enterprise for Exports of 2011 (2011年度中國罐頭(出口)十強企業) by China Canned Food Industry Association (中國罐頭工業協會) and National Top Ten Edible Fungi Industrial Production Enterprise (全國食用菌產業化建設十強企業) in 2013 by China Edible Fungi Association (中國食用菌協會). We have an extensive nationwide distribution and sales network that spreads over 19 provinces, autonomous region and municipalities in the PRC. We sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers in the PRC which manufacture canned edible fungi. We sell our canned food to trading companies in the PRC, which then on-sell our products to distributors in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. We mainly sell our other processed food products to distributors in the PRC, which then on-sell our products to sub-distributors and processed mushroom manufacturers. – 125 – BUSINESS We strategically locate our cultivation facilities of our fresh edible fungi produce in different regions in the PRC which are in the proximity of local major agricultural product markets. As at the Latest Practicable Date, we had established eight cultivation facilities for our fresh edible fungi produce, including (i) three king trumpet mushroom facilities and one button mushroom and straw mushroom facility in Zhangzhou, Fujian province; (ii) one king trumpet mushroom facility in Dandong, Liaoning province; (iii) one king trumpet mushroom facility in Changzhou, Jiangsu province; and (iv) two button mushroom facilities in Chengdu, Sichuan province. The aggregate land area covers approximately an area of 1.1 million sq.m. As at the Latest Practicable Date, we had established two production facilities for our processed food products in Zhangzhou, Fujian province. The aggregate production facilities covers approximately an aggregate land area of 23,000 sq.m., with an annual designed production volume of 26,220 tonnes. Our strong research and development team together with the collaborative effort from universities and institutions we have engaged in research and development, have allowed us to conduct research in edible fungi industrial cultivation method and process, processed food manufacturing method and techniques and introduce new edible fungi products to refine our existing product offerings to tailor to the latest demand of consumers. We have established two in-house research and development laboratories in the production facility for our processed food products and our king trumpet mushroom cultivation facility, both in Zhangzhou, Fujian province to enable us to improve our edible fungi cultivation method and our processed food manufacturing techniques. With such in-house research and development capacity, we were recognised as Fujian Edible Fungi Industrial Cultivation and Fine Processing Enterprise Engineering Technology Research Center (福建省食用菌工廠化栽培及精加工企業工程技術 研究中心) in 2012 by Fujian Provincial Department of Science and Technology (福建省科學技術廳). Further, we have established Fujian Academician Expert Work Station (福建省院士專家工作站) in collaboration with Engineering Research Center of Edible and Medicinal Fungi of Ministry of Education of the PRC (食藥用菌教育部工程研究中心) in November 2012 for the research and development on strains, formula, cultivation processes and deep processing of edible fungi and other biological technologies. We highly emphasise product quality of our fresh edible fungi produce and processed food products. We have been accredited with GB/T19001-2008/ISO9001:2008 (quality management system), GB/T24001-2004/ISO14001:2004 (environment management system), GB/T28001-2011/ OHSAS18001:2007 (occupation health and safety management system), GB/T22000-2006/ ISO22000:2005 (food safety management system) and GB14881-2013 (HACCP system) certifications from Fujian Southeast Standard Certification Center (福建東南標準認證中心) and organic food products certificates (有機產品認證證書) from Beijing Co-ops Integrity Certification Center (北京中合金諾認證 中心) in respect of king trumpet mushroom cultivated at our Jiaomei cultivation facilities in Zhangzhou, Fujian province according to the relevant national standards in relation to organic food in the PRC. We were also granted the Certificate of Pollution-free Agricultural Products (無公害農產品證書) for our king trumpet mushroom and its cultivation process in November 2011 by the Ministry of Agriculture. Moreover, we have been certified for our canned food under the British Retail Council (BRC) global standard for food safety and International Food Standard (IFS) by accredited certification bodies in Europe. We have registered with U.S. Food and Drug Administration (FDA) under Food Facility Registration Module (FFRM) as a manufacturer or processor of certain canned food exported to the United States. During the Track Record Period, we were engaged in trading operations in the PRC through Minhui Trading. We discontinued such trading operations as we disposed of Minhui Trading in 2012. – 126 – BUSINESS We have achieved a solid track record of consistent growth in revenue and profit. For the three years ended 31 December 2012, 2013 and 2014, we recorded a total revenue from our continuing operations of approximately RMB425.4 million, RMB471.5 million and RMB545.7 million, respectively, while our net profit from our continuing operations for the three years ended 31 December 2012, 2013 and 2014 were approximately RMB91.2 million, RMB147.8 million and RMB175.1 million, respectively. OUR COMPETITIVE STRENGTHS We believe that the following competitive strengths have allowed us to achieve sustainable growth and profitability and maintain our leading position in the fresh edible fungi produce market and enable us to compete effectively in the processed food product market in the PRC: Vertically integrated business model with cost effective operations Our edible fungi business operations are vertically integrated, covering the cultivation and sales of fresh edible fungi produce as well as the manufacturing and sales of various processed edible fungi products. Such integrated business model distinguishes us from other fresh and processed edible fungi suppliers in the PRC, most of which are mainly engaged in part or parts of the value chain of cultivation, processing and sales of edible fungi. Our product offerings cover both fresh edible fungi produce and processed food products. We not only focus on the cultivation and sales of fresh edible fungi produce, but also provide fresh edible fungi produce as raw materials to our various processed food products such as canned edible fungi and brined mushroom. Our canned food are made-to-order from trading companies who then on-sell our products to overseas distributors. We arrange the manufacturing of processed food products upon the receipt of customers’ orders. Our cultivation capabilities enable us to secure the timing, quality and quantity of fresh edible fungi produce supply as raw materials of certain processed food products featuring edible fungi. During the Track Record Period, the fresh edible fungi produce supplied to our processed food product production amounted to RMB22.5 million, RMB13.7 million and RMB39.7 million, respectively. We are able to plan the cultivation and harvest of edible fungi according to customers’ orders, including the type and volume of edible fungi and delivery schedules. In addition, leveraging our research and development capabilities, we are able to employ our cultivation waste of king trumpet mushroom as the raw materials for cultivation of our button mushroom and straw mushroom so as to lower our cost of raw materials and increase our profitability. We believe the diversity of our product offerings generated from our integrated operations allow us to reduce our business and operational risks. In addition, such vertically integrated business allows our cost control over processed food products and further improve our profit margin. – 127 – BUSINESS Leading position in the fresh edible fungi produce market in the PRC with strong brand recognition and high product quality We have been able to secure a leading market position in the fresh edible fungi produce market in the PRC. According to Euromonitor, we were the largest producer of king trumpet mushroom and the seventh largest producer of button mushroom in the PRC in terms of production volume in 2013 with a market share of 2.5% and 0.6%, respectively. Our market leading position and our strong brand recognition are not only evidenced by our strong production performance, but also by the awards and accreditations received, including Well-known Trademark in China (中國馳名商標) in 2012 by the SAIC, National Agricultural Industrialisation Key Leading Enterprise (農業產業化國家重點龍頭企業) in 2011 and 2014 jointly by Ministry of Agriculture, National Development and Reform Commission, Ministry of Finance, Ministry of Commerce, PBOC, SAT, CSRC and All China Federation of Supply and Marketing Cooperatives (農業部、國家發展和改革委員會、財政部、商務部、中國人民銀行、國家稅務總局、 中國證券監督管理委員會和中華全國供銷合作總社), National Top Ten Edible Fungi Industrialisation Production Enterprise (全國食用菌產業化建設十強企業) in 2013 by China Edible Fungi Association (中 國食用菌協會) and Top Ten Agricultural Industrialisation Leading Enterprises (2013年度農業產業化十 強龍頭企業) in 2014 by Zhangzhou Municipal Government (漳州市政府). For further details of our awards, please refer to the section headed “Business – Awards” in this prospectus. Our products are primarily marketed under our core brands and which are widely known to customers for the quality and food safety of our products. To ensure the product quality, we have implemented strict quality control measures in every steps of our cultivation and manufacturing processes. We have a dedicated quality control team to ensure that our internal quality procedures are duly followed. All our cultivation and production facilities and procedures follow the relevant PRC laws and regulations in relation to food production. As at the Latest Practicable Date, we had been accredited with GB/T19001-2008/ ISO9001:2008 (quality management system), GB/T24001-2004/ISO14001:2004 (environment management system), GB/T28001-2011/OHSAS18001:2007 (occupation health and safety management system), GB/T22000-2006/ISO22000:2005 (food safety management system) and GB14881-2013 (HACCP system) certifications from Fujian Southeast Standard Certification Center (福 建東南標準認證中心) and organic food products certificates (有機產品認證證書) from Beijing Co-ops Integrity Certification Center (北京中合金諾認證中心) in respect of king trumpet mushroom cultivated at our Jiaomei cultivation facilities in Zhangzhou, Fujian province according to the relevant national standards in relation to organic food in the PRC. We also have been granted the Certificate of Pollution-free Agricultural Products (無公害農產品證書) for our king trumpet mushroom and its cultivation process in November 2011 by the Ministry of Agriculture. Moreover, we have been certified for our canned food under the British Retail Council (BRC) global standard for food safety and International Food Standard (IFS) by accredited certification bodies in Europe. We have registered with U.S. Food and Drug Administration (FDA) under Food Facility Registration Module (FFRM) as a manufacturer or processor of certain canned food exported to the United States. These certifications signify our commitment and active pursuit of high quality control standards and stringent food safety measures throughout our operational and production processes. We believe the strong brand recognition of our brands and our high quality products will continue to be a main factor driving our future success and we are well positioned to leverage our strength in the edible fungi industry to capture future growth. – 128 – BUSINESS Nationwide and extensive distribution and sales network across the PRC We have an nationwide and extensive distribution and sales network consisting of distribution channels operated by distributors, processed mushroom manufacturers and trading companies which are Independent Third Parties in the PRC. As at 31 December 2014, our distribution and sales network spreads over 19 provinces, autonomous region and municipalities in the PRC. We sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers in the PRC which manufacture canned edible fungi. As at 31 December 2012, 2013 and 2014, we had 56, 63 and 56 distributors of our fresh edible fungi produce, respectively, while we had 8, 11 and 9 processed mushroom manufacturer customers, respectively as at the same dates. We sell our canned food to trading companies in the PRC, which then on-sell our products to distributors in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. As at 31 December 2012, 2013 and 2014, we sold canned food to 45, 37 and 47 trading companies respectively. We sell our other processed food products to distributors, which then on-sell our products to sub-distributors and processed mushroom manufacturers. As at 31 December 2012, 2013 and 2014, we had 64, 55 and 22 distributors for our other processed food products, respectively. Our extensive distribution and sales network allows us to distribute our products at all levels, from cities and urban centres to counties and towns across the PRC. This extensive distribution and sales network allows us to benefit from our distributors’ and trading companies’ established distribution channels and resources, save costs that would otherwise be required to build up an extensive logistic network across the PRC, increase the effectiveness of the penetration of our products and the launch of our new products to the market within a short period of time. We believe we have established an effective channel management system. Our extensive nationwide distribution and sales network is supported by our strong sales and marketing team. As at the Latest Practicable Date, our sales and marketing department consisted of 26 employees, a majority of which have over 10 years of experience in sales of food products. Our sales personnel work with and provide support to our distributors and trading companies to market and promote our products in different regions across the PRC. Our sales personnel also gather market intelligence from distributors and trading companies so as to monitor changing market trends, consumer preferences, sales performance of our products and of our competitors and providing feedback to us on a regular basis, which allows us to anticipate and respond to these changes in a timely manner as well as to facilitate our marketing strategies. We believe our well-established nationwide distribution and sales network will continue to allow us to successfully market and deliver products to consumers and support future growth. – 129 – BUSINESS Strong research and development capabilities with the ability to develop new products We have a strong team of research and development personnel. As at the Latest Practicable Date, our research and development team comprised twelve employees. Our research and development team is responsible for conducting research in edible fungi cultivation methods and processes, processed food manufacturing methods and techniques and introducing new edible fungi products to refine our existing product offerings to tailor to the latest demand of consumers. We have established two in-house research and development laboratories in the production facility for our processed food products and our king trumpet mushroom cultivation facility, both in Zhangzhou, Fujian province to enable us to improve our edible fungi cultivation method and our processed food manufacturing techniques. Our in-house research and development laboratories provides a platform for the development of new edible fungi products, refinement of our current product offerings, enhancement of our cultivation and production methods and techniques, training of our research and development personnel, and sufficient testing of our newly developed products before they are introduced to the market. With such in-house research and development capacity, we were recognised as Fujian Edible Fungi Industrial Cultivation and Fine Processing Enterprise Engineering Technology Research Center (福建省食用菌工廠化栽培及精加工企業 工程技術研究中心) by Fujian Provincial Department of Science and Technology (福建省科學技術廳). Moreover, we were awarded Fujian Provincial Scientific and Technological Enterprise Certificate (福建省科 技型企業證書) by the Fujian Provincial Department of Science and Technology (福建省科學技術廳) and Fujian Provincial Intellectual Property Outstanding Enterprise (福建省知識產權優勢企業) by the Fujian Intellectual Property Office (福建省知識產權局). As a result of our research and development efforts, we have successfully developed a small size king trumpet mushroom which is suitable for household consumption in the PRC through our proprietary bottle-cultivation techniques (杏鮑菇瓶栽技術). We intend to commence the massive commercial cultivation of such small size king trumpet mushroom in 2015. Moreover, with the use of our in-house research and development team and a research and development platform, we are keen to explore cooperation opportunities with leading agricultural universities and institutions in the PRC to jointly develop advanced systems and processes of cultivation of edible fungi in order to improve the quality and yield of our fresh edible fungi produce and to develop new products. For example, in 2010, we entered into project cooperation agreements with Fujian Agriculture and Forestry University (福建農林大學) to jointly develop edible fungi cultivation energy-saving and simplification technology (食用菌栽培節能與輕簡化技術示範推廣) and edible fungi quality control technology and quality reservation technology (食用菌質量安全控制技術和採後保質新 技術示範推廣). Further, we have established the Fujian Academician Expert Work Station (福建省院士 專家工作站) in collaboration with Engineering Research Center of Edible and Medicinal Fungi of Ministry of Education of the PRC (食藥用菌教育部工程研究中心) in November 2012. The Fujian Academician Expert Work Station is responsible for the research and development on strains, formula, cultivation processes and deep processing of edible fungi and other biological technologies. The work product of the Fujian Academician Expert Work Station belongs to us. In addition, in September 2014, we entered into a two-year service agreement with Mr. Li Yu, an academician of Chinese Academy of Engineering (中國工程院) and a professor of Jilin Agricultural University (吉林農業大學), pursuant to which we appointed Mr. Li Yu as the chief technology consultant of our Group. We believe our strong brand recognition and leading position in the edible fungi market in the PRC is partly contributed by our ability to continuously and quickly develop various products to meet the changing demands of consumers. We believe that our strong research and development capabilities will continue to contribute to our growth and profitability. – 130 – BUSINESS Experienced management team with a proven track record to lead our development Our management team is composed of knowledgeable and experienced personnel with a proven track record in the edible fungi and processed food product industries. Our senior management team members have extensive operational and management experience in the cultivation and manufacturing of fresh edible fungi produce and processed food products in the PRC. Mr. Zheng Songhui, our founder, chairman of our Board, the chief executive officer and an executive Director, has about 20 years of experience in edible fungi and processed food product industries. Mr. Zheng Tianming, an executive Director, has joined our Group since our inception in November 1995 and has since then been assisting Mr. Zheng Songhui in the development of our Group by taking an active part in the production and operation of our Group. Mr. Zheng Songhui was appointed as the leading talent of technology entrepreneurship of Fujian province (福建省科技創業領軍人才) by the talent working committee of Fujian Provincial Committee of Communist Party of the PRC (中共福建省委人才工組領導小組) in 2014 and elected as the vice chairperson of Industrial Sub-committee of China Edible Fungi Association (中國 食用菌協會工廠化專業委員會) in 2013. Moreover, Mr. Zheng Songhui was awarded Outstand Talent (優 秀人才) by the government of Zhangzhou (漳州市人民政府) in 2012, Outstanding Entrepreneur in the PRC (中國傑出企業家) by China Economy And Trade Promotion Association (中國經濟貿易促進會) in January 2011, China Outstanding Innovation Entrepreneur (中國優秀創新企業家) jointly by China Private Entrepreneur Association (中國民營企業家協會) and China Academy of Science Information Consulting Center (中國科學院信息諮詢中心) in August 2010 and Asia Top 10 Innovation Personality (亞洲品牌十大創新人物) by Asia Brand Ceremony (亞洲品牌盛典) in September 2009. Leveraging Mr. Zheng Songhui’s foresight and in-depth industry knowledge, our management team is able to formulate sound business strategies, assess and manage risks, anticipate changes in consumer preferences, and capture significant market opportunities. For example, although we commenced commercial cultivation and sales of fresh edible fungi produce in 2009, we have grown rapidly to become a leading integrated edible fungi product supplier in the PRC. Our dedicated management team spearheads our business operations and drives our future growth plans. Their experience in, and knowledge of, the industries in which we operate also enables us to develop new products and identify new business opportunities. Our management team has played a key role in building a corporate culture which encourages consistent delivery of high quality products and continuous innovation. Our management team contributed significantly to our continued growth during the Track Record Period. We believe our experienced management team is a key to our success in the past and will continue to contribute to our growth of our operations and profitability in the future. OUR STRATEGIES We intend to achieve sustainable growth in sales and profit and further strengthen our leading position in the fresh edible fungi produce industry and current position in processed food products industry by implementing the following strategies: Further strengthen our leading market position through expansion of our cultivation and production capacity and improvement of operational efficiency We aim to capture a greater share of the fresh edible fungi produce and processed food products markets in the PRC, thereby strengthening our leading positions in the fresh edible fungi produce market and current position in processed food products market. To further strengthen our market position, we plan to increase our cultivation and production capacity to meet increasing market demand. According to – 131 – BUSINESS Euromonitor, the PRC king trumpet mushroom market in terms of total sales volume grew by a CAGR of 27.6% from 309,500 tonnes in 2009 to 820,400 tonnes in 2013, and is estimated to grow by a CAGR of 14.7% from 1.0 million tonnes in 2014 to 1.7 million tonnes in 2018. According to Euromonitor, the PRC canned vegetables and fruit market in terms of total production volume grew from 1.7 million tonnes in 2009 to 2.1 million tonnes in 2013, representing a CAGR of 4.6%, and is estimated to grow from 2.1 million tonnes in 2014 to 2.5 million tonnes in 2018, representing a CAGR of 3.7%. Recent Expansion We are currently expanding our cultivation capacity through acquisition and installation of bottle-cultivation king trumpet mushroom facilities at our cultivation facilities in Zhangzhou, Fujian province as we have been foreseeing an increasing demand for small size king trumpet mushroom for household consumption in the PRC. We commenced construction of bottle-cultivation king trumpet mushroom facilities since 2013. Our bottle-cultivation king trumpet mushroom facilities cover an area of approximately 32,581 sq.m. of land in total with an aggregate gross floor area of approximately 12,368 sq.m. We anticipate that the construction of the bottle-cultivation king trumpet mushroom facilities will be completed by December 2015. The annual designed cultivation volume of bottle-cultivation king trumpet mushroom is estimated to be 1,980 tonnes. The estimated total investment of our bottle-cultivation king trumpet mushroom facilities amounted to approximately RMB40.4 million, and as at the Latest Practicable Date, we had incurred RMB8.2 million. We plan to utilise the funds generated by our operating activities to fund the remaining investment cost. Assuming the utilisation rate for bottle-cultivation king trumpet mushroom facilities is 95.0% and the average selling price of our king trumpet mushroom is RMB8.5 per kilogram, we expect the total investment will pay back by 2021. We expect upcoming customers’ orders to support our expansion plan. For example, in January 2015, we entered into letters of intent with certain distributors to establish long term cooperative relationship in relation to purchase of our bottle-cultivation king trumpet mushroom once our cultivation facilities starts operation. In consideration of improving and enhancement of productivity and efficiency, we are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province to replace our current production facilities for processed food products. We commenced construction of such new production facilities since July 2013. We have not obtained the construction works planning permit and the construction works commencement permit for such production facilities before we commenced construction. We have obtained both of the construction works planning permit and the construction works commencement permit in January 2015. For further information of such incident of defective title, please refer to the section headed “Business – Properties – Owned properties”. Our new production facilities cover an area of approximately 6,110 sq.m. of land in total with an aggregate gross floor area of approximately 6,641 sq.m. We anticipate that the construction of such production facilities and the installation of equipment and machinery will be completed by December 2015. We expect to launch the trial operation in December 2015 and commence commercial production in January 2016. The annual designed production volume of processed food products is estimated to be 33,660 tonnes. The estimated total investment of such production facilities amounted to approximately RMB18.1 million, and as at the Latest Practicable Date, we had incurred RMB6.9 million. We plan to utilise the funds generated by our operating activities to fund the remaining investment cost. Assuming the utilisation rate of such production facilities is 70.0% for our processed food products, and the average selling price of our processed food products is RMB7.5 per kilogram, we expect the total investment will pay back by 2018. – 132 – BUSINESS Planned Expansion In anticipation of the increased demand of king trumpet mushroom in the Southern China and Eastern China markets and in order to cater for more orders for canned food from our customers, we also plan to establish Guangxi Biological Technology Food Industry Park in Hezhou, Guangxi Zhuang Autonomous Region and Zhangzhou Biological Technology Food Industry Park in Zhangzhou, Fujian province which house king trumpet mushroom cultivation facilities and canned food production facilities. The estimated total investment amount are approximately RMB246.0 million and RMB201.0 million for Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park, respectively, of which the estimated investment amount of the first phase of each of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park are RMB198.0 million and RMB157.0 million, respectively. We incurred RMB43.8 million in relation to the acquisition of land in relation to Guangxi Biological Technology Food Industry Park for the year ended 31 December 2013. As at the Latest Practicable Date, we had not contemplated the specific plan for phase two of each industry parks. The table below sets forth the details of our planned first phase of each of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park: Location of facilities Year of Type of products commencement produced Total land area of operation (sq.m.) Guangxi Biological Technology Food Industry Park – king trumpet mushroom king trumpet (bag-cultivation) facility mushroom Designed cultivation/ production capacity Estimated total investment cost(1) (tonnes) (RMB’000) Source of funds for the estimated total investment costs(2) 46,667 2016 5,040 58,440 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – king trumpet mushroom (bottle-cultivation) facility king trumpet mushroom 26,667 2016 1,800 42,680 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – canned food facility canned food 66,667 2016 28,800 59,200 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – 133 – BUSINESS Location of facilities Year of Type of products commencement produced Total land area of operation (sq.m.) – administrative building, staff dormitory and ancillary facilities Designed cultivation/ production capacity Estimated total investment cost(1) (tonnes) (RMB’000) Source of funds for the estimated total investment costs(2) N/A 26,667 2016 N/A 37,680 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities king trumpet mushroom 46,667 2016 5,040 59,000 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – canned food facility canned food 66,667 2016 28,800 60,000 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – administrative building, staff dormitory and ancillary facilities N/A 26,667 2016 N/A 38,000 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities Zhangzhou Biological Technology Food Industry Park – king trumpet mushroom (bag-cultivation) facility Notes: (1) Estimated total investment cost includes cost of payment of acquisition price of land, land levelling and greening, the construction of cultivation facilities and production facilities, acquisition and installation of relevant equipment. (2) For more information of the source of funds, please refer to the section headed “Future Plans and Use of Proceeds” in this prospectus. – 134 – BUSINESS Assuming the utilisation rates for king trumpet mushroom facilities and canned food production facilities in both industry parks are 95.0% and 70.0%, respectively, the average selling prices of our king trumpet mushroom and canned food are RMB8.5 per kilogram and RMB7.5 per kilogram, respectively, the construction period for both industry parks is approximately 12 to 16 months, and we will receive the net proceeds of the Global Offering by the end of June 2015, we expect the total investment of the first phase of each of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park will pay back by 2022. We are committed to the improvement of our cultivation and manufacturing processes and techniques to increase the utilisation rate of our cultivation and production facilities and increase profitability of our operations. For example, we have obtained various patents in the PRC in connection with the improvement of the cultivation processes of edible fungi and the processed food product manufacturing process and efficiency. For more information on our patents registered in the PRC, please refer to the section headed “Appendix V – Statutory and General Information – B. Further Information About Our Business – 2. Intellectual Property of the Group” in this prospectus. We intend to implement in the new cultivation and manufacturing facilities a vertically integrated production system which covers all major steps, from raw material supply, raw material processing to finished products. We are currently utilising our research and development capabilities to develop innovative cultivation techniques to further automate our cultivation of edible fungi, as well as the recycling of cultivation waste in order to materialise high value-added comprehensive utilisation of king trumpet mushroom. We believe that we will leverage the enhanced manufacturing capacity and strengthened research and development capability to minimise manufacturing costs and optimise our profit margin. Further expand the breadth and depth of our distribution and sales network across the PRC We believe further expansion of our existing distribution and sales network is crucial to further increase our market share and coverage, which can be achieved by broadening and deepening our distribution and sales network. Therefore, we will continue to develop our own distribution channels into other geographic markets with high growth potential. For our mature markets in Liaoning province, Jilin province, Guangdong province, Fujian province, Sichuan province and Jiangxi province, we intend to expand our distribution network by relying on the expansion of distribution coverage by distributors. Building on our strong presence in these markets, we aim to increase the number of local distributors and increase the market penetration of our offerings. We will also primarily distribute and promote sales of our products in these more mature markets following our expansion of cultivation and production capacity in response to the increased demand of consumers. For our less mature markets in Northwestern, Southwestern and Southern regions such as Shaanxi province, Yunnan province and Guangxi Zhuang Autonomous Region in the PRC, by leveraging our experience gained in developing our more mature markets, we intend to continue to support our distributors, in particular, distributors who have strong track records, to expand their distribution channels in these markets. We aim to develop these less mature markets into our more mature markets in the future. Furthermore, we intend to expand our distribution and sales channels of our edible fungi products offerings by leveraging the established distribution network operated by COFCO Fund, one of our Shareholders. For example, we entered into strategic cooperation agreements with COFCO Wo Mai Wang Co., Ltd. (中糧我買網有限公司) and COFCO Industrial Food Import and Export Co., Ltd. (中糧工業食 品進出口有限公司), affiliates of COFCO Fund, in November 2014, respectively, pursuant to which we – 135 – BUSINESS are entitled to, under the same conditions, priority rights in selling our fresh edible fungi produce and processed food products featuring edible fungi through the e-commerce platform operated by COFCO Wo Mai Wang Co., Ltd. (中糧我買網有限公司) and distribution channels operated by COFCO Industrial Food Import and Export Co., Ltd. (中糧工業食品進出口有限公司), respectively. The strategic cooperation agreements provided that the specific terms of cooperation arrangements will be set forth in separate agreements to be entered into between both parties. As at the Latest Practicable Date, we had not entered into any separate agreements with COFCO Industrial Food Import and Export Co., Ltd. (中糧工 業食品進出口有限公司) or COFCO Wo Mai Wang Co., Ltd. (中糧我買網有限公司). Increase recognition and awareness of our brands by increasing marketing and promotional activities We believe successful branding is key to our business development and that the wide recognition and popularity of our core brands have been a major factor for our Group’s success. To further strengthen our established reputation of our brands, we plan to continue to promote our brand image through marketing and promotional initiatives to increase the profile and value of our brand, particularly to our target customers, and differentiate ourselves from our competitors. Further, in order to cultivate a consumer base of the younger generation and raise their awareness of our brands, we intend to devote more resources to marketing events that target them. For example, we have established China Edible Fungi Scientific Museum (中國食用菌科技館) in our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province as a consumer edible fungi education base to promote our edible fungi product offerings to the younger generation. Further, we plan to construct a mushroom garden affiliated to our China Edible Fungi Scientific Museum at our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province. The mushroom garden is positioned as an out-door science education base which integrate the functions of exhibition, promotion and scientific education of edible fungi products. In addition, we will continue to participate in various trade shows and food exhibitions to make our products more visible to potential customers and to collect up-to-date information on market trends and consumer preferences. Through the implementation of these strategies, we aim to continue to promote our brands and products to a broader spectrum of consumers across different age groups to address the full range of consumer needs and further enhance our brand recognition. Diversify our product offerings and develop new products We believe that continuous product innovation and improvement is an important factor for us to further strengthen our market position. We plan to invest in and strengthen our market-oriented product development effort to continuously provide new products that are tailored to the consumers’ preferences. We believe that this can be achieved by leveraging our in-house research and development capacity and collaborating with leading agricultural universities and institutions specialising in agricultural science in the PRC to explore new cultivation method and process, processed food manufacturing method and techniques and introduce edible fungi products in order to diversify our product offerings. For example, we plan to refine our existing product offerings by introducing a production line of small size of king trumpet mushroom which is suitable for household consumption in the PRC by our bottle-cultivation techniques (杏鮑菇瓶栽技術) in 2015. We also plan to invest in and enhance our research and development capabilities by procurement of advanced testing and laboratory equipment for our research and development laboratory at our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province. Furthermore, we have invested in the research and development for the commercial cultivation of other kinds of edible fungi such as oyster mushroom (秀珍菇) and brown beech mushroom (茶樹菇) for preparation of potential new product offerings in the future. – 136 – BUSINESS Pursue appropriate strategic acquisition opportunities We plan to continue to grow our business by acquiring two existing king trumpet mushroom cultivation facilities in Northeastern and Southwestern China although we currently do not have identified any acquisition targets. We will identify suitable king trumpet mushroom cultivation facilities based on factors such as local market demand, development potential, complementary effect with our existing products and price. We believe suitable acquisition opportunities of existing king trumpet mushroom cultivation facilities will further expand our cultivation capacities, widen our distribution coverage and increase our profitability. We believe that, as we have extensive experience in managing multiple cultivation facilities in different locations in the PRC, we can continue to grow our business through acquisitions. OUR PRODUCTS We are principally engaged in the cultivation and sales of fresh edible fungi produce and manufacturing and sales of processed food products. As at the Latest Practicable Date, our products were mainly categorised into two series, namely (i) fresh edible fungi produce consisting of king trumpet mushroom, button mushroom and straw mushroom; and (ii) processed food products consisting of canned food such as canned edible fungi, canned vegetables and canned fruit, and other processed food products such as brined mushroom, preserved vegetables and dried mushroom. During the Track Record Period, we were also engaged in trading business involving canned food and furniture in the PRC through Minhui Trading which we disposed of in 2012. The following table sets forth our sales by product categories for the years indicated: Year ended 31 December 2012 % of total revenue RMB’000 CONTINUING OPERATIONS Fresh edible fungi produce King trumpet mushroom . . . . Button mushroom and straw mushroom . . . . . . . Processed food products Canned food . . . . . . . . . . Other processed food products . 2013 2014 % of total revenue RMB’000 % of total revenue RMB’000 . . . . . . . 135,640 26.4% 196,306 41.6% 199,272 36.5% . . . . . . . 57,644 11.2% 96,117 20.4% 175,860 32.2% . . . . . . . . . . . . . . 166,483 65,661 32.5% 12.8% 129,208 49,859 27.4% 10.6% 124,690 45,843 22.9% 8.4% 425,428 82.9% 471,490 100.0% 545,665 100.0% DISCONTINUED OPERATION Trading . . . . . . . . . . . . . . . . . . . . 87,868 17.1% – – – – Total . . . . . . . . . . . . . . . . . . . . . 513,296 100.0% 471,490 100.0% 545,665 100.0% – 137 – BUSINESS We offer our products to the market primarily under our core brands and . The following table sets forth details of our principal products offered in the market as at the Latest Practicable Date: Product category Brands Average selling price range Typical life span RMB per kilogram Fresh edible fungi produce King trumpet mushroom 7 to 11 1 to 15 days Button mushroom 7 to 12 1 to 3 days Straw mushroom 6 to 9 1 to 3 days 10 to 13 3 years 5 to 9 3 years Processed food products Canned food Canned edible fungi Canned vegetables – 138 – Sample product picture BUSINESS Product category Brands Average selling price range Typical life span Sample product picture RMB per kilogram Canned fruit 8 to 10 3 years 9 to 13 1 year Preserved vegetables 5 to 30 1 year Snacks 60 to 80 1 year 140 to 3,068(1) 1 year Other processed food products Brined mushroom Dried mushroom N/A N/A Note: (1) Our dried mushroom includes certain high value ingredients, such as Morchella esculenta (羊肚菌). As a result, we recorded a wide price range of dried mushroom during the Track Record Period. – 139 – BUSINESS Fresh edible fungi produce King trumpet mushroom We first launched the cultivation of king trumpet mushroom in 2009. Our king trumpet mushroom is our most successful product during the Track Record Period, sales of which constituted the largest component of our revenue from continuing operations and accounted for 31.9%, 41.6% and 36.5% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. As at the Latest Practicable Date, we offered eight classes of different sizes of king trumpet mushroom. Button mushroom and straw mushroom We first launched the cultivation of button mushroom and straw mushroom in 2009 and 2012, respectively. Sales of our button mushroom and straw mushroom accounted for 13.5%, 20.4% and 32.2% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. As at the Latest Practicable Date, we offered three classes of different sizes of button mushroom and one class of straw mushroom. Processed food products Canned food We first launched production of canned food in 1995. We produce canned food according to the specifications and design provided by trading companies. A majority of our canned food are produced under OEM arrangements and labeled with brands and logos of overseas distributors or retailers while the remaining is produced and marketed under our own brand. Sales of our canned food accounted for 39.1%, 27.4% and 22.9% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. As at the Latest Practicable Date, we offered three major types of canned food, namely, canned edible fungi, canned vegetables and canned fruit. Other processed food products Apart from the canned food, we also manufacture and sell a wide range of other processed food products, including brined mushroom, preserved vegetables, snacks and dried mushroom. We sell other processed food products under our own brand. Sales of our other processed food products accounted for 15.4%, 10.6% and 8.4% of our revenue from continuing operations for each of the three years ended 31 December 2012, 2013 and 2014, respectively. We discontinued the production of snacks in November 2013 because the return on snacks (taking the advertising and promotion expenses into account) did not meet our expectation and considering the required investment of resources in the marketing efforts to establish our brand of snack. Therefore we decided to focus on our main business of the cultivation and sales of fresh edible fungi produce. – 140 – BUSINESS DISTRIBUTION AND SALES NETWORK Our geographical coverage We have an extensive nationwide distribution and sales network in the PRC consisting primarily of distribution channels operated by our distributors, processed mushroom manufacturers and trading companies. As at 31 December 2014, our products were sold in over 19 provinces, autonomous region and municipalities across the PRC. The following table sets forth our revenue of our continuing operations by geographical regions and product category for the years indicated: Year ended 31 December 2012 2013 % of revenue from continuing operations RMB’000 2014 % of revenue from continuing operations RMB’000 % of revenue from continuing operations RMB’000 PRC Eastern China . . . . . . . . . . . . . . . . 339,126 79.7% 291,116 61.8% 326,178 59.8% King trumpet mushroom . . . . . . . . . . . . 64,795 15.2% 58,932 12.5% 57,045 10.5% Button mushroom and straw mushroom . . . . . 45,740 10.8% 61,452 13.0% 102,850 18.9% Canned food . . . . . . . . . . . . . . . . . 164,750 38.7% 127,607 27.1% 124,037 22.7% Other processed food products . . . . . . . . . 63,841 15.0% 43,125 9.2% 42,246 7.7% Southern China . . . . . . . . . . . . . . . 28,083 6.6% 51,436 10.9% 53,315 9.8% King trumpet mushroom . . . . . . . . . . . . 27,949 6.6% 47,002 10.0% 53,179 9.8% Button mushroom and straw mushroom . . . . . – N/A – N/A – N/A Canned food . . . . . . . . . . . . . . . . . 134 0.0% 270 0.0% 108 0.0% Other processed food products . . . . . . . . . – N/A 4,164 0.9% 28 0.0% Northern China . . . . . . . . . . . . . . . 2,471 0.6% 6,109 1.3% 11,293 2.1% King trumpet mushroom . . . . . . . . . . . . 528 0.1% 4,568 1.0% 10,282 1.9% Button mushroom and straw mushroom . . . . . – N/A – N/A – N/A Canned food . . . . . . . . . . . . . . . . . 1,598 0.4% 1,332 0.3% 1,011 0.2% Other processed food products . . . . . . . . . 345 0.1% 209 0.0% – N/A Central China . . . . . . . . . . . . . . . . 20,088 4.7% 18,975 4.0% 27,686 5.1% King trumpet mushroom . . . . . . . . . . . . 14,356 3.4% 16,938 3.6% 18,728 3.5% Button mushroom and straw mushroom . . . . . 4,710 1.1% 976 0.2% 8,958 1.6% Canned food . . . . . . . . . . . . . . . . . – N/A – N/A – N/A Other processed food products . . . . . . . . . 1,022 0.2% 1,061 0.2% – N/A Northeastern China . . . . . . . . . . . . . 20,476 4.8% 38,417 8.2% 36,689 6.7% King trumpet mushroom . . . . . . . . . . . . 20,023 4.7% 38,417 8.2% 36,675 6.7% Button mushroom and straw mushroom . . . . . – N/A – N/A – N/A Canned food . . . . . . . . . . . . . . . . . – N/A – N/A 14 0.0% Other processed food products . . . . . . . . . 453 0.1% – N/A – N/A – 141 – BUSINESS Year ended 31 December 2012 2013 % of revenue from continuing operations RMB’000 2014 % of revenue from continuing operations RMB’000 % of revenue from continuing operations RMB’000 Southwestern China . . . . . . . . . . . . . 10,168 2.4% 45,934 9.7% 77,760 14.2% King trumpet mushroom . . . . . . . . . . . . 2,973 0.7% 10,946 2.3% 13,606 2.5% 11.7% Button mushroom and straw mushroom . . . . . 7,195 1.7% 33,689 7.1% 64,053 Canned food . . . . . . . . . . . . . . . . . – N/A – N/A – N/A Other processed food products . . . . . . . . . – N/A 1,299 0.3% 101 0.0% Northwestern China . . . . . . . . . . . . . 5,016 1.2% 19,503 4.1% 9,757 1.8% King trumpet mushroom . . . . . . . . . . . . 5,016 1.2% 19,503 4.1% 9,757 1.8% Button mushroom and straw mushroom . . . . . – N/A – N/A – N/A Canned food . . . . . . . . . . . . . . . . . – N/A – N/A – N/A Other processed food products . . . . . . . . . – N/A – N/A – N/A Overseas . . . . . . . . . . . . . . . . . . . – – – – 2,987 0.5% Total . . . . . . . . . . . . . . . . . . . . . 425,428 100.0% 471,490 100.0% 545,665 100.0% Notes: (1) Eastern China represents Shanghai municipality, Shandong, Jiangxi, Jiangsu, Zhejiang, Anhui and Fujian provinces (2) Southern China represents Guangdong province and Guangxi Zhuang Autonomous Region (3) Northern China represents Beijing municipality (4) Central China represents Henan, Hubei and Hunan provinces (5) Northeastern China represents Jilin, Liaoning and Heilongjiang provinces (6) Southwestern China represents Sichuan and Yunnan provinces (7) Northwestern China represents Shaanxi province (8) Overseas represents the United States – 142 – BUSINESS The following map shows the coverage of our sales network by location of our customers in the PRC as at 31 December 2014: Heilongjiang Harbin Changchun Jilin Xi’an Fushun Liaoning Shenyang Dandong Dalian Beijing Shangqiu Qingdao Shandong Henan Shaanxi Ma’anshan Hefei Nanjing Changzhou Jiangsu Wuxi Shanghai Hubei Sichuan Hunan HangzhouSuzhou Ningbo Wuhan Quzhou Nanchang Zhejiang Changsha Anhui Jiangxi Fujian Chengdu Yunnan Guangxi Guangdong Fuzhou Quanzhou Xiamen Zhangzhou Guangzhou Shenzhen Kunming Nanning Hezhou Northeastern China represents Heilongjiang, Jilin, Liaoning Northern China represents Beijing Eastern China represents Shanghai, Shandong, Jiangsu, Zhejiang, Jiangxi, Fujian, Anhui Central China represents Hubei, Hunan, Henan Southern China represents Guangdong, Guangxi Northwestern China represents Shaanxi Southwestern China represents Yunnan, Sichuan Apart from domestic sales of our products in the PRC, we also conducted intermediary trade of canned food during the Track Record Period through Greenfresh HK, our wholly-owned subsidiary. During the Track Record Period, Greenfresh HK purchased canned food from trading companies in the PRC and then sold to the customers in overseas countries. The trading companies in the PRC were responsible for exporting the canned food to the relevant overseas countries. The canned food was shipped from the PRC directly to the relevant overseas countries. To the best knowledge of our Directors, the trading companies in the PRC and the customers in the relevant overseas countries were all Independent Third Parties. For the three years ended 31 December 2012, 2013 and 2014, our sales under intermediary trade amounted to nil, nil and RMB3.0 million, respectively, representing nil, nil and 0.5% of our revenue from continuing operations during the same periods, respectively. As advised by our PRC legal adviser and Hong Kong legal adviser, neither Greenfresh HK is required to obtain any license or permit in the PRC or Hong Kong in order to conduct such intermediary trading business. – 143 – BUSINESS Our customers Consistent with market practice, we sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers in the PRC which manufacture canned edible fungi. We sell our canned food to trading companies in the PRC, which then on-sell our products to overseas distributors in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. We sell our other processed food products to distributors in the PRC, which then on-sell our products to sub-distributors and processed mushroom manufacturers. The following table sets forth our revenue from continuing operations generated by sales channel for the periods indicated: Year ended 31 December 2012 RMB’000 Sales to distributors of our fresh edible fungi produce King trumpet mushroom . . . . . . . . . . . Button mushroom . . . . . . . . . . . . . . . Sales to processed mushroom manufacturers Button mushroom . . . . . . . . . . . . . . . Straw mushroom . . . . . . . . . . . . . . . Sales to trading companies Canned food . . . . . . . . . . . . . . . . . Sales to distributors of our other processed food products Other processed food products . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . 2013 % RMB’000 2014 % RMB’000 % 135,640 7,333 31.9% 1.7% 196,306 25,233 41.6% 5.3% 199,272 70,161 36.5% 12.8% 45,986 4,325 10.8% 1.0% 65,384 5,500 13.9% 1.2% 95,440 10,259 17.5% 1.9% 166,483 39.1% 129,208 27.4% 124,690 22.9% 65,661 15.5% 49,859 10.6% 45,843 8.4% 425,428 100.0% 471,490 100.0% 545,665 100.0% For the three years ended 31 December 2012, 2013 and 2014, sales to our largest customers accounted for 9.5%, 7.8% and 8.0%, respectively, of our total revenue. For the same periods, our five largest customers combined accounted for 28.5%, 23.0% and 29.2%, respectively, of our total revenue. During the Track Record Period and up to the Latest Practicable Date, none of our suppliers was also our major customer. As at the Latest Practicable Date, our five largest customers during the Track Record Period had maintained business relationship with us for at least one year. During the Track Record Period and up to the Latest Practicable Date, we did not have any material dispute with our customers. – 144 – BUSINESS The following table sets forth certain information with respect to our five largest customers during the Track Record Period. Five largest customers Customer A The year for which the customer was one of our five largest customers Customer B 2012, 2013 and 2014 2012 and 2013 Customer C 2012 and 2013 Customer D 2012 Customer E 2012 Customer F 2013 Customer G 2013 and 2014 Customer H (1) 2014 Customer I 2014 Customer J 2014 Customer type/ Business scope Trading company/Canned food export Trading company/Canned food export Trading company/Canned food export Trading company/Canned food export Processed mushroom manufacturer/Canned food processing Trading company/Canned food export Trading company/Canned food export Trading company/Canned food export Processed mushroom manufacturer/Edible fungi production and processing Processed mushroom manufacturer/Canned edible fungi production Headquarters Length of relationship with our Group as at 31 December 2014 Fujian province 8 years Fujian province 8 years Fujian province 5 years Fujian province 8 years Jiangxi province 1 year Fujian province 3 years Fujian province 5 years Fujian province 7 years Fujian province 3 years Fujian province 6 years Note: (1) Customer H is Minhui Trading which we disposed of in 2012. We sold canned food to Minhui Trading in 2013 and 2014 at arm's length basis. The length of relationship with our Group as at 31 December 2014 includes the period of time during which Minhui Trading was our wholly-owned subsidiary. To the best knowledge of our Directors, none of our Directors or their associates, or any Shareholders, who owns more than 5% of our issued share capital, had any interest in any of our five largest customers for the three years ended 31 December 2012, 2013 and 2014 and up to the Latest Practicable Date. Sales to distributors of fresh edible fungi produce Our distributors are our major customers which on-sell our fresh edible fungi produce to sub-distributors and retailers. The majority of our distributors of fresh edible fungi produce are individual distributors while the others are corporate distributors. The sub-distributors and retailers are – 145 – BUSINESS mainly local individual agricultural wholesalers and supermarkets, respectively. For the three years ended 31 December 2012, 2013 and 2014, sales to our distributors of our fresh edible fungi produce amounted to RMB143.0 million, RMB221.5 million and RMB269.4 million, respectively, representing 33.6%, 46.9% and 49.3% of our revenue from continuing operations during the same periods, respectively. We have established an extensive nationwide distribution network. As at 31 December 2012, 2013 and 2014, we had 56, 63 and 56 distributors of our fresh edible fungi produce, respectively. We believe that this extensive distribution network allows us to benefit from our distributors’ established distribution channels and resources, save costs that would otherwise be required to build up an extensive logistics network across the PRC, increase the effectiveness of the penetration of our products and the launch of our new products to the market within a short period of time. We select our distributors on the basis of a number of factors, including their nature of business, their coverage of distribution networks, recent sales performance of other products, operation facilities, number of employees and creditworthiness to ensure they can meet our requirements. The following table sets forth the changes in the number of our distributors of our fresh edible fungi produce for the periods indicated: Year ended 31 December 2012 Number of distributors at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of new distributors added during the year . . . . . . . . . . . . . . . . . . . . . . . . Number of existing distributors terminated during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in the number of distributors during the year . . . . . . . . . . . . . Number of distributors at the end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 2014 32 56 63 37 36 11 (13) (29) (18) 24 7 (7) 56 63 56 In line with our expansion of cultivation capacity of fresh edible fungi produce during the Track Record Period, we added 37, 36 and 11 new distributors of our fresh edible fungi produce for the three years ended 31 December 2012, 2013 and 2014, respectively. In order to improve the quality of our distribution network, we terminated our contractual relationship with 13, 29 and 18 distributors of our fresh edible fungi produce who (i) were small-scale distributors with minimal purchase amount, (ii) were one-off distributors and/or (iii) had unsatisfactory business operation capabilities, for the same periods. In 2012, there was a significant net increase in the number of our distributors of our fresh edible fungi produce as we actively expanded our distribution network primarily due to the commencement of cultivation at our king trumpet mushroom facility in Dandong, Liaoning province and the commencement of the industrial cultivation of button mushroom at our button mushroom facility in Chengdu, Sichuan province. The net increase in the number of distributors in 2013 was primarily due to the expansion of our distribution network as a result of the commencement of cultivation of king trumpet mushroom at our cultivation facility in Changzhou, Jiangsu province and in Zhangzhou (Zhangpu No. 3 facility), Fujian province. For the year ended 31 December 2014, the number of our distributors of our fresh edible fungi – 146 – BUSINESS produce decreased primarily because we terminated small-scale distributors of our fresh edible fungi produce in Liaoning and Jiangsu provinces in the PRC as these distributors are one-off customers with relative small purchase volume in order to guarantee the supply to large-scale and recurrent distributors with relative large purchase volume. During the Track Record Period and up to the Latest Practicable Date, we had one distributor which was wholly-owned by one of our ex-employees. Our Directors confirm that the sales to such distributor had been on normal commercial terms which were consistent with the terms offered to other distributors. Our Directors also confirm that no employees had acted as distributors while still being employees during the Track Record Period and up to the Latest Practicable Date. To the best knowledge of our Directors, save for the disclosure above, during the Track Record Period and up to the Latest Practicable Date, all of our distributors of our fresh edible fungi produce were Independent Third Parties, and none of our distributors was wholly-owned or majority controlled by our current or ex-employees nor does any of them used our trade or brand names. To the best knowledge of our Directors, our distributors of our fresh edible fungi produce are primarily engaged in the business of edible fungi distribution in the PRC. Further, our Directors are not aware any of the sub-distributors or retailers of our distributors was not an Independent Third Party during the Track Record Period and up to the Latest Practicable Date. Designated geographical region Our distributors of our fresh edible fungi produce are local, rather than national, distributors who are primarily involved in the distribution of our products in their respective regions. Although we do not grant exclusivity to our distributors of our fresh edible fungi produce nor we provide designated geographical area in the distribution agreement, we believe there is no potential cannibalisation or competition among our distributors of our fresh edible fungi produce as their respective distribution channels do not overlap. Further, we require our sales personnel to conduct regular on-site inspections on our distributors of our fresh edible fungi produce and keep track of any potential cannibalisation or competition among them. During the Track Record Period, we were not aware of any material cannibalisation or competition among our distributors of our fresh edible fungi produce in the same region. Supply commitment, minimum purchase requirement, sales targets and rebates We provide supply commitment to our distributors of our fresh edible fungi produce to guarantee a minimum amount of supply of fresh edible fungi produce. We set annual supply commitments in the standard distribution agreements which are negotiated and determined with reference to various criteria, including the past performance of the distributor, the market conditions and our own estimated annual production volume. During the Track Record Period and up to the Latest Practicable Date, we had satisfied our annual supply commitments. There is no minimum purchase requirement provided under the distribution agreement. We do not provide sales targets nor rebates to our distributors in the distribution agreements. We recognise our sales once our fresh edible fungi produce have been sold to the distributors and all titles and risks in connection with such products will also be passed to the distributors. After the distributors have acknowledged receipt of those products, they will not be entitled to any recourse from our Group if they fail to sell our products to the sub-distributors or retailers. – 147 – BUSINESS Management of our distributors We require our sales personnel to conduct regular inspections on our distributors to collect information about their sales volumes, selling prices, monitor the number of distributors in any given area and keep track of any potential competition among our distributors. Through these inspections, we seek to ensure that the terms and conditions of the distribution agreements are being complied with throughout our distribution network. In line with market practice, distributors of our fresh edible fungi produce do not keep material amount of inventories as the distributors will distribute and sell the fresh produce to sub-distributors or retailers within a short period of time after they receive our products due to the perishable nature of fresh edible fungi produce. Sub-distributors of our distributors will not keep material amount of inventories as well because they distribute and sell the fresh produce to their customers due to the perishable nature of fresh edible fungi produce. During the Track Record Period and up to the Latest Practicable Date, we were not aware of any material accumulation of stock by our distributors of fresh edible fungi produce and sub-distributors of our distributors. We regularly evaluate the performance of our distributors based primarily on the following factors: • overall sales performance; • performance under the distribution agreement; • payment history; and • maintenance of their creditworthiness. We normally renew the relevant distribution agreements on an annual basis with the distributors who pass our performance evaluation. For further details regarding our pricing policy applied to our distributors, please refer to the sections headed “Business – Distribution and Sales Network – Pricing policy” in this prospectus. Sales to trading companies We sell all of our canned food to trading companies in the PRC, which then on-sell our products to overseas distributors in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. Our trading companies customers are all corporate entities with export qualification in the PRC. The overseas distributors are corporate importers of the relevant jurisdictions. For the three years ended 31 December 2012, 2013 and 2014, our sales to trading companies amounted to RMB166.5 million, RMB129.2 million and RMB124.7 million, respectively, representing 39.1%, 27.4% and 22.9% of our total sales during the same periods, respectively. – 148 – BUSINESS As at 31 December 2012, 2013 and 2014, we had 45, 37 and 47 trading companies as our customers, respectively. During the Track Record Period and up to the Latest Practicable Date, all of these trading companies were Independent Third Parties. Further, our Directors are not aware any of the overseas distributors of our trading companies customers was not an Independent Third Party during the Track Record Period and up to the Latest Practicable Date. The following table sets forth the changes in the number of trading companies for the periods indicated: Year ended 31 December 2012 Number of trading companies at the beginning of the year . . . . . . . . . . . . . . . . . Number of new trading companies added during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of existing trading companies terminated during the year . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in the number of trading companies during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of trading companies at the end of the year . . . . . . . . . . . . . . . . . . . . 2013 2014 49 45 37 14 10 22 (18) (18) (12) (4) (8) 10 45 37 47 Our trading companies customers comprise recurrent customers and one-off customers. During the Track Record Period, the new trading companies that purchased canned food from us and the trading companies which terminated business relationship with us mainly represented trading companies who did one-off purchase from us due to the fluctuation on the number of orders those trading companies received from overseas distributors. We generally enter into sales agreements with trading companies for a term ranging from three months to one year subject to the delivery schedule specified in the relevant sales agreements. The sales agreements set forth the product name, specification, quantity of products, packaging specifications, delivery time and venue. We are required to pay our trading companies customers liquidated damages if we breach the terms of the purchase orders in accordance with the relevant legal provisions. We recognise our sales once our canned food have been sold to the trading companies and all titles and risks in connection with such products will also be passed to the trading companies. After the trading companies have acknowledged receipt of those products, they will not be entitled to any recourse from our Group if they fail to sell our products to overseas distributors. Management of trading companies We require our sales personnel to conduct regular inspections on trading companies to collect information about their sales volumes, selling prices and sales returns of our products. Through these inspections, we seek to ensure that the terms and conditions of the sales agreements with trading companies are being complied with. In line with the market practice, trading companies do not keep material amount of inventories as they enter into sales agreements with us after receiving orders from overseas distributors. During the Track Record Period and up to the Latest Practicable Date, we were not aware of any material accumulation of stock by our trading companies customers. Overseas distributors will monitor and control the level of their inventories based on the market demand of the relevant jurisdictions. – 149 – BUSINESS We regularly evaluate the performance of our trading companies customers based primarily on the following factors: • overall sales performance; • performance under the distribution agreement; • payment history; and • maintenance of their creditworthiness. We normally renew the relevant sales agreements on an annual basis with the trading companies customers who pass our performance evaluation. Sales to distributors of our other processed food products We sell brined mushroom to distributors in the PRC, which on-sell our products to the processed mushroom manufacturers. We sell preserved vegetables and snacks to distributors in the PRC, which on-sell our products to the sub-distributors. The majority of our distributors are corporate distributors while the others are individual distributors. The sub-distributors of our distributors are mainly local corporate distributors which are engaged in the business of food distribution. For the three years ended 31 December 2012, 2013 and 2014, sales to these distributors amounted to RMB65.7 million, RMB49.9 million and RMB45.8 million, respectively, representing 15.5%, 10.6% and 8.4% of our revenue from continuing operations during the same periods, respectively. As at 31 December 2012, 2013 and 2014, we had 64, 55 and 22 distributors, respectively. The number of our distributors decreased in 2013 and 2014 primarily due to our decision to discontinue the production of snacks and the cessation of production of snacks in November 2013. To the best knowledge of our Directors, during the Track Record Period and up to the Latest Practicable Date, all of our distributors of other processed food products were Independent Third Parties, and none of our distributors was wholly-owned or majority-controlled by our current or ex-employees nor does any of them used our trade or brand names. To the best knowledge of our Directors, our distributors of other processed food products are primarily engaged in the business of food distribution in the PRC. Further, our Directors are not aware any of the sub-distributors or processed mushroom manufacturers of our distributors was not an Independent Third Party during the Track Record Period and up to the Latest Practicable Date. Designated geographical region We typically grant our distributors of preserved vegetables and snacks distribution rights to distribute our products within a designated geographical area to avoid cannibalisation among themselves. Pursuant to the standard distribution agreements, our distributors are prohibited from selling our products in other areas beyond those designated by us. We are entitled to unilaterally terminate the distribution agreements with distributors if they are in breach of such restriction. Our products are also printed with date of production which allow our sales representatives to keep track of any product being sold to other regions beyond those designated by us since each batch of products with specific date of production is sold to specific distributors. Further, we require our sales personnel to conduct regular on-site inspections on our distributors and keep track of any potential cannibalisation or competition among our distributors. During the Track Record Period, we were not aware of any material cannibalisation or competition among our distributors in the same region. – 150 – BUSINESS Sales targets and rebates We set annual sales targets in the standard distribution agreements which are negotiated and determined with reference to various criteria, including the past performance of the distributors of our other processed food products, the market condition, our plan in launching new products and our own annual sales targets. Our distributors of our other processed food products are encouraged to attain such targets. If they fail to meet such targets, we have the discretion not to renew the relevant distribution agreements with them the following year. In order to encourage our distributors to extend their distribution coverage so as to increase the market share of our products, we also provide incentives to our distributors in the form of rebates if they achieve certain sales targets. During the Track Record Period, we typically agreed to provide incentives to our distributors of our other processed food products in the form of rebates of 1.0% of their purchase amount if they achieve the sales targets stipulated in such agreements. Such rebates will be settled at the expiry of the distribution agreement. Management of our distributors We require our sales personnel to conduct regular inspections on our distributors of our other processed food products to collect information about their sales volumes, selling prices, inventory levels and sales returns of our products, ensure that our products are distributed by our distributors of our other processed food products within the agreed geographical region, monitor the number of distributors of our other processed food products in any given area and keep track of any potential competition among our distributors of our other processed food products. Through these inspections, we seek to ensure that the terms and conditions of the distribution agreements are being complied with throughout our distribution network. We are entitled to terminate the distribution agreements if our distributors of our other processed food products breach certain provisions stipulated in the agreements, including distribution geographical region restrictions and sales targets. Our distributors of our brined mushroom do not keep material amount of inventories because these distributors purchase brined mushroom from us based on the quantity of orders they received from the processed mushroom manufactures who produce processed mushroom products. Our distributors and sub-distributors of preserved vegetables and snacks do not keep material amount of inventories as well because we produce and sell preserved vegetables and snacks to our distributors based on the orders from our distributors with reference to the market demand of our products. During the Track Record Period and up to the Latest Practicable Date, we were not aware of any material accumulation of stock by our distributors of our other processed food products and sub-distributors of our distributors. We regularly evaluate the performance of our distributors based primarily on the following factors: • overall sales performance; • performance under the distribution agreement; • payment history; and • maintenance of their creditworthiness. We normally renew the relevant distribution agreements on an annual basis with the distributors of our other processed food products who pass our performance evaluation. – 151 – BUSINESS Standard distribution/sales agreements We generally enter into standard distribution agreements or sales contracts with our distributors and trading companies. All distributors and trading companies purchase our products as principals who place purchase orders with us from time to time with specifications on the type and quantity of products. We are not obligated to accept any return of products that have not been sold by our distributors or trading companies. The distributors or trading companies would bear the loss for the unsold products. During the Track Record Period, we did not accept any return of unsold products from our distributors or trading companies. The following table sets forth a summary of the principal terms of our standard distribution/sales agreements with our distributors and trading companies as at the Latest Practicable Date: Principal terms Distributors of fresh edible fungi produce Term of agreement One year Termination Distributors of other processed food products • Brined mushroom: three months to one year • Preserved vegetables and snacks: one year The distribution agreement is • terminable by either party • by giving notice to, and verified by the other party in the event that the other party fails to perform any of the obligations stipulated in the agreement due to natural disasters, major insect pests and other occurrences of force majeure. – 152 – Trading companies Three months to one year Brined mushroom: N/A N/A Preserved vegetables and snacks: We are entitled to terminate the agreement if the distributor (i) fails to meet the sales target within the consecutive three months; (ii) distributes the products outside the designated geographical area; (iii) distribute fake products under our brands; (iv) fails to meet our pricing policy; and (v) does harm to our reputation. BUSINESS Principal terms Distributors of fresh edible fungi produce Distribution within N/A a designated geographical area (yes/no) Pricing Recommended price ranges for on-sell of products (yes/no) Trading companies • Brined mushroom: N/A N/A • Preserved vegetables and snacks: Yes Both parties to determine • with reference to the prevailing market price at delivery. The prevailing market price is determined • based on a few factors such as (i) the proposed price provided by the distributor; (ii) the price of the most recent purchase by the same distributor; and (iii) the local market price intelligence provided by our sales personnel. Brined mushroom: fixed price specified in the sales agreement N/A • Brined mushroom: N/A N/A • Preserved vegetables and snacks: Yes • Brined mushroom: N/A N/A • Preserved vegetables and snacks: N/A • Brined mushroom: N/A N/A • Preserved vegetables and snacks: N/A Minimum purchase N/A amount (yes/no) Minimum supply amount (yes/no) Distributors of other processed food products Yes – 153 – Fixed prices stipulated in the sales agreement Preserved vegetables and snacks: we shall notify the distributor 15 business days in advance if there is any adjustment to the price set forth in the distribution agreement. The new price shall take effective after our notification to the distributor. Distributor is prohibited to distribute the products at a price below the price at which we sell to them. BUSINESS Distributors of other processed food products Trading companies • Brined mushroom: we or distributors bear the cost We or distributors bear the costs • Preserved vegetables and snacks: Distributors bear the cost • Brined mushroom: N/A N/A • Preserved vegetables and snacks: Yes • Brined mushroom: N/A N/A • Preserved vegetables and snacks: Yes Return or exchange N/A of defective products • Brined mushroom: N/A N/A • Preserved vegetables and snacks: Yes Return of unsold or expired products (yes/no) N/A • Brined mushroom: N/A N/A • Preserved vegetables and snacks: N/A Credit terms 45 days • Brined mushroom: 45 days • Preserved vegetables and snacks: N/A • Brined mushroom: N/A N/A • Preserved vegetables and snacks: Yes • Brined mushroom: N/A N/A • Preserved vegetables and snacks: N/A Principal terms Delivery costs Sales target (yes/no) Rebates (yes/no) Distributors of fresh edible fungi produce We or distributors bear the costs N/A N/A Confidentiality undertaking (yes/no) N/A Non-competition undertaking (yes/no) N/A – 154 – 45 days BUSINESS Sales to processed mushroom manufacturers We sell part of our fresh button mushroom and straw mushroom produce directly to processed mushroom manufacturers which use such fresh produce as raw materials for their own production of processed mushroom products. For the three years ended 31 December 2012, 2013 and 2014, sales to processed mushroom manufacturers amounted to RMB50.3 million, RMB70.9 million and RMB105.9 million, respectively, representing 11.8%, 15.1% and 19.4% of our revenue from continuing operations during the same periods, respectively. As at 31 December 2012, 2013 and 2014, we had sales to 8, 11 and 9 processed mushroom manufacturers, respectively. To the best knowledge of our Directors, during the Track Record Period and as at the Latest Practicable Date, all of our processed mushroom manufacturers were Independent Third Parties. Pricing policy The selling prices of our products are jointly determined by our senior management and sales departments on the basis of cost-plus method. We adopt a market pricing strategy when we determine the price of our products. In determining our pricing strategies, we take into account the market demand and supply of our products, the anticipated market trends, costs of our raw materials, cultivation or production costs, product type, the prices of our competitors’ products, historical sales data of our products and expected profit margins to be enjoyed by our distributors, trading companies and us. We review and adjust these prices periodically based on these factors and other general market condition. We have limited control over the prices at which our distributors, processed mushroom manufacturers and trading companies are willing to purchase our products as prices are driven mainly by economic factors such as demand and supply. We also have limited control over the prices at which our distributors of fresh edible fungi produce, processed mushroom manufacturers and trading companies are willing to sell our products to their respective customers. For preserved vegetables and snacks, we sell our products to our distributors at prices stipulated in the distribution agreements. The distributors are obliged to sell the products at the prices stipulated in the distribution agreement and are prohibited to lower or increase the selling prices. We also set up recommended price ranges for our distributors to on-sell our products to sub-distributors. As stipulated in our standard distribution agreement, our distributors are required to add 3% to 10% of the price at which we sell to them when they sell our products to their sub-distributors. Credit control We generally grant a credit period of up to 45 days to our customers depending on their credit history, historical sales performance, estimated future purchases, relationship history with us and business scale. – 155 – BUSINESS As at 31 December 2012, 2013 and 2014, our trade receivables turnover days of continuing operations were approximately 34 days, 34 days and 35 days, respectively. Our finance and accounting department carries out monthly reconciliation exercise of all outstanding accounts receivables and produces receivables reconciliation reports monthly. If a distributor does not settle its outstanding receivables when they are due, we will consider suspending our delivery of products to such distributor until its outstanding receivables have been settled. Our management team monitors our receivable balances on an ongoing basis and considers whether bad or doubtful debt provisions are necessary. As at 31 December 2012, 2013 and 2014, we did not record allowance for doubtful debts. For these reasons, our Directors do not consider there is any material liquidity risk associated with our credit policy. For further details regarding our credit control policy, please refer to the section headed “Financial Information – Certain Items of Consolidated Statements of Financial Position – Trade receivables” in this prospectus. Product return and recall policy We accept return or exchange of any defective product or damaged product after our examination and approval. We will refund our customers the relevant purchase amount for any defective or damaged product returned to us or exchange the defective or damaged products for new products. The liability of defects of our products is borne by us solely. There is no allocation of liability for product defects between our suppliers and us. Apart from product quality issues, we do not accept return or exchange of any unsold products, expired product or product that is getting close to expiry from our customers. During the Track Record Period and up to the Latest Practicable Date, we did not experience any material product return of any unsold product, expired product or product that is getting close to expiry from our customers. We also do not expect any return of unsold product, expired product or product that is getting close to expiry from our customers in the foreseeable future. For the three years ended 31 December 2012, 2013 and 2014, the amount of sales return from our customers amounted to nil, RMB0.9 million and nil, respectively, and mainly because the packaging materials of canned food did not meet the requirements of our customers. During the Track Record Period and up to the Latest Practicable Date, we did not experience any material product return or made any product recall due to product quality defects or damages during delivery. Seasonality During the Track Record Period, we experienced the seasonality fluctuations in our production and sales due to our customers’ purchase patterns and weather condition for traditional cultivation. According to our experience, industrial cultivation is not affected by weather cycles (such as hot summers and cold winters) so the production of king trumpet mushroom are all year round as all of our king trumpet mushroom are under industrial cultivation. Our price of king trumpet mushroom tend to increase around the Christmas and Chinese New Year holiday period (usually during December, January and February of each year) and therefore our revenue from sales of king trumpet mushroom tends to be higher accordingly in those periods. Our production volume of button mushroom and straw mushroom is affected by weather cycles as the majority of our button mushroom and straw mushroom are under traditional cultivation. Due to the habit of button mushroom and straw mushroom, the peak season of production of button mushroom is from October to May of the following year and the peak season of production of straw mushroom is June and September. As such, the sales of button mushroom and straw mushroom will be generated only during such periods. – 156 – BUSINESS Due to their seasonality, we accept the orders from trading companies and purchase various types of vegetables and fruit for the production of canned food in accordance with the respective seasonal availability of the various raw materials. We purchase fresh produce of vegetables and fruit from local suppliers in Fujian province which source these vegetables and fruit in Fujian province, Guangdong province and Guangxi Zhuang Autonomous Region. We manufacture canned food during the harvesting season of the various vegetables and fruit and deliver the products according to the schedules set forth in the relevant sales contracts entered into with trading companies. For more details relating to seasonality of our production and sales of products, please refer to the section headed “Risk Factors – Risks Relating to our Business – Production and sales of some of our products are subject to seasonality fluctuations” in this prospectus. After-sales service We have established customer complaints processing procedures to better serve our customers and take corrective and improvement measures in a timely manner. It is our policy that complaints from our customers or consumers shall be handled and answered upon receipt in accordance with the written procedures. Sales department and quality control department are jointly responsible for the analysis of complaints from customers on product quality. In addition, our sales department and quality control department pay visits to our customers to assist them in solving any sales-related issues. During the Track Record Period and up to the Latest Practicable Date, we did not record product recall and had not received any material complaints or product liability claims from our customers. OUR BRANDS AND MARKETING AND PROMOTIONAL ACTIVITIES Currently a majority of our products are marketed and sold under our core brands and . Our brand was recognised as Well-Known Trademark in China (中國馳名商標) in 2012 by the SAIC and National Top Ten Innovative Brands of Canned Food of 2013 (2013年度全國罐頭食品十大創新品 牌) in 2013 by China Canned Food Industry Association (中國罐頭工業協會). To promote our brand recognition, enhance the visibility and marketability of our products, we engage in a variety of marketing and promotional activities, including trade shows and food exhibitions for our canned edible fungi and other processed food products. Our senior management together with our sales and marketing department set annual sales targets and conduct corresponding performance review of the marketing achievements. – 157 – BUSINESS Going forward, we intend to engage in other advertising channels, including advertisements on the internet, television, public transport and printed media, such as outdoor billboards and newspapers, to increase the awareness of our brands and products in both domestic and overseas markets. This will allow us to further enhance our brand recognition and attract more media and public attention to our brands and products. Further, in order to cultivate a consumer base of younger generation and raise their awareness of our brands, we intend to devote more resources to marketing events that target them. For example, we have established China Edible Fungi Scientific Museum (中國食用菌科技館) in our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province as a consumer edible fungi education base to promote our edible fungi products to the younger generation. We plan to establish a button mushroom garden as a supplement to the China Edible Fungi Scientific Museum. In addition, we will continue to participate in various domestic and international trade shows and food exhibitions to make our products more visible to potential buyers and collect up-to-date information on market trends and consumer preferences. Moreover, we intend to sell our products online through e-commerce platform operator. For example, we entered into strategic cooperation agreements with COFCO Wo Mai Wang Co., Ltd. (中糧我 買網有限公司) in November 2014, pursuant to which we are entitled to, under the same conditions, priority rights in selling our fresh edible fungi produce and processed food products featuring edible fungi through the e-commerce platform operated by COFCO Wo Mai Wang Co., Ltd. (中糧我買網有限公 司). The strategic cooperation agreement provided that the specific terms of cooperation arrangements will be set forth in separate agreements to be entered into between both parties. As at the Latest Practicable Date, we had not entered into any separate agreements with COFCO Wo Mai Wang Co., Ltd. (中糧我買網有限公司). For the three years ended 31 December 2012, 2013 and 2014, we incurred advertising and promotional expenses of RMB1.1 million, RMB0.8 million and RMB1.5 million, respectively, representing 0.3%, 0.2% and 0.3% of our total revenue of continuing operations during the same periods, respectively. Sales and marketing team As at the Latest Practicable Date, our sales and marketing department consisted of 26 employees who are grouped into teams according to different products and different geographical regions in which our distributors, trading companies and processed mushroom manufacturer customers are located. A majority of our sales personnel have over 10 years of experience in the sales of food products. They are primarily responsible for approaching potential customers, liaising with our existing customers, promoting our products, assisting with the provision of after-sales services to our customers, implementing our marketing strategies, supervising marketing and promotional activities, assisting our distributors to expand the coverage of their distribution network in the PRC, gathering market intelligence including sales performance of our competitors, providing feedback to us on a regular basis, conducting regular inspections on our distributors and trading companies and other sales channels than our distributors and trading companies, and monitoring the performance of our distributors and trading companies. For further details regarding the role of our sales personnel in management of our distributors and trading companies, please also refer to the sections headed “Business – Distribution and Sales Network – Our customers – Sales to distributors of fresh edible fungi produce – Management of our distributors”, “Business – Distribution and Sales Network – Our customers – Sales to trading companies – Management of trading companies” and “Business – Distribution and Sales Network – Our customers – Sales to distributors of our other processed food products – Management of our distributors” in this prospectus. – 158 – BUSINESS CULTIVATION OF FRESH EDIBLE FUNGI Cultivation process Overview We employ two kinds of cultivation methods, namely industrial cultivation and traditional cultivation for our fresh edible fungi produce. Industrial cultivation ( 工廠化種植 ) We apply industrial cultivation method to produce all of our king trumpet mushroom and part of our button mushroom. Industrial cultivation involves employing advanced and automated machineries and equipment in connection with refrigeration, heating and ventilation to control temperature, humidity, carbon dioxide density and illumination during the cultivation process in order to create the most appropriate and ideal environment for the growth of edible fungi. Industrial cultivation standardises cultivation processes, stabilises mushroom yield and improves product quality without exposure to environmental and natural risks, and therefore makes all-year-round cultivation of edible fungi possible without regional or seasonal limitations. Traditional cultivation ( 傳統種植 ) We principally apply traditional cultivation method to produce button mushroom and straw mushroom. Traditional cultivation is subject to environmental and natural condition and thus experiences seasonality. We lease the land or buildings of respective cultivation facilities from various Villagers’ Committees and engage individual farmers to apply traditional cultivation method to produce button mushroom and straw mushroom. We provide raw materials and technical expertise to the farmers. The farmers are responsible for the cultivation of button mushroom and straw mushroom under our management and supervision. We are responsible for the sales of button mushroom and straw mushroom to our customers. The traditional cultivation process of button mushroom and straw mushroom is similar to the industrial cultivation process of button mushroom. The primary difference between these two kinds of cultivation methods is that the industrial cultivation process involves automated equipment and machinery while every step in the traditional cultivation process relies on manual labour. Another primary difference between the two kinds of cultivation methods is that the industrial cultivation process involves all year round cultivation and harvesting, while the growing and harvesting cycles under the traditional cultivation process are affected by weather cycles, resulting in peak seasons for production under the traditional cultivation method during the year. Please refer to the charts illustrating the typical growing and harvesting cycles of king trumpet mushroom, button mushroom and straw mushroom in this section of this prospectus for further details. For details on the seasonality fluctuations on the production of our products, please refer to the section headed “Business – Seasonality” in this prospectus. – 159 – BUSINESS The chart below illustrates the typical growing and harvesting cycle of king trumpet mushroom, button mushroom and straw mushroom throughout the year. January February The harvesting period of button mushroom cultivated under the traditional cultivation method in Fujian province and Sichuan province. March April King trumpet mushroom and button mushroom cultivated under the industrial cultivation method are cultivated and harvested all year round. May The growing period of the first crop of straw mushroom in Fujian province. June The harvesting period of the first crop of straw mushroom in Fujian province. July August The growing period and harvesting period of the second crop of straw mushroom in Fujian province. The growing period of button mushroom cultivated under the traditional cultivation method in Fujian province and Sichuan province. September October The growing period of button mushroom cultivated under the traditional cultivation method in Fujian province. The harvesting period of button mushroom cultivated under the traditional cultivation method in Sichuan province. November The harvesting period of button mushroom cultivated under the traditional cultivation method in Fujian province and Sichuan province. December – 160 – BUSINESS Cultivation process of king trumpet mushroom The entire industrial cultivation process of king trumpet mushroom commencing from preparation of raw materials to harvesting takes approximately 60 days. The period from 0 to 43th day is the growing period and the period from 44th to 60th day is the harvesting period. The chart below illustrates major steps of typical industrial cultivation processes for king trumpet mushroom: Preparation of raw materials (購入原材料) Pre-wetting of mixed ingredients (預濕拌料) Bag making (製袋) Sterilisation (滅菌) Cooling (冷卻) Inoculation (接種) Cultivars (育菌) Fruiting (出菇) Harvesting (採收) Packaging (包裝) – 161 – BUSINESS Preparation of raw materials: Procurement of qualified raw and auxiliary materials needed for production such as sawdust, bagasse, corncob, bran and dregs of beans. Pre-wetting of mixed ingredients: The synthesis and pre-wetting of raw and auxiliary materials according to a formula and carry out level 3 mixing by the mixing machine and then deliver to the bag making machine. Bag making: After the mixing, the compost is placed into polypropylene bags according to specific weight by automatic bag making machine to form the fungus package. Sterilisation: After bag making, the fungus package will move to an autoclave sterilisation cabinet and undergo high temperature sterilisation for a long period of time. Cooling: After sterilisation, the fungus package will be moved into a clean room and cooled by normal room temperature as well as forced cooling, so that the temperature would reach the temperature for inoculation. Inoculation: To inoculate cultures of fungi on to the fungus package in a bio-clean room. Cultivars: After inoculation, the fungus package will be moved into the cultivate room quickly for cultivation with constant temperature, constant humidity and good ventilation, the fungus package will be gradually overgrown with mature cultures of fungi and mycelium. Fruiting: The matured fungus package will be moved into the fruition houses, the lids of the fungus package will be opened according to the growing time, fruiting will be induced by making physical adjustment of lighting, temperature, humidity and the concentration of carbon dioxide, and then the buds will be sparse manually according to the growing condition so that the shape of king trumpet mushroom will grow in line with market needs. Harvesting: The matured king trumpet mushroom will be harvested and moved into the cold storage. Packaging: The king trumpet mushroom will be trimmed and then packed in vacuum packs and stored in insulation foam box. – 162 – BUSINESS Cultivation process of button mushroom and straw mushroom The entire industrial cultivation process of button mushroom takes approximately 60 days. The period from 0 to 38th day is the growing period. The sowing is conducted only once at the beginning of the entire industrial cultivation process. Button mushroom under industrial cultivation could be harvested three times during the period from 39th to 60th day which is divided into three crops. The period of time of such three crops is estimated to be approximately 3 days, 10 days and 10 days, respectively. Each crop is assumed to be harvested with equal quantity of button mushroom. After harvesting the third crop, a new 60-day cultivation process begins. The chart below illustrates major steps of typical industrial cultivation process of button mushroom: Preparation of raw materials (備料) Pre-wetting (預濕) Primary fermentation (一次發酵) Secondary fermentation (二次發酵) Feeding (上料) Seeding (播種) Management of spawn running (發菌管理) Casing (覆土) Fruiting (出菇) Harvesting (採收) – 163 – BUSINESS Preparation of raw materials: Advanced procurement of raw and auxiliary materials such as barley grass and chicken manure based on the production arrangements. Pre-wetting: Put the advance prepared barley grass into the pre-wet area for pre-wetting process. Primary fermentation: Use the new material tossing machine to toss the pre-wet compost evenly into the primary fermentation tunnel at a certain height, and heaping up periodically. Secondary fermentation: Use the raw material tossing machine to toss the primary fermented compost evenly into the secondary fermentation tunnel at a certain height. Feeding and Seeding: Use the feeding machine to mix the fully fermented compost with the cultures of fungi and then put onto the mushroom beds, and strews cultures of fungi evenly on the feeding surface. Management of spawn running: The management of the compost pack with the mycelium process. Casing: After the compost is covered with the mycelium, use the casing machine to evenly spread the prepared turfy soil over the feeding surface of the mushroom beds. Fruiting: Fruiting bodies grow and become mushrooms after they matured. Harvesting: Harvesting the mushrooms which are in line with the requirement. The entire traditional cultivation process for button mushroom takes approximately eight to nine months from August to April of the following year. The sowing is conducted only once at the beginning of the entire traditional cultivation process. Button mushroom under traditional cultivation could be harvested 11 times from November to April of the following year which is divided into 11 crops and the length of period of each 11 crops is different subject to the weather and geographical condition. After harvesting the last crop, a new cultivation process will begin in August. The entire traditional cultivation process for straw mushroom commences from May to June and August to September every year. The straw mushroom is sowed once in May and August and harvested in June and September, respectively. The major steps of typical traditional cultivation process of button mushroom and straw mushroom is similar to that of the industrial cultivation process of button mushroom. – 164 – BUSINESS Cultivation facilities As at the Latest Practicable Date, we had been accredited with organic food products certificates (有 機產品認證證書) from Beijing Co-ops Integrity Certification Center (北京中合金諾認證中心) in respect of king trumpet mushroom cultivated at our Jiaomei cultivation facilities in Zhangzhou, Fujian province according to the relevant national standards in relation to organic food in the PRC. We also have been granted the Certificate of Pollution-free Agricultural Products (無公害農產品證書) for our king trumpet mushroom and its cultivation process in November 2011 by the Ministry of Agriculture. The aggregate land area covers approximately 1.1 million sq.m. We strategically locate our cultivation facilities of our fresh edible fungi produce in different regions in the PRC which are in the proximity of local major agricultural product markets. As at the Latest Practicable Date, we had established eight cultivation facilities for our fresh edible fungi produce, including (i) three king trumpet mushroom facilities and one button mushroom and straw mushroom facility in Zhangzhou, Fujian province; (ii) one king trumpet mushroom facility in Dandong, Liaoning province; (iii) one king trumpet mushroom facility in Changzhou, Jiangsu province; and (iv) two button mushroom facilities in Chengdu, Sichuan province. In determining the location of our cultivation facilities, we take into account the proximity to our markets and the location of the plantation and cultivation bases of our raw materials so as to facilitate their delivery and lower transportation costs. We purchased parcels of land for the construction of our owned king trumpet mushroom cultivation facilities in Zhangzhou, Fujian province. We entered into various lease agreements with Independent Third Parties to lease properties at our king trumpet mushroom cultivation facilities in Zhangzhou, Fujian province, Dandong, Liaoning province and Changzhou, Jiangsu province. We entered into various lease agreements with the relevant Villagers’ Committees to lease the farmland and other properties at our button mushroom cultivation facilities in Chengdu, Sichuan province and button mushroom and straw mushroom cultivation facilities Zhangzhou, Fujian province. The farmland lease agreements with Villagers’ Committees are typically with a term of nine months from September to May of the following year which is within the cultivation season of button mushroom. Our own employees are responsible for the cultivation of king trumpet mushroom at our cultivation facilities. We outsource the cultivation service of our button mushroom and straw mushroom to local farmers at our button mushroom cultivation facilities in Chengdu, Sichuan province and button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province by entering into production contracting management contracts (生產承包管理合同) with local farmers. We provide technical guidance to the local farmers and monitor the cultivation process in order to ensure that button mushroom or straw mushroom is cultivated in accordance with our quality requirements. The compensation we paid to local farmers was fixed to a certain monetary amount per sq.m. mainly with reference to the monthly average income of the local farmers and the period of time of the cultivation of button mushroom and straw mushroom. As advised by our PRC legal adviser, the production contracting management contracts entered into with local farmers is not in violation of the relevant PRC laws and regulations. The principal terms of the production contracting management contracts are as follows: • for a term of nine months from September to May of the following year or three months from July to September which is within the cultivation seasons of button mushroom and straw mushroom, respectively; – 165 – BUSINESS • we provide with local farmers with required raw materials, detailed cultivation plan and process and detailed quantity and quality requirement of button mushroom or straw mushroom; • the local farmers bear the daily maintenance costs at the cultivation facilities during the term of the contracts; • we could unilaterally terminate the agreements without any obligation of compensation to the local farmers in the event that the local farmers breach the agreements which results in material adverse consequence, relinquish the contracting service after entering into the agreement, destroy properties owned by us which results in material losses or tarnish the image and reputation of us which results in material adverse consequence; and • settled after the sale of button mushroom or straw mushroom to our customers. The table below sets forth the location, type of edible fungi produced, size and the year of commencement of operation of our cultivation facilities as at the Latest Practicable Date: Cultivation facilities Address Type of edible fungi produced Total land area (sq.m.) Owned facilities Zhangzhou king trumpet mushroom facility (Fujian province) 1. Jiaomei 2. Chengxi 3a. Zhangpu (No. 1 facility) Leased facilities Zhangzhou king trumpet mushroom facility (Fujian province) 3b. Zhangpu (No. 2 facility) 3c. Zhangpu (No. 3 facility) 3d. Zhangpu (No. 4 facility) 4. Dandong king trumpet mushroom facility (Liaoning province) 5. Changzhou king trumpet mushroom facility (Jiangsu province) Jiaomei Town, Longhai, Zhangzhou, Fujian Province, PRC Chengxi Town, Longhai, Zhangzhou, Fujian Province, PRC Shiliu Town, Zhangpu County, Zhangzhou, Fujian Province, PRC Shiliu Town, Zhangpu County, Zhangzhou, Fujian Province, PRC Changqiao Town, Zhangpu County, Zhangzhou, Fujian Province, PRC Shiliu Town, Zhangpu County, Zhangzhou, Fujian Province, PRC Chengnan Industrial Park, Kuandian County, Dandong, Liaoning Province, PRC Zouqu Town, Wujin District, Changzhou, Jiangsu Province, PRC Total Year of cultivation commencement area (1) of operation Expiry date of leasehold (sq.m.) King trumpet mushroom 48,380 N/A 2011 N/A King trumpet mushroom 20,624 N/A 2009 N/A King trumpet mushroom 29,748 N/A 2010 N/A King trumpet mushroom 12,006 N/A 2010 31 January 2020 King trumpet mushroom 13,340 N/A 2013 30 April 2020 King trumpet mushroom 12,000 N/A 2015 29 February 2020 King trumpet mushroom 40,020 N/A 2012 19 February 2022 King trumpet mushroom 20,010 N/A 2013 30 April 2023 – 166 – BUSINESS Cultivation facilities Total land area Type of edible fungi produced Address (sq.m.) 6. Chengdu button Jixian Town, Chongzhou, mushroom facility Chengdu, Sichuan Province, PRC (Sichuan Dongchang Town, Dayi County, province) Chengdu, Sichuan Province, PRC (traditional Caichang Town, Dayi County, cultivation) Chengdu, Sichuan Province, PRC Sancha Town, Dayi County, Chengdu, Sichuan Province, PRC 7. Chengdu button Caichang Town, Dayi County, mushroom facility Chengdu, Sichuan Province, PRC (Sichuan province) (industrial cultivation) 8. Zhangzhou button Jiaomei Town, Longhai, mushroom and Zhangzhou, Fujian Province, PRC straw mushroom facility (Fujian province) (traditional cultivation) Total Year of cultivation commencement area (1) of operation (sq.m.) Button mushroom 677,005 677,005 Button mushroom 46,690 28,800 217,300 892,191 Button mushroom and straw mushroom Expiry date of leasehold 2011 30 April 2015 (2) 2012 30 September 2019 2009 30 April 2016 Notes: (1) The cultivation area is inapplicable for our king trumpet mushroom as we cultivate king trumpet mushroom in bags. The cultivation area of Chengdu button mushroom facility (industrial cultivation) is smaller than the land area of such facility is because the land area includes areas of greenery, storage, roads and plants. The cultivation area of Zhangzhou button mushroom and straw mushroom facility is larger than the land area of such facility because the cultivation of button mushroom and straw mushroom in such facility involves cultivation shelves therefore the cultivation area is the sum of the area of all cultivation shelves which is larger than the land area of such facility. (2) We typically enter into lease agreements with respect to our traditional cultivation facility in Chengdu, Sichuan province in August every year. The term of such lease agreements is from August to April of the following year corresponding to duration of the entire cultivation process under traditional cultivation method. We expect to renew the current leases in August 2015. The table below sets forth our edible fungi produced, designed cultivation capacity, cultivation volume and utilisation rate for the periods indicated: As at 31 December 2012 Location of cultivation facility Zhangzhou king trumpet mushroom facility (Fujian province) – Jiaomei – Chengxi Type of edible fungi produced Year ended 31 December 2012 Cultivation area (1) Designed cultivation capacity (2) Cultivation volume Utilisation rate (2) (sq.m.) (tonnes) (tonnes) (%) King trumpet mushroom King trumpet mushroom – 167 – N/A 4,410 4,188 95.0% N/A 2,772 2,612 94.2% BUSINESS As at 31 December 2012 Location of cultivation facility – Zhangpu (No. 1 facility) – Zhangpu (No. 2 facility) Dandong king trumpet mushroom facility (Liaoning province) Chengdu button mushroom facility (Sichuan province) (traditional cultivation) Chengdu button mushroom facility (Sichuan province) (industrial cultivation) Zhangzhou button mushroom and straw mushroom facility (Fujian province) (traditional cultivation) Ningdu button mushroom facility (Jiangxi province) (traditional cultivation) Gongan Button mushroom facility (Hubei province) (3) (traditional cultivation) Type of edible fungi produced Year ended 31 December 2012 Cultivation area (1) Designed cultivation capacity (2) Cultivation volume Utilisation rate (2) (sq.m.) (tonnes) (tonnes) (%) King trumpet mushroom King trumpet mushroom King trumpet mushroom Button mushroom N/A 2,268 2,050 90.4% N/A 1,260 1,172 93.0% N/A 2,457 2,194 84.3% 223,445 N/A 1,067 N/A Button mushroom 14,400 60 38 64.1% Button mushroom and straw mushroom 422,872 N/A N/A Button mushroom 104,800 N/A 6,263 (button mushroom) 703 (straw mushroom) 3,669 Button mushroom N/A N/A 848 N/A N/A Notes: (1) The cultivation area is inapplicable for our king trumpet mushroom as we cultivate king trumpet mushroom in bags. (2) The designed cultivation capacity of our respective king trumpet mushroom facilities for the year ended 31 December 2012 equals to the daily king trumpet mushrooms harvested at the relevant cultivation facilities multiplied by 360 days. The daily king trumpet mushrooms harvested were calculated as to the estimated historical average weight of king trumpet mushroom harvested per bag multiplied by the total number of bags of king trumpet mushrooms harvested per day. It is reasonable to assume the king trumpet mushroom could be harvested 360 days a year because the industrial cultivation method is applied at our cultivation facilities which results in all year round cultivation and harvesting. The designed cultivation capacity and utilisation rate of our respective button mushroom and straw mushroom facilities under traditional cultivation method for the year ended 31 December 2012 are inapplicable because the button mushroom and straw mushroom harvested per sq.m. under traditional cultivation method could not be accurately estimated due to environmental and other natural condition. (3) Gongan button mushroom facility was closed in 2012, primarily because the operations at such cultivation facility was not cost-effective as it was located relatively far from local major agricultural product markets which resulted in inconvenient transportation of our fresh produce. Further, we planned to concentrate our resources to operate the button mushroom cultivation facilities in Zhangzhou, Fujian province and Chengdu, Sichuan province in order to reduce the operating costs. – 168 – BUSINESS As at 31 December 2013 Location of cultivation facility Zhangzhou king trumpet mushroom facility (Fujian province) – Jiaomei – Chengxi – Zhangpu (No. 1 facility) – Zhangpu (No. 2 facility) – Zhangpu (No. 3 facility) Dandong king trumpet mushroom facility (Liaoning province) Changzhou king trumpet mushroom facility (Jiangsu province) Chengdu button mushroom facility (Sichuan province) (traditional cultivation) Chengdu button mushroom facility (Sichuan province) (industrial cultivation) Zhangzhou button mushroom and straw mushroom facility (Fujian province) (traditional cultivation) Ningdu button mushroom facilities (Jiangxi province) (3) (traditional cultivation) Type of edible fungi produced Year ended 31 December 2013 Cultivation area (1) Designed cultivation capacity (2) Cultivation volume Utilisation rate (2) (sq.m.) (tonnes) (tonnes) (%) King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom Button mushroom N/A 4,662 4,419 94.8% N/A 2,772 2,758 99.5% N/A 2,268 2,234 98.4% N/A 1,260 1,259 99.9% N/A 1,134 1,026 90.5% N/A 5,292 4,078 77.1% N/A 1,304 1,054 78.4% 677,005 N/A 2,209 N/A Button mushroom 21,600 3,024 2,004 66.3% Button mushroom and straw mushroom 892,191 N/A N/A Button mushroom N/A N/A 8,260 (button mushroom) 711 (straw mushroom) 1,246 N/A Notes: (1) The cultivation area is inapplicable for our king trumpet mushroom as we cultivate king trumpet mushroom in bags. (2) The designed cultivation capacity of our respective king trumpet mushroom facilities for the year ended 31 December 2013 equals to the daily king trumpet mushrooms harvested at the relevant cultivation facilities multiplied by 360 days. The daily king trumpet mushrooms harvested were calculated as to the estimated historical average weight of king trumpet mushroom harvested per bag multiplied by the total number of bags of king trumpet mushrooms harvested per day. It is reasonable to assume the king trumpet mushroom could be harvested 360 days a year because the industrial cultivation method is applied at our cultivation facilities which results in all year round cultivation and harvesting. The designed cultivation capacity and utilisation rate of our respective button mushroom and straw mushroom facilities under traditional cultivation method for the year ended 31 December 2013 are inapplicable because the button mushroom and straw mushroom harvested per sq.m. under traditional cultivation method could not be accurately estimated due to environmental and other natural condition. – 169 – BUSINESS (3) Ningdu button mushroom facility was closed in 2013 primarily because the operations at such cultivation facility was not cost-effective as it was located relatively far from local major agricultural product markets which resulted in inconvenient transportation of our fresh produce. Further, we planned to concentrate our resources to operate the button mushroom cultivation facilities in Zhangzhou, Fujian province and Chengdu, Sichuan province in order to reduce the operating costs. As at 31 December 2014 Location of cultivation facility Zhangzhou king trumpet mushroom facility (Fujian province) – Jiaomei – Chengxi – Zhangpu (No. 1 facility) – Zhangpu (No. 2 facility) – Zhangpu (No. 3 facility) Dandong king trumpet mushroom facility (Liaoning province) Changzhou king trumpet mushroom facility (Jiangsu province) Chengdu button mushroom facility (Sichuan province) (traditional cultivation) Chengdu button mushroom facility (Sichuan province) (industrial cultivation) Zhangzhou button mushroom and straw mushroom facility (Fujian province) (traditional cultivation) Type of edible fungi produced Year ended 31 December 2014 Cultivation area (1) Designed cultivation capacity (2) Cultivation volume Utilisation rate (2) (sq.m.) (tonnes) (tonnes) (%) King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom King trumpet mushroom Button mushroom N/A 4,662 4,565 97.9% N/A 2,772 2,589 93.4% N/A 2,268 2,309 101.8% (3) N/A 1,260 1,250 99.2% N/A 2,016 1,660 82.3% N/A 5,292 4,431 83.7% N/A 2,016 1,530 75.9% 677,005 N/A 3,148 N/A Button mushroom 28,800 4,838 3,860 79.8% Button mushroom and straw mushroom 892,191 N/A 19,664 (button mushroom) 1,462 (straw mushroom) N/A Notes: (1) Cultivation area is inapplicable for our king trumpet mushroom as we cultivate king trumpet mushroom in bags. – 170 – BUSINESS (2) The designed cultivation capacity of our respective king trumpet mushroom facilities for the year ended 31 December 2014 equals to the daily king trumpet mushrooms harvested at the relevant cultivation facilities multiplied by 360 days. The daily king trumpet mushrooms harvested were calculated as to the estimated historical average weight of king trumpet mushroom harvested per bag multiplied by the total number of bags of king trumpet mushrooms harvested per day. It is reasonable to assume the king trumpet mushroom could be harvested 360 days a year because the industrial cultivation method is applied at our cultivation facilities which results in all year round cultivation and harvesting. The designed cultivation capacity and utilisation rate of our respective button mushroom and straw mushroom facilities under traditional method for the year ended 31 December 2014 are inapplicable because the button mushroom and straw mushroom harvested per sq.m. under traditional cultivation method could not be accurately estimated due to environmental and other natural condition. (3) The utilisation rate of 101.8% at Zhangpu (No.1 facility) for the year ended 31 December 2014 primarily due to an increase in average yield of king trumpet mushroom in 2014 as a result of our improvement of productivity and efficiency of the cultivation process by leveraging our research and development capabilities compared to designed average yield of king trumpet mushroom which was determined at the commencement of production of Zhangpu (No.1 facility) in 2011. PRODUCTION OF PROCESSED FOOD PRODUCTS The production of our canned food is based on our customers’ orders. The final canned food is according to the customers’ requirements, such as food type, container, and preservation method. Upon the receipt of orders of customers, our sales department fills in production notification form with order information and production forecast to our production department. Product management prepares production plans with highlights of priority and deadline, based on the review of the notification forms, periodic internal discussions and discussion with sales department in relation to production capacity and delivery schedule. Procurement of raw materials and the production are arranged according to the production plans. Production department monitors the daily production activities through daily reports. In the event that delay is foreseeable, production department shall immediately inform sales department, which shall further coordinate with customers in relation to the possible delay. Production process The entire process of our processed food products commencing from the preparation of raw materials to the completion of production takes approximately 24 hours. – 171 – BUSINESS We set forth below the typical production process for canned food, one of our major processed food products: Procurement and inspection of raw materials (原材料採購、驗收) Rinsing (漂洗) Pre-cooking and cooling (預煮、冷卻) Sorting (分級處理) Canning of raw materials (原料裝罐) Addition of soup base and auxiliary mateials (灌湯、輔料添加) Sealing (封口) Sterilisation and cooling (殺菌、冷卻) Roller can drying and warehousing (擦罐、入庫) Inspection and packing (打檢包裝) Procurement and inspection of raw materials: Procurement of the required raw and auxiliary materials and conduct inspection by batch. Rinsing: Pour the raw materials that passed the inspection into a rinsing pool and rinse them with tap water that complies with the hygiene requirements, so as to remove impurities such as mud and sands. – 172 – BUSINESS Pre-cooking and cooling: After rinsing, pour (or fill) the raw materials into an automatic pre-cooking machine where they are sterilised by cooking with high temperature water for a certain period of time. Use hygienic tap water to cool the raw materials in a timely manner. Sorting: Pour (or fill) the raw materials into an automatic sorting machine for sorting into different sizes or grades according to the production specifications, then carry out screening, classification and inspection on the raw materials. Canning of raw materials: Canning of the up to standard raw materials after sorting in accordance with the canning (bottling) specifications. Addition of soup base and auxiliary materials: Add in up to standard soup base and other ingredients according to the recipes or automatically. Sealing: Use the automatic sealing machine for the vacuum canning (bottling) of the cans filled with raw materials and soup base. Sterilisation and cooling: After sealing, put the stacked cans into an automatic sterilizer for high temperature sterilisation for a certain period of time, then put the sterilised cans into up to standard tap water for cooling. Roller can drying and warehousing: After cooling, send the cans to an automatic air drying machine and a roller can dryer for drying, then send the cans to the semi-finished product warehouse. Inspection and packing: Conduction inspection on the cans according to the delivery requirements, then label and pack them before sending them to the finished product warehouse. Production facilities As at the Latest Practicable Date, we had established two production facilities for our processed food products in Zhangzhou, Fujian province with an aggregate land area of approximately 23,000 sq.m. As at the Latest Practicable Date, these two production facilities housed three production lines in operation. In determining the location of our production facilities, we take into account the proximity to our market and the location of the plantation and manufacturing bases of our raw materials so as to facilitate their delivery and lower transportation costs. – 173 – BUSINESS Production capacity The table below sets forth the number of production lines for our products and their designed production capacity, production volume and utilisation rate for the periods indicated: Year ended 31 December 2012 Products and production lines Zhangzhou Lvbao facility Zhangzhou Lvxian facility Zhangzhou brined mushroom production area in Zhangzhou Lvxian facility Canned food Preserved vegetables and snacks Canned food Brined mushroom Designed production capacity (1) Production volume Utilisation rate (tonnes) (tonnes) (%) 14,490 (2) 1,800 (2) 9,953 1,269 68.7% 70.5% 11,730 N/A (4) 13,766 1,873 117.3% (3) N/A (4) Notes: (1) The designed production capacity of our canned food at the respective production facilities for the year ended 31 December 2012 equals to the daily weight of semi-products in tonnes sterilised at the relevant production facilities multiplied by 276 days. The designed production capacity of our preserved vegetable and snacks at the respective production facilities for the year ended 31 December 2012 equals to the daily weight of semi-products in tonnes that have completed the sealing process at the relevant production facilities multiplied by 276 days. We estimated the duration of production of 276 days by excluding Sundays and average scheduled downtime for maintenance and repair in a year of 365 days. (2) The total production capacity at Zhangzhou Lvbao facility was shared between canned food production line and preserved vegetables and snacks production line. The maximum designed production capacity at Zhangzhou Lvbao facility for the year ended 31 December 2012 was 14,490 tonnes of processed food products. The designed production capacity of canned food was estimated to be 14,490 tonnes assuming the production capacity at Zhangzhou Lvbao facility was fully utilised to produce canned food. The designed production capacity of preserved vegetables and snacks was estimated to be 1,800 tonnes assuming the production capacity at Zhangzhou Lvbao facility was fully utilised to produce preserved vegetables and snacks. (3) The utilisation rate of our Zhangzhou Lvxian facility exceeded 100.0% for the year ended 31 December 2012 primarily due to our increased actual production time for canned food in response to the increased purchase orders we received during the same period. (4) There is no designed production capacity and utilisation rate for brined mushroom because brined mushroom is made of our fresh button mushroom produce during the cultivation season which is subject to the cultivation volume of button mushroom of the relevant periods. – 174 – BUSINESS Year ended 31 December 2013 Products and production lines Zhangzhou Lvbao facility Zhangzhou Lvxian facility Zhangzhou brined mushroom production area in Zhangzhou Lvxian facility Canned food Preserved vegetables and snacks Canned food Brined mushroom Designed production capacity (1) Production volume Utilisation rate (tonnes) (tonnes) (%) 14,490 (2) 3,000 (2) 7,213 1,105 49.8% 36.8% 11,730 N/A (3) 9,640 1,375 82.2% N/A (3) Notes: (1) The designed production capacity of our respective canned food facilities for the year ended 31 December 2013 equals to the daily weight of semi-products in tonnes sterilised at the relevant production facilities multiplied by 276 days. The designed production capacity of our preserved vegetable and snacks at the respective production facilities for the year ended 31 December 2013 equals to the daily weight of semi-products in tonnes that have completed the sealing process at the relevant production facilities multiplied by 276 days. We estimated the duration of production of 276 days by excluding Sundays and average scheduled downtime for maintenance and repair in a year of 365 days. (2) The total production capacity at Zhangzhou Lvbao facility was shared between canned food production line and preserved vegetables and snacks production line. The maximum designed production capacity at Zhangzhou Lvbao facility for the year ended 31 December 2013 was 14,490 tonnes of processed food products. The designed production capacity of canned food was estimated to be 14,490 tonnes assuming the production capacity at Zhangzhou Lvbao facility was fully utilised to produce canned food. The designed production capacity of preserved vegetables and snacks was estimated to be 3,000 tonnes assuming the production capacity at Zhangzhou Lvbao facility was fully utilised to produce preserved vegetables and snacks. (3) There is no designed production capacity and utilisation rate for brined mushroom because brined mushroom is made of our fresh button mushroom produce during the cultivation season which is subject to the cultivation volume of button mushroom of the relevant periods. Year ended 31 December 2014 Products and production lines Zhangzhou Lvbao facility Zhangzhou Lvxian facility Zhangzhou brined mushroom production area in Zhangzhou Lvxian facility Canned food Preserved vegetables Canned food Brined mushroom Designed production capacity (1) Production volume Utilisation rate (tonnes) (tonnes) (%) 14,490 (2) 3,000 (2) 11,730 N/A (4) 8,890 15 7,818 970 61.4% 0.5% (3) 66.6% N/A (4) Notes: (1) The designed production capacity of our respective canned food facilities for the year ended 31 December 2014 equals to the daily weight of semi-products in tonnes sterilised at the relevant production facilities multiplied by 276 days. The designed production capacity of our preserved vegetable at the respective production facilities for the year ended 31 December 2014 equals to the daily weight of semi-products in tonnes that have completed the sealing process at the relevant production facilities multiplied by 276 days. We estimated the duration of production of 276 days by excluding Sundays and average scheduled downtime for maintenance and repair in a year of 365 days. – 175 – BUSINESS (2) The total production capacity at Zhangzhou Lvbao facility was shared between canned food production line and preserved vegetables production line. The maximum designed production capacity at Zhangzhou Lvbao facility for the year ended 31 December 2014 was 14,490 tonnes of processed food products. The designed production capacity of canned food was estimated to be 14,490 tonnes assuming the production capacity at Zhangzhou Lvbao facility was fully utilised to produce canned food. The designed production capacity of preserved vegetables was estimated to be 3,000 tonnes assuming the production capacity at Zhangzhou Lvbao facility was fully utilised to produce preserved vegetables. (3) There is no designed production capacity and utilisation rate for brined mushroom because brined mushroom is made of our fresh button mushroom produce during the cultivation season which is subject to the cultivation volume of button mushroom of the relevant periods. (4) The utilisation rate was 0.5% for the year ended 31 December 2014 because of the cessation of production of snacks in November 2013 and the decrease in the production volume of preserved vegetables. Our production lines generally operate eight hours per day and six days a week. Our production lines are operated in one work shift per day. As at the Latest Practicable Date, we employed approximately 200 production workers to operate and manage our production lines of our processed food products. Our production plants are equipped with automated production machineries sourced from the PRC. All of these production machineries are owned by us. A number of our production machineries were specifically designed and made to meet our requirements for specific functions, and achieve better product quality and higher cost efficiency. We also endeavor to keep abreast of technological advances in our production facilities and regularly monitor and upgrade our production technology, equipment and processes. Equipment Maintenance Our production team is responsible for the equipment maintenance. They are responsible for carrying out daily, weekly and monthly inspections and routine daily cleaning and maintenance of our production equipment. Each production employee is responsible for the daily cleaning and maintenance of the production equipment. Major maintenance and repair work is conducted annually. For the three years ended 31 December 2012, 2013 and 2014, the average scheduled downtime for maintenance and repair of each of our production lines was 23 days, 25 days and 28 days, respectively. Manufacturers of our equipment also provide on-site equipment maintenance services on an as needed basis during warranty period for the equipment. The following table sets forth the average age of major equipments of our production lines during the Track Record Period: Location of production facilities Number of production lines Average age Zhangzhou Lvbao facility 2 5.9 years, 6.1 years and 6.4 years as at 31 December 2012, 2013 and 2014, respectively Zhangzhou Lvxian facility 1 4.7 years, 5.1 years and 5.4 years as at 31 December 2012, 2013 and 2014, respectively – 176 – BUSINESS We did not experience any material or prolonged interruptions to our production process due to equipment or machinery failure during the Track Record Period. EXPANSION PLANS, SITE SELECTION AND DEVELOPMENT We aim to capture a greater share of the fresh edible fungi produce and processed food products markets in the PRC, thereby strengthening our leading positions in the fresh edible fungi produce market and current position of processed food products market. To further strengthen our market position, we plan to increase our cultivation and production capacity to meet increasing market demand. According to Euromonitor, the PRC king trumpet mushroom market in terms of total sales volume grew by a CAGR of 27.6% from 309,500 tonnes in 2009 to 820,400 tonnes in 2013, and is estimated to grow by a CAGR of 14.7% from 1.0 million tonnes in 2014 to 1.7 million tonnes in 2018. According to Euromonitor, the PRC canned vegetables and fruit market in terms of total production volume grew from 1.7 million tonnes in 2009 to 2.1 million tonnes in 2013, representing a CAGR of 4.6%, and is estimated to grow from 2.1 million tonnes in 2014 to 2.5 million tonnes in 2018, representing a CAGR of 3.7%. Recent Expansion We are currently expanding our cultivation capacity through acquisition and installation of bottle-cultivation king trumpet mushroom facilities at our cultivation facilities in Zhangzhou, Fujian province as we have been foreseeing an increasing demand for small size king trumpet mushroom for household consumption in the PRC. We commenced construction of bottle-cultivation king trumpet mushroom facilities since 2013. Our bottle-cultivation king trumpet mushroom facilities cover an area of approximately 32,581 sq.m. of land in total with an aggregate gross floor area of approximately 12,368 sq.m. We anticipate that the construction of the bottle-cultivation king trumpet mushroom facilities will be completed by December 2015. The annual designed cultivation volume of bottle-cultivation king trumpet mushroom is estimated to be 1,980 tonnes. The estimated total investment of our bottle-cultivation king trumpet mushroom facilities amounted to approximately RMB40.4 million, and as at the Latest Practicable Date, we had incurred RMB8.2 million. We plan to utilise the funds generated by our operating activities to fund the remaining investment cost. Assuming the utilisation rate for bottle-cultivation king trumpet mushroom facilities is 95.0% and the average selling price of our king trumpet mushroom is RMB8.5 per kilogram, we expect the total investment will pay back by 2021. We expect upcoming customers’ orders to support our expansion plan. For example, in January 2015, we entered into letters of intent with certain distributors to establish long term cooperative relationship in relation to purchase of our bottle-cultivation king trumpet mushroom once our cultivation facilities starts operation. In consideration of improving and enhancement of productivity and efficiency, we are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province to replace our current production facilities for processed food products. We commenced construction of such new production facilities since July 2013. We have not obtained the construction works planning permit and the construction works commencement permit for such production facilities before we commenced construction. We have obtained both of the construction works planning permit and the construction works commencement permit in January 2015. For further information of such incident of defective title, please refer to the section headed "Business – Properties – Owned Properties". Our new production facilities cover an area of approximately 6,110 sq.m. of land in total with an aggregate gross floor area of approximately 6,641 sq.m. We anticipate that the construction of such production facilities and the installation of equipment and machinery will be completed by December – 177 – BUSINESS 2015. We expect to launch the trial operation in December 2015 and commence commercial production in January 2016. The annual designed production volume of processed food products is estimated to be 33,660 tonnes. The estimated total investment of such production facilities amounted to approximately RMB18.1 million, and as at the Latest Practicable Date, we had incurred RMB6.9 million. We plan to utilise the funds generated by our operating activities to fund the remaining investment cost. Assuming the utilisation rate of such production facilities is 70.0% for our processed food products, and the average selling price of our processed food products is RMB7.5 per kilogram, we expect the total investment will pay back by 2018. Planned Expansion In anticipation of the increased demand of king trumpet mushroom in the Southern China and Eastern China markets, we plan to establish Guangxi Biological Technology Food Industry Park in Hezhou, Guangxi Zhuang Autonomous Region and Zhangzhou Biological Technology Food Industry Park in Zhangzhou, Fujian province which house king trumpet mushroom cultivation facilities. The aforesaid two industry parks also house canned food production facilities as we plan to expand our production capacity in order to cater for more orders for canned button mushroom during the harvesting season of button mushroom in Zhangzhou, Fujian province and orders for canned water chestnut and canned ginkgo biloba from trading companies. The under-utilisation of our existing canned food production facilities during the Track Record Period was because our canned food production capacity was fully utilised during the harvesting season of button mushroom commencing from November to May of the following year to produce canned button mushroom which is a major kind of our canned food while our canned food production facilities experienced low utilisation commencing from May to November of the following year during which we produced canned vegetables and canned fruit, which in aggregate resulted in overall under-utilisation of our existing canned food production facilities during the Track Record Period. During the Track Record Period, we received orders for our canned button mushroom which exceeds our existing production capacity during the harvesting season of button mushroom in Zhangzhou, Fujian province. We believe there is a need to capture the market opportunities. Moreover, we received orders for canned water chestnut and canned ginkgo biloba during the Track Record Period. However, we were not able to accept such orders as we did not offer canned water chestnut and canned ginkgo biloba. We plan to establish the production facilities in Guangxi Zhuang Autonomous Region which is a major production area of water chestnut and ginkgo biloba in the PRC. The establishment of the production facilities in Guangxi Zhuang Autonomous Region will enable us to cater for the orders for canned water chestnut and canned ginkgo biloba. In consideration of the full utilisation of our existing canned food production capacity in Zhangzhou, Fujian province during the harvesting season of button mushroom, our Directors are of the view that the expansion of our canned food production capacity by establishment of production facilities in the planned two industry parks could enable us to cater for more orders of our canned button mushroom during the harvesting season of button mushroom and orders for canned water chestnut and canned ginkgo biloba in the future. For further details, please refer to “Future Plans and Use of Proceeds” in this prospectus. On 6 December 2013, we entered into a letter of intent with Hezhou Wanggao Industry Park Administrative Committee (賀州旺高工業園管理委員會) in Hezhou, Guangxi Zhuang Autonomous Region, pursuant to which Hezhou Wanggao Industry Park Administrative Committee agreed to provide with us parcels of land for our planned Guangxi Biological Technology Food Industry Park. On 24 November 2014, we entered into a letter of intent with the government of Dongyuan Town of Longhai City (龍海市東園鎮人民政府) in Zhangzhou, Fujian province, pursuant to which the government of Longhai agreed to provide with us parcels of land for our planned Zhangzhou Biological Technology – 178 – BUSINESS Food Industry Park. The specific land area, price and the terms of grant of the land use right will be subject to the land use right grant contracts to be entered into with local land administrative authorities in Hezhou, Guangxi Zhuang Autonomous Region and Longhai, Fujian province. The estimated total investment amount are approximately RMB246.0 million and RMB201.0 million for Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park, respectively, of which the estimated investment amount of the first phase of each of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park are RMB198.0 million and RMB157.0 million, respectively. We incurred RMB43.8 million in relation to the acquisition of land in relation to Guangxi Biological Technology Food Industry Park for the year ended 31 December 2013. As at the Latest Practicable Date, we had not contemplated the specific plan for phase two of each industry parks. The table below sets forth the details of our planned first phase of each of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park: Location of facilities Type of products produced Year of commencement Total land area of operation (sq.m.) Guangxi Biological Technology Food Industry Park – king trumpet mushroom king trumpet (bag-cultivation) facility mushroom Designed cultivation/ production capacity (tonnes) Estimated total investment Source of funds for the estimated cost(1) total investment costs(2) (RMB’000) 46,667 2016 5,040 58,440 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – king trumpet mushroom (bottle-cultivation) facility king trumpet mushroom 26,667 2016 1,800 42,680 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – canned food facility canned food 66,667 2016 28,800 59,200 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – 179 – BUSINESS Location of facilities Type of products produced Year of commencement Total land area of operation (sq.m.) – administrative building, staff dormitory and ancillary facilities N/A Zhangzhou Biological Technology Food Industry Park – king trumpet mushroom king trumpet (bag-cultivation) facility mushroom Designed cultivation/ production capacity (tonnes) Estimated total investment Source of funds for the estimated cost(1) total investment costs(2) (RMB’000) 26,667 2016 N/A 37,680 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities 46,667 2016 5,040 59,000 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – canned food facility canned food 66,667 2016 28,800 60,000 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities – administrative building, staff dormitory and ancillary facilities N/A 26,667 2016 N/A 38,000 Partly from the net proceeds of the Global Offering and partly from funds generated from our operating activities Notes: (1) Estimated total investment cost includes cost of payment of acquisition price of land, land levelling and greening, the construction of cultivation facilities and production facilities, acquisition and installation of relevant equipment. (2) For more information of the source of funds, please refer to the section headed “Future Plans and Use of Proceeds” in this prospectus. – 180 – BUSINESS Assuming the utilisation rates for king trumpet mushroom facilities and canned food production facilities in both industry parks are 95.0% and 70.0%, respectively, the average selling prices of our king trumpet mushroom and canned food are RMB8.5 per kilogram and RMB7.5 per kilogram, respectively, the construction period for both industry parks is approximately 12 to 16 months, and we will receive the net proceeds of the Global Offering by the end of June 2015, we expect the total investment of the first phase of each of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park will pay back by 2022. RAW MATERIALS AND SUPPLIERS Raw Materials Our raw materials primarily include (i) cultivation materials such as strains, sawdust, bran, dregs of beans, corncob, straw and cow dung for fresh edible fungi produce; (ii) fresh produce of edible fungi, vegetables and fruit; and (iii) packaging materials. The following table sets forth the costs of cultivation materials, fresh fruit and vegetables and packaging materials and their percentage of our cost of sales for the periods indicated: Year ended 31 December 2012 2013 % of cost of sales RMB’000 RMB’000 2014 % of cost of sales RMB’000 % of cost of sales Cultivation materials . . . . . . . . . . . . . Fresh fruit and vegetables . . . . . . . . . . Packaging materials . . . . . . . . . . . . . 65,279 116,968 45,342 16.3% 29.3% 11.3% 94,761 83,294 37,755 21.4% 18.9% 8.5% 109,009 96,347 35,294 19.8% 17.5% 6.4% Total . . . . . . . . . . . . . . . . . . . . . 227,589 56.9% 215,810 48.8% 240,650 43.7% Our Directors believe that the fluctuation of the prices of the primary raw materials we used in the cultivation and production of our products during the Track Record Period are dependent on a number of factors, including the weather, cultivation and production location, vegetables and fruit production, transportation and processing costs, government regulations and policies, and the supply and demand for such raw materials in the PRC during the relevant period. Certain of our major raw materials, such as fresh fruit and vegetables, are agricultural produce and thus subject to the market fluctuation. Fluctuation of market price for our raw materials did not have a material impact on our costs of raw material during the Track Record Period as the increase in prices of certain raw materials was partially offset by the decrease in prices of certain other raw materials during the same period. We are also generally able to pass on increases in cost of raw materials of our products to our customers. To manage fluctuation of raw material prices, we have introduced a number of measures, such as optimisation of cultivation and production procedures and change of formula of cultivation materials for king trumpet mushroom and button mushroom, to reduce the cost of materials and to monitor the use of raw materials by leveraging our research and development capabilities. In addition, we diversify our products for production during production seasons to reduce our reliance on certain specific raw materials and to have flexibility in choosing the products requiring low raw materials costs. In the event that the supply of certain raw materials is expected to significantly fluctuate, our – 181 – BUSINESS procurement team is required to report relevant departments in time and take precaution measures accordingly. For further details of the sensitivity of our net profit during the Track Record Period in relation to movements in our costs of cultivation materials, fresh fruit and vegetables and packaging materials, please refer to the section headed “Financial Information – Description of Selected Statements of Profit or Loss Items – Cost of sales” in this prospectus. Our dedicated procurement team is responsible for carrying out the following cost control measures: (i) monitoring the market prices of our raw materials on a regular basis, (ii) conducting analysis to anticipate potential changes in the market prices of our raw materials, (iii) negotiating and determining the purchase prices of raw materials with our suppliers, with reference to the market data obtained during the regular monitoring of and analysis on the market prices of our raw materials, and (iv) identifying alternative raw materials suppliers who provide the most competitive prices. Our Directors believe that adopting these cost control measures enable us to have a more comprehensive and better understanding of the fluctuation of prices of our raw materials, increase our bargaining power, and allow us to obtain more competitive prices when negotiating the supply contracts with our suppliers. Our raw material procurement is determined by our production schedule. Our production and sales departments determine the expected production and sales volume at a particular time to formulate our procurement plan. Our procurement department then contacts suppliers with our raw materials requirements. We centralise the procurement of our raw materials for different products to take advantage of our economies of scale and to increase our negotiation leverage with suppliers. We believe this centralised procurement system enables us to obtain more competitive prices. Suppliers We typically purchase raw materials from the suppliers as set forth in our qualified suppliers list maintained by our procurement department. As primary raw materials have significant impact on the quality of our products, we select our new suppliers based on an internal suppliers evaluation procedure which contains a stringent set of criteria, including quality, price, service, quality control, production capability and credibility which involves assessment of the quality of sample of raw materials supplied and stringent inspection of quality and service during the probation period. We will only appoint suppliers who can satisfy all our internal selection criteria. Each of our suppliers is subject to our annual evaluation of quality of the raw materials supplied. During the Track Record Period and up to the Latest Practicable Date, we did not experience any significant problems with the quality of raw materials provided by our suppliers. We normally enter into sales agreements with our suppliers to specify name of raw materials, quality, specifications, terms of delivery, credit period and payment methods. The price of our fresh fruit and vegetables and cultivation materials are determined according to the prevailing market price at delivery while the price of packaging materials is fixed in the sales contracts. We maintain at least two suppliers for each type of our primary raw materials. During the Track Record Period, we did not encounter any shortage of supply of our raw materials. – 182 – BUSINESS All of our raw materials are procured in the PRC, with a majority being procured at the location of the cultivation facilities. Our suppliers are responsible for arranging delivery of the raw materials to our cultivation or production facilities at their own costs. During the Track Record Period, we did not encounter any delay in delivery of raw materials by our suppliers that significantly affected our manufacturing operations. After we have received the raw materials, we will perform quality checks and are entitled to return the raw materials which fail to meet our quality standards or the standards set by the PRC government to our suppliers. For further details of our quality control measures on our raw materials, please refer to the section headed “Business – Quality Control – Raw materials quality control” in this prospectus. Our suppliers usually provide us with a credit term of 15 to 30 days and we usually settle our trade payables by wire transfers. Company plus farmer model (公司加農戶模式) In addition to fresh fruit and vegetables we purchase to produce our processed food products, we also purchase king trumpet mushroom from local farmers under company plus farmer model. We typically entered into king trumpet mushroom exclusive sales contract with local farmers who have qualified cultivation capability and cultivation facilities in Zhangzhou, Fujian province pursuant to which we agreed to provide financial support, technical service and management guidance to such farmers who in turn agreed to sell all king trumpet mushroom cultivated at their facilities to us exclusively. The principal terms of the king trumpet mushroom exclusive sales contracts are as follows: • for a term of one year; • we provide local farmers with financial support in the form of a deposit repayable at the expiry of the term of the relevant contracts, technical service and management guidance on the cultivation of king trumpet mushroom; • the farmers are obliged to sell all king trumpet mushroom cultivated at their cultivation facilities according to the relevant specification and requirements to us exclusively; and • the sale price of king trumpet mushroom is not higher than the 80% of the local prevailing market price. For the three years ended 31 December 2012, 2013 and 2014, purchases from our largest supplier accounted for 10.4%, 3.4% and 4.7%, respectively, of our total purchases of raw materials. For the same periods, our five largest suppliers combined accounted for 26.1%, 16.4% and 22.5%, respectively, of our total purchases of raw materials. During the Track Record Period and up to the Latest Practicable Date, none of our customers was also our major suppliers. As at the Latest Practicable Date, our five largest suppliers during the Track Record Period had maintained a working relationship with us for at least one year. – 183 – BUSINESS The table below sets forth certain information with respect to our Group’s five largest suppliers during the Track Record Period. The year for which the supplier was one of our Group’s five largest suppliers Five largest suppliers Supplier A(1) 2012 Supplier B 2012 Supplier C(1) 2012 Supplier D(1) 2012 Supplier E 2012 Supplier F 2013 and 2014 Supplier G 2013 and 2014 Supplier H 2013 and 2014 Supplier I 2013 and 2014 Supplier J 2013 Supplier K 2014 Supplier type/ Business scope Trading company/ Import and export trading Fresh vegetables and fruit supplier/Agricultural trading Trading company/ Import and export trading Packaging materials supplier/Import and export trading Fresh vegetables and fruit supplier/ Agricultural trading Cultivation materials supplier/Agricultural trading Cultivation materials supplier/Agricultural trading King trumpet mushroom supplier/Agricultural trading Cultivation materials supplier/Agricultural cultivation Cultivation materials supplier/Agricultural trading King trumpet mushroom supplier/Agricultural cultivation Headquarters Fujian province 4 years Fujian province 4 years Fujian province 4 years Fujian province 1 year Fujian province 7 years Fujian province 4 years Fujian province 4 years Fujian province 4 years Fujian province 2 years Fujian province 4 years Fujian province 3 years Note: (1) Suppliers A, C, and D were the suppliers of our discontinued trading business. – 184 – Length of relationship with our Group as at 31 December 2014 BUSINESS To the best knowledge of our Directors, none of our Directors or their associates, or any Shareholders, who owns more than 5% of our issued share capital, had any interest in any of our five largest suppliers for the three years ended 31 December 2012, 2013 and 2014 and up to the Latest Practicable Date. During the Track Record Period and as at the Latest Practicable Date, we did not have any material disputes with our suppliers. QUALITY CONTROL We place great emphasis on the quality of our products and adhere to stringent quality control measures over our entire production process, from selection of suppliers and sourcing of raw materials to our manufacturing process, inspection of finished goods and inventory storage. Our quality control team comprised 29 employees as at the Latest Practicable Date, with an average of seven years’ experience in implementing quality control measures in edible fungi and processed food product industries. We require our quality control team to obtain relevant knowledge and trainings in relation to the production, product and service assessment. Our quality control team is responsible for formulating our quality control system in accordance with the relevant PRC laws and regulations, and monitoring our entire production process. In addition, to ensure continuous improvement in the quality of our products, our quality control team reviews the implementation of our quality control system on a regular basis and submits to the management product quality inspection reports which set forth the quality inspection results of our raw materials and finished products, quality control conditions in our cultivation process, manufacturing process, product acceptance rate, details of complaints received from customers on quality of our products (if any), details of product recalls (if any), compliance with the relevant national standards on product quality and food safety and recommended improvement procedures. As at the Latest Practicable Date, we had been accredited with, by application, GB/T19001-2008/ISO9001:2008 (quality management system), GB/T24001-2004/ISO14001:2004 (environment management system), GB/T28001-2011/OHSAS18001:2007 (occupation health and safety management system), GB/T22000-2006/ISO22000:2005 (food safety management system) and GB14881-2013 (HACCP system) certifications from Fujian Southeast Standard Certification Center (福 建東南標準認證中心) and organic food products certificates (有機產品認證證書) from Beijing Co-ops Integrity Certification Center (北京中合金諾認證中心) in respect of king trumpet mushroom cultivated at our Jiaomei cultivation facilities in Zhangzhou, Fujian province according to the relevant national standards in relation to organic food in the PRC. We also have been granted the Certificate of Pollution-free Agricultural Products (無公害農產品證書) for our king trumpet mushroom and its cultivation process in November 2011 by the Ministry of Agriculture. Moreover, we have been certified for our canned food under the British Retail Council (BRC) global standard for food safety and International Food Standard (IFS) by accredited certification bodies in Europe. We have registered with U.S. Food and Drug Administration (FDA) under Food Facility Registration Module (FFRM) as a manufacturer or processor of certain canned food exported to the United States. These certifications signify our commitment and active pursuit of high quality control standards throughout our operational and production processes. ISO9001 is a standard and guideline relating to quality management systems, and represents an international consensus on good quality management practices. ISO9001 is maintained by the International Organisation for Standardisation, or ISO, and is administered by accreditation and certification organisations. ISO14001 is a management system which addresses environmental management through the identification and control of environmental impact and constantly improvement of environmental performance. – 185 – BUSINESS We have also obtained the production license for industrial products (全國工業產品生產許可證) for the manufacturing of our products from the provincial-level Bureau of Quality and Technical Supervision for all of our processed food production plants. For our canned food sales, we have obtained the registration certificate of manufacturing enterprises on export food (出口食品生產企業備案證明) issued by the Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門出入境檢驗檢疫局) in order to obtain and maintain the production license for industrial products and the sanitary registration certificate of export commodities, we have to meet the quality and hygiene standards set by the PRC government, covering different stages of the production process from raw material procurement, manufacturing, maintenance of production facilities, finished products and storage. Moreover, we are subject to annual inspection from the relevant PRC government authorities. During the Track Record Period and up to the Latest Practicable Date, we did not fail to pass any such inspection from the relevant PRC government authorities. We implement strict quality control procedures throughout the production and service process. Below is an overview of our quality control procedures applicable to our raw material sourcing, production process and our finished products. Raw materials quality control We have stringent procedures in place in the selection of our new suppliers. Please refer to the section headed “Business – Raw Materials and Suppliers – Suppliers” in this prospectus for further details. We also conduct annual evaluations on each of our existing suppliers. Besides, we have implemented an inspection and testing procedure whereby each batch of raw materials delivered to our cultivation and production facilities are sampled for inspection and testing in accordance our quality requirements upon they are accepted. Testing is conducted in accordance with the testing required by the standards set by the PRC government. These standards set out the required nutrient content, water content, hygiene standards and maximum permitted levels of contamination in these raw materials. We have also implemented storage control procedures in relation to the storage of raw material. Production process quality control For cultivation of fresh edible fungi, we conduct routine inspection at check points of each of our cultivation and production processes. In addition, each check point is inspected by a dedicated inspector to ensure work-in-progress meet the quality requirements. For our processed food products, we strictly follow the relevant industry standards throughout our production process. Each stage of our production process is closely monitored by our quality control team who conducts quality sample testing and inspection on our semi-finished products at various stages of our production process. Our quality control team is responsible for ensuring that (i) our production procedures, including the use of ingredients, follow our internal production guidelines, (ii) our products are consistent in size, weight, appearance and water content, (iii) there is no contamination in our products, and (iv) our products meet our quality and hygiene standards and the standards set by the PRC government. Only those products which pass our quality checks can proceed to the next stage of production. In addition, we adopt the relevant national strict hygiene and safety standards of PRC government at all of our production facilities. Our employees are required to follow strict sanitising procedures and receive sanitation trainings in connection with the production. – 186 – BUSINESS Finished product quality control Each batch of our finished products is sample-tested and inspected to ensure that they are consistent in labeling and packaging and the relevant quality standards have been met. These standards include the PRC National Standards (中華人民共和國國家標準) and the standards and requirements set forth in the relevant sales contracts. We have also implemented finished product storage control procedure in relation to the storage of our finished products, including shelf life, storage temperature, humidity and ventilation requirements. Products in storage are also subject to regular quality audits depending on their shelf lives. Further, it is our policy that all complaints from our customers or consumers are handled upon receipt. Our sales and marketing team and quality control team are responsible for handling complaints from our customers or consumers and answering their enquiries in relation to our products. Complaints are collected, processed and provided to relevant departments for their analysts with a view to improving and resolving any deficiency promptly so as to enhance customer satisfaction. The responsible department is also required to prepare a quality improvement report detailing the reasons of complaints in question, how the complaints were handled and preventive measures to prevent recurrence of similar incidents. During the Track Record Period, we did not encounter any material complaints on product quality or any material product return or product recall due to product quality defects. INVENTORY AND LOGISTICS Inventory management Our inventory comprises of raw materials, work-in-progress and finished products. Our raw materials mainly include cultivation materials such as strains, bran, dregs of beans, corncob, straw and cow dung for our fresh edible fungi produce, and fresh vegetables and fruit for our canned food. Finished products mainly include our processed food products. We maintain a computerised enterprise resource planning system to track the in-coming and out-going inventory. This system enables us to monitor levels of inventory on a timely basis so as to maintain an optimum level of raw materials and finished products. We keep an adequate level of cultivation materials in accordance with the cultivation schedule of king trumpet mushroom, button mushroom and straw mushroom every year. We sell our king trumpet mushroom, button mushroom and straw mushroom as fresh edible fungi produce. As our king trumpet mushroom is usually sold within 72 hours after harvesting and button mushroom and straw mushroom are usually sold promptly after harvesting, our inventory level of our finished products of fresh edible fungi produce is minimal. We generally do not maintain a regular stock of fresh vegetables and fruit for manufacturing our canned food because all of our canned food are made-to-order. We typically procure fresh vegetables and fruit based on the orders from trading companies. The inventory of finished products of our canned food fluctuate during the Track Record Period primarily due to the delivery schedule specified in the relevant sales contracts entered into with trading companies. – 187 – BUSINESS We also regularly conduct stock-take of our inventories. Our warehouse employees are required to prepare monthly, semi-annual and annual records on our inventory levels. During the Track Record Period, we did not experience any shortage of inventory. We have warehouses in each of our cultivation facilities and production facilities to store our inventories. Our finished products are stored in designated zones within our warehouses according to their manufacturing dates and product categories. To maintain their freshness, our finished products are stored in well-ventilated and temperature and humidity controlled warehouses. Moreover, we undertake pest control regularly to ensure our warehouses are pest-free. We also undertake safety measures to minimise fire hazards and contamination to our finished products. Please refer to the section headed “Financial Information – Valuation of Biological Assets – Stock-take and Internal Control” for the details of our biological assets management. Logistics We outsource our product transportation to logistics providers when the relevant distribution or sales agreements provide that we are responsible for the transportation of products to the customers. We select our logistics providers on the basis of their transportation efficiency, transportation capability, service fee, service quality and track records. We enter into service contracts with our logistics providers with a term of one year. During the Track Record Period and as at the Latest Practicable Date, all of our logistics providers were Independent Third Parties. Our products are delivered by trucks to our customers. Our logistics providers are required to transport our products from our facilities to the location designated by us in our delivery orders. We require our logistics providers to follow certain transportation procedures to ensure that our products are transported under proper conditions. Our logistics providers are liable to compensate us any loss arising from spoilage, damage, contamination or loss of products which arises during transportation. We are also entitled to liquidated damages in the event of delay of delivery. We have obtained Certificate of the Customs of the People’s Republic of China Registration of Consignees and Consigners of Imports and Exports for Customs Declaration (中華人民共和國海關進出口貨物收貨人報關註冊登記證書) issued by the General Administration of Customs of Zhangzhou of the PRC (漳州市海關). We believe the above outsourcing arrangements allow us to reduce our capital investment and transfer the risks associated with delivery of our products, including those arising from delay of delivery, spoilage, damage, contamination or loss of products during transportation. During the Track Record Period and up to the Latest Practicable Date, we did not experience any significant delay in delivery that materially affected our business operations. We believe that there are sufficient alternative logistics providers who provide transportation services based on terms similar to those from the logistics providers we engaged during the Track Record Period. RESEARCH AND DEVELOPMENT We have a strong team of research and development personnel. As at the Latest Practicable Date, our research and development team comprised 12 members, one of them is an expert member of the committee of canned food technology of the China National Food Industry Association (中國食品工業協 會罐藏食品科技工作委員會). The China National Food Industry Association was approved by the State Council of the PRC and established in 1981, which functions include promoting and developing the food industry in the PRC and assisting with the enactment of relevant regulations and establishment of national standards. Our research and development team is responsible for conducting research in edible fungi cultivation method and process, processed food manufacturing method and techniques and – 188 – BUSINESS introduce new edible fungi products to refine our existing product offerings to tailor to the latest demand of consumers. We have established two in-house research and development laboratories in our processed food production facility in Zhangzhou, Fujian province and our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province, respectively, to enable us to improve our edible fungi cultivation method and our processed food manufacturing techniques. Our in-house research and development laboratories provide a platform for the development of new edible fungi products, refinement of our current product offerings, enhancement of our cultivation and production methods and techniques, training of our research and development personnel, and sufficient testing of our newly developed products before they are introduced to the market. With such in-house research and development capacity, we were recognised as Fujian Edible Fungi Industrial Cultivation and Fine Processing Enterprise Engineering Technology Research Center (福建省食用菌工廠化栽培及精加工企業工程技術研究中心) by Fujian Provincial Department of Science and Technology (福建省科學技術廳). Moreover, we were awarded Fujian Provincial Scientific and Technological Enterprise Certificate (福建省科技型企業證書) by the Fujian Provincial Department of Science and Technology (福建省科學技術廳) and Fujian Provincial Intellectual Property Outstanding Enterprise (福建省知識產權優勢企業) by the Fujian Intellectual Property Office (福建省知識產權局). Moreover, with the use of our in-house research and development team and a research and development platform, we are keen to explore cooperation opportunities with leading agricultural universities and institutions in the PRC to jointly develop advanced systems and processes of cultivation of edible fungi in order to improve the quality and yield of our fresh edible fungi produce and to develop new products. For example, in 2010, we entered into project cooperation agreements with Fujian Agriculture and Forestry University (福建農林大學) to jointly develop and promote edible fungi cultivation energy-saving and simplification technology (食用菌栽培節能與輕簡化技術示範推廣) and edible fungi quality control technology and quality reservation technology (食用菌質量安全控制技術和 採後保質新技術示範推廣). Further, we have established the Fujian Academician Expert Work Station (福建省院士專家工作站) in collaboration with Engineering Research Center of Edible and Medicinal Fungi of Ministry of Education of the PRC (食藥用菌教育部工程研究中心) in November 2012. The Fujian Academician Expert Work Station is responsible for the research and development on strains, formula, cultivation processes and deep processing of edible fungi and other biological technologies. The work product of the Fujian Academician Expert Work Station belongs to us. In addition, in September 2014, we entered into a two-year service agreement with Mr. Li Yu, an academician of Chinese Academy of Engineering (中國工程院) and a professor of Jilin Agricultural University (吉林農業大學), pursuant to which we appointed Mr. Li Yu as the chief technology consultant of our Group. – 189 – BUSINESS The following table sets forth the details of the research we jointly carried out with our research partner during the Track Record Period: Research items Research fees paid to research partners/funds contributed to the research project by us Intellectual property rights arising out of the research project Year Research partners 2012 Engineering Research Center of Edible and Medicinal Fungi of Ministry of Education of the PRC (食藥用菌教育部工 程研究中心) • to jointly establish the Fujian Academician Expert Work Station (福建省院士專家工作 站) which conduct the research and development on strains, formula, cultivation processes and deep processing of edible fungi and other biological technologies To be determined according to agreements for specific projects We are entitled to retain all intellectual property rights 2014 Mr. Li Yu • to jointly develop technology in edible fungi industry N/A Intellectual property rights to be determined by separate agreements to be entered into by the parties As a result of our research and development efforts, we have successfully developed new processed mushroom products such as spicy king trumpet mushroom snack (辣味杏鮑菇) and preserved mushroom with vegetarian abalone flavor (素鮑鮮菌菜). Our preserved mushroom with vegetarian abalone favor was awarded the Specialty Product of the Year (年度特色產品獎) in 2014 by China Canned Food Industry Association (中國罐頭工業協會). We also developed small size of king trumpet mushroom which is suitable for household consumption in the PRC by our proprietary bottle-cultivation techniques (杏鮑菇 瓶栽技術). We intend to commence the massive commercial cultivation of such small size of king trumpet mushroom in 2015. Furthermore, we have invested in the research for the trial cultivation of other kinds of edible fungi such as oyster mushroom (秀珍菇) and brown beech mushroom (茶樹菇) as our preparation of potential product offerings in the future. We aim to continually innovate and improve our products to cater to changing consumer preferences, focusing particularly on product tastes, textures and packaging, while maintaining our cost of production at acceptable levels. Our product innovation efforts have led to the introduction of new type of king trumpet mushroom to our current series. Our research and development expenses amounted to RMB1.3 million, RMB1.2 million and RMB0.4 million, representing approximately 0.3%, 0.3% and 0.1% of our revenues of continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. – 190 – BUSINESS AWARDS We have been granted a number of awards and certificates in recognition of our business development, details of which are set forth as follows: Year of grant Award/Accreditation Awarding Body September 2014 National Agricultural Industrialisation Key Leading Enterprise (農業產業化國家重點龍頭企業) Ministry of Agriculture, National Development and Reform Commission, Ministry of Finance, Ministry of Commerce, PBOC, SAT, CSRC and All China Federation of Supply and Marketing Cooperatives (中華人民共和國國家農業部、 國家發展和改革委員會、 財政部、商務部、中國人民銀行、 國家稅務總局、 中國證券監督管理委員會及 中華全國供銷合作總社) July 2014 Fujian Provincial Intellectual Property Outstanding Enterprise of 2014 (2014年度福建省知識產權優勢企業) Fujian Intellectual Property Office (福建省知識產權局) May 2014 Specialty Product of the Year (年度特色產品獎) China Canned Food Industry Association (中國罐頭工業協會) June 2014 Top Ten Agricultural Industrialisation Leading Enterprise of 2013 (2013年度農業產業化十強龍頭企業) Zhangzhou Municipal Government of the PRC (漳州市人民政府) February 2014 Award for Contribution to Longhai Economic Development for 2013 (2013年龍海經濟建設貢獻獎) Longhai Municipal Committee of Communist Party and Longhai Municipal Government of the PRC (中共龍海市委、龍海市人民政府) December 2013 Famous Brand in Fujian Province (福建省著名商標) Administration for Industry and Commerce of Fujian (福建省工商行政管理局) December 2013 Member of the Zhangzhou Municipal Intellectual Property Association (漳州市知識產權協辦會會員單位) Zhangzhou Municipal Intellectual Property Association (漳州市知識產權協會) – 191 – BUSINESS Year of grant Award/Accreditation Awarding Body September 2013 National Top Ten Edible Fungi Industrial Production Enterprise (全國食用菌產業化建設十強企業) China Edible Fungi Association (中國食用菌協會) August 2013 Fujian Provincial Scientific and Technological Enterprise (福建省科技型企業) Fijian Provincial Department of Science and Technology (福建省科學技術廳) May 2013 China Top Ten Innovative Product of China Canned Food Canned Food of 2013 Industry Association (2013年度中國罐頭食品十大創新產品) (中國罐頭工業協會) April 2013 Superior Taxpayer of Zhangzhou for 2012 (2012年度漳州市納稅大戶) Zhangzhou Municipal Government of the PRC (漳州市人民政府) January 2013 AA Credit Rating Enterprise of Good Industrial and Commercial Credit (工商信用良好企業(AA級)) Longhai Municipal Administration for Industry and Commerce (龍海市工商行政管理局) December 2012 Unit of Observing Contract and Valuing Credit for 2011 (2011年度守合同重信用單位) Longhai Municipal Government of the PRC (龍海市人民政府) December 2012 Fujian Provincial Famous Brand for Agricultural Products (福建省名牌農產品) Fujian Provincial Agricultural Department (福建省農業廳) December 2012 Famous Brand in Fujian Province (福建省著名商標) Administration for Industry and Commerce of Fujian (福建省工商行政管理局) December 2012 Fujian Provincial Famous Enterprise (福建省知名企業) Administration for Industry and Commerce of Fujian (福建省工商行政管理局) December 2012 Well-known Trademark in China (中國馳名商標) SAIC (中華人民共和國 國家工商行政管理總局) December 2012 Fujian Edible Fungi Industrial Cultivation and Fine Processing Enterprise Engineering Technology Research Centre (福建省食用菌工廠化栽培及 精加工企業工程技術研究中心) Fijian Provincial Department of Science and Technology (福建省科學技術廳) – 192 – BUSINESS Year of grant July 2012 June 2012 Award/Accreditation Zhangzhou Municipal Intellectual Property Test Point Unit (漳州市智慧財產權試點單位) Fujian Academician Expert Work Station (福建省院士專家工作站) Awarding Body Zhangzhou Municipal Intellectual Property Office (漳州市知識產權局) Fujian Provincial Party Committee Organisation of the Communist Party, the Public Servant Bureau of Fujian Province, the Office of Human Resources Department of Fujian Province and Fujian Association for Science and Technology (中共福建省委組織部,福建省公務員 局,福建省人力資源開發辦公室及 福建省科學技術協會) January 2012 Outstanding Unit for Economic Construction for 2011 (2011年度經濟建設功臣) Longhai Municipal Party Chief of the Communist Party and Longhai Municipal Government of the PRC (中共龍海市委、龍海市人民政府) December 2011 National Agricultural Industrialisation Key Leading Enterprise (農業產業化國家重點龍頭企業) Ministry of Agriculture, National Development and Reform Commission, Ministry of Finance, Ministry of Commerce, PBOC, SAT, CSRC and All China Federation of Supply and Marketing Cooperatives (中華人民共和國國家農業部、 國家發展和改革委員會、 財政部、商務部、中國人民銀行、 國家稅務總局、 中國證券監督管理委員會及 中華全國供銷合作總社) May 2011 Top Ten Chinese Canned Food Enterprise for Exports of 2011 (2011年度中國罐頭(出口)十強企業) China Canned Food Industry Association (中國罐頭工業協會) January 2011 Leading Enterprise for Agricultural Industrialisation of 2011-2012 (2011-2012年度農業產業化龍頭企業) Zhangzhou Municipal Government of the PRC (漳州市人民政府) – 193 – BUSINESS INTELLECTUAL PROPERTY RIGHTS Our intellectual properties are crucial to us as we rely on consumers’ recognition of our brands and products. As at the Latest Practicable Date, we had 32 registered trademarks, 33 pending trademark is one of our key applications, 20 registered patents and five pending patent applications in the PRC. registered trademarks and was designated as a “Well-Known Trademark in China” (中國馳名商標) by the SAIC in 2012. As at the Latest Practicable Date, we had one registered trademark application in Hong Kong. As at the Latest Practicable Date, we had registered eight domain names. Please see the section entitled “Statutory and General Information – B. Further Information about our Business – 2. Intellectual Property of the Group” in Appendix V to this prospectus. Over the years, we have accumulated knowledge and experience in relation to the cultivation method, process and formula of cultivation materials of edible fungi which is part of our proprietary technical know-how. Thus, effective protection of proprietary information and technical know-how in our business operations is critical to our business. As certain of our proprietary information and know-how are not patented, we are vulnerable to unauthorised disclosure of such proprietary information to our competitors, which may adversely affect our business. We rely on intellectual property laws in the PRC to protect our intellectual property rights. We also rely on a combination of trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights. Our employees are generally required to enter into confidentiality agreements with us, pursuant to which our employees undertake to keep our trade secrets confidential during and after the termination of their employment with us. Mr. Li Minpei (李閩培), an employee of the Group, together with certain of Mr. Li Minpei’s friends established Shanghai Junwei Network Technology Company Limited (上海菌緯網絡科技有限公司) (the “Website Operator”), an Independent Third Party, which owns and operates the website “蘑購城 MOGOUCITY” (http://mogou.junbaike.com/) (the “Website”). To the best knowledge of the Directors, the Website focuses on the provision of industry information of edible fungi, and is currently at its trial stage and hence has not yet received any fee from its users. Save that the Website, as a marketing platform for edible fungi, previously published certain publicly available information of the Group and our brands and products, the businesses of the Website and the Website Operator are not related to us. We have no business relationship with nor have we paid any fee to the Website or the Website Operator. There were no sales of the Group made through or to the Website, the Website Operator or Mr. Li Minpei during the Track Record Period and the subsequent period up to the Latest Practicable Date. In order to avoid any confusion in the future, the Website Operator had agreed to remove the relevant web pages and all other information in relation to the Group from the Website as at the Latest Practicable Date. For the purpose of brand diversification for product promotion, the Group had designed the trademark of “蘑購城 MOGOUCITY” (the “Trademark”) and decided to apply for its registration in April 2014 and subsequently submitted its registration application for the Trademark in June 2014. At the material time, Mr. Li Minpei who came into knowledge of the Group’s registration application for the Trademark and proposed promotional plans, discussed with the Group for the use of the logo “蘑購城 MOGOUCITY” which is the same as the Trademark, as well as publication of other information of the – 194 – BUSINESS Group and its products in the Website. In this connection, upon the request of the Group, the Website Operator had issued a written confirmation letter confirming that the Trademark is designed and owned by the Group and upon registration of the Trademark, it will obtain written authorisation from the Group for the use of the Trademark or cease to use the same at the Group’s direction. Taking into account the confirmation letter given by the Website Operator, as well as the promotional benefits to the Group and its brands and products, the Group had no objection to the Website Operator to use the logo “蘑購城 MOGOUCITY” in the Website. We are not currently using the Trademark for commercial purpose. Before our Group obtains the registration certificate of the trademark “蘑購城MOGOUCITY”, any third party may use the logo being identical with or similar to the design of the trademark “蘑購城 MOGOUCITY”, which may cause confusion to or mislead the public. As advised by our PRC legal adviser, once our Group obtains the registration certificate of such trademark, without the prior consent of our Group, no party is entitled to use the design, word or symbol identical with or similar to the trademark “蘑購城MOGOUCITY” on the categories of goods or services being identical with or similar to those of our Group, for which the trademark has been registered. However, we may be unable to identify all unauthorised use of our trademarks. If we are unable to protect our trademark in a timely or effective way, our Group’s business operations may be adversely affected. During the Track Record Period and up to the Latest Practicable Date, we did not experience any infringement of our intellectual property rights having a material adverse effect on our business. Please refer to the section headed “Risk Factors – Risk Relating to Our Business – We are exposed to possible infringements of our intellectual property rights, which may materially and adversely affect our sales, reputation, business operations and financial performance”. EMPLOYEES We had 990 employees as at the Latest Practicable Date. None of them was hired through employment agencies. All of our employees during the Track Record Period were located in the PRC. The following table sets forth a breakdown of our employees by function as at the Latest Practicable Date: Function Production . . . . . . . . . . . . . . . . . . Sales and marketing. . . . . . . . . . . . Quality control . . . . . . . . . . . . . . . Inventory management and logistics Research and development . . . . . . . Procurement . . . . . . . . . . . . . . . . . Finance and accounting . . . . . . . . . Internal audit . . . . . . . . . . . . . . . . Management and administration . . . Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740 26 29 52 12 18 35 2 76 74.8% 2.6% 2.9% 5.3% 1.2% 1.8% 3.5% 0.2% 7.7% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990 100.0% – 195 – . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of total employees BUSINESS When we make hiring decisions, we take into account factors such as our business strategies, our development plans, industry trends and the competitive environment. We recruit our employees based on a number of factors such as their work experience, educational background and vacancy needs. All of our employees are paid a fixed salary and may be granted other allowances and commissions based on their position and performance. We utilise a periodic employee evaluation program whereby our employees receive feedback on their performance. During the three years ended 31 December 2012, 2013 and 2014, our labour costs were approximately RMB40.7 million, RMB40.4 million and RMB54.2 million, respectively. We provide continuing education and training programs to our employees on a regular basis to enhance their skills and knowledge in various areas, including sales and marketing, product knowledge, sanitary requirements, production safety and quality management. We also provide induction programs and team-building training. These training programs are either delivered internally or by external trainers. We believe that our working environment and the support and benefits provided to our employees have contributed to maintaining good working relationships with our employees. During the Track Record Period and up to the Latest Practicable Date, we did not experience any strikes or labour disputes with our employees which have had a material effect on our business. Social insurance contribution As required under the applicable PRC laws and regulations, we are obliged to provide our employees with a social welfare schemes covering pension insurance, medical insurance, unemployment insurance, work injury insurance, maternity insurance and unemployment insurance. For more details, please see the section headed “Business – Non-compliance” in this prospectus. Housing providence fund We are also required under the applicable PRC laws and regulations to provide our employees in the PRC with the social welfare schemes covering housing provident funds and housing benefits. Please refer to details in the section headed “Business – Non-compliance” in this prospectus for further details. COMPETITION The edible fungi market in the PRC is a fragmented market with a large number of players. While there were more than 500 industrial producers of king trumpet mushroom in the PRC as at the end of 2013, according to Euromonitor, the top five king trumpet mushroom producers in the PRC, in aggregate, accounted for approximately 9.7% of the total market share in the PRC in terms of production volume in 2013. The market concentration of button mushroom is also quite low mainly due to the massive independent growers in the PRC. According to Euromonitor, by the end of 2013, there were less than 40 large-scale industrial button mushroom producers in the PRC and the top five of them combined accounted for approximately 5.9% of the total market share in the PRC in terms of production volume in 2013. According to Euromonitor, we were the largest producer of king trumpet mushroom and the seventh largest producer of button mushroom in the PRC in terms of production volume in 2013 with a market share of 2.5% and 0.6% in 2013, respectively. – 196 – BUSINESS According to Euromonitor, the PRC edible fungi market demonstrates high growth potential in fungi consumption per capita. In the future, major mushroom-producing regions are expected to continue the commitment to building modern warehousing and logistics facilities, cold chains, agro-commodities wholesale markets and distribution centres. In addition, large size edible fungi companies will attempt to expand to both upstream and downstream industries such as mushroom processing, food service and agricultural by-product to make full use of the resources of mushroom growing, to increase profitability and expand their distribution networks. Entry barriers and the competitiveness of king trumpet mushroom market largely lie in product quality, brand name, research and development, manufacturing equipment as well as the capital. Our Directors believe that we are able to compete by leveraging our strengths of vertically integrated business model, established brand name and extensive distribution network. We will also further penetrate the edible fungi market in the PRC through enhanced research and development and improvement of product quality. According to Euromonitor, production volume of canned vegetables and fruit increased from 1.7 million tonnes in 2009 to 2.1 million tonnes in 2013, representing a CAGR of 4.6%. Canned vegetables and fruit is a typical export-oriented industry. According to comtrade.un.org sources, total export volume of canned vegetables and fruit continued to grow, with an increase from approximately 1.7 million tonnes in 2009 to nearly 2.0 million tonnes in 2013. According to Euromonitor, the canned vegetables and fruit market is primarily driven by favourable environment in the PRC domestic market, alternative distribution channels and emerging overseas markets such as Russia, Southeastern Asia and Latin America. According to Euromonitor, the canned vegetables and fruit market faces the threats and challenges in quality control and international trade barriers and intensified competition. Our Directors believe that we are also able to compete in the canned vegetables and fruit market on the basis of our strong reputation and recognition among customers. Please see the section headed “Industry Overview – Competitive Landscape and Nature of Competition” in this prospectus for further details. ENVIRONMENTAL PROTECTION We recognise the importance of environmental protection and therefore have controlled our pollutant emissions and ensured compliance with the PRC environmental laws and regulations during the course of production. Our operations are subject to national, provincial and local environmental laws, rules and regulations which, among other things, require manufacturers to conduct an environmental impact assessment before engaging in new construction projects, pay fees in connection with activities that discharge waste materials, properly manage and dispose of hazardous substances, and impose fines and other penalties on activities that threaten the environment. For further information on the environmental laws, rules and regulations governing our operations, please refer to the section headed “Laws and Regulations of the Industry – Laws and Regulations relating to Environmental Protection” in this prospectus. The primary waste generated from our production process is waste water, which are treated in compliance with all applicable environmental laws, regulations and rules. We have implemented a set of waste water treatment procedures in our manufacturing facilities. For example, we have installed waste water disposal devices in our processed food production facilities. We have been accredited with GB/T24001-2004/ISO14001:2004 (environmental management system) certification issued by China Southeast Certification Center. – 197 – BUSINESS We have received the respective confirmation letters issued by the competent environmental administrative authorities in the PRC, stating that we have not been subject to any punishment as a result of any breach of the applicable PRC environmental laws and regulations. We have not incurred material environmental compliance cost during the Track Record Period. We expect our annual cost of compliance with applicable PRC environmental laws, regulations and policies will not experience significant change from that of the Track Record Period for the year ending 31 December 2015. During the Track Record Period and up to the Latest Practicable Date, we had not received any notifications or warnings, nor had we been subject to any fines or penalties in relation to any breach of any such environmental laws or regulations which had materially and adversely affected our production. OCCUPATIONAL HEALTH AND SAFETY Our operations are subject to a number of PRC laws and regulations with respect to employee health and safety. Based on such regulations, we have implemented employee occupational health and safety management system in relation to safety control procedures and standards, including procedures for handling safety issues, accident investigation procedures, protective and remedial measures, accident reporting procedures, and procedures for arranging health examination and establishing occupational health records for our employees. We require all of our employees to strictly comply with such guidelines. We carry out regular safety checks on our production equipment to ensure that such equipment is thoroughly tested and safe for use. We also require operators of our production equipment to attend training sessions on the required safety standards. Furthermore, all of our employees are provided with work place safety trainings. Our occupational health and safety management system has been accredited with GB/T28001-2011 (occupational health and safety management system) certification issued by Fujian Southeast Certification Center. Our PRC legal adviser has confirmed that during the Track Record Period and up to the Latest Practicable Date, we had complied with all material applicable PRC laws and regulations in relation to employee health and safety. During the Track Record Period and up to the Latest Practicable Date, we had not had any incidents, claims or complaints which had materially and adversely affected our operations. INSURANCE We have purchased insurance for our motor vehicles. We have not maintained insurance for our cultivation and manufacturing facilities and other properties or fixed assets. Our insurance coverage may not adequately protect us against certain operating risks and other hazards, which may result in adverse effects on our business. Please see the section headed “Risk Factors – Risks relating to our Business – Our insurance may not sufficiently cover, or may not cover at all, losses and liabilities we may encounter” in this prospectus. PROPERTIES Pursuant to Chapter 5 of the Listing Rules and section 6(2) of the Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice, save and except the disclosure set out in the appendix to this prospectus headed “Appendix III – Property Valuation,” this prospectus is exempted from compliance with the requirements of section 342(1)(b) of the Companies Ordinance (Miscellaneous Provisions) in relation to paragraph 34(2) of the Third Schedule to the Companies Ordinance (Miscellaneous Provisions) which requires a valuation report with respect to all our Group’s interests in land or buildings. – 198 – BUSINESS According to our Group’s consolidated statements of financial position set out in Appendix I to this prospectus, the carrying amount of total assets as at 31 December 2014 was approximately RMB813.3 million and the carrying amount of the prepaid land leasehold payment and building as at 31 December 2014 was approximately RMB114.6 million. As such and pursuant to Rule 5.01B(2) of the Listing Rules, our Directors confirm that: • our Group does not have any property interest that forms part of property activities as at 31 December 2014; and • save and except the disclosure set out in Appendix III to this prospectus headed “Property Valuation” in relation to six parcels of land, 14 buildings and various structures together with four buildings under construction located at Fengshan Industry Park, Jiaomei Town, Zhangzhou, Fujian province, no single property interest that forms part of non-property activities has a carrying amount of 15% or more of our Group’s total assets as at 31 December 2014. Owned properties As at the Latest Practicable Date, we owned the state-owned land use rights to six parcels of land and the collectively-owned land use rights to two parcels of land for our cultivation and production facilities in Zhangzhou, Fujian province with an aggregate area of approximately 225,075 sq.m. and sixteen buildings or units in Zhangzhou, Fujian province with an aggregate gross floor area of approximately 43,069 sq.m., which were used as cultivation and production facilities, office buildings, staff dormitory, warehousing and ancillary purposes. As at the Latest Practicable Date, we had four buildings or units that are under construction, with a total planned gross floor area of approximately 24,751 sq.m. We intend to use these buildings mainly for production and dormitory. Our PRC legal adviser has confirmed that we have obtained the land use rights certificate and relevant planning and construction certificates for such buildings under construction. Except for disclosed under our properties with defective titles, we are in the course of applying for completion inspection and acceptance documents for such buildings under construction. As advised by our PRC legal adviser, in respect of the collectively-owned land acquired by our Group, according to the relevant PRC laws and regulations, an entity may not directly acquire the collectively-owned land from the owner of the collectively-owned land (i.e. peasants collectives) which has not first been converted into state-owned land through the land expropriation process. The acquisitions by our Group of the collectively-owned land had not been through the land expropriation process of the local government. Please refer to the section headed “Laws and Regulations of the Industry–Laws and Regulations relating to the Use, Acquisition and Lease of Collectively-owned Land” for the proper steps that should have been taken by the Group to acquire the collectively-owned land. Therefore, our PRC legal adviser is of the view that our Group's acquisition of the collectively-owned land are not in compliance with the relevant PRC laws and regulations and are not legal, valid and binding on the parties under the relevant PRC laws and regulations. Based on the view of the PRC legal adviser, our Group and the Sole Sponsor are of the view that the acquisitions of the collectively-owned land were not legal, valid and binding on the parties under the relevant PRC laws and regulations. – 199 – BUSINESS As at the Latest Practicable Date, such parcels of land had been approved by the People’s Government of Fujian Province to be expropriated and converted from collectively-owned land into state-owned construction land for non-agricultural use. Based on the confirmation letter issued by the Department of Land and Resources of Fujian Province (福建省國土資源廳), on 5 February 2015, such parcel of land has been approved by the People’s Government of Fujian Province to be expropriated and the Longhai Municipal Land Resources Bureau (龍海市國土資源局) is in the process of converting the land from collectively-owned land into state-owned construction land for non-agricultural use. As advised by our PRC legal adviser, based on the relevant PRC law, the Longhai Municipal Land Resources Bureau is the competent authority to formulate a plan for bidding, auction and listing of state-owned land and implement the procedures of bidding, auction and listing in the jurisdiction of Longhai City and the Department of Land and Resources of Fujian Province is the competent provincial authority for issuing such confirmation letter. The Longhai Municipal Land Resources Bureau (龍海市國土資源局) issued a written confirmation on 19 November 2014 confirming that Fujian Greenfresh Foods has the right to occupy and use such parcels of lands for non-agricultural purposes within the period prescribed in the collectively-owned land use right certificate held by Fujian Greenfresh Foods. Furthermore, the staff member of the Land Reserve Centre (收儲中心科員) at the Longhai Municipal Land Resources Bureau (龍海市國土資源局), who, to the best knowledge of the Directors, is one of the officials handling the bidding, auction and listing procedure of such parcels of land, orally confirmed on 13 February 2015 that: (i) the Longhai Municipal Land Resources Bureau (龍海市國土資源局) will not impose any penalties on Fujian Greenfresh Foods for its occupation and use of such land for non-agricultural purposes; and (ii) the bidding, auction and listing procedure for such land will be proceeded with. As advised by our PRC legal adviser, the Land Reserve Centre of Longhai Municipal Land Resources is in charge of the bidding, auction and listing procedure of the state-owned land within the jurisdiction of Longhai city. Therefore, our PRC legal adviser is of the view that the relevant official has the authority to provide such oral confirmation to the Group. On 8 May 2015, Fujian Greenfresh Foods executed the transaction confirmation letter (成交確認書) with the Longhai Municipal Land Resources Bureau (龍海市國土資源局) regarding the purchase of the land use right attached to such parcel of land, which is a combination of the two parcels of land in question. In light of the transaction confirmation letter, Fujian Greenfresh Foods has won the bidding of such parcel of land at a price of RMB2.28 million, and it shall enter into a land use right grant contract with the Longhai Municipal Land Resources Bureau before 8 May 2016. Accordingly, our PRC legal adviser is of the view that there is no legal impediment for our Group to enter into the land use right grant contract with the relevant authority before the specified time. Our Directors estimate that the bidding, auction and listing procedure for such land, including our Group entering into the land use right grant contract with the Longhai Municipal Land Resources Bureau and obtaining the land use right certificate, will be completed by September 2015. Based on the foregoing, our PRC legal adviser is of the view that the likelihood that the relevant authority will impose penalties on Fujian Greenfresh Foods or require Fujian Greenfresh Foods to vacate from or demolish the buildings and ancillary facilities on such land with defective titles is relatively remote. Please refer to the table below for further details on the defective titles on the collectively-owned land acquired by our Group. – 200 – (1) Fujian Fujian Greenfresh Greenfresh Foods Foods acquired a parcel of collectivelyowned land with a total site area of approximately 3,570 sq.m. from Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province, and obtained the collectivelyowned land use right certificate of Long Ji Yong (2012) No. JD0009. However, the acquisition had not been through the land expropriation process of the local government and the collectivelyowned land use rights Company involved Details of properties and nature of the title defect The non-compliance is mainly caused by (i) our local management at the relevant time being not familiar with the relevant regulatory requirements; (ii) inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations; and (iii) the absence of any investigation, penalty or request for remedial action from the local authorities, which was considered by our local management as being an Reasons for non-compliance Maximum penalty and potential legal impact According to the relevant applicable laws and regulations, Fujian Greenfresh Foods may be required to vacate from or demolish the buildings and ancillary facilities on the Such parcel of land. Fujian land, together Greenfresh with a certain Foods, as a parcel of transferee, will collectivelynot be subject owned land to any with a total site monetary area of penalties. approximately 6,406 sq.m. referred to below in this table, attributed for 12.1% of the total revenue of the Group as at 31 December 2014. Fujian Greenfresh Foods currently uses such parcel of land for the production of our processed food products, warehousing, office and ancillary purposes. Primary use of the property and percentage of total revenue attributable to the property Our PRC legal adviser is of the view that the likelihood that the relevant authority will impose penalties on Fujian Greenfresh Foods or require Fujian Greenfresh Foods to vacate from or demolish the buildings and ancillary facilities on such land with defective titles is relatively remote on the basis that (i) Longhai Yan Cuo Land Bureau (龍海市 顏厝鎮土地管理局), the Municipal Government of Yan Cuo, Longhai (龍海市 顏厝鎮人民政府), and the Longhai Municipal Land Resources Bureau (龍海市 國土資源局), recognised acquisition of the collectively-owned land by Fujian Greenfresh Foods; (ii) such parcel of land has been approved by the People’s Government of Fujian Province to be expropriated and converted from collectively-owned land to state-owned construction land for non-agricultural use; (iii) the Longhai Municipal Land Resources Bureau (龍 海市國土資源局), being Views of our PRC legal adviser – 201 – The bidding, auction and listing procedure for such land was started on 7 April 2015 and it is estimated that the process will be completed by September 2015. Our Directors confirm that our Group has duly participated in the bidding, auction and listing procedure for such land and on 10 April 2015 a deposit of RMB450,000 was paid by Based on the confirmation letter issued by the Department of Land and Resources of Fujian Province (福建省國 土資源廳), on 5 February 2015, such parcel of land has been approved by the People’s Government of Fujian Province to be expropriated and the Longhai Municipal Land Resources Bureau (龍海 市國土資源局) is in the process of converting the land from collectively-owned land into state-owned construction land for non-agricultural use. As advised by our PRC legal adviser, based on the relevant PRC law, the Longhai Municipal Land Resources Bureau is the competent authority to formulate a plan for bidding, auction and listing of state-owned land and implement the procedures of bidding, auction and listing in the jurisdiction of Longhai City and the Department of Land and Resources of Fujian Province is the competent provincial authority for issuing such confirmation letter. Remedial actions taken or to be taken and enhanced internal control measures The table below summarises our properties with defective titles during the Track Record Period and as at the Latest Practicable Date: BUSINESS Company involved Reasons for non-compliance For the same reason, Fujian Greenfresh Foods’ ownership to certain buildings with an aggregate gross floor area of approximately 1,832 sq.m. constructed on such parcel of land is defective even though Fujian Greenfresh Foods obtained the building ownership certificate of Long Fang Quan Zheng Zi Di No. 20131392. thereunder were implied used for consent to use non-agricultural such land. purposes which is prohibited by the relevant applicable laws and regulations in the PRC. Details of properties and nature of the title defect Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact the competent authority for supervising and administering the use of land in the jurisdiction of Longhai City, as advised by our PRC legal adviser, issued a written confirmation on 19 November 2014 that Fujian Greenfresh Foods has the right to occupy and use such parcels of lands for non-agricultural purposes within the period prescribed in the granted collectively-owned land use right certificate. Despite our Company’s communication with the Department of Land and Resources of Fujian Province (福建省國土資源 廳), which is the upper level department to the Longhai Municipal Land Resources Bureau (龍海市 國土資源局), we have not been able to obtain the same confirmation from such authority, as the official in the Department of Land and Resources of Fujian Province believes that the Longhai Municipal Land Resources Bureau instead of the Department of Land and Resources of Views of our PRC legal adviser – 202 – We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province with an estimated annual designed production capacity of 33,660 tonnes to replace our current production facilities for processed food products, including the production facilities on such parcel of Fujian Greenfresh Foods. The price offered by the government is RMB2.2 million. It is estimated that the total cost will be approximately RMB3.0 million. On 8 May 2015, Fujian Greenfresh Foods executed a transaction confirmation letter (成交確認書) with the Longhai Municipal Land Resources Bureau (龍海市國土資源局), indicating that Fujian Greenfresh Foods has won the bidding at a price of RMB2.28 million and it shall enter into a land use right grant contract with the Longhai Municipal Land Resources Bureau before 8 May 2016. Our PRC legal adviser is of the view that there is no legal impediment for our Group to enter into the land use right grant contract with the relevant authority before the specified time. In any event, our Directors confirm that from January 2016, our Group will cease the operations carried on such property and lease the property to suitable lessees under the condition that the lessees will enter into a deed of non-competition with our Group. Remedial actions taken or to be taken and enhanced internal control measures BUSINESS Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact Remedial actions taken or to be taken and enhanced internal control measures land together with a certain parcel of land with a total site area of approximately 6,406 sq.m. referred to below in this table, with a combined designed production capacity of 14,490 tonnes for the year ended 31 December 2014. We expect to commence commercial production in January 2016. In the event that the relevant authority requires us to vacate from or demolish the buildings and ancillary facilities on the land before January 2016, our Directors envisage that any loss in profits as a result of business interruption can be mitigated by sub-contracting our sales orders to third party subcontractors, due to the number of readily available third party contractors for processed food production available in Zhangzhou. Our estimated net profit loss as a result of business interruption on the operations on such parcel of land, together with a certain parcel of land with a total site area of approximately 6,406 sq.m. referred to below in this table, through sub-contracting our sales orders to third party subcontractors is approximately RMB2.0 million, based on and with reference to the historical net profit contributed by such two parcels of collectively-owned land for the financial year ended 31 December 2014 and the difference in net profit margins between production by our Group and subcontracting to third party Views of our PRC legal adviser Fujian Province is the competent authority to provide such confirmation on such issue in Longhai City where the collectively-owned land in question is located; and (iv) the staff member of the Land Reserve Centre (收儲 中心科員) at the Longhai Municipal Land Resources Bureau, who, to the best knowledge of the Directors, is one of the officials handling the bidding, auction and listing procedure of such parcels of land, orally confirmed on 13 February 2015 that (i) the Longhai Municipal Land Resources Bureau will not impose any penalties on Fujian Greenfresh Foods for its occupation and use of such land for non-agricultural purposes; and (ii) the bidding, auction and listing procedure for such land will be proceeded with. As advised by our PRC legal adviser, the Land Reserve Centre of Longhai Municipal Land Resources is in charge of the bidding, auction and listing BUSINESS – 203 – Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact Remedial actions taken or to be taken and enhanced internal control measures subcontractors. Our estimated costs of demolishing the buildings and ancillary facilities on such parcel of land, together with a certain parcel of land with a total site area of approximately 6,406 sq.m. referred to below in this table, is approximately RMB1.0 million. Based on the foregoing, our Directors do not foresee any material impairment to our Group’s business and financial Our PRC legal adviser is of position in the event of such request the view that the likelihood bythe relevant authority. that the relevant authority will impose penalties on Furthermore, our Controlling Fujian Greenfresh Foods or Shareholders have provided an require Fujian Greenfresh indemnity against all claims, actions, Foods to vacate from or demands, proceedings, judgments, demolish the buildings and losses, liabilities, damages, costs, ancillary facilities on such charges, fees, expenses and fines buildings with defective suffered or incurred by us due to the titles is relatively remote title defects of our properties. on the basis that (i) the Construction Bureau of As the non-compliance will not be Longhai (龍海市建設局), rectified before Listing, our Group will being the competent include relevant disclosures in our construction works interim and annual reports upon Listing. planning and construction authority, issued a written We have formalised the procedures for confirmation on 10 March obtaining the requisite permits, licenses 2015 that Fujian and approvals relating to land, Greenfresh Foods had designated an administration supervisor completed the approval and to be responsible for the application of registration procedures of the requisite permits and licenses, and construction following up with the relevant authorities on the application status. The designated administration supervisor has obtained an associate degree in law and procedure of the state-owned land within the jurisdiction of Longhai city. Therefore, our PRC legal adviser is of the view that the relevant official has the authority to provide such oral confirmation to the Group. Views of our PRC legal adviser BUSINESS – 204 – Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact works planning, commencement of construction works and completion of construction; (ii) the Municipal Housing Security and Housing Administration Bureau of Longhai (龍海市住房保障 與房地產管理局), being the competent authority for issuance of building ownership certificates, issued a written confirmation on 13 March 2015 that the building ownership certificate received by Fujian Greenfresh Foods was valid, Fujian Greenfresh Foods had the rights to occupy, use and dispose the buildings referred to thereunder, and as at the date of the confirmation, there had not been disputes regarding the ownership of the buildings concerned; and (iii) the Longhai Municipal Land Resources Bureau (龍海市國土資源 局) has confirmed that Fujian Greenfresh Foods has the right to occupy and use the land within the period prescribed in the land use right certificate. Views of our PRC legal adviser has experience in the application of the requisite permits and licenses for approximately four years, and she is familiar with the application procedures and the relevant required approval documents. Also, we have prepared a list of land used by our Group containing the details of the relevant pieces of land (including but not limited to registration number of the Right to the Use of the Land, the nature of the land, the expiry date of the land use rights, etc.) and which list will be updated from time to time, designated the in-house legal adviser to be responsible for reviewing the application documents for compliance with the applicable laws and regulations, and providing legal advice in relation to the application matters, and ensuring compliance of the land use, and designated the administration supervisor to be responsible for record keeping (including those documents relating to the obtaining of the requisite permits, licenses and approval) which is reviewed by the in-house legal adviser. Remedial actions taken or to be taken and enhanced internal control measures BUSINESS – 205 – Reasons for non-compliance (2) Fujian Fujian The Fujian Greenfresh Greenfresh non-compliance Greenfresh Foods Foods acquired is mainly Foods a parcel of caused by (i) currently uses collectivelyour local such parcel of owned land management at land for the with a total site the relevant production of area of time being not processed food approximately familiar with products, 6,406 sq.m. the relevant warehousing, from regulatory office and transferors requirements; ancillary including (ii) purposes. among others inconsistent Minhui implementation Such parcel of Trading, and or interpretation land, together obtained the by local with a certain collectivelyauthorities in parcel of owned land use the PRC of the collectivelyright certificate relevant owned land of Long Ji regulations; with a total site Yong (2012) and (iii) the area of No. JD0010. absence of any approximately However, the investigation, 3,570 sq.m. acquisition had penalty or referred to not been request for above in this through land remedial action table, expropriation from the local attributed for process of the authorities, 12.1% of the local which was total revenue government considered by of the Group as and the our local at 31 collectivelymanagement as December owned land use being an 2014. rights implied thereunder consent to use were used for such land. non-agricultural Company involved Details of properties and nature of the title defect Primary use of the property and percentage of total revenue attributable to the property According to the relevant applicable laws and regulations, Fujian Greenfresh Foods may be required to vacate from or demolish the buildings and ancillary facilities on the land. Fujian Greenfresh Foods, as a transferee, will not be subject to any monetary penalties. Maximum penalty and potential legal impact Our PRC legal adviser is of the view that the likelihood that the relevant authority will impose penalties on Fujian Greenfresh Foods and Minhui Trading or require Fujian Greenfresh Foods or Minhui Trading to vacate from or demolish the buildings and ancillary facilities on such land with defective titles is relatively remote on the basis that (i) the land transfer to Fujian Greenfresh Foods was granted consent by Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province and the Longhai Municipal Land Resources Bureau Yan Cuo Land Office (龍海市國土資 源局顏厝國土資源所); (ii) such parcel of land has been approved by the People’s Government of Fujian Province to be expropriated and converted from collectively-owned land to state-owned construction land for non-agricultural use; (iii) the Longhai Municipal Land Resources Bureau (龍 海市國土資源局), being the competent authority for Views of our PRC legal adviser – 206 – The bidding, auction and listing procedure for such land was started on 7 April 2015 and it is estimated that the process will be completed by September 2015. Our Directors confirm that our Group has duly participated in the bidding, auction and listing procedure for such land and on 10 April 2015 a deposit of RMB450,000 was paid by Fujian Greenfresh Foods. The price offered by the government is RMB2.2 Based on the confirmation letter issued by the Department of Land and Resources of Fujian Province (福建省國 土資源廳), being the competent authority for issuing the confirmation letter, on 5 February 2015, such parcel of land has been approved by the People’s Government of Fujian Province to be expropriated and the Longhai Municipal Land Resources Bureau is in the process of converting the land from collectively-owned land state-owned construction land for non-agricultural use. As advised by our PRC legal adviser, based on the relevant PRC law, the Longhai Municipal Land Resources Bureau is the competent authority to formulate a plan for bidding, auction and listing of state-owned land and implement the procedures of bidding, auction and listing in the jurisdiction of Longhai City and the Department of Land and Resources of Fujian Province is the competent provincial authority for issuing such confirmation letter. Remedial actions taken or to be taken and enhanced internal control measures BUSINESS Company involved For the same reason, Fujian Greenfresh Foods’ ownership to certain buildings with an aggregate gross floor area of approximately 4,082 sq.m. constructed on such parcel of land is defective even though Fujian Greenfresh Foods obtained the building ownership certificates of Long Fang Quan Zheng Zi Di No. 20131391. purpose, which is prohibited by the relevant applicable laws and regulations in the PRC. Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact supervising and administering the use of land in the jurisdiction of Longhai City, as advised by our PRC legal adviser, issued a written confirmation on 19 November 2014 that Fujian Greenfresh Foods has the right to occupy and use such parcels of lands for non-agricultural purposes within the period prescribed in the granted collectively-owned land use right certificate. Despite our Company’s communication with the Department of Land and Resources of Fujian Province (福建省國土資源 廳), which is the upper level department to the Longhai Municipal Land Resources Bureau (龍海市 國土資源局), we have not been able to obtain the same confirmation from such authority, as the official in the Department of Land and Resources of Fujian Province believes that the Longhai Municipal Land Resources Bureau instead of the Department of Land and Resources of Fujian Province is the Views of our PRC legal adviser – 207 – We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province with an estimated annual designed production capacity of 33,660 tonnes to replace our current production facilities for processed food products, including the production facilities on such parcel of land together with a certain parcel of land with a total site area of million. It is estimated that the total cost will be approximately RMB3.0 million. On 8 May 2015, Fujian Greenfresh Foods executed a transaction confirmation letter (成交確認書) with the Longhai Municipal Land Resources Bureau (龍海市國土資源局), indicating that Fujian Greenfresh Foods has won the bidding at a price of RMB2.28 million and it shall enter into a land use right grant contract with the Longhai Municipal Land Resources Bureau before 8 May 2016. Our PRC legal adviser is of the view that there is no legal impediment for our Group to enter into the land use right grant contract with the relevant authority before the specified time. In any event, our Directors confirm that from January 2016, our Group will cease to use the operations carried on such property and lease the property to lessees under the condition that the lessees will enter into a deed of non-competition with our Group. Remedial actions taken or to be taken and enhanced internal control measures BUSINESS Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact Remedial actions taken or to be taken and enhanced internal control measures approximately 3,507 sq.m. referred to below in this table, with a combined designed production capacity of 14,490 tonnes for the year ended 31 December 2014. We expect to commence commercial production in January 2016. In the event that the relevant authority requires us to vacate from or demolish the buildings and ancillary facilities on the land before January 2016, our Directors envisage that any loss in net profits as a result of business interruption can be mitigated by sub-contracting our sales orders to third party subcontractors, due to the number of readily available third party contractors for processed food production available in Zhangzhou. Our estimated net profit loss as a result of business interruption on the operations on such parcel of land, together with a certain parcel of land with a total site area of approximately 3,570 sq.m. referred to above in this table, through sub-contracting our sales orders to third party subcontractors is approximately RMB2.0 million, based on and with reference to the historical net profit contributed by such two parcels of collectively-owned land for the financial year ended 31 December 2014 and the difference in net profit margins between production by our Group and subcontracting to third party subcontractors. Our estimated costs of demolishing the buildings and ancillary facilities on such parcel of land, Views of our PRC legal adviser competent authority to provide such confirmation on such issue in Longhai City where the collectively-owned land in question is located; and (iv) the staff member of the Land Reserve Centre (收儲 中心科員) at the Longhai Municipal Land Resources Bureau, who, to the best knowledge of the Directors, is one of the officials handling the bidding, auction and listing procedure of such parcels of land, orally confirmed on 13 February 2015 that (i) the Longhai Municipal Land Resources Bureau will not impose any penalties on Fujian Greenfresh Foods for its occupation and use of such land for non-agricultural purposes; and (ii) the bidding, auction and listing procedure for such land will be proceeded with. As advised by our PRC legal adviser, the Land Reserve Centre of Longhai Municipal Land Resources is in charge of the bidding, auction and listing procedure of the state-owned land within the BUSINESS – 208 – Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact Remedial actions taken or to be taken and enhanced internal control measures together with a certain parcel of land with a total site area of approximately 3,570 sq.m. referred to above in this table, is approximately RMB1.0 million. Based on the foregoing, our Directors do not foresee any material impairment to our Group’s business and financial position in the event of such request by Our PRC legal adviser is of the relevant authority. the view that the likelihood that the relevant authority Furthermore, our Controlling will impose penalties on Shareholders have provided an Fujian Greenfresh Foods or indemnity against all claims, actions, require Fujian Greenfresh demands, proceedings, judgments, Foods to vacate from or losses, liabilities, damages, costs, demolish the buildings and charges, fees, expenses and fines ancillary facilities on such suffered or incurred by us due to the buildings with defective title defects of our properties. titles is relatively remote on the basis that (i) the As the non-compliance will not be Construction Bureau of rectified before Listing, our Group will Longhai (龍海市建設局), include relevant disclosures in our being the construction interim and annual reports upon Listing. works planning and construction authority, issued a written confirmation on 10 March 2015 that Fujian Greenfresh Foods had completed the approval and registration procedures of construction works planning, commencement of construction works and completion of construction; (ii) the Municipal Housing Security and Housing jurisdiction of Longhai city. Therefore, our PRC legal adviser is of the view that the relevant official has the authority to provide such oral confirmation to the Group. Views of our PRC legal adviser BUSINESS – 209 – Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property Maximum penalty and potential legal impact Administration Bureau of Longhai (龍海市住房保障 與房地產管理局), being the competent authority for issuance of building ownership certificates, issued a written confirmation on 13 March 2015 that the building ownership certificate received by Fujian Greenfresh Foods was obtained validly, Fujian Greenfresh Foods had the rights to occupy, use and dispose the buildings referred to thereunder, and as at the date of the confirmation, there had not been disputes regarding the ownership of the buildings concerned; and (iii) the Longhai Municipal Land Resources Bureau (龍海市 國土資源局) has confirmed that Fujian Greenfresh Foods has the right to occupy and use the land within the period prescribed in the land use right certificate. Views of our PRC legal adviser We have formalised the procedures for obtaining the requisite permits, licenses and approvals relating to land, designated an administration supervisor to be responsible for the application of the requisite permits and licenses, and following up with the relevant authorities on the application status. The designated administration supervisor has obtained an associate degree in law and has experience in the application of the requisite permits and licenses for approximately four years, and she is familiar with the application procedures and the relevant required approval documents. Also, we have prepared a list of land used by our Group containing the details of the relevant pieces of land (including but not limited to registration number of the Right to the Use of the Land, the nature of the land, the expiry date of the land use rights, etc.) and which list will be updated from time to time, designated the in-house legal adviser to be responsible for reviewing the application documents for compliance with the applicable laws and regulations, and providing legal advice in relation to the application matters, and ensuring compliance of the land use, and designated the administration supervisor to be responsible for record keeping (including those documents relating to the obtaining of the requisite permits, licenses and approval) which is reviewed by the in-house legal adviser. Remedial actions taken or to be taken and enhanced internal control measures BUSINESS – 210 – (3) During the Zhangzhou Track Record Greenfresh Period, Zhangzhou Greenfresh had not obtained the construction works planning permit and the construction works commencement permit for certain buildings with an aggregate gross floor area of approximately 6,642 sq.m. Company involved Details of properties and nature of the title defect The non-compliance is mainly caused by (i) our local management at the relevant time being not familiar with the relevant regulatory requirements; (ii) inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations; and (iii) the absence of any investigation, penalty or request for remedial action from the local authorities, which was considered by our local management as being an implied consent to use such buildings. Reasons for non-compliance Views of our PRC legal adviser Our PRC legal adviser is of the view that the likelihood that the relevant authority will impose penalties on Zhangzhou Greenfresh for such buildings constructed without the construction works planning permit and construction works commencement permit is relatively low on the basis that Taiwanese Investment Zone, Zhangzhou Construction Bureau (漳州市 台商投資區建設局) and the Municipal Urban-rural Development Bureau of Zhangzhou (漳州市城鄉規 劃局台商投資區分局) issued confirmations on 8 December 2014 and 10 December 2014, respectively, that there was, and will not Pursuant to the be, penalties imposed on Administrative Zhangzhou Greenfresh due to Measures on its constructions conducted the Construction without the relevant permits Works and Zhangzhou Greenfresh’s Commencement applications for the Permit, construction works planning Zhangzhou permit and the construction Greenfresh is works commencement permit subject to a had been accepted, and we maximum had obtained both of the penalty of construction works planning RMB100,000, permit and the construction representing works commencement permit as at January 2015. Maximum penalty and potential legal impact Pursuant to the Urban and Rural Planning Law of the PRC, Zhangzhou Greenfresh is Such buildings subject to a currently do maximum not contribute penalty of to the total RMB542,000, revenue of the representing Group. 10% of the construction costs of the relevant buildings, due to the failure to obtain the construction works planning permit. The construction of the buildings concerned is currently in progress. Primary use of the property and percentage of total revenue attributable to the property We have formalised the procedures for obtaining the construction works planning permits and commencement permits, established a construction works policy containing details of the construction works planning permits and commencement permits that need to be obtained, designated the administrative supervisor to be responsible for obtaining the construction works planning permits and commencement permits, and record keeping, including those documents relating to the obtaining of the construction works planning permits and commencement permits. Based on the view of our PRC legal adviser and the remote risks of such title defects on our business operations, we consider that no remedial action is necessary. Remedial actions taken or to be taken and enhanced internal control measures BUSINESS – 211 – Company involved Details of properties and nature of the title defect Reasons for non-compliance Primary use of the property and percentage of total revenue attributable to the property 2% of the construction contract price of the relevant buildings, due to the failure to obtain the construction works commencement permit. Maximum penalty and potential legal impact Views of our PRC legal adviser Remedial actions taken or to be taken and enhanced internal control measures BUSINESS – 212 – BUSINESS Our PRC legal adviser has confirmed that, as at the Latest Practicable Date, other than disclosed above, we had obtained all necessary land use rights certificates and building ownership certificates for our properties. As advised by our PRC legal adviser, according to the PRC Property Law, our right as owner or occupant of the properties with defective titles may be adversely affected due to the absence of approval and title certificates, such as our rights to transfer or lease the land and buildings and/or subject the building structures to mortgage loans. Our PRC legal adviser also advises that the buildings with defective titles (except for the buildings under construction) are in conformity with the relevant safety requirements in all material aspects during the Track Record Period. Based on the above, our Directors confirm that the safety condition of the buildings with defective titles (except for the buildings under construction) is in compliance with the relevant safety requirements in all material aspects during the Track Record Period. In September 2014, we engaged RSM Nelson Wheeler Consulting Limited (“RSMIC”), an independent internal control consultant, to perform reviews on an agreed set of our Group’s internal control procedures, systems and controls to assess the adequacy and effectiveness of our internal control systems, identify whether there are material internal control weaknesses and suggest recommendations to us for rectification. RSMIC, established in 1986, is a firm of professional consultants that mainly engages in providing consulting and advisory services to listed companies and companies preparing for a listing in Hong Kong. The key team members of RSMIC engaged by us possess the relevant experience and professional qualifications for the services rendered to their clients. Professional qualifications include Certified Public Accountants (CPA), Certified Internal Auditors (CIA) and Certified Information Systems Auditors (CISA). Based on the internal control review report issued by RSMIC, RSMIC and the Sole Sponsor are satisfied that there is no material internal control deficiency identified. RSMIC has conducted a follow-up review on the status of the implementation of the enhanced internal control measures in February to March 2015. Based on such review, RSMIC has confirmed that our Group has satisfactorily implemented the enhanced internal control measures in mid-March 2015, and that the measures are adequate and effective in enhancing our internal control system and to prevent future recurrences of non-compliances of our Group. After reviewing the findings provided by RSMIC regarding our Group's internal control system, nothing has come to the Sole Sponsor's attention that our Company's enhanced internal measures are inadequate or ineffective. Leased properties As at the Latest Practicable Date, we had leased ten parcels of land used for industrial purposes in Fujian province and Liaoning province, among which, seven parcels are state-owned land, three parcels are collectively-owned land. Leased properties on state-owned land (1) Properties without the construction works planning permit and construction works commencement permit in Dandong, Liaoning province Among the seven parcels of leased state-owned land, two factory buildings located in Dandong, Liaoning province with the gross floor area of 19,290 sq.m. leased by Greenfresh Biological Technology for king trumpet mushroom cultivation are constructed without obtaining the construction works planning permit and construction works commencement permit. According to the relevant PRC laws, the competent governmental authorities may order that such buildings be dismantled and impose penalties on – 213 – BUSINESS the person who constructed the building. In this regard, our occupation and use of the buildings will be materially adversely affected if the competent governmental authorities order the building to be dismantled. Such buildings attributed for 4.2% of the total revenue of the Group as at 31 December 2014. The non-compliance is mainly caused by (i) our local management at the relevant time being not familiar with the relevant regulatory requirements; (ii) inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations; and (iii) the absence of any investigation, penalty or request for remedial action from the local authorities, which was considered by our local management as being an implied consent to use such land. Our PRC legal adviser advised that, according to the Urban and Rural Planning Law of the People’s Republic of China (中華人民共和國城鄉規劃法) and the Construction Law of the People’s Republic of China (2011 Amendment) (中華人民共和國建築法(2011修正)), the construction entity (建設單位) which obtained approval to use the land for construction works is responsible for applying for the construction work planning permit and construction works commencement permit. Therefore, our PRC legal adviser is of the view that the lessor who owns the title of the leased land use right is responsible for applying for the construction work planning permit and construction works commencement permit instead of Greenfresh Biological Technology. Based on the undertaking letter provided by the lessor on 3 December 2014, the lessor undertook to Greenfresh Biological Technology that it will not request Greenfresh Biological Technology to cease using the leased buildings for the reason that such leased buildings have no construction works planning permit or construction works commencement permit and it will indemnify Greenfresh Biological Technology against any losses and damages caused by the failure of obtaining the construction works planning permit and construction works commencement permit issued by competent planning and construction authorities. Based on the confirmation letter provided by the lessor to Greenfresh Biological Technology on 9 March 2015, by the date of such confirmation letter, the lessor had not been punished by the competent authorities due to its failure in obtaining the construction works planning permit and construction works commencement permit, and the Housing and Urban and Rural Construction Bureau of Kuandian Mandarin Autonomous County (寬甸滿族自治縣住房和城鄉建設局) (“Kuandian Construction Bureau”) had accepted the lessor’s application for the issuance of the construction works planning permit and construction works commencement permit. The lessor estimates that the relevant construction works planning permit and construction works commencement permit will be obtained by the lessor by December 2015. On 27 April 2015, Kuandian Construction Bureau, which is, as advised by our PRC legal adviser, the competent authority to issue the construction works planning permit and construction works commencement permit, issued a confirmation letter, confirming that Kuandian Construction Bureau had accepted the lessor’s application for the issuance of construction works planning permit and construction works commencement permit, and there would be no legal impediments for the lessor to obtain such permits. In view of the above, our PRC legal adviser is of the view that Greenfresh Biological Technology has the right to use such land and the relevant buildings on such land, and the risk for Greenfresh Biological Technology being imposed penalties by the relevant authorities due to its usage of such buildings or required to vacate from such buildings is remote. In the event that Greenfresh Biological Technology is required to vacate from the aforesaid buildings by Kuandian Construction Bureau, our Group will cease our king trumpet mushroom cultivation in such buildings. In the event that we cease our operations in such buildings, our Directors do not foresee any material impairment to our Group’s business and financial position. – 214 – BUSINESS Based on the view of our PRC legal adviser and the remote risks of the impact on our business operations, we consider that it is unlikely that we would be required to relocate the business carried thereabove. In accordance with an undertaking letter issued by the lessor on 3 December 2014, if we are required to relocate our operations carried under such leased buildings due to the failure of obtaining the construction works planning permit and construction works commencement permit issued by competent planning and construction authorities, we are entitled to request the lessor to indemnify us against any losses and damages caused by the failure of obtaining the construction works planning permit and construction works commencement permit issued by competent planning and construction authorities. For the buildings without obtaining construction works planning permit and the construction works commencement permit, the landlord did not conduct any independent safety appraisal. However, our dedicated personnel of management and administration department, which oversaw the construction of our other facilities and have the relevant experience to make general assessments regarding building safety, conducted safety review procedures for such buildings and consulted with Fujian Bo Hai Engineering Technology Co., Ltd (福建博海工程技術有限公司) (the “Testing Co”). The Testing Co obtained the Construction Engineering Quality Test Organisation Qualification Certificate from the Department of Housing and Urban-Rural Development of Fujian Province and the Metrology Accreditation Certificate issued by the Administration of Quality and Technology Supervision of Fujian Province, respectively. Based on such safety review procedures and our consultation with the Testing Co, our Directors are of the view that such buildings are in conformity of the relevant safety requirements in material respects under the applicable PRC laws and regulations and can be used safely under the applicable PRC laws and regulations. (2) Properties without the construction works planning permit and construction works commencement permit in Zhangzhou, Fujian province Among the seven parcels of leased state-owned land, Zhangzhou Greenfresh funded the construction of buildings with a gross floor area of 4,426 sq.m. for the production of canned food on a parcel of leased land without obtaining the construction works planning permit and the construction works commencement permit prior to the commencement of construction. Such buildings attributed for 10.7% of the total revenue of the Group as at 31 December 2014. The non-compliance is mainly caused by (i) our local management at the relevant time being not familiar with the relevant regulatory requirements; (ii) inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations; and (iii) the absence of any investigation, penalty or request for remedial action from the local authorities, which was considered by our local management as being an implied consent to use such land. As advised by our PRC legal adviser, according to the Administration Law of Urban Real Estate of the People’s Republic of China 《 ( 中華人民共和國城市房地產管理法(2007修正)》) and the Property Law of the People’s Republic of China 《 ( 中華人民共和國物權法》), the ownership of the buildings constructed on a parcel of land shall be registered in consistence with the ownership of the land use right; and the buildings on a parcel of construction land shall be transferred concurrently when such construction land is transferred. Therefore, our PRC legal adviser is of the view that the lessor who owns the title of the land use right of the leased land is entitled to the title of the building ownership. Our PRC legal adviser also advised that, according to the Urban and Rural Planning Law of the People’s Republic of China 《 ( 中華人民共和國城鄉規劃法》) and the Construction Law of the People’s Republic of China (2011 Amendment) 《 ( 中華人民共和國建築法(2011修正)》), the construction entity (建設單位) which obtained approval to use the land for construction works is responsible for applying for the construction work planning permit and construction works commencement permit. Therefore, our PRC legal adviser is of the view that the lessor who owns the title of the leased land use right shall be responsible for applying for the construction work planning permit and construction works commencement permit. – 215 – BUSINESS On 10 March 2015, the Construction Bureau of Longhai (龍海市建設局), being the competent authority, issued a written confirmation that it had not, and would not, impose penalties on the lessor or Zhangzhou Greenfresh due to the failure to obtain the relevant permits. In addition, the lessor has undertaken that she will apply for the relevant permits in due course and that Zhangzhou Greenfresh will not be requested to vacate from the buildings due to the aforementioned reason. As such, our PRC legal adviser is of the view that Zhangzhou Greenfresh has the right to occupy and use the land and the likelihood that Zhangzhou Greenfresh may be imposed penalties by relevant authorities due to its usage of such buildings is relatively low. In any event, our Directors confirm that from January 2016, our Group will cease to lease such parcels of state-owned land and cease operations carried on such properties. We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province with an estimated annual designed production capacity of 33,660 tonnes to replace our current production facilities for processed food products, including the production facilities for processed food products on such parcels of state-owned land which has a combined designed production capacity of 11,730 tonnes for the year ended 31 December 2014. We expect to commence commercial production in January 2016. As the non-compliance will not be rectified before Listing, our Group will include relevant disclosures in our interim and annual reports upon Listing. For the buildings without obtaining the construction works planning permit and the construction works commencement permit, we engaged a third party inspection institution, Fujian Bo Hai Engineering Technology Co., Ltd (福建博海工程技術有限公司) (the “Testing Co”), to examine the structure, including cement foundation, walls, steel roof truss, steel girder and steel column, of such buildings. The Testing Co obtained the Construction Engineering Quality Test Organisation Qualification Certificate from Department of Housing and Urban-Rural Development of Fujian Province and the Metrology Accreditation Certificate issued by the Administration of Quality and Technology Supervision of Fujian Province. As advised by our PRC legal adviser, the Testing Co is a qualified and competent institution to issue such report to the Group. According to the report issued by the Testing Co on 24 April 2015, the Testing Co is of the view that the structure of such buildings are in conformity of the relevant safety requirements in material respects under the applicable PRC laws and regulations and can be used safely under the applicable PRC laws and regulations. Leased collectively-owned land (1) Leased collectively-owned land for non-agricultural purposes In terms of the three parcels of leased collectively-owned land used for non-agricultural purposes, Fujian Greenfresh Foods leased two parcels of land from Qiaoshan Villagers’ Committees of Yan Cuo, Longhai, Zhangzhou, Fujian province and Zhangzhou Greenfresh leased one parcel of land from Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province, for an aggregate site area of 7,691 sq.m. for warehousing and ancillary purpose. According to the applicable laws of the PRC, any collectively-owned land shall not be sold, transferred or leased for non-agricultural purpose. As the buildings constructed on the aforesaid three parcels of collectively-owned land leased from the relevant Villagers’ Committees are primarily used for non-agricultural purpose such as warehouse, ancillary facilities and office, the relevant Villagers’ Committee did not have the authority to lease to our Group such three parcels of collectively-owned land used for non-agricultural purpose. Our PRC legal adviser is of the view that such lease is not in compliance with the relevant PRC laws and regulations. Based on the view of our PRC legal adviser, our Group and the Sole Sponsor are of the view that such leases are not in compliance with the relevant PRC laws and regulations. The non-compliance is mainly caused by (i) our local management at the relevant – 216 – BUSINESS time being not familiar with the relevant regulatory requirements; (ii) inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations; and (iii) the absence of any investigation, penalty or request for remedial action from the local authorities, which was considered by our local management as being an implied consent to use such land. In this connection, as advised by our PRC legal adviser, the competent land authority may order that such non-compliance should be rectified by the lessors, impose penalties on the lessors, and confiscate the illegal income derived from such lease. As advised by our PRC legal adviser, our Group, as a lessee of the leases of the collectively-owned land used for non-agricultural purposes, will not be subject to any monetary penalties. In the event that the lessors are ordered to rectify the non-compliance, we may be required to rectify our operations carried thereunder, our occupation and use of the land and buildings thereupon will be materially adversely affected. As advised by our PRC legal adviser, the Longhai Municipal Land Resources Bureau (龍海市國土資源局) is the competent authority for supervising and administering the use of land in the jurisdiction of Longhai City and it issued a written confirmation dated 5 December 2014 confirming that: (i) Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province has obtained the collectively-owned land use right certificate for such leased land; and (ii) Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province could occupy, use, lease and dispose of such land for non-agricultural purposes within the time limit prescribed on the land use right certificate. Based on the foregoing confirmation, our PRC legal adviser is of the view that the likelihood that Qiaoshan Villagers’ Committee of Yan Cuo, Longhai, Zhangzhou, Fujian province is ordered to rectify such non-compliance, including demolishing the buildings on such land or requiring us to vacate from such buildings which may cause us to cease our operations carried on such leased land is relatively remote. Despite our Company’s communication with the Department of Land and Resources of Fujian Province (福建省國土資源廳), which is the upper level department to the Longhai Municipal Land Resources Bureau (龍海市國土資源局), we have not been able to obtain the same confirmation from such authority, as the official in the Department of Land and Resources of Fujian Province believes that the Longhai Municipal Land Resources Bureau instead of the Department of Land and Resources of Fujian Province is the competent authority to provide such confirmation on such issue in Longhai City where the collectively-owned land in question is located. In any event, our Directors confirm that from January 2016, our Group will cease to lease such parcels of collectively-owned land and cease operations carried on such properties. As the non-compliance will not be rectified before Listing, our Group will include relevant disclosures in our interim and annual reports upon Listing. Such leased land is currently used for ancillary purposes required for the production of processed food products on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, amongst other purposes. We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province to replace our current production facilities for processed food products. We expect to commence commercial production in January 2016. In the event that the relevant authority orders the lessors to rectify the non-compliance and we are required to vacate from such land before January 2016, the operations carried on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, will be affected. Our Directors envisage that any loss in profits as a result of business interruption on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, can be mitigated by sub-contracting our sales – 217 – BUSINESS orders to third party subcontractors, due to the number of readily available third party contractors for processed food production available in Zhangzhou. Our estimated net profit lost as a result of business interruption on the operations on two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, through sub-contracting our sales orders to third party subcontractors is approximately RMB2.0 million, based on and with reference to the historical net profit contributed by such two parcels of collectively-owned land for the financial year ended 31 December 2014 and the difference in net profit margins between production by our Group and subcontracting to third party subcontractors. Based on the foregoing, our Directors do not foresee any material impairment to our Group’s business and financial position in the event of such request by the relevant authority. Furthermore, our Controlling Shareholders have provided an indemnity against all claims, actions, demands, proceedings, judgments, losses, liabilities, damages, costs, charges, fees, expenses and fines suffered or incurred by us due to any non-compliance in respect of our leased properties. As at the Latest Practicable Date, we had strengthened our internal control in relation to leased properties, including conducting due diligence on the proposed leased properties by the administration supervisor and the general manager by conducting site visits and obtaining the lessor’s background information such as business certificate, tax certificate, premises permit and certificate of land ownership to verify the lessor’s identity and the land information, designating the in-house internal auditor who is a Certified Public Accountant to be responsible for reviewing the background information of the lessors to ensure proper execution of the due diligence, designating the in-house legal adviser to be responsible for ensuring the legality of the leased properties and compliance with the relevant land use and construction requirements, and designating the administration supervisor for record keeping. (2) Leased collectively-owned land for agricultural purposes We had leased eighteen parcels of farmland, which are all collectively-owned land, used for the cultivation of edible fungi in Fujian province, Jiangsu province and Sichuan province as at the Latest Practicable Date. We have constructed agricultural and ancillary facilities for cultivation of king trumpet mushroom on nine parcels of such farmland in Fujian province and Jiangsu province. The other nine parcels of farmland are used for the traditional cultivation of button mushroom in Fujian province and Sichuan province. In respect of collectively-owned land leased by our Group which are used for agricultural purposes, according to the relevant PRC laws and regulations, as advised by our PRC legal adviser, members (i.e. the farmer-households) of a collective economic organisation in rural areas have the right to contract (承 包) the rural land awarded by their collective economic organisation. The contractors (承包人) acquiring the contracted management right of rural land may entrust the contract-letting party (發包人) or intermediary organisation to further circulate the contracted management right of rural land to other entities and individuals. In the case of such leased collectively-owned land for agricultural purposes by our Group, our Group entered into (1) thirteen lease agreements with the relevant Villagers’ Committees who had been authorised by the relevant farmer-households to circulate the contracted management right of rural land to our Group, and such lease agreements were filed with the competent authorities of the relevant village or town; (2) two lease agreements with individual lessors who had already leased the collectively-owned land from the relevant Villagers’ Committees, which had been authorised by relevant farmer-households to circulate the contracted management right of farm land and had approved the individuals’ subletting of the collectively-owned land to our Group. Subsequently, the aforesaid lease agreements were filed with – 218 – BUSINESS the competent authorities of the relevant village or town; (3) three lease agreements with three entities other than Villagers’ Committees who had already leased the farmland from contract-letting parties and obtained the consent from the contract-letting parties to sublet the farmland to our Group. Subsequently, such lease agreements were filed with the competent authorities of the relevant village or town. The following flow chart illustrates the respective steps taken by our Group to lease the collectively-owned land for agricultural use under the above-mentioned three different situations: (1) (2) (3) Farmer-households authorised Villagers’ Committees to circulate the land Farmer-households authorised Villagers’ Committees to circulate the land Entities obtained the consent from the land use right user or contract-letting parties to lease the land Our Group entered into lease agreements with Villagers’ Committees Individual lessors leased from relevant Villagers’ Committees Our Group entered into lease agreements with these entities Filed the lease agreements with authorities of the relevant village or town Our Group entered into lease agreements with individual lessors Filed the lease agreements with authorities of the relevant village or town Filed the lease agreements with authorities of the relevant village or town As advised by our PRC legal adviser, under the applicable PRC laws and regulations, only if an entity or an individual who is not a member of the collective economic organisation, intends to contract the collectively-owned land, such entity or individual shall obtain the consent of at least two-thirds of the members of the villagers’ conference or of the representatives of villagers. Therefore, the farmer-households of a collective economic organisation are not required to obtain the consent of at least two-thirds of the members of the villagers’ conference or of the representatives of villagers with respect to its contracting of the rural land awarded by their collective economic organisation and circulation (流 轉) of their contracted management right of rural land. They may determine by themselves to entrust the contract-letting party (i.e. the Villagers’ Committee) to further circulate (流轉) the contracted management right of rural land to other entities or individuals. With respect to the collectively-owned land leased by our Group from various Villagers’ Committees, the relevant farmer-households have signed or put their thumb prints on resolution documents showing that they have severally agreed and entrusted the relevant Villagers’ Committees to circulate their contracted management right of collectively-owned land. As such, our PRC legal adviser is of the view that the relevant Villagers’ Committees had the authority to act on behalf of such farmer-households of collectively-owned land. – 219 – BUSINESS With respect to the land leased by our Group from individuals and entities, the relevant farmer-households that have acquired the contracted management right of rural land have agreed and entrusted the relevant Villagers’ Committees to circulate their respective contracted management right of collectively-owned land. Subsequently, the entrusted Villagers’ Committees leased such land to the individuals and the entities involved and such individuals and the entities involved subsequently sub-leased the land to our Group. As the individuals and entities sub-leased the land from the Villagers’ Committees, and had not directly acquired the contracted management right of the land from relevant farmer-households, such individuals and entities are not required to obtain at least two-thirds of the members of the villagers’ conference or of the representatives of villagers. Further, our Group is not required to obtain at least two-thirds of the members of the villagers’ conference or of the representatives of villagers for sub-leasing the land from such individuals and villagers. In terms of the collectively-owned land used for agricultural purposes leased or subleased by our Group from the Villagers’ Committees, our PRC legal adviser is of the view that the relevant Villagers’ Committees had the authority to act on behalf of such farmer-households of collectively-owned land. Based on the view of our PRC legal adviser, our Group and the Sole Sponsor consider that the relevant Villagers’ Committees had the authority to act on behalf of such farmer-households of collectively-owned land. As advised by our PRC legal adviser, the lease agreements with respect to the leases of the collectively-owned land for agricultural purposes have been filed with the competent authorities of the village or town. Save as otherwise disclosed in this prospectus, as advised by our PRC legal adviser, each of the leases of the collectively-owned land for agricultural purposes, which was leased by the entities or individuals as lessors that lawfully had such right to lease the land and had filed the lease agreements with the competent rural land contracting authorities was legal, valid and binding on the parties under the relevant PRC laws and regulations and the usage of such land parcels complies with the relevant PRC laws and regulations. Considering that the revenue generated from the operations carried out on our owned and leased properties with defective titles in aggregate accounted for approximately 27% of our total revenue for the year ended 31 December 2014, our Directors are of the view that our properties with defective titles are, individually and collectively, crucial to our business operation. Our Directors confirm that there is no difference in land or rental cost which we would otherwise have to pay if the properties with defective titles disclosed above did not have the said title defects. However, based on the view of our PRC legal adviser, we believe that the title defects on our owned and leased properties will not cause any material adverse effect on our Group. We are currently in the process of construction of new production facilities of processed food products in Zhangzhou, Fujian province with an estimated annual designed production capacity of 33,660 tonnes to replace our current production facilities for processed food products, including our facilities on two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, with a combined designed production capacity of 14,490 tonnes for the year ended 31 December 2014. We expect to commence commercial production in January 2016. For more information about such expansion plan, please refer to the section headed “Business – Expansion Plans, Site Selection and Development – Recent Expansion” in this prospectus. In the event that the relevant authority orders rectification of the non-compliance of our owned or leased properties before January 2016, the operations carried on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, will be affected. Our Directors envisage that any loss in profits as a result – 220 – BUSINESS of business interruption on our two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, can be mitigated by sub-contracting our sales orders to third party subcontractors, due to the number of readily available third party contractors for processed food production available in Zhangzhou. Our estimated net profit lost as a result of business interruption on the operations on two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, through sub-contracting our sales orders to third party subcontractors is approximately RMB2.0 million, based on and with reference to the historical net profit contributed by such two parcels of collectively-owned land for the financial year ended 31 December 2014 and the difference in net profit margins between production by our Group and subcontracting to third party subcontractors. Our estimated costs of demolishing the buildings and ancillary facilities on the two parcels of collectively-owned land with total site areas of approximately 6,406 sq.m. and 3,570 sq.m., respectively, is approximately RMB1.0 million. Based on the foregoing, our Directors do not foresee any material impairment to our Group’s business and financial position in the event of such request by the relevant authority. Furthermore, our Controlling Shareholders have provided an indemnity against all claims, actions, demands, proceedings, judgments, losses, liabilities, damages, costs, charges, fees, expenses and fines suffered or incurred by us due to any non-compliance in respect of our leased properties. LICENSES, PERMITS AND CERTIFICATES We are subject to laws, regulations and supervision by different levels of regulatory authorities and are required to maintain various licenses, permits and approvals in order to operate our facilities and conduct our business. A summary of such relevant PRC laws and regulations which our business operations are subject to is set out in the section headed “Laws and Regulations of the Industry” in this prospectus. Our PRC legal adviser has confirmed that we had obtained all necessary licenses, permits and certificates for our business operations in the PRC and such licenses, permits and certificates are valid and remain in effect as at the Latest Practicable Date. The following table sets forth details of our material licenses and permits for our operation: Licence and permit Issuing authority Date of issue Date of expiry Recipient National Industrial Goods Production Permit (Dried edible fungi) (全國工業 產品生產許可證(乾食用菌)) Zhangzhou Food and Drug Administration (漳州市食品藥品監督管理局) 15 January 2015 14 January 2018 Shengtai Agricultural Development Food Exports Production Enterprise Certificate (Dried edible fungi) (出口食品生產企業備案證明 (乾食用菌)) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市檢驗檢疫局) 10 December 2014 10 December 2018 Shengtai Agricultural Development Edible Fungi Strains Production and Operation Permit (食用菌菌種生產經營許可證) Fujian Provincial Department of Agriculture (福建省農業廳) 26 January 2014 25 January 2017 Greenfresh Ecological Agriculture Pollution Emission Permit (排放污染物許可證) Longhai Environmental Protection Bureau (龍海市環境保護局) 4 November 2013 5 November 2016 Fujian Greenfresh Foods – 221 – BUSINESS Licence and permit Issuing authority Date of issue Date of expiry Recipient Certificate of Member of the Chinese Commercial Goods Barcode System (中國商品條碼系統成員證書) GS1 China (中國物品編碼中心) 11 October 2013 11 October 2015 Fujian Greenfresh Foods National Industrial Goods Production Permit (Canned food) (全國工業產品生產許可證(罐頭)) Fujian Provincial Bureau of Quality and Technical Supervision (福建省質量技術監督局) 9 October 2013 13 September 2017 Zhangzhou Greenfresh Certificate of the Customs of the People’s Republic of China Registration of Consignees and Consigners of Imports and Exports for Customs Declaration (中華人民共和國海關進出口貨物 收貨人報關註冊登記證書) Zhangzhou Municipal Customs (漳州市海關) 18 September 2013 18 September 2016 Greenfresh Ecological Agriculture Fujian Provincial Scientific and Technological Enterprise Certificate (福建省科技型企業證書) Fujian Provincial Department of Science and Technology (福建省科學技術廳) 1 August 2013 1 August 2016 Fujian Greenfresh Foods National Industrial Goods Production Permit (Canned food) (全國工業產品生產許可證(罐頭)) Fujian Provincial Bureau of Quality and Technical Supervision (福建省質量技術監督局) 20 May 2013 19 May 2016 Fujian Greenfresh Foods Water Obtainment Permit (取水許可證) Longhai Municipal Water Resources Bureau (龍海市水利局) 31 December 2012 31 December 2017 Zhangzhou Greenfresh Plantation Base Inspection and Quarantine Record Filing and Registration Certificate for Botanical Food Raw Materials Exports (出口植物源性食品原料種植基地 檢驗檢疫備案證書) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市出入境檢驗檢疫局) 5 December 2012 5 December 2015 Greenfresh Ecological Agriculture Certificate of Green Food (綠色食品證書) China Green Food Development Centre (中國綠色食品發展中心) 14 November 2012 November 2015 Fujian Greenfresh Foods Self-reporting Unit Record Registration Certificate (自理報檢單位備案登記證明書) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市出入境檢驗檢疫局) 30 October 2012 NIL Greenfresh Ecological Agriculture – 222 – BUSINESS Licence and permit Issuing authority Date of issue Date of expiry Recipient Food Exports Production Enterprise Certificate (Fresh edible fungi produce) (出口食品生產企業備案證明 (鮮食用菌)) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市檢驗檢疫局) 29 August 2012 29 August 2016 Greenfresh Ecological Agriculture National Industrial Goods Production Permit (Preserved vegetables and edible fungi products) (全國工業產品生產許可證 (醬醃菜食用菌製品)) Fujian Provincial Bureau of Quality and Technical Supervision (福建省質量技術監督局) 2 July 2012 24 September 2015 Fujian Greenfresh Foods Food Exports Production Enterprise Record Certificate (Canned food) (出口食品生產企業備案證明(罐頭)) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市檢驗檢疫局) 17 April 2012 17 April 2016 Zhangzhou Greenfresh Food Exports Production Enterprise Record Certificate (Canned food) (出口食品生產企業備案證明(罐頭)) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市檢驗檢疫局) 12 March 2012 11 March 2016 Fujian Greenfresh Foods Standardised Drainage Outlet Symbol Registration Certificate (規範化排污口標誌登記證) Longhai Environmental Protection Bureau (龍海市環境保護局) 12 March 2012 11 March 2016 Fujian Greenfresh Foods Certificate of Pollutant-free Agricultural Products (無公害農產品證書) Agricultural Products Quality Safety Centre of the Ministry of Agriculture (農業部農產品質量安全中心) December 2011 December 2014 (1) Fujian Greenfresh Foods Certificate of Origin of Pollutant-free Agricultural Products (無公害農業品產地認定證書) Fujian Provincial Agricultural Department (福建省農業廳) 12 August 2011 August 2014 (1) Fujian Greenfresh Foods Record Filing and Registration Form for Foreign Trade Operators (對外貿易經營者備案登記表) Zhangzhou Municipal Foreign Trade and Economic Cooperation Bureau (漳州市對外貿易經濟合作局) 30 December 2010 NIL Fujian Greenfresh Foods Self-reporting Unit Record Registration Certificate (自理報檢單位備案登記證明書) Xiamen Entry-Exit Inspection and Quarantine Bureau (廈門市出入境檢驗檢疫局) 30 July 2008 NIL Fujian Greenfresh Foods Note: (1) We have applied for the renewal of the Certificate of Pollutant-free Agricultural Products and the Certificate of Origin of Pollutant-free Agricultural Products and expect to obtain the renewed certificates by the second quarter of 2015. Our PRC legal adviser has confirmed that such certificates are not the necessary permit and licenses for the Group to conduct its business or operations pursuant to the relevant PRC laws and regulations. – 223 – Reasons for non-compliance The non-compliance was mainly caused by (i) our local management at the relevant time being not familiar with the relevant regulatory requirements; (ii) different levels of acceptance of the social insurance scheme by our employees; and (iii) inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations. Historical non-compliance (1) During the Track Record Period, six of our PRC subsidiaries had not been making contributions in full to the social welfare schemes for our employees. According to Social Insurance Law of the PRC (中華人民共和國社會保險 法), the relevant PRC authorities may demand us to pay the difference in social welfare scheme contribution based on the actual wages of employees within a stipulated deadline and (i) in respect of total amount of difference that accumulated prior to 1 July 2011, where payment is not made prior to such deadline, we may be liable to a penalty equal to 0.2% of the outstanding amount calculated daily from the date the relevant insurance welfare scheme became payable; and (ii) in respect of the difference that accumulated after 1 July 2011, we may be liable to a penalty equal to 0.05% of the difference calculated daily from the date the relevant insurance welfare scheme funds became payable and, if we fail to make such payments in arrears, we may be subject to a fine of one to three times of the total amount of the difference. Legal consequences and potential maximum and other financial liabilities Enhanced internal control measures As an annual compliance measure following the Listing, we will continue to communicate with our employees with regard to the employee social welfare schemes and contribute to the employee social welfare schemes for our We are advised by our PRC legal employees in line with the adviser that the relevant local standards stipulated under the social welfare scheme authorities applicable PRC laws and from which we have obtained the regulations or the standards set by confirmations are competent to the social welfare schemes give such confirmations and it is authorities. We will make relevant unlikely that such confirmations disclosure in the annual reports will be challenged or revoked by after the Listing. Furthermore, in higher level authorities. the event that the local authorities require us to pay the difference in Furthermore, as at the Latest social insurance contribution, our Practicable Date, we had not Controlling Shareholders have also received any notification from the provided an indemnity against all relevant PRC authorities alleging claims, actions, demands, that we had not fully contributed to proceedings, judgments, losses, the social insurance and demanding liabilities, damages, costs, charges, payment of the same before a fees, expenses and fines suffered or stipulated deadline, nor were we incurred by us due to our aware of any employees’ non-compliance with the social complaints or demands for insurance contribution regulations. payment of social insurance contributions, nor had we received any legal documentation from the labour arbitration tribunals or the PRC court regarding disputes of social insurance contributions. We have obtained confirmations from the relevant local social welfare scheme authorities for all of our subsidiaries stating that no administrative penalty has been imposed. Rectification actions taken, provisioning and latest status Except as disclosed below, we complied with the laws and regulations applicable to us in all material aspects during the Track Record Period and up to the Latest Practicable Date. The table below sets out summaries of certain incidents of historical non-compliance with applicable regulations during the Track Record Period. Our Directors believe that these incidents of non-compliance, whether individually or collectively, will not have a material operational or financial impact on us. NON-COMPLIANCE BUSINESS – 224 – Historical non-compliance Reasons for non-compliance The maximum amount of late charges which may potentially be imposed on our Group as a result of non-compliance with the requirements of social insurance contributions is estimated to be RMB41,000, RMB71,000 and RMB125,000 for the three years ended 31 December 2012, 2013 and 2014, respectively. For the three years ended 31 December 2012, 2013 and 2014, the total outstanding amount payable by us in relation to social welfare schemes was RMB318,000, RMB420,000 and RMB733,000, respectively. We believe that such amount of social welfare scheme contribution will not have material adverse impacts on our Group’s business and operations. Legal consequences and potential maximum and other financial liabilities Based on the above reasons, our PRC legal adviser is of the view that as corresponding provision has been made, such non-compliance will not materially adversely affect our business operations. Nevertheless, in the event that we receive requests from the relevant authorities, we intend to immediately pay the difference in social welfare scheme funds accordingly. Rectification actions taken, provisioning and latest status We had strengthened our internal control in relation to social insurance and housing provident funds, including formalising the procedures for preparing, reviewing and making payment of social insurance and housing provident funds and designating the human resources manager to be responsible for complying with the relevant registration requirements. Enhanced internal control measures BUSINESS – 225 – (2) As at the Latest Practicable Date, some of our PRC subsidiaries did not register with the relevant housing provident fund authority and make housing provident fund contributions for all the employees of such PRC subsidiaries. In addition, two of our PRC subsidiaries had not been making contributions in full to housing fund to our employees. Historical non-compliance The non-compliance is mainly caused by (i) our local management at the relevant time being not familiar with the relevant regulatory requirements; (ii) different levels of acceptance of the housing provident fund by our employees; (iii) and inconsistent implementation or interpretation by local authorities in the PRC of the relevant regulations. Reasons for non-compliance According to the Regulation on the Administration of Housing Provident Fund (住房公積金管理條例), the relevant housing provident fund authorities may order our relevant PRC subsidiaries to register and establish an account for housing providence fund for its employees within a prescribed time period. If our PRC subsidiaries fail to do so, a fine in the range of RMB10,000 to RMB50,000 will be imposed. The relevant housing provident fund authorities may also order our relevant PRC subsidiaries to pay the outstanding amounts of the housing provident fund within the prescribed time period. If our PRC subsidiaries fail to do so, the relevant housing provident fund authorities may apply to the relevant PRC court for the enforcement of the unpaid amounts. Other than the outstanding amounts of the housing provident fund, there are no additional late charges as provided in the Regulation on the Administration of Housing Provident Fund (住房公積金管 理條例). Legal consequences and potential maximum and other financial liabilities Furthermore, as at the Latest Practicable Date, we had not received any notification from the relevant PRC authorities alleging that we had not fully contributed to the housing provident fund and demanding payment of the same before a stipulated deadline. We were also not aware of any employee’s complaints or demands for payment of housing fund contributions, nor had we received any legal documentation from the labour arbitration tribunals or the PRC courts regarding disputes of housing fund contributions. We are advised by our PRC legal adviser that the relevant local housing provident fund contribution authorities from which we have obtained the confirmations are competent to give such confirmations and it is unlikely that such confirmations will be challenged or revoked by higher level authorities. We have obtained the confirmations from the relevant local housing provident fund authorities for all of our subsidiaries that no administrative penalty has been imposed. Rectification actions taken, provisioning and latest status As an annual compliance measure following the Listing, we will continue to communicate with our employees with regard to the housing provident fund schemes and contribute to the housing provident fund schemes for our employees in line with the standards stipulated under the applicable PRC laws and regulations or the standards set by the housing provident fund schemes authorities. We will make relevant disclosure in the annual reports after the Listing. Furthermore, in the event that the local authorities require us to pay the difference in housing provident fund contribution, our Controlling Shareholders have also provided an indemnity against all claims, actions, demands, proceedings, judgments, losses, liabilities, damages, costs, charges, fees, expenses and fines suffered or incurred by us due to our non-compliance with the housing provident fund contribution regulations. Enhanced internal control measures BUSINESS – 226 – Historical non-compliance Reasons for non-compliance For the three years ended 31 December 2012, 2013 and 2014, the total outstanding amount of housing provident fund payable by us was RMB467,000, RMB646,000 and RMB706,000, respectively. We believe that the outstanding housing provident fund contribution will not have material adverse impacts on our Group’s business and operations. Legal consequences and potential maximum and other financial liabilities Based on the above reasons, our PRC legal adviser is of the view that as corresponding provision has been made, such non-compliance will not materially adversely affect our business operations. Nevertheless, in the event that we receive requests from the relevant authorities, we intend to immediately pay the outstanding housing provident funds accordingly. Rectification actions taken, provisioning and latest status We had strengthened our internal control in relation to social insurance and housing provident funds, including formalising the procedures for preparing, reviewing and making payment of social insurance and housing provident funds and designating the human resources manager to be responsible for complying with the relevant registration requirements. Enhanced internal control measures BUSINESS – 227 – BUSINESS For the non-compliance incidents in connection with our properties with defective titles during the Track Record Period and our corresponding reasons for non-compliance, legal consequences, rectification taken or to be taken and enhanced internal control measures, please refer to the section headed “Business – Properties” in this section of this prospectus. Mr. Zheng Songhui, our chairman, chief executive officer and executive Director, is responsible for actions taken or to be taken to implement the enhanced internal control measures in response to our non-compliance incidents during the Track Record Period, and to monitor and ensure our future compliance with the relevant laws and regulations. Having considered the facts and circumstances leading to the non-compliance incidents disclosed herein, the advices given by our PRC legal adviser, the relevant rectification and on-going compliance measures mentioned above, our Directors are of the view that our Group has adequate internal control procedures in place and that these past non-compliance incidents do not affect the suitability of our Directors to act as directors of a listed issuer under Rules 3.08 and 3.09 of the Listing Rules, and the suitability for listing of our Company under Rule 8.04 of the Listing Rules. The Sole Sponsor concurred with such view of our Directors on the same basis as described above. LEGAL PROCEEDINGS We may from time to time be involved in disputes or legal proceedings arising from the ordinary course of our business. As at the Latest Practicable Date, there were no litigation or arbitration proceedings pending or threatened against us or any of our Directors which could have a material adverse effect on our business, financial condition or results of operations. – 228 – DIRECTORS AND SENIOR MANAGEMENT BOARD OF DIRECTORS The Board currently consists of seven Directors comprising three executive Directors, one non-executive Director and three independent non-executive Directors. The functions and duties of the Board include, but are not limited to, convening the general meetings, reporting on the performance of the Board at the general meeting, implementing the resolutions passed at the general meetings, formulating business plans and investment plans, preparing the annual budget and final accounts, preparing proposals on profit distribution and increasing or decreasing the registered capital, as well as performing the other authorities, functions and responsibilities in accordance with the Articles of Association. The following table sets forth the information regarding the members of the Board: Directors Name Age Zheng Songhui (鄭松輝) 51 Position Chairman, Chief Executive Officer and Executive Director Roles and Responsibilities Chairman of nomination committee and member of remuneration committee Date of Date of Joining Appointment Our Group as Director Relationship with other Directors and senior management November 1995 28 March 2011 None November 1995 4 February None 2013 Responsible for the overall operations and development strategy and overseeing internal control of our Group Zheng Tianming (鄭天明) 45 Executive Director Responsible for the production and operations of our Group – 229 – DIRECTORS AND SENIOR MANAGEMENT Position Roles and Responsibilities Date of Date of Joining Appointment Our Group as Director Relationship with other Directors and senior management Name Age Zheng Ruyan (鄭如燕) 40 Executive Director, Responsible for Vice President, management of Chief Financial finance and legal Officer and Joint affairs and Company Secretary investors’ relationship of our Group February 2012 4 February None 2013 Zhang Lin (張琳) 45 Non-executive Director Responsible for overseeing the overall management and strategic planning of our Group February 2013 4 February None 2013 Mak Hing Keung, Thomas (麥興強) 52 Independent Non-executive Director Chairman of audit committee and member of remuneration committee May 2015 27 May 2015 None May 2015 27 May 2015 None Responsible for supervising and providing independent judgement to the Board Lou Robert Hsiu-sung (樓秀嵩) 41 Independent Non-executive Director Member of audit committee and nomination committee Responsible for supervising and providing independent judgement to the Board – 230 – DIRECTORS AND SENIOR MANAGEMENT Name Age Cheng Hiu Yung (鄭曉勇) 37 Position Independent Non-executive Director Roles and Responsibilities Chairman of remuneration committee and member of audit committee and nomination committee Date of Date of Joining Appointment Our Group as Director May 2015 27 May 2015 Relationship with other Directors and senior management None Responsible for supervising and providing independent judgement to the Board DIRECTORS Executive Directors Mr. Zheng Songhui (鄭松輝), aged 51, is the founder of our Group. Mr. Zheng is the chairman of our Board, the chief executive officer of our Group and an executive Director. Mr. Zheng was appointed as a Director on 28 March 2011. Mr. Zheng also currently holds directorship in each of the subsidiaries of the Company. Mr. Zheng is the chairman of the nomination committee and a member of the remuneration committee of the Company. Mr. Zheng is in charge of the overall operations and development strategy and overseeing internal control of our Group. Mr. Zheng founded our Group in November 1995 when he established our first operating subsidiary, Fujian Greenfresh Foods. Mr. Zheng has around 20 years of experience in fresh and processed food industry and was recognised as an intermediate engineer of food processing by the Office of Human Resources Development of Fujian Province (福建省人力資源開發辦 公室) and the Public Servant Bureau of Fujian Province (福建省公務員局) in July 2011. Mr. Zheng graduated with a bachelor degree in earth study from Fujian Agriculture and Forestry University (福建農 林大學) (formerly known as Fujian Agriculture Institute (福建農學院)) in July 1984. Mr. Zheng was admitted to a program of executive master of business administration at Xiamen University in July 2007. Mr. Zheng Songhui was elected as the vice chairperson of Industrial Sub-committee of China Edible Fungi Association (中國食用菌協會工廠化專業委員會) in 2013. Moreover, Mr. Zheng Songhui was awarded Outstand Talent (優秀人才) by the government of Zhangzhou (漳州市人民政府) in 2012, Outstanding Entrepreneur in the PRC (中國傑出企業家) by China Economy And Trade Promotion Association (中國經濟貿易促進會) in January 2011, China Outstanding Innovation Entrepreneur (中國 優秀創新企業家) jointly by China Private Entrepreneur Association (中國民營企業家協會) and China Academy of Science Information Consulting Center (中國科學院信息咨詢中心) in August 2010 and Asia Top 10 Innovation Personality (亞洲品牌十大創新人物) by Asia Brand Ceremony (亞洲品牌盛典) in September 2009. In October 2014, Mr. Zheng Songhui was appointed as the leading talent of technology entrepreneurship of Fujian province (福建省科技創業領軍人才) by the talent working committee of Fujian Provincial Committee of Communist Party of the PRC (中共福建省委人才工組領導 小組). – 231 – DIRECTORS AND SENIOR MANAGEMENT Mr. Zheng Tianming (鄭天明), aged 45, is an executive Director of the Company. Mr. Zheng was appointed as a Director on 4 February 2013. Mr. Zheng has joined our Group since our inception in November 1995 and has since then been assisting Mr. Zheng Songhui in the development of our Group by taking an active part in the production and operation of our Group. Mr. Zheng graduated from the Open University of China (中央廣播電視大學) in July 2013 with a certificate in Business Administration (majoring in sales and marketing). Ms. Zheng Ruyan (鄭如燕), aged 40, is an executive Director and the vice president, chief financial officer and joint company secretary of our Group. Ms. Zheng is also the chief financial officer, joint company secretary and vice president of the Company. Ms. Zheng was appointed as a Director on 4 February 2013. Ms. Zheng is responsible for our Group’s management of finance and legal affairs and investors’ relation. Ms. Zheng obtained a master degree in accounting from Xiamen University (廈門大 學) in December 2011. She obtained the certificate of Certified Internal Auditor issued by China Institute of Internal Auditors (中國內部審計師協會) in November 2004. Ms. Zheng has over 19 years of experience in auditing, accounting consultancy and financial management. From December 1995 to November 2006, she was responsible for the internal auditing management of the internal units of Huadian Fujian Power Generation Company Limited (now known as Huadian Fuxin Energy Corporation Limited (a company listed on the Stock Exchange: stock code 816)). From December 2006 to December 2011, Ms. Zheng had been the vice president of Changfeng Axle (China) Company Limited (a company listed on the Stock Exchange: stock code 1039) responsible for financial management, corporate management, human resources administration and management. Non-executive Director Ms. Zhang Lin (張琳), aged 45, is a non-executive Director. Ms. Zhang was appointed as a Director on 4 February 2013 pursuant to the nomination rights granted to COFCO Fund under the COFCO Subscription Agreement and the COFCO Shareholders’ Agreement, details of which are set out in the section headed “History and Corporate Structure – Pre-IPO Investments – Investments of COFCO Fund” of this prospectus. Upon Listing, Ms. Zhang will be subject to re-election procedures as provided in the Articles of Association (and subject to the requirements of the Listing Rules) at the annual general meeting of our Company. Ms. Zhang is currently the assistant of general manager of financial business department general management department of China National Cereals, Oils and Foodstuffs Corporation (“COFCO”) and the secretary of the board and the general legal counsel of COFCO Agricultural Industrial Investment Fund Management Co., Ltd.. She has been working in COFCO and its affiliated companies for more than 20 years since April 1994. Ms. Zhang graduated from Shanghai Maritime University (上海海事大學) with a bachelor degree and a master degree, both of international economics law, in July 1991 and April 1994 respectively. Independent Non-executive Directors Mr. Mak Hing Keung, Thomas (麥興強), aged 52, is an independent non-executive Director appointed on 27 May 2015. Mr. Mak obtained a bachelor degree of commerce from Queen’s University, Canada in May 1989. Mr. Mak is a member of the Canadian Institute of Chartered Accountants and a fellow member of the Hong Kong Institute of Certified Public Accountants. Mr. Mak is currently the chief operations officer of HF Financial Group Limited, an executive director of Millennium Pacific Group Holdings Limited (stock code: 8147) and an independent non-executive director of Harmony Asset Limited (stock code: 428). Mr. Mak was the chief financial officer and the company secretary of Heritage International Holdings Limited (stock code: 412) from October 2014 to May 2015. Mr. Mak has been an independent non-executive director of Tao Heung Holdings Limited (stock code: 573) since June – 232 – DIRECTORS AND SENIOR MANAGEMENT 2007. Mr. Mak has extensive experience and expertise in accounting and financial management. From May 2010 to April 2014, Mr. Mak worked as the chief financial officer of South China Media Group. From October 2007 to April 2010, Mr. Mak worked as the chief financial officer of Redgate Media (Hong Kong) Limited, a wholly owned subsidiary of Redgate Media Group. From February 2006 to October 2007, Mr. Mak worked as the chief financial officer of Minmetals Resources Limited (stock code: 1208). From June 2001 to January 2006, Mr. Mak worked as the chief financial officer of RoadShow Holdings Limited (stock code: 0888). From June 2000 to June 2001, Mr. Mak worked as senior manager in corporate finance department in Vickers Ballas. From October 1997 to May 2000, Mr. Mak worked as a manager in the listing division of Stock Exchange. Mr. Mak had also worked in Ernst & Young for about 7 years. Mr. Lou Robert Hsiu-sung (樓秀嵩), aged 41, is an independent non-executive Director appointed by our Company on 27 May 2015. Mr. Lou is qualified as a solicitor in Hong Kong in December 2002 and has over 12 years of experience in legal field. Mr. Lou is the chief legal officer of TransAsia Airways Corporation (復興航空運輸股份有限公司) since December 2013. From August 2012 to November 2013, Mr. Lou was the legal manager of Acer Incorporated (宏碁股份有限公司). Mr. Lou obtained a bachelor degree in foreign languages and literature in National Taiwan University (台灣大學) in June 1995 and a bachelor of arts in jun’s prudence in Oxford University in August 2000. Mr. Lou obtained a Postgraduate Certificate in Laws in the City University of Hong Kong in July 2000 and a master of laws (LLM) with the Northwest University (西北大學) in June 2004. Mr. Lou is a member of the audit committee and nomination committee of our Company. Mr. Cheng Hiu Yung (鄭曉勇), aged 37, is an independent non-executive Director appointed by our Company on 27 May 2015. Mr. Cheng is currently a production manager of Hong Kong Rainigrace Agricultural Science Group Holding Company Limited (香港澤雨農科集團控股有限公司) which he has joined since November 2014. He worked as production manager in Epicurean and Company (Hong Kong) Limited from April 2013 to October 2014, production manager of City Super Limited from September 2009 to March 2013, assistant production manager in Original Taste Workshop Ltd (原味家作有限公司) from February 2007 to June 2009. From April 2004 to November 2006, Mr. Cheng worked in the Hung Fook Tong (China) Development Limited, which was a subsidiary company of Hung Fook Tong Holdings Ltd (鴻福堂集團). Mr. Cheng has over 10 years of experience in food testing and quality control industry. Mr. Cheng obtained a bachelor degree of science majoring in applied chemistry from Hong Kong Baptist University in December 2000. Mr. Cheng obtained basic food hygiene certificate for hygiene managers by School of Continuing and Professional Education, City University of Hong Kong in October 2008, and was awarded “level 2 award in food safety in catering” by Chartered Institute of Environmental Health in September 2008. Mr. Cheng completed food safety management systems auditor – lead auditor training course in April 2008. Mr. Cheng is the chairman of the remuneration committee and a member of the audit committee and nomination committee of our Company. Please refer to the subsection headed “Statutory and General Information – C. Further Information about Our Directors and Substantial Shareholders” in Appendix V to this prospectus for details of our Directors’ interests in our Shares (within the meaning of Part XV of the SFO), particulars of our Directors’ service contracts and Directors’ remuneration. There is no family relationship between each of the Directors. Save as disclosed in this prospectus, each of our Directors has confirmed that there are no other matters relating to his/her appointment as a Director that need to be brought to the attention of our Shareholders and there is no other information in relation to his/her appointment which is required to be disclosed pursuant to Rule 13.51(2) of the Listing Rules. – 233 – DIRECTORS AND SENIOR MANAGEMENT SENIOR MANAGEMENT Mr. Chen Wei (陳偉), aged 49, is the vice president of our Company. Mr. Chen joined our Group in January 2006 and is responsible for our Group’s research and development, production and operations. Mr. Chen has around 19 years of experience in food processing industry. Before joining our Group, Mr. Chen was the deputy general manager of Fujian Zhangzhou Gangchang Canned Foods Co., Ltd. (褔建省 漳州巿港昌罐頭食品有限公司) responsible for the management of operation, production and technology from January 1995 to December 2005. Mr. Chen obtained diploma (專科) in quality management from the Fujian Economic Management College (福建經濟管理學院) in July 1990 and graduated with a bachelor degree of economic management from the Open College of the Central Communist Party School (中共中 央黨校函授學院) in December 1996. JOINT COMPANY SECRETARIES Ms. Ng Wing Shan (吳詠珊), aged 38, was appointed as the joint company secretary of our Company on 28 November 2014. Ms. Ng is an assistant vice president of SW Corporate Services Group Limited and is responsible for assisting listed companies in professional company secretarial work. She has over 10 years of professional experience in the company secretarial field. Ms. Ng is an associate member of the Hong Kong Institute of Chartered Secretaries and the Institute of Chartered Secretaries and Administrators in the United Kingdom. Ms. Zheng Ruyan (鄭如燕), was appointed as the joint company secretary of our Company on 28 November 2014. Ms. Zheng is also an executive Director and our chief financial officer. For further details of Ms. Zheng’s biography, please refer to “Directors – Executive Directors” above. BOARD COMMITTEE Audit Committee An audit committee was established by our Company pursuant to a resolution of the Board on 27 May 2015 with written terms of reference in compliance with the Code on Corporate Governance Practices as set out in Appendix 14 to the Listing Rules. The primary duties of the audit committee are to review and approve our Group’s financial reporting process and internal control system. The members of the audit committee are Mr. Mak Hing Keung Thomas, Mr. Cheng Hiu Yung and Mr. Lou Robert Hsiu-sung, all of whom are independent non-executive Directors. Mr. Mak Hing Keung Thomas is the chairman of the audit committee. Remuneration Committee A remuneration committee was established by our Company pursuant to a resolution of the Board on 27 May 2015 with written terms of reference in compliance with the Code on Corporate Governance Practices as set out in Appendix 14 to the Listing Rules. The primary duties of the remuneration committee are to review and determine the terms of remuneration packages, bonuses and other compensation payable to Directors and senior management of our Group. The members of the remuneration committee are Mr. Cheng Hiu Yung, Mr. Mak Hing Keung Thomas and Mr. Zheng Songhui. Mr. Cheng Hiu Yung is the chairman of the remuneration committee. – 234 – DIRECTORS AND SENIOR MANAGEMENT Nomination Committee A nomination committee was established by our Company pursuant to a resolution of the Board on 27 May 2015 with written terms of reference. The primary duties of the nomination committee are to make recommendations to the Board on appointment of Directors and the management of the Board succession. The members of the nomination committee are Mr. Zheng Songhui, Mr. Cheng Hiu Yung and Mr. Lou Robert Hsiu-sung. Mr. Zheng Songhui is the chairman of the nomination committee. CORPORATE GOVERNANCE CODE Pursuant to code provision A.2.1 of the Corporate Governance Code as set out in Appendix 14 to the Listing Rules, companies listed on the Stock Exchange are expected to comply with, but may choose to deviate from the requirement that the responsibilities between the chairman and the chief executive officer should be segregated and should not be performed by the same individual. We do not have a separate chairman and chief executive officer and Mr. Zheng Songhui currently performs these two roles concurrently. Our Board believes that vesting the roles of both the chairman and chief executive officer in the same person has the benefit of ensuring consistent leadership within our Group for more effective and efficient overall strategic planning for our Group. Our Board considers that the balance of power and authority within our Group will not be impaired by the present arrangement and the current structure will enable our Company to make and implement decisions more promptly and effectively. Our Board will from time to time review and consider splitting the roles of chairman of our Board and the chief executive officer of our Company to ensure appropriate and timely arrangements are in place to meet changing circumstances. COMPENSATION OF THE DIRECTORS AND SENIOR MANAGEMENT Our Directors and senior management receive compensation in the form of salaries, benefits in kind and discretionary bonuses related to the performance of our Company. We also reimburse them for expenses which are necessarily and reasonably incurred for providing services to us or executing their functions in relation to our operations. The compensation paid to our Directors for the three years ended 31 December 2012, 2013 and 2014 (including Mr. Li Yu who was appointed on 4 February 2013 and resigned on 26 November 2014) were approximately RMB156,000, RMB456,000 and RMB477,000 respectively. The compensation paid to the five highest paid individuals, excluding our Directors for the three years ended 31 December 2012, 2013 and 2014 were approximately RMB741,000, RMB644,000 and RMB807,000 respectively. No remuneration was paid by our Group to the Directors or the five highest paid individuals as an inducement to join or upon joining our Group or as a compensation for loss of office during the Track Record Period. Under the arrangement currently in force, the aggregate remuneration of our Directors for the year ending 31 December 2015 is estimated to be approximately RMB762,000. – 235 – DIRECTORS AND SENIOR MANAGEMENT THE PRE-IPO SHARE OPTION SCHEME AND THE SHARE OPTION SCHEME We have conditionally adopted the Pre-IPO Share Option Scheme and the Share Option Scheme. Under the Pre-IPO Share Option Scheme, certain persons were conditionally granted options immediately prior to the Listing Date to subscribe for Shares. The principal terms of the Pre-IPO Share Option Scheme and the Share Option Scheme are summarised in the sections headed “Statutory and General Information – E. Share Option Scheme” and “Statutory and General Information – D. Pre-IPO Share Option Scheme” in Appendix V to this prospectus. COMPLIANCE ADVISOR Pursuant to Rule 3A.19 of the Listing Rules, our Company has appointed Essence Corporate Finance (Hong Kong) Limited as our compliance adviser. The compliance adviser will advise us on the following matters pursuant to Rule 3A.23 of the Listing Rules: (i) the publication of any regulatory announcement, circular or financial report; (ii) where a transaction, which might be a notifiable or connected transaction, is contemplated including share issues and share repurchases; (iii) where our Company proposes to use the proceeds of the Global Offering in a manner different from that detailed in this prospectus or where our business activities, developments or results deviate from any forecast, estimate or other information of this prospectus; and (iv) where the Stock Exchange makes an inquiry of our Company regarding unusual movements in the price or trading volume of our Shares the possible development of a false market in its securities, or any other matters. The term of this appointment will commence on the Listing Date and is expected to end on the date on which we comply with Rule 13.45 of the Listing Rules on the distribution of our annual report in respect of the financial results of the first full financial year commencing after the Listing Date. – 236 – RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS OUR CONTROLLING SHAREHOLDERS Immediately after completion of the Capitalisation Issue and the Global Offering, Song Rising, Grand Ample and Absolute Bright will be legally and beneficially interested in an aggregate of approximately 56.66% of the Shares in issue (assuming the Over-allotment Option is not exercised and without taking into account any options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme). Song Rising and Grand Ample are directly and wholly owned by Mr. Zheng Songhui while Absolute Bright is directly and wholly owned by Ms. Zheng Yangyu, the daughter of Mr. Zheng Songhui. Accordingly, Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright will together be considered as our Controlling Shareholders upon Listing. Save as disclosed in this prospectus and except for their respective interests in our Company, each of the Controlling Shareholders confirms that he/she/it does not hold or conduct any business which competes, or is likely to compete, either directly or indirectly, with our Group’s business upon Listing. INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS The Directors believe that our Group is capable of carrying on our business independently from the Controlling Shareholders and/or their respective close associates after the Listing, having taken into consideration the following factors: Management independence Our Company aims at establishing and maintaining a strong and independent Board to oversee our Group’s business. The Board’s main function includes the approval of the overall business plans and strategies of our Group, monitoring the implementation of these policies and strategies and the management of our Company. We have an independent management team which is led by our executive Directors and a team of senior management with experience and expertise in our business to implement our policies and strategies. The Board consists of seven Directors, comprising three executive Directors, one non-executive Director and three independent non-executive Directors. Other than Mr. Zheng Songhui, who is the sole director of Grand Ample, none of our other Directors holds any directorship in Song Rising, Grand Ample or Absolute Bright, being our corporate Controlling Shareholders. Each of the Directors is aware of his/her fiduciary duties as a Director which require, among other things, that he/she acts for the benefit and in the best interests of our Company and does not allow any conflict between his/her duties as a Director and his/her personal interest. In the event that there is a potential conflict of interest arising out of any transaction to be entered into between our Group and the Directors or their respective close associates, the interested Director(s) shall abstain from voting at the relevant board meetings of our Company in respect of such transactions and shall not be counted in the quorum. The provisions of the Articles also ensure that matters involving a conflict of interests which may arise from time to time will be managed in line with accepted corporate governance practice. Our Company has also appointed three independent non-executive Directors to ensure that there is a strong independent element on the Board and with a view to promote the best interests of our Company and Shareholders taken as a whole. The independent non-executive Directors have diversified skills and experience in their respective fields of expertise and the Directors believe that the Board will benefit from their independent advice. – 237 – RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS In light of the above, the Directors are satisfied that they are able to perform their roles in our Company independently, and the Directors are of the view that our Company is capable of managing its business independently from the Controlling Shareholders after the Listing. Operational independence Our Group has established our own organisational structure comprising individual departments, each with specific areas of responsibilities. Our Group has independent access to customers and suppliers. Save as disclosed in the section headed “Connected Transactions” in this prospectus, none of our Controlling Shareholders and/or their close associates has been our major supplier or customer which provided any critical services or materials for our operation during the Track Record Period. We have established a set of internal controls to facilitate the effective operation of our business. Our Group is therefore able to operate independently from the Controlling Shareholders after the Listing. Financial independence We have an independent financial accounting system and make financial decisions according to our own business needs. All of outstanding balances with the Controlling Shareholders will be settled and all personal guarantees from our Controlling Shareholders will be released before Listing. We have sufficient capital to operate our business independently, and have adequate internal resources, including proceeds from the Global Offering, to support our daily operations. We are therefore financially independent from our Controlling Shareholders. Therefore, in view of the above fact, our Group is considered independent in all material aspects including finance, management and operations of the Controlling Shareholders. COMPETING BUSINESS The Controlling Shareholders and our Directors do not have any interest in a business apart from our Group’s business which competes or is likely to compete, directly or indirectly, with our Group’s business, and would require disclosure pursuant to Rule 8.10 of the Listing Rules. DEED OF NON-COMPETITION For the purpose of the Listing, our Controlling Shareholders have entered into the Deed of Non-Competition with our Company, pursuant to which each of the Controlling Shareholders has unconditionally and irrevocably undertaken to our Company (for itself and for the benefits of members of our Group) that it/he/she would not, and would procure that its/his/her close associates (other than any members of our Group) would not, directly or indirectly, either on its/his/her own account or in conjunction with or on behalf of any person, firm or company, among other things, carry on, participate or be interested or engaged in or acquire or hold (in each case whether as a shareholder, director, partner, agent, employee, or otherwise, and whether for profit, reward or otherwise) any activity or business which is or may be in competition, directly or indirectly, with the business carried on or contemplated to be carried on by any member of our Group from time to time (“Restricted Activity”). – 238 – RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS Further, each of our Controlling Shareholders has unconditionally and irrevocably undertaken to our Company that in the event that it/he/she or its/his/her close associate(s) is given/identifies any opportunities which directly or indirectly competes, or may lead to competition with the Restricted Activity, it/he/she will and will procure its/his/her close associate(s) to, as soon as practicable inform our Group of such opportunity in writing, provide such information as is available to it/him/her in respect of such opportunity to our Group, refer such opportunity to our Group, and use all reasonable endeavours to procure the person who communicated the opportunity to the Controlling Shareholders or their respective close associates to contact our Group directly regarding the opportunity upon becoming aware of it, and that it/he/she could engage in the Restricted Activity only upon the Company, after consideration by (i) all the independent non-executive Directors (where the case requires, by referring to the independent advice or opinion given by the independent financial advisor); and (ii) the Board (provided that the Directors attending or voting on the relevant meeting shall not have any interest in the Restricted Activity or the opportunity connected thereto), resolving not to carry out or otherwise engage in the Restricted Activity. Each of our Controlling Shareholders has represented and warranted that, as at the date of the Deed of Non-Competition, neither it/he/she nor any of its/his/her close associates was interested, involved or engaged, directly or indirectly, in (whether as a shareholder, partner, agent or otherwise and whether for profit, reward or otherwise) the Restricted Activity otherwise than through our Group or was otherwise engaged in any business which is in competition or potential competition to those of our Group. Each of the Controlling Shareholders has also undertaken to our Company the following: (a) to provide all information requested by our Company which is necessary for the annual review by our independent non-executive Directors of its/his/her compliance with the terms of the Deed of Non-Competition and the enforcement of the Deed of Non-Competition; (b) to procure our Company to disclose decisions on matters reviewed by our independent non-executive Directors relating to the compliance and enforcement of its/his/her non-competition undertakings under the Deed of Non-Competition either through our annual report, or by way of announcements to the public; and (c) to make an annual declaration on compliance with his/her/its undertaking under the Deed of Non-Competition in the annual reports of our Company as the independent non-executive Directors think fit and ensure that the disclosure of details of its/his/her compliance with and the enforcement of the non-competition undertakings under the Deed of Non-Competition is consistent with the relevant requirements under the Listing Rules. The Deed of Non-Competition does not apply to: (a) the holding of or interests in the shares of any member of our Group; or (b) the holding of or interests in shares or other securities in any company other than our Group which conducts or is engaged in any Restricted Activity, provided that, in the case of such shares, they are listed on a recognised stock exchange and either: (i) the relevant Restricted Activity (and assets relating thereto) accounts for less than 5% of that relevant company’s consolidated turnover or consolidated assets, as shown in that company’s latest audited accounts; or – 239 – RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS (ii) the total number of the shares held by our Controlling Shareholders and/or their respective close associates or in which they are together interested does not amount to more than 5% of the issued shares of that class of the company in question, provided that our Controlling Shareholders and/or their respective close associates, whether acting singly or jointly, are not entitled to appoint a majority of the directors of that company or otherwise participate in or be involved in the management of that company and that at all times there should exist at least another shareholder of that company (together, where appropriate, with its close associates) whose shareholdings in that company should be more than the total number of shares held by our Controlling Shareholders and/or their respective close associates together hold. The obligation of our Controlling Shareholders under the Deed of Non-Competition will cease to have any effect whatsoever on: (a) the date on which our Shares cease to be listed on the Stock Exchange; or (b) in respect of a Controlling Shareholder, the date on which that Controlling Shareholder and/or its/his/her close associates, jointly and severally, ceases to be entitled to exercise or control the exercise of not less than 30% in aggregate of the voting power at general meetings of our Company, whichever occurs first. CORPORATE GOVERNANCE MEASURES Our Company will further adopt the following measures to manage the conflict of interest arising from the possible competing business of our Controlling Shareholders and to safeguard the interests of our independent Shareholders: (i) in preparation for the Listing, our Company has amended our Articles to comply with the Listing Rules. In particular, our Articles provide that, except for certain exceptions permitted under the Listing Rules or the Stock Exchange, a Director shall not vote on any board resolution approving any contract in relation to which he has a material interest, nor shall such Director be counted in the quorum present at the meeting; (ii) we have appointed Essence Corporate Finance (Hong Kong) Limited as our compliance adviser, which will provide advice and guidance to us with respect to compliance with the applicable laws and the Listing Rules, including but not limited to various requirements relating to Directors’ duties and internal controls; (iii) our independent non-executive Directors will review, at least on an annual basis, the compliance with the Deed of Non-Competition by our Controlling Shareholders; – 240 – RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS (iv) each of our Controlling Shareholders has undertaken to provide all information necessary for the annual review by our independent non-executive Directors of its/his/her compliance with the terms of the Deed of Non-Competition and the enforcement of the Deed of Non-Competition; (v) we will disclose decisions on matters reviewed by our independent non-executive Directors relating to compliance and enforcement of the Deed of Non-Competition either through our annual report, or by way of announcements to the public; (vi) each of our Controlling Shareholders will make an annual declaration of compliance with the Deed of Non-Competition in the annual reports of our Company; (vii) the management structure of our Group includes an audit committee, a remuneration committee, and a nomination committee, the terms of reference of each of which will require them to be alert to prospective conflict of interest and to formulate their proposals accordingly; and (viii) pursuant to the Corporate Governance Code in Appendix 14 of the Listing Rules, our Directors, including our independent non-executive Directors, will be able to seek independent professional advice from external parties in appropriate circumstances at our Company’s costs. Our Directors consider that the above corporate governance measure are sufficient to manage any potential conflict of interests between our Controlling Shareholders and their respective close associates and our Group and to protect the interests of our Shareholders, in particular, our minority Shareholders. – 241 – CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTIONS WHICH ARE EXEMPTED FROM THE REPORTING, ANNOUNCEMENT AND INDEPENDENT SHAREHOLDERS’ APPROVAL REQUIREMENTS Ms. Zheng Ying, is daughter of Mr. Zheng Songhui, our chairman, chief executive officer, executive Director and one of our Controlling Shareholders. Therefore, Ms. Zheng Ying will become our connected person upon the Listing by virtue of Rule 14A.07(4) of the Listing Rules. On 18 November 2014, we entered into the following lease agreements (the “Lease Agreements”) with Ms. Zheng Ying with respect to the land and properties (the “Properties”) located at Longhai Yancuo Town Qiaoshan Village Jin Pu (龍海巿顏厝鎮巧山村錦浦): Lease Agreements Lessor Lessee Term Annual Rental Description of Leased Properties Property A Lease Agreement Ms. Zheng Ying Zhangzhou Greenfresh Commencing from 18 November 2014 and expiring on 17 November 2017 RMB22,824 payable in arrear annually Land parcel of site area of 5,282 sq.m. (“Property A”) Property B Lease Agreement Ms. Zheng Ying Fujian Greenfresh Foods Commencing from 18 November 2014 and expiring on 17 November 2017 RMB100,452 payable in arrear annually Buildings of total gross floor area of 1,287.88 sq.m. used for production base, warehouse and office purpose (“Property B”) Property C Lease Agreement Ms. Zheng Ying Fujian Greenfresh Foods Commencing from 18 November 2014 and expiring on 17 November 2017 RMB163,680 payable in arrear annually Buildings of total gross floor area of 1,363.98 sq.m. used for office purpose (“Property C”) We are entitled to terminate each of the Lease Agreements by giving a 30-day prior notice. Upon its expiration, we will have the priority in leasing the Properties under each of the Lease Agreements from Ms. Zheng Ying upon negotiation of the rentals and signing of the renewed lease agreements. The Properties were originally leased by us from Fujian Minhui Packaging Group Company Limited (福建閩輝包裝集團有限公司) (“Minhui Packaging”), an Independent Third Party. Our lease agreements with Minhui Packaging were terminated upon Ms. Zheng Ying acquired the Properties from Minhui Packaging in November 2014. Our Directors confirm that the terms of the Lease Agreements are on normal commercial terms and are determined by our Group and Ms. Zheng Ying on arm’s length basis with reference to and the historical annual rentals paid to Minhui Packaging for leasing of the Properties. – 242 – CONNECTED TRANSACTIONS Historical figures Set out below is a summary of the historical figures during the Track Record Period of the rentals paid by us for leasing of the Properties: For the year ended 31 December Properties 2012 2013 2014 Property A . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property B . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property C . . . . . . . . . . . . . . . . . . . . . . . . . . . . RMB22,824 RMB100,452 RMB163,680 RMB22,824 RMB100,452 RMB163,680 RMB22,824 RMB100,452 RMB163,680 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RMB286,956 RMB286,956 RMB286,956 Listing Rules implications In view of the fact that Ms. Zheng Ying is a connected person of our Company, the transactions under the Lease Agreements constitute continuing connected transactions of our Company (“Lease Transactions”) under Chapter 14A of the Listing Rules. Pursuant to Rule 14A.81 of the Listing Rules, the considerations payable under each of the Lease Agreements are considered on an aggregate basis for the purpose of classification of the continuing connected transactions. For each of the three years ending 31 December 2015, 2016 and 2017, the annual rental payable by our Group in respect of the Properties will be as follows: For the year ending 31 December Lease Agreements 2015 2016 2017 Property A Lease Agreement . . . . . . . . . . . . . . . Property B Lease Agreement . . . . . . . . . . . . . . . Property C Lease Agreement . . . . . . . . . . . . . . . RMB22,824 RMB100,452 RMB163,680 RMB22,824 RMB100,452 RMB163,680 RMB22,824 RMB100,452 RMB163,680 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RMB286,956 RMB286,956 RMB286,956 Based on the above annual cap for each of the three years ending 31 December 2015, 2016 and 2017, each of the applicable percentage ratios under the Listing Rules will be less than 5.0% and less than HK$3,000,000. Given that each of the Lease Agreements is on normal commercial terms, according to Rule 14A.76(1)(c) of the Listing Rules, the Lease Transactions will be exempt from the reporting, announcement and the independent shareholders’ approval requirements under the Listing Rules. – 243 – CONNECTED TRANSACTIONS Confirmation from our Directors Our Directors (including our independent non-executive Directors) confirm that (i) the Lease Transactions have been and are entered into in the ordinary and usual course of business and on normal commercial terms that are fair and reasonable to our Group and in the interests of our Shareholders and our Group as a whole; and (ii) the proposed annual cap amount set out above are fair and reasonable and in the interests of our Shareholders taken as a whole. RELATED PARTY TRANSACTIONS Our Group had certain transactions with our related parties during the Track Record Period. For further information, please refer to the sections headed “Financial Information – Related Party Transactions” and note 38 to the Accountants’ Report in Appendix I to this prospectus. – 244 – SUBSTANTIAL SHAREHOLDERS So far as our Directors are aware, immediately following completion of the Global Offering and the Capitalisation Issue (without taking into account any Shares which may be issued under the Over-allotment Option or the exercise of any options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme), the following persons will have or be deemed or taken to have beneficial interests and/or short position in the Shares or the underlying Shares which would be required to be disclosed to our Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or be directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any of our Group: Number of Shares held/interested as at 22 December 2014(5) Percentage of shareholding as at 22 December 2014(5) Approximate Number of percentage of Shares interest in held/Interested our Company immediately after immediately after the Global the Global Offering and Offering and the Capitalisation the Capitalisation Issue Issue Name Nature of interest Song Rising(1)(4) Beneficial owner 3,825,000 66.55% 249,547,661 (L)(2) 49.91% Grand Ample(1)(4) Beneficial owner 342,500 5.95% 22,345,117 (L)(2) 4.47% Mr. Zheng Songhui(1)(4) Interest in controlled corporation 4,167,500 72.50% 271,892,778 (L)(2) 54.38% Absolute Bright(3)(4) Beneficial owner 175,000 3.04% 11,417,213 (L)(2) 2.28% Ms. Zheng Yangyu(3)(4) Interest in controlled corporation 175,000 3.04% 11,417,213 (L)(2) 2.28% Notes: (1) Song Rising is directly and wholly owned by Mr. Zheng Songhui, who is therefore deemed to be interested in all the shares of the Company held by Song Rising. Mr. Zheng Songhui also directly wholly owns Grand Ample, which is legal and beneficial owner of 342,500 Shares (or approximately 5.95% of issued share capital of our Company) as at 22 December 2014, being the date of filing of the application proof of the prospectus, or 22,345,117 Shares (or approximately 4.47% of the issued share capital of our Company) after the Global Offering and the Capitalisation Issue. Mr. Zheng Songhui is therefore also deemed to be interested in all the Shares held by Grand Ample. (2) The letter “L” denotes the person’s long position in the Shares. (3) Absolute Bright is directly and wholly owned by Ms. Zheng Yangyu, who is therefore deemed to be interested in all the shares of the Company held by Absolute Bright. (4) Mr. Zheng Songhui, Song Rising, Grand Ample, Ms. Zheng Yangyu and Absolute Bright are directly or indirectly interested in 10% or more of the share capital of the Company and are taken as a group of connected persons of the Company and Substantial Shareholders. (5) The date of filing of the application proof of the prospectus. – 245 – SUBSTANTIAL SHAREHOLDERS Save as disclosed above, our Directors are not aware of any other person who will, immediately following the completion of the Global Offering and the Capitalisation Issue (without taking into account any Shares that may be issued under the Over-allotment Option or the exercise of any options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme), have beneficial interests or short positions in any of our Shares or underlying Shares, which would be required to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in the circumstances at general meetings of any member of our Group. Our Directors are not aware of any arrangement which may at a subsequent date result in a change of control of our Company. – 246 – SHARE CAPITAL AUTHORISED AND ISSUED SHARE CAPITAL The authorised and issued share capital of our Company is as follows: Number of Shares comprised in the authorised share capital US$ 2,000,000,000 Shares 20,000,000 Assuming that the Over-allotment Option is not exercised, the share capital of our Company immediately following the Global Offering and the Capitalisation Issue will be as follows: US$ 5,747,900 125,000,000 369,252,100 Shares in issue as at the date of this prospectus Shares to be issued under the Global Offering Shares to be issued under the Capitalisation Issue 57,479 1,250,000 3,692,521 500,000,000 Shares 5,000,000 Assuming that the Over-allotment Option is exercised, the share capital of our Company immediately following the Global Offering and the Capitalisation Issue will be as follows: US$ 5,747,900 125,000,000 369,252,100 22,500,000 522,500,000 Shares in issue as at the date of this prospectus Shares to be issued under the Global Offering Shares to be issued under the Capitalisation Issue Shares to be issued upon exercise of the Over-allotment Option in full 57,479 1,250,000 3,692,521 Shares 5,225,000 225,000 ASSUMPTIONS The above table assumes that the Global Offering has become unconditional and the Shares are issued pursuant to the Global Offering. It takes no account of any Shares, which may be allotted and issued pursuant to the exercise of the options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme or which may be allotted and issued or repurchased by our Company under the general mandates of any Shares referred to below. – 247 – SHARE CAPITAL RANKING The Offer Shares will rank pari passu with all Shares in issue or to be issued as mentioned in this prospectus and will qualify for all dividends or other distributions declared, made or paid after the date of this prospectus save for the entitlement under the Capitalisation Issue. THE PRE-IPO SHARE OPTION SCHEME AND THE SHARE OPTION SCHEME We have conditionally adopted the Pre-IPO Share Option Scheme and the Share Option Scheme. Under the Pre-IPO Share Option Scheme, certain persons were conditionally granted options immediately prior to the Listing Date to subscribe for Shares. The principal terms of the Pre-IPO Share Option Scheme and the Share Option Scheme are summarised in the sections headed “Statutory and General Information – E. Share Option Scheme” and “Statutory and General Information – D. Pre-IPO Share Option Scheme” in Appendix V to this prospectus. GENERAL MANDATE TO ISSUE NEW SHARES Subject to the Global Offering becoming unconditional, the Directors have been granted a general unconditional mandate to allot or issue and deal with unissued Shares with an aggregate nominal value of not more than: (a) 20% of the total nominal amount of Shares in issue immediately following completion of the Global Offering and the Capitalisation Issue; and (b) the total nominal amount of Shares repurchased by our Company pursuant to the mandate referred to in the paragraph headed “General mandate to repurchase Shares” below. This mandate will expire: • at the conclusion of the next annual general meeting of our Company; or • at the expiration of the period within which our Company required by the Articles of Association or any applicable laws of the Cayman Islands to hold its next annual general meeting; or • when varied or revoked by an ordinary resolution of the Shareholders in general meeting, whichever is the earliest. Particulars of this general mandate are set out in the section headed “Statutory and General Information – A. Further Information about our Company – 3. Written Resolutions of the Shareholders” in Appendix V to this prospectus. – 248 – SHARE CAPITAL GENERAL MANDATE TO REPURCHASE SHARES Subject to the Global Offering becoming unconditional, the Directors have been granted a general mandate to exercise all the powers of our Company to repurchase Shares with a total nominal value of not more than 10% of the total nominal amount of the Shares in issue immediately following completion of the Global Offering and the Capitalisation Issue (excluding Shares that may be allotted and issued pursuant to exercise of the Over-allotment Option or options granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme). This mandate only relates to repurchases made on the Main Board, or on any other stock exchange on which the Shares are listed (and which are recognised by the SFC and the Stock Exchange for this purpose), and which are in accordance with the Listing Rules. This mandate will expire: • at the conclusion of the next annual general meeting of our Company; or • at the expiration of the period within which our Company is required by its Articles of Association or any applicable laws of the Cayman Islands to hold its next annual general meeting; or • when varied or revoked by an ordinary resolution of the Shareholders in general meeting, whichever is the earliest. Particulars of this general mandate are set out in the section headed “Statutory and General Information – A. Further Information about our Company – 3. Written Resolutions of the Shareholders” in Appendix V to this prospectus. – 249 – FINANCIAL INFORMATION You should read the following discussion and analysis in conjunction with our consolidated financial information, including the accompanying notes thereto, included in Accountants’ Report set forth in Appendix I to this prospectus. Our consolidated financial information has been prepared in accordance with IFRS, which may differ in certain material respects from generally accepted accounting principles in other jurisdictions. These statements are based on assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. However, whether actual outcomes and developments will meet our expectations and predictions depend on a number of risks and uncertainties over which we do not have control. Please also see the sections headed “Risk Factors” and “Forward-looking Statements” in this prospectus. OVERVIEW We are a leading integrated supplier of edible fungi products in the PRC. According to Euromonitor, we were the largest producer of king trumpet mushroom and the seventh largest producer of button mushroom in the PRC in terms of production volume in 2013 with a market share of 2.5% and 0.6% in 2013, respectively. Our business operations are vertically integrated, covering the cultivation and sales of fresh edible fungi produce as well as the manufacturing and sales of various processed edible fungi products. Such integrated business model distinguishes us from other fresh and processed edible fungi suppliers in the PRC, most of which are mainly engaged in part or parts of the value chain of cultivation, processing and sales of edible fungi. We are also a manufacturer of processed food products such as canned food and other processed food products in the PRC. In addition, we are engaged in canned food trading business through Greenfresh HK. and , which are mainly Our products are primarily marketed under our core brands categorised into two major series, namely (i) fresh edible fungi produce consisting of king trumpet mushroom, button mushroom and straw mushroom; and (ii) processed food products consisting of canned food such as canned edible fungi, canned vegetables, canned fruit, and other processed food products such as brined mushroom, preserved vegetables, snacks and dried mushroom. We sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers in the PRC which manufacture canned edible fungi. We sell our canned food to trading companies in the PRC, which then on-sell our products to overseas distributors in more than 50 countries and jurisdictions in Europe, North America, South America, Asia and Africa. We sell our other processed food products to distributors in the PRC, which then on-sell our products to sub-distributors and processed mushroom manufacturers. To facilitate our nationwide sales, we have established eight edible fungi cultivation facilities in Fujian province, Jiangsu province, Liaoning province and Sichuan province and two processed food production facilities in Fujian province. We have achieved a solid track record of consistent growth in revenue and net profit. For the three years ended 31 December 2012, 2013 and 2014, we recorded a total revenue from our continuing operations of approximately RMB425.4 million, RMB471.5 million and RMB545.7 million, respectively, while our net profit from our continuing operations for the three years ended 31 December 2012, 2013 and 2014 were approximately RMB91.2 million, RMB147.8 million and RMB175.1 million, respectively. – 250 – FINANCIAL INFORMATION BASIS OF PRESENTATION Our Company was incorporated in the Cayman Islands with limited liability on 28 March 2011. In preparation for the Global Offering, we underwent the Reorganisation, as detailed in the section entitled “History and Corporate Structure”. Following the Reorganisation, our Company became the holding company of all the companies now comprising our Group. Our financial information has been prepared on the basis as if our Company had always been the holding company of our Group using the pooling of interest method. For more information on the basis of preparation of the financial information included herein, please see note 2 to the financial information included in Appendix I to this prospectus. DISCONTINUED OPERATION AND ITS PRESENTATION IN THE CONSOLIDATED FINANCIAL STATEMENTS During the Track Record Period, we terminated our trading operation in the PRC through our disposal of the relevant subsidiary in connection with our Reorganisation, which were accounted for as our discontinued operation under our consolidated statements of profit or loss and other comprehensive income according to IFRS 5. See note 15 to the financial information included in Appendix I to this prospectus for details. Discontinued Trading Operation We terminated our discontinued trading operation in the PRC through the disposal of Minhui Trading in 2012 by Fujian Greenfresh Foods. During the Track Record Period, Minhui Trading had been one entity of our Group until our disposal of it on 25 June 2012. The financial information of Minhui Trading was consolidated into our consolidated financial statements during the Track Record Period. Prior to the Reorganisation commenced in 2011, Fujian Greenfresh Foods held 100% of the equity interest of Minhui Trading. Minhui Trading was our subsidiary engaged in trading business in the PRC. In June 2012, Fujian Greenfresh Foods disposed of all equity interest that it held in Minhui Trading. For details regarding the disposal of our discontinued trading operation, please see the section entitled “History and Corporate Structure”. As a result, trading operation in the PRC conducted through this disposed subsidiary became our discontinued trading operation. Presentation of Discontinued Operation in the Consolidated Financial Statements Results of discontinued operation were accounted for as a separate line item as “profit for the year from discontinued operation” in the consolidated statements of profit or loss. Assets and liabilities of continuing and discontinued operations are presented in the consolidated statements of financial position on a consolidated basis. Cash flows of continuing and discontinued operations are presented in the consolidated statements of cash flows on a consolidated basis. – 251 – FINANCIAL INFORMATION FACTORS AFFECTING OUR RESULTS OF OPERATIONS Our results of operations are affected by a number of factors, many of which may be beyond our control, including those factors set forth in the section entitled “Risk Factors” and those set forth below. Consumer demand for our fresh edible fungi produce in the PRC Consumer demand for our fresh edible fungi produce in the PRC is one of the key drivers of our revenue and it depends on the economic growth, urbanisation and rising individual income in the PRC, changing consumer demand and favorable government policies in the PRC. Improved living standards and higher disposable incomes have allowed Chinese consumers to increase their food expenditures, while scientific dietary habits and the concept of balanced nutrition intake took root in their lifestyle choices. Edible fungi, with their high nutritional value, green sources, freshness, eco-friendly and pollution-free features, are ideal food ingredients for today’s healthy living. Consumption of major mushroom species has been growing steadily, while more mushroom-based processed products are constantly coming on to the market, diversifying the end-products and the consumption of edible fungi. According to Euromonitor, the PRC edible fungi market in terms of production volume grew by 55.0% from 20.2 million tonnes in 2009 to 31.3 million tonnes in 2013, and is expected to grow by 41.3% from 34.6 million tonnes in 2014 to 48.9 million tonnes in 2018. The rising demand for edible fungi may positively affect our results of operations. Cost of raw materials Our cost of sales primarily consists of cost of raw materials. The key raw materials required by the cultivation of our edible fungi are cultivation materials such as strains, bran, dregs of beans, corncob, sawdust, straw and cow dung. The key raw materials for the production of our processed food products include fresh produce of vegetables and fruit. For the three years ended 31 December 2012, 2013 and 2014, the costs of raw materials represented 56.9%, 48.8% and 43.7% of our cost of sales, respectively. The price of raw materials, including packaging materials, are determined principally by market supply and demand and changes in governmental policies, as well as our bargaining power with our suppliers. Over the Track Record Period, costs of our major raw materials, such as fresh produce of vegetables and fruit, cultivation materials and packaging materials experienced fluctuation. We monitor supply and cost trends of these raw materials and take appropriate actions to obtain the raw materials we need for production. To manage fluctuation of raw material prices, we have introduced a number of measures, such as optimisation of cultivation and production procedures and change of formula of raw materials for cultivation of king trumpet mushroom and button mushroom in order to reduce the cost of raw materials and to monitor the use of raw materials by leveraging our research and development capabilities. While these measures can mitigate the effect of rises in the prices of raw materials on our cost of sales, we expect fluctuations in the cost of raw materials to continue to affect our profit margins. All of the raw materials we procure are purchased from a number of suppliers to ensure adequate supply and efficient delivery to our cultivation and production facilities. – 252 – FINANCIAL INFORMATION Our ability to maintain our competitive advantages that differentiate us from our competitors We compete on a product by product basis with other large PRC manufacturers of edible fungi. We also face competition when we expand into other markets, and from new entrants entering into our existing markets. The edible fungi industry in the PRC is also impacted by various other factors including economic and market conditions, demographic trends and regulatory developments. The edible fungi market in the PRC is a fragmented market with a large number of players. While there were more than 500 industrial producers of king trumpet mushroom in the PRC by the end of 2013, according to Euromonitor, the top five king trumpet mushroom producers in the PRC, in aggregate, accounted for approximately 9.7% of the total market share in the PRC in terms of production volume in 2013. The market concentration of button mushroom is also quite low mainly due to the massive independent growers in the PRC. According to Euromonitor, by the end of 2013, there were less than 40 large-scale industrial button mushroom producers in the PRC and the top five of them combined accounted for approximately 5.9% of the total market share in the PRC in terms of production volume in 2013. According to Euromonitor, over the forecast period of 2014 to 2018, market shares of leading manufacturers producing king trumpet mushroom and button mushroom in the PRC will consolidate following rising entry barriers in terms of product quality, technology and techniques for fermentation and sterilisation, large capital expenditures for machinery and facilities and brand awareness from consumers. The development of small edible fungi manufacturers in the PRC will be impeded by the increasing level of barriers of entry. We believe, however, that we have a competitive advantage over our competitors in the edible fungi industry in the PRC through our widely recognised brand of, extensive distribution network, well-established and scalable cultivation platform, strong research and development capability, and diverse product offerings. Distribution network Our sales volume is and will continue to be affected by the size of our distribution network. We sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. As at 31 December 2012, 2013 and 2014, we had 56, 63 and 56 distributors of our fresh edible fungi produce, respectively. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers which manufacture canned edible fungi in the PRC. As at 31 December 2012, 2013 and 2014, we had sales to 8, 11 and 9 processed mushroom manufacturers, respectively. We sell our canned food to trading companies in the PRC, which then on-sell our products to sub-distributors and retailers overseas in more than 50 countries and regions in Europe, North America, South America, Asia and Africa. As at 31 December 2012, 2013 and 2014, we had sales to 45, 37 and 47 trading companies, respectively. We sell our other processed food products to distributors, which then on-sell our products to sub-distributors and processed mushroom manufacturers. As at 31 December 2012, 2013 and 2014, we had 64, 55 and 22 distributors for our other processed food products, respectively. Our extensive distribution network allows us to distribute our products at all levels, from cities and urban centers to counties and towns across the PRC and overseas. Our extensive nationwide distribution channel is supported by our strong sales and marketing team. As at the Latest Practicable Date, our sales and marketing department consisted of 26 employees. For the three years ended 31 December 2012, 2013 and 2014, the increase in our revenue from the sales of our products was in part due to our expanded distribution network. – 253 – FINANCIAL INFORMATION Building on our strong presence in our more mature markets in the eastern, southern and north eastern regions in the PRC, we intend to further expand our distribution network with an aim to increase the market penetration of our current product offerings and promote our newly introduced products to these mature markets. For our less mature markets, we intend to continue to support our distributors, in particular, distributors who have strong track records, to expand their distribution channels in these markets. For our relatively new markets, we aim to provide more support to our distributors who have greater potential to strengthen their distribution channels in these markets. PRC taxation and preferential tax treatment The profit attributable to our Shareholders is affected by the amount of income tax that we pay and the level of preferential tax treatments to which we are entitled. The rate of income tax chargeable on our Group depends on the availability of preferential tax treatments. Termination or revision of preferential tax treatments that our Group currently enjoys will have a negative impact on the results of operations and financial condition of our Group. The rate of income tax chargeable on companies in the PRC may vary depending on the availability of preferential tax treatments or subsidies based on their industry or location. The current maximum PRC EIT rate chargeable on companies in the PRC is 25%. As enterprises engaging in primary processing of agricultural produce, after satisfying the requisite requirements, the relevant taxation authorities have granted waivers to certain of our PRC subsidiaries, namely Greenfresh Ecological Agriculture, Greenfresh Biological Technology, Shengtai Agricultural Development and Jingxiang Foods under the PRC EIT Law, its implementation regulations, and the Notice Issued by Ministry of Finance and State Administration of Taxation in Relation to the Scope of Corporate Income Tax Preferential Treatment Policy Applicable to Agricultural Products Which Have Undergone Primary Processing (Trial)《財政部 國家稅務總局關於發佈享受企業所得稅優惠政策的農產品初加工範圍(試行)的通知》waiving its payment of the PRC EIT during the Track Record Period. If we fail to satisfy the requisite requirements for entitlement to the waiver of the PRC EIT tax in the future or if there is any change in the existing PRC policy relating to preferential tax treatments applicable to us, we may no longer be entitled to the preferential tax treatments currently enjoyed by us. There is no assurance that we will continue to receive the preferential tax treatments currently enjoyed by us in the future. Any loss or substantial reduction of the tax benefits enjoyed by us would adversely affect our financial condition and performance. Changes in the fair value of biological assets Our results have been, and we expect will continue to be, affected by changes in the fair value of our biological assets. For the three years ended 31 December 2012, 2013 and 2014, our results of operations were positively affected by gains arising from changes in fair value less costs to sell of biological assets of RMB97.9 million, RMB146.7 million and RMB211.1 million, respectively. Changes in fair value less costs to sell of biological assets represent fair value gains/losses on our biological assets and gains/losses from the sale of edible fungi less the costs of selling. The fair value of edible fungi is determined based on market approach and cost approach. Market and cost approaches are adopted to value the agricultural produce of edible fungi as at the end of respective years. During the growing period, cost approach is adopted. The costs of direct raw material, direct labour, labour contracting service and related expense have been considered in the calculation of the fair values for the growing period. During the harvesting period, market approach is adopted. Therefore, the fair values of the biological assets as at the end of respective years are calculated to be the – 254 – FINANCIAL INFORMATION product of market price and estimated the agricultural produce edible fungi by deducting the reasonable cost related to selling. In applying these valuation methods, the independent valuer has relied on a number of assumptions, related to, among other things, classification of cultivation method into industrial and traditional methods, sales volume of edible fungi, market price of edible fungi and cost to sell. The fair value of our edible fungi could be affected by, among other things, the accuracy of these assumptions. Any changes in the estimates may affect the fair value of the edible fungi significantly. The independent qualified professional valuer and our management review the assumptions and estimates periodically to identify any significant changes in fair value of edible fungi. We expect that our results will continue to be affected by changes in the fair value of our edible fungi. For more information about the valuation methods applied in valuing our edible fungi, see the section headed “Financial Information – Valuation of Biological Assets” in this prospectus. Product offerings While we currently offer two main series of products, our revenue and our overall gross profit margin was largely affected by the sales of our king trumpet mushroom and button mushroom and straw mushroom which in aggregate accounted for 45.4%, 62.0% and 68.7% of our revenue from our continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. Going forward, we will continue to modify our product portfolio from time to time to focus on products with higher demand from consumers and higher gross profit margins and divert from those with lower growth rates or lower gross profit margins. Seasonality During the Track Record Period, we experienced the seasonality fluctuations in our production and sales due to our customers’ purchase patterns and weather conditions for traditional cultivation. According to our experience, industrial cultivation is not affected by weather cycles (such as hot summers and cold winters) so the production of king trumpet mushroom are all year round as all of our king trumpet mushroom are under industrial cultivation. Our price of king trumpet mushroom tend to increase around the Christmas and Chinese New Year holiday period (usually during December, January and February of each year) and therefore our revenue from sales of king trumpet mushroom tends to be higher accordingly in those periods. Our production volume of button mushroom and straw mushroom is affected by weather cycles as the majority of our button mushroom and straw mushroom are under traditional cultivation. Due to the habit of button mushroom and straw mushroom, the peak season of production of button mushroom is from October to May of the following year and the peak season of production of straw mushroom is June and September. As such, the sales of button mushroom and straw mushroom will be generated only during such periods. Due to their seasonality, we accept the orders from trading companies and purchase various types of vegetables and fruit for the production of processed food products in accordance with the respective seasonal availability of the various raw materials. We purchase fresh produce of vegetables and fruit from local suppliers in Fujian province which source these vegetables and fruit in Fujian province, Guangdong province and Guangxi Zhuang Autonomous Region. We manufacture the processed food products during the harvesting season of the various vegetables and fruit and deliver the products according to the schedules set forth in the relevant sales contracts entered into with trading companies. – 255 – FINANCIAL INFORMATION SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES The preparation of our financial statements requires us to make judgements in selecting the appropriate estimates and assumptions that affect the amounts reported in our financial statements. Actual results may differ from these estimates under different assumptions and conditions. The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our combined financial information. By their nature, these judgements are subject to an inherent degree of uncertainty. These judgements are based on, among other things, our experience, our observance of trends in the industry, and information available from outside sources, as appropriate. There can be no assurance that our judgements will prove correct or that actual results reported in future periods will not differ from our expectations reflected in our accounting treatment of certain items. Our significant accounting policies and critical accounting estimates and judgements are set forth in detail in notes 4 and 5 to financial information included in Accountants’ Report in Appendix I to this prospectus. We believe the following accounting policies involve the more significant judgements and estimates used in the preparation of our financial statements. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and is recognised when it is probable that the economic benefits will flow to our Group and the amount of revenue can be measured reliably. Revenues from the sales of goods are recognised on the transfer of significant risks and rewards of ownership, which generally coincides with the time when the goods are delivered and the title has passed to the customers. Interest income is recognised on a time-proportion basis using the effective interest method. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to our Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised in profit or loss during the period in which they are incurred. – 256 – FINANCIAL INFORMATION Depreciation of property, plant and equipment is calculated at rates sufficient to write off their cost less their residual values over the estimated useful lives on a straight-line basis. The principal useful lives are as follows: Buildings 20 years Plant and machinery 10 years Leasehold improvements 5 years Motor vehicles 2 to 5 years Office equipment and others 5 years The residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at the end of each reporting period. Construction in progress represents buildings under construction and plant and machinery pending installation, and is stated at cost less impairment losses. Depreciation begins when the relevant assets are available for use. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in profit or loss. Our Group determines the estimated useful lives, residual values and related depreciation charges for our Group’s property, plant and equipment. This estimate is based on the historical experience of the actual useful lives and residual values of property, plant and equipment of similar nature and functions. Our Group will revise the depreciation charge where useful lives and residual values are different to those previously estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. Impairment of assets At the end of each reporting period, our Group reviews the carrying amounts of its tangible and other intangible assets except inventories, biological assets and receivables to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of any impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, our Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. – 257 – FINANCIAL INFORMATION Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour and an appropriate proportion of all production overheads expenditure, and where appropriate, subcontracting charges. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Allowance for slow-moving inventories is made based on the ageing and estimated net realisable value of inventories. The assessment of the allowance amount involves judgement and estimates. Where the actual outcome in future is different from the original estimate, such difference will impact the carrying value of inventories and allowance charge/write-back in the period in which such estimate has been changed. Trade and other receivables Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. An allowance for impairment of trade and other receivables is established when there is objective evidence that our Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is the difference between the receivables’ carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate computed at initial recognition. The amount of the allowance is recognised in profit or loss. Impairment losses are reversed in subsequent periods and recognised in profit or loss when an increase in the receivables’ recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the receivables at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. Our Group makes impairment loss for bad and doubtful debts based on assessments of the recoverability of the trade and other receivables, including the current creditworthiness and the past collection history of each debtor. Impairments arise where events or changes in circumstances indicate that the balances may not be collectible. The identification of bad and doubtful debts requires the use of judgement and estimates. Where the actual result is different from the original estimate, such difference will impact the carrying value of the trade and other receivables and doubtful debt expenses in the year in which such estimate has been changed. – 258 – FINANCIAL INFORMATION Biological assets Our Group is involved in the agricultural activities of the transformation of biological assets into agricultural produce. The mushrooms are measured at fair value less costs to sell at initial recognition and at the end of each reporting period. Gain or loss on initial recognition and from subsequent changes in fair value less costs to sell is included in profit or loss for the period in which it arises. The mushrooms are initially measured at their fair value less costs to sell at the time of harvest. The fair value of the mushrooms is determined based on market prices in the local area. Gain on initial recognition at fair value less costs to sell is included in profit or loss for the period in which it arises. The fair value less costs to sell at the time of harvest of the mushrooms becomes their cost for the measurement of mushroom. Such mushroom are subsequently stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Our Group appointed an independent professional valuer to assess the fair values of the biological assets. In determining the fair values, the valuer has utilised a method of valuation which involves certain estimates. The Directors have exercised their judgement and are satisfied that the method of valuation and input used are reflective of the current market conditions. Government grants A government grant is recognised when there is reasonable assurance that our Group will comply with the conditions attaching to it and that the grant will be received. Government grants relating to income are deferred and recognised in profit or loss over the period to match them with the costs they are intended to compensate. Government grants that become receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to our Group with no future related costs are recognised in profit or loss in the period in which they become receivable. Taxation Income tax represents the sum of the current tax and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit recognised in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Our liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. – 259 – FINANCIAL INFORMATION Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences, unused tax losses or unused tax credits can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where we are able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is recognised in profit or loss, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which we expect, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis. – 260 – FINANCIAL INFORMATION RESULTS OF OPERATIONS The following table sets forth selected items of our consolidated statements of profit or loss for the years indicated: Year ended 31 December 2012 % of revenue from continuing operations RMB’000 CONTINUING OPERATIONS Revenue . . . . . . . . . . . . . . . . . Changes in fair value of biological assets less cost to sell . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . Business tax and auxiliary charges . . . . . . . . . . . . 2013 2014 % of revenue from continuing operations RMB’000 % of revenue from continuing operations RMB’000 . . 425,428 100.0% 471,490 100.0% 545,665 100.0% . . . . 97,883 (399,685) 22.9% (93.9%) 146,667 (442,022) 31.1% (93.7%) 211,122 (550,393) 38.8% (100.9%) . . (1,807) (0.4%) (920) (0.2%) (924) (0.2%) Gross profit . . . . . . . . . . . . . . . . . 121,819 28.6% 175,215 37.2% 205,470 37.7% Other income . . . . . . . . . . . . . . . . . Selling expenses . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . 5,808 (5,897) (18,235) 1.4% (1.4%) (4.3%) 6,849 (6,914) (17,582) 1.4% (1.5%) (3.7%) 9,947 (6,083) (30,800) 1.8% (1.1%) (5.7%) Profit from operations . . . . . . . . . . . . 103,495 24.3% 157,568 33.4% 178,534 32.7% Finance costs . . . . . . . . . . . . . . . . . (1,678) (0.4%) (3,735) (0.8%) (1,194) (0.2%) Profit before tax . . . . . . . . . . . . . . . 101,817 23.9% 153,833 32.6% 177,340 32.5% Income tax expense . . . . . . . . . . . . . . (10,610) (2.5%) (6,047) (1.3%) (2,252) (0.4%) Profit for the year from continuing operations . . . . . . . . 91,207 21.4% 147,786 31.3% 175,088 32.1% DISCONTINUED OPERATION Profit for the year from discontinued operation . . . . . . . . . . . 9,850 2.3% – – – – Profit for the year . . . . . . . . . . . . . . . 101,057 23.7% 147,786 31.3% 175,088 32.1% – 261 – FINANCIAL INFORMATION DESCRIPTION OF SELECTED STATEMENTS OF PROFIT OR LOSS ITEMS Revenue During the Track Record Period, we primarily derived our revenue of continuing operations from the cultivation, manufacturing and sale of (i) fresh edible fungi produce consisting of king trumpet mushroom, button mushroom and straw mushroom; and (ii) processed food products consisting of canned food such as canned edible fungi, canned vegetables and canned fruit, and other processed food products such as brined mushroom, preserved vegetables, snacks and dried mushroom. We also derived revenue through Minhui Trading which was engaged mainly in furniture trading operation in the PRC for the years ended 31 December 2012. We disposed of Minhui Trading on 25 June 2012 as we decided to focus on our main business. In addition, we generated revenue from the canned food trading operation through Greenfresh HK for the year ended 31 December 2014. The following tables set forth our revenue by product category for the years indicated: Year ended 31 December 2012 RMB’000 CONTINUING OPERATIONS Fresh edible fungi produce King trumpet mushroom. . . . . . . Button mushroom and straw mushroom . . . . . . . . . . . Processed food products Canned food . . . . . . . . . . . . . . . Other processed food products. . . . . . . . . . . . . . . . . 2013 % of total revenue RMB’000 2014 % of total revenue RMB’000 % of total revenue 135,640 26.4% 196,306 41.6% 199,272 36.5% 57,644 11.2% 96,117 20.4% 175,860 32.2% 166,483 32.5% 129,208 27.4% 124,690 22.9% 65,661 12.8% 49,859 10.6% 45,843 8.4% 425,428 82.9% 471,490 100.0% 545,665 100% DISCONTINUED OPERATION Trading . . . . . . . . . . . . . . . . . . . 87,868 17.1% – – – – Total . . . . . . . . . . . . . . . . . . . . 513,296 100.0% 471,490 100.0% 545,665 100.0% – 262 – FINANCIAL INFORMATION The following table sets forth our sales volume and average selling price by product category of our continuing operations for the periods indicated: Year ended 31 December 2012 2013 2014 Average Average Average Sales volume selling price Sales volume selling price Sales volume selling price kilogram Fresh edible fungi produce King trumpet mushroom. . . . Button mushroom and straw mushroom . . . . . . . Processed food products Canned food . . . . . . . . . . Other processed food products RMB kilogram RMB kilogram RMB . . . . . . 14,489,404 9.4 23,578,925 8.3 26,627,647 7.5 ...... 9,487,268 6.1 12,963,630 7.4 22,545,685 7.8 . . . . . . 20,414,666 . . . . . . 4,801,521 8.2 17,235,682 13.7 3,241,680 7.5 16,406,498 15.3 4,094,680 7.6 11.2 Total/Overall. . . . . . . . . . . . . . . . 49,192,859 8.6 57,019,917 8.3 69,674,510 7.8 Our revenue from continuing operations increased from RMB425.4 million for the year ended 31 December 2012 to RMB471.5 million for the year ended 31 December 2013, and increased further to RMB545.7 million for the year ended 31 December 2014, representing a CAGR of 13.3% over the period. The increase in our revenue during the Track Record Period was primarily due to the increase in sales of our king trumpet mushroom, button mushroom and straw mushroom as a result of our continued expansion of cultivation capacity of cultivation facilities. The revenue contributed by the sales of our king trumpet mushroom amounted to 31.9%, 41.6% and 36.5% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. The sales volume of our king trumpet mushroom increased from 14.5 million kilograms for the year ended 31 December 2012 to 23.6 million kilograms for the year ended 31 December 2013, and increased further to 26.6 million kilograms for the year ended 31 December 2014, representing a CAGR of 35.6% over the period. The average selling price of our king trumpet mushroom decreased from RMB9.4 per kilogram for the year ended 31 December 2012 to RMB8.3 per kilogram for the year ended 31 December 2013, and decreased further to RMB7.5 per kilogram for the year ended 31 December 2014. The general decrease of average selling prices of king trumpet mushroom during the Track Record Period was primarily due to the increased overall cultivation capacity and supply of king trumpet mushroom in the PRC as king trumpet mushroom became increasingly popular and accepted in the PRC. The average selling price of king trumpet mushroom was higher in the period from 2009 to 2011 than the average selling price during the Track Record Period as the consumption of king trumpet mushroom as a type of high end food product started emerging in 2009 in the PRC. The relative high average selling price of king trumpet mushroom stimulated increased number of suppliers to cultivate and supply king trumpet mushroom in the PRC which drove down the average selling price of king trumpet mushroom during the Track Record Period. – 263 – FINANCIAL INFORMATION The revenue contributed by the sales of our button mushroom and straw mushroom amounted to 13.5%, 20.4% and 32.2% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. The sales volume of our button mushroom and straw mushroom increased from 9.5 million kilograms for the year ended 31 December 2012 to 13.0 million kilograms for the year ended 31 December 2013, and increased further to 22.5 million kilograms for the year ended 31 December 2014, representing a CAGR of 54.2% over the period. The average selling prices of our button mushroom and straw mushroom increased from RMB6.1 per kilogram for the year ended 31 December 2012 to RMB7.4 per kilogram for the year ended 31 December 2013, and increased further to RMB7.8 per kilogram for the year ended 31 December 2014. The revenue contributed by the sales of our canned food amounted to 39.1%, 27.4% and 22.9% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. The sales volume of our canned food decreased from 20.4 million kilograms for the year ended 31 December 2012 to 17.2 million kilograms for the year ended 31 December 2013 and was 16.4 million kilograms for the year ended 31 December 2014. The average selling prices of our canned food decreased from RMB8.2 per kilogram for the year ended 31 December 2012 to RMB7.5 per kilogram for the year ended 31 December 2013, and increased to RMB7.6 per kilogram for the year ended 31 December 2014. The revenue contributed by the sales of our other processed food products amounted to 15.4%, 10.6% and 8.4% of our revenue from continuing operations for the three years ended 31 December 2012, 2013 and 2014, respectively. The sales volume of our other processed food products decreased from 4.8 million kilograms for the year ended 31 December 2012 to 3.2 million kilograms for the year ended 31 December 2013, and increased to 4.1 million kilograms for the year ended 31 December 2014. The average selling prices of our other processed food products increased from RMB13.7 per kilogram for the year ended 31 December 2012 to RMB15.3 per kilogram for the year ended 31 December 2013, and decreased to RMB11.2 per kilogram for the year ended 31 December 2014. – 264 – FINANCIAL INFORMATION We sell our fresh edible fungi produce primarily to distributors in the PRC, which then on-sell our fresh edible fungi produce to sub-distributors and retailers. To a lesser extent, we also sell some of our fresh edible fungi produce directly to processed mushroom manufacturers. We sell our canned food to trading companies in the PRC, which then on-sell our products to overseas distributors. We sell our other processed food products to distributors in the PRC, which then on-sell our products to sub-distributors and processed mushroom manufacturers. The following table sets forth our revenue generated by sales channel of our continuing operations for the years indicated: Year ended 31 December 2012 % of total revenue RMB’000 Sales to distributors of our fresh edible fungi produce King trumpet mushroom . . . . . Button mushroom . . . . . . . . . Sales to processed mushroom manufacturers Button mushroom . . . . . . . . . . Straw mushroom . . . . . . . . . . Sales to trading companies Canned food . . . . . . . . . . . . . Sales to distributors of our other processed food products Other processed products . . . . 2013 RMB’000 2014 % of total revenue RMB’000 % of total revenue . . 135,640 7,333 31.9% 1.7% 196,306 25,233 41.6% 5.3% 199,272 70,161 36.5% 12.8% . . 45,986 4,325 10.8% 1.0% 65,384 5,500 13.9% 1.2% 95,440 10,259 17.5% 1.9% . 166,483 39.1% 129,208 27.4% 124,690 22.9% . 65,661 15.5% 49,859 10.6% 45,843 8.4% Total . . . . . . . . . . . . . . . . . . . . 425,428 100.0% 471,490 100.0% 545,665 100.0% Changes in fair value of biological assets less cost to sell Changes in fair value of biological assets less cost to sell represent fair value changes of the biological assets (i.e. edible fungi) due to the changes in physical attributes and market determined prices of biological assets. During the Track Record Period, our biological assets were revalued at each reporting date by JLL with any resultant gain recognised in profit or loss for the year in which it arose. For more information about the valuation method adopted by JLL, please refer to the section headed “Financial Information – Valuation of Biological Assets – Valuation Method” in this prospectus. The fair value of biological assets less cost to sell is determined using the cost and market approaches with respect to the valuation of edible fungi during the growing period and harvesting period, respectively. During the growing period, cost approach is adopted. The cost of raw material, direct labour, labour contracting service and rental expenses have been considered in the calculation of the fair values for the growing period. During the harvesting period, market approach is adopted. There is an active market for the edible fungi and market prices are available for domestic edible fungi. Therefore, the fair values of the biological assets as at the valuation dates are calculated to be the product of market price and estimated the agricultural produce edible fungi by deducting the reasonable cost related to selling. – 265 – FINANCIAL INFORMATION We recognised gain arising from changes in fair value of biological assets less costs to sell of RMB97.9 million, RMB146.7 million and RMB211.1 million for the three years ended 31 December 2012, 2013 and 2014 respectively. Moreover, as at 31 December 2012, 2013 and 2014, our Group’s biological assets amounted to RMB47.7 million, RMB91.9 million and RMB93.7 million respectively. Our biological assets as a percentage to our net asset value as at the end of each reporting period during the Track Record Period were approximately 15.6%, 17.9% and 12.3% respectively. Cost of sales Our cost of sales primarily consists of raw materials, direct labour, cultivation overheads and manufacturing overheads. Raw materials primarily include (i) cultivation materials such as strains, sawdust, bran, dregs of beans, corncob, straw and cow dung for the cultivation of our fresh edible fungi produce, (ii) fresh produce of vegetables and fruit and (iii) packaging materials such as tin plate, glass jars, foam boxes and cartons. Direct labour comprises salaries and benefits for employee involved in cultivation and production activities including the payment of labour contracting fees to the individual farmers in connection with cultivation of button mushroom and straw mushroom. Cultivation overheads primarily represent transportation expenses, depreciation charges on farm equipment and fixtures, amortisation charges on land use rights, utility charges, consumables and other cultivation related costs. Manufacturing overheads primarily represent depreciation of plant and machinery, utilities, processing fee and other miscellaneous production costs. The following table sets forth a breakdown of our cost of sales of continuing operations for the years indicated: Year ended 31 December 2012 % of cost of sales RMB’000 Raw materials . . . . . . . . . . – Cultivation materials . . – Fresh fruit and vegetables – Packaging materials . . . Direct labour . . . . . . . . . . . Cultivation overheads . . . . Manufacturing overheads . . Change in fair value of biological assets . . . . . . . . . . . . . . . . . . . . . 2013 RMB’000 2014 % of cost of sales RMB’000 % of cost of sales . . . . . . . 227,589 65,279 116,968 45,342 40,685 24,909 10,596 56.9% 16.3% 29.3% 11.3% 10.2% 6.2% 2.7% 215,810 94,761 83,294 37,755 40,397 32,331 8,975 48.8% 21.4% 18.9% 8.5% 9.2% 7.3% 2.0% 240,650 109,009 96,347 35,294 54,169 45,718 7,248 43.7% 19.8% 17.5% 6.4% 9.9% 8.3% 1.3% ... 95,906 24.0% 144,509 32.7% 202,608 36.8% Total . . . . . . . . . . . . . . . . . . . 399,685 100.0% 442,022 100.0% 550,393 100.0% For the three years ended 31 December 2012, 2013 and 2014, our cost of sales of continuing operations, including change in fair value of biological assets, were RMB399.7 million, RMB442.0 million and RMB550.4 million, representing 93.9%, 93.7% and 100.9%, respectively, of our revenue from continuing operations for the same periods. – 266 – FINANCIAL INFORMATION For the three years ended 31 December 2012, 2013 and 2014, our cost of sales of continuing operations, excluding change in fair value of biological assets, were RMB303.8 million, RMB297.5 million and RMB347.8 million, representing 71.4%, 63.1% and 63.7%, respectively, of our revenue from continuing operations for the same periods. The cost of raw materials was the largest component of our cost of sales and accounted for 56.9%, 48.8% and 43.7% of the total cost of sales for the three years ended 31 December 2012, 2013 and 2014, respectively. The decrease in the cost of raw materials from 2012 to 2013 was primarily due to a decrease in cost of fresh fruit and vegetables and packaging materials as a result of a decrease in the production and sales volume of our processed food products for the year ended 31 December 2013. The increase in the cost of raw materials from 2013 to 2014 was primarily due to an increase in cost of cultivation materials and fresh fruit and vegetables as a result of an increase in the cultivation and sales volume of our fresh edible fungi produce and an increase in the price of button mushroom we purchased to produce canned button mushroom. During the Track Record Period, cultivation materials and fresh fruit and vegetables were two largest components of our cost of raw materials. For the three years ended 31 December 2012, 2013 and 2014, fresh fruit and vegetables accounted for 29.3%, 18.9% and 17.5% of our total cost of sales. For the three years ended 31 December 2012, 2013 and 2014, cultivation materials accounted for 16.3%, 21.4% and 19.8% of our total cost of sales. The cost of direct labour was the second largest component of our cost of sales and accounted for 10.2%, 9.2% and 9.9% of the total cost of sales for the three years ended 31 December 2012, 2013 and 2014, respectively. The following table sets forth our cost of sales by product category of our continuing operations after fair value adjustment of biological assets for the years indicated: Year ended 31 December 2012 % of cost of sales RMB’000 Fresh edible fungi produce King trumpet mushroom . . . . Button mushroom and straw mushroom . . . . . . . . Processed food products Canned food . . . . . . . . . . . . Other processed food products . 2013 RMB’000 2014 % of cost of sales RMB’000 % of cost of sales .. 140,289 35.1% 195,709 44.3% 206,367 37.5% .. 78,575 19.6% 110,383 25.0% 200,242 36.4% .. .. 136,559 44,262 34.2% 11.1% 102,660 33,270 23.2% 7.5% 102,468 41,316 18.6% 7.5% Total . . . . . . . . . . . . . . . . . . . . 399,685 100.0% 442,022 100.0% 550,393 100.0% – 267 – FINANCIAL INFORMATION The following table sets forth our cost of sales by product category of our continuing operations before fair value adjustment of biological assets for the years indicated: Year ended 31 December 2012 2013 % of cost of sales RMB’000 RMB’000 2014 % of cost of sales RMB’000 % of cost of sales Fresh edible fungi produce King trumpet mushroom . . . . . . Button mushroom and straw mushroom . . . . . . . . . . . . . . 84,163 27.7% 112,446 37.8% 119,488 34.3% 38,795 12.8% 49,137 16.5% 84,514 24.3% Processed food products Canned food . . . . . . . . . . . . . . Other processed food products . 136,559 44,262 45.0% 14.5% 102,660 33,270 34.5% 11.2% 102,468 41,316 29.5% 11.9% Total . . . . . . . . . . . . . . . . . . . . 303,779 100.0% 297,513 100.0% 347,786 100.0 The following table sets forth the sensitivity analysis on the impact of hypothetical fluctuations in the average unit purchase price of our major raw materials, fresh fruit and vegetables, cultivation materials and packaging materials on our net profit for the Track Record Period, assuming all other factors affecting our profit margin remain unchanged: (a) Hypothetical fluctuation on average unit purchase price of fresh fruit and vegetables Increase/decrease by 10% Increase/decrease by 15% Increase/decrease by 20% 8,773 6,247 7,226 13,159 9,371 10,839 17,545 12,494 14,452 Change in net profit (RMB’000) Year ended 31 December 2012 . . . . . . . . . Year ended 31 December 2013 . . . . . . . . . Year ended 31 December 2014 . . . . . . . . . (b) Hypothetical fluctuation on average unit purchase price of packaging materials Increase/decrease by 10% Increase/decrease by 15% Increase/decrease by 20% 3,401 2,832 2,647 5,101 4,247 3,971 6,801 5,663 5,294 Change in net profit (RMB’000) Year ended 31 December 2012 . . . . . . . . . Year ended 31 December 2013 . . . . . . . . . Year ended 31 December 2014 . . . . . . . . . – 268 – FINANCIAL INFORMATION (c) Hypothetical fluctuation on average unit purchase price of cultivation materials Increase/decrease by 10% Increase/decrease by 15% Increase/decrease by 20% 6,528 9,476 10,901 9,792 14,214 16,351 13,056 18,952 21,802 Change in net profit (RMB’000) Year ended 31 December 2012 . . . . . . . . . Year ended 31 December 2013 . . . . . . . . . Year ended 31 December 2014 . . . . . . . . . Business tax and auxiliary charges Business tax and auxiliary charges primarily consist of urban construction tax, education surcharge and business tax in relation to our production and sales of processed food products. Our cultivation and sales of fresh edible fungi produce does not subject to business tax and auxiliary charges in the PRC. Business tax and auxiliary charges decreased from RMB1.8 million for the year ended 31 December 2012 to RMB0.9 million for the year ended 31 December 2013 primarily attributable to the decrease in revenue generated from sales of our processed food products for the year ended 31 December 2013. Our business tax and auxiliary charges maintained stable being RMB0.9 million for the year ended 31 December 2014. Gross profit and gross profit margin The following table sets forth the gross profit and gross profit margin by product category of our continuing operations after and before fair value adjustment of biological assets for the years indicated: Year ended 31 December 2012 after fair value adjustment King trumpet mushroom . Button mushroom and straw mushroom . . . Canned food . . . . . . Other processed food products . . . . . . . 2013 before fair value adjustment after fair value adjustment 2014 before fair value adjustment after fair value adjustment before fair value adjustment Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin RMB’000 % RMB’000 % RMB’000 % RMB’000 % RMB’000 % RMB’000 % . 52,783 38.9% 51,477 38.0% 82,936 42.2% 83,860 42.7% 84,003 42.2% 79,784 40.0% . . 19,520 29,924 33.9% 18.0% 18,849 29,924 32.7% 18.0% 50,062 26,548 52.1% 20.5% 46,980 26,548 48.9% 20.5% 95,642 22,222 54.4% 17.8% 91,346 22,222 51.9% 17.8% . 21,399 32.6% 21,399 32.6% 16,589 33.3% 16,589 33.3% 4,527 9.9% 4,527 9.9% 123,626 29.1% 121,649 28.6% 176,135 37.4% 173,977 36.9% 206,394 37.8% 197,879 36.3% Business tax and auxiliary charges . . . . (1,807) N/A (1,807) N/A (920) N/A (920) N/A (924) N/A (924) N/A Total/Overall . . . . . . 121,819 28.6% 119,842 28.2% 175,215 37.2% 173,057 36.7% 205,470 37.7% 196,955 36.1% – 269 – FINANCIAL INFORMATION Our gross profit increased from RMB121.8 million for the year ended 31 December 2012 to RMB175.2 million for the year ended 31 December 2013 and further to RMB205.5 million for the year ended 31 December 2014, representing a CAGR of 29.9% over the period. Such increases were primarily the result of an increase in the revenue generated from the sales of our king trumpet mushroom, button mushroom and straw mushroom during the Track Record Period. For the three years ended 31 December 2012, 2013 and 2014, our gross profit margin were 28.6%, 37.2% and 37.7%, respectively. We recorded our gross profit after fair value adjustment of our biological assets, i.e. king trumpet mushroom, button mushroom and straw mushroom. The gross profit of the biological assets after fair value adjustment include the realised gain of the biological assets sold during the respective financial year plus the unrealised gain/(loss) of the biological assets as at the end of the respective financial year while the gross profit of the biological assets before fair value adjustment represented the realised gain of the biological assets sold during the respective financial year, which led to the differences of gross profit and gross profit margin after and before the fair value adjustment of biological assets. For the three years ended 31 December 2012, 2013 and 2014, our gross profit margin for our king trumpet mushroom were 38.9%, 42.2% and 42.2%, respectively. The gross profit margin for our king trumpet mushroom increased from 38.9% for the year ended 31 December 2012 to 42.2% for the year ended 31 December 2013, primarily due to a decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) by 17.2% from RMB5.8 per kilogram for the year ended 31 December 2012 to RMB4.8 per kilogram for the year ended 31 December 2013. The decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) was mainly attributable to (i) the adjustment of formula of cultivation materials of king trumpet mushroom in July 2012 by increasing volume of sawdust and decreasing volume of dregs of beans, corncob and corn powder which resulted in a decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) of 5.9% per kilogram; (ii) a decrease in the purchase prices of main cultivation materials such as corncob, bagasse, and corn powder for the year ended 31 December 2013 which resulted in a decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) of 2.2% per kilogram; and (iii) an increase in average yield of king trumpet mushroom from 0.39 kilogram per bag for the year ended 31 December 2012 to 0.42 kilogram per bag for the year ended 31 December 2013 which resulted in a decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) per kilogram as a result of our improvement of productivity and efficiency of the cultivation process by leveraging our research and development capabilities. The gross profit margin for our king trumpet mushroom remained stable for the year ended 31 December 2014 being 42.2%, primarily as a result of the combination of (i) a decrease in the average selling price of our king trumpet mushroom from RMB8.3 per kilogram for the year ended 31 December 2013 to RMB7.5 per kilogram for the year ended 31 December 2014 and (ii) a decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) by 6.3% from RMB4.8 per kilogram for the year ended 31 December 2013 to RMB4.5 per kilogram for the year ended 31 December 2014, primarily attributable to an increase in average yield of king trumpet mushroom from 0.42 kilogram per bag for the year ended 31 December 2013 to 0.43 kilogram per bag for the year ended 31 December 2014 which resulted in a decrease in average cost of king trumpet mushroom (before fair value adjustment of biological assets) per kilogram as a result of our improvement of productivity and efficiency of the cultivation process by leveraging our research and development capabilities. – 270 – FINANCIAL INFORMATION For the three years ended 31 December 2012, 2013 and 2014, our gross profit margin for our button mushroom and straw mushroom were 33.9%, 52.1% and 54.4%, respectively. The gross profit margin of our button mushroom and straw mushroom increased from 33.9% for the year ended 31 December 2012 to 52.1% for the year ended 31 December 2013, primarily due to (i) an increase in average selling price of button mushroom and straw mushroom from RMB6.1 per kilogram for the year ended 31 December 2012 to RMB7.4 per kilogram for the year ended 31 December 2013 and (ii) a decrease in average cost of button mushroom (before fair value adjustment of biological assets) by 7.3% from RMB4.1 per kilogram for the year ended 31 December 2012 to RMB3.8 per kilogram for the year ended 31 December 2013 mainly as a result of the adjustment of formula of cultivation materials of button mushroom in July 2013 by increasing volume of cultivation waste of our king trumpet mushroom and decreasing volume of straw which resulted in a decrease in average cost of button mushroom of 6.0% per kilogram. The gross profit margin for our button mushroom and straw mushroom increased to 54.4% for the year ended 31 December 2014, primarily due to an increase in the average selling price of button mushroom from RMB7.4 per kilogram for the year ended 31 December 2013 to RMB7.8 per kilogram for the year ended 31 December 2014. For the three years ended 31 December 2012, 2013 and 2014, our gross profit margin for our canned food were 18.0%, 20.5% and 17.8%, respectively. The gross profit margin for our canned food increased to 20.5% for the year ended 31 December 2013, primarily due to a decrease in average cost of canned food by 10.4% from RMB6.7 per kilogram for the year ended 31 December 2012 to RMB6.0 per kilogram for the year ended 31 December 2013. The decrease in average cost of canned food was mainly attributable to a decrease in the cost of vegetable and fruit of 22.9% from RMB4.8 per kilogram for the year ended 31 December 2012 to RMB3.7 per kilogram for the year ended 31 December 2013. The gross profit margin for our canned food decreased to 17.8% for the year ended 31 December 2014, primarily due to an increase in average cost of canned food by 3.3% from RMB6.0 per kilogram for the year ended 31 December 2013 to RMB6.2 per kilogram for the year ended 31 December 2014. The increase in average cost of canned food was mainly attributable to an increase in the cost of button mushroom purchased to produce canned button mushroom of 15.3% from RMB5.9 per kilogram for the year ended 31 December 2013 to RMB6.8 per kilogram for the year ended 31 December 2014. For the three years ended 31 December 2012, 2013 and 2014, our gross profit margin for our other processed food products were 32.6%, 33.3% and 9.9%, respectively. The gross profit margin of our other processed food products increased from 32.6% for the year ended 31 December 2012 to 33.3% for the year ended 31 December 2013, primarily due to an increase in the portion of sales volume of our snacks which entailed a higher gross profit margin from 27.4% to 35.7% of the total sales volume of our other processed food products as a result of the increase in production volume and marketing efforts. The gross profit margin of our other processed food products significantly decreased to 9.9% for the year ended 31 December 2014, primarily due to (i) an increase in the cost of button mushroom we purchased to produce brined mushroom of 15.3% from RMB5.9 per kilogram for the year ended 31 December 2013 to RMB6.8 per kilogram for the year ended 31 December 2014 and (ii) a decrease in the portion of sales volume of our snacks which entailed a higher gross profit margin as a result of the cessation of production of our snacks in November 2013 because the return on snacks (taking the advertising and promotion expenses into account) did not meet our expectation and considering the required investment of resources in the marketing efforts to establish our brand of snack. Therefore we decided to focus on our main business of the cultivation and sales of fresh edible fungi produce. – 271 – FINANCIAL INFORMATION Other income Other income primarily consists of input value-added tax deduction, government subsidies and awards, interest income on bank deposits, interest income from a Director, scrap sales, rental income, compensation received and other income. The following table sets forth our other income for the years indicated: Year ended 31 December Compensation received . . . . . . . . Government subsidies and awards Input value-added tax deduction. . Bank interest income . . . . . . . . . . Interest income from a Director . . Rental income. . . . . . . . . . . . . . . Scrap sales . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 300 603 2,920 374 1,055 79 502 17 – 2,226 1,786 2,392 – 107 330 8 – 3,170 4,705 1,818 – 82 170 2 5,850 6,849 9,947 Representing: Continuing operations . . . . . . . . . . . . . . . . . . Discontinued operation . . . . . . . . . . . . . . . . . 5,808 42 6,849 – 9,947 – Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,850 6,849 9,947 Input value-added tax deduction represents the value-added tax deduction as a result of intra-group purchase of fresh edible fungi produce for manufacturing processed food products. Government subsidies and awards primarily consisted of (i) a subsidy of RMB0.6 million received by Fujian Greenfresh Foods for a research and development project and a subsidy of RMB2.5 million received by Greenfresh Ecological Agriculture for a recycling utilisation project in 2014; (ii) a monetary award of RMB0.7 million received by Fujian Greenfresh Foods from the local government of Longhai, Fujian province for our obtaining the Well-known Trademark in China in 2013; (iii) a subsidy of RMB0.6 million received by Fujian Greenfresh Foods from Ministry of Agriculture for an agricultural industrialisation project in 2013; and (iv) a subsidy of RMB0.5 million received by Fujian Greenfresh Foods from the local government of Zhangzhou, Fujian province for the development of local specialised small and medium enterprise in 2012. The monetary awards and subsidies are non-recurring in nature and the amounts are subject to the government’s discretion. There are no unfulfilled conditions or other contingencies attached to the grants. Interest income from a Director represents the interest income on the advance we granted to Mr. Zheng Songhui. Scrap sales represent the cultivation waste of our king trumpet mushroom and button mushroom sold to individual farmers and enterprises as fertilizer and fuel, respectively. – 272 – FINANCIAL INFORMATION Rental income represents the rental income generated from the leases of certain space in our production facilities in Zhangzhou, Fujian province to our packaging materials suppliers for manufacturing packaging materials for our processed food products. Compensation received represents liquidated damages paid by the landlord to us as a result of the early termination of the lease of our certain office space in Xiamen, Fujian province. Selling expenses Selling expenses primarily consist of salaries and employee benefit expenses for employees engaging in the sales and marketing activities, transportation and related expenses for the delivery of our processed food products, travelling and entertainment and related expenses, advertising and promotion expenses and other sales-related expenses. The following table sets forth a breakdown of our selling expenses of our continuing operations for the years indicated: Year ended 31 December 2012 RMB’000 Salaries and employee benefits . . Transportation and related expenses . . . Travelling and entertainment expenses . . . . . . . . Advertising and promotion expenses Others . . . . . . . . . . . . 2013 % of selling expense RMB’000 2014 % of selling expense RMB’000 % of selling expense ... 2,432 41.2% 2,493 36.1% 2,733 44.9% ... 1,551 26.3% 1,507 21.8% 1,232 20.3% ... 695 11.8% 1,100 15.9% 549 9.0% ... ... 1,068 151 18.1% 2.6% 846 968 12.2% 14.0% 1,466 103 24.1% 1.7% Total. . . . . . . . . . . . . . . . 5,897 100.0% 6,914 100.0% 6,083 100.0% For the three years ended 31 December 2012, 2013 and 2014, our selling expenses amounted to RMB5.9 million, RMB6.9 million and RMB6.1 million, respectively. Salaries and employee benefit expenses were the largest component of our selling expenses during the Track Record Period, which represents salaries, social welfare scheme and housing provident fund contributions, bonus and other employee benefits. During the same periods, as a percentage of our revenue of continuing operations, our selling expenses were 1.4%, 1.5% and 1.1%, respectively. We managed to largely maintain the proportion of our selling expenses to our revenue during the Track Record Period as a result of our efforts in maintaining our control over salaries and employee benefit expenses. – 273 – FINANCIAL INFORMATION Administrative expenses Administrative expenses primarily consist of salaries and employee benefit expenses for employees engaging in administrative activities, rental expenses, depreciation and amortisation of property, plant and equipment, legal and professional fees, office expenses, motor car expenses, entertainment expenses, research and development expenses and other administration-related expenses. The following table sets forth a breakdown of our administrative expenses of our continuing operations for the years indicated: Year ended 31 December Salaries and employee benefits . . . . . . . . . . . . . Rental expenses. . . . . . . . . Depreciation and amortisation. . . . . . . . . . Legal and professional fees . . . . . . . . . . . . . . . . Entertainment . . . . . . . . . . Motor car expenses . . . . . . Office expenses . . . . . . . . . Research and development . Others . . . . . . . . . . . . . . . 2012 2013 2014 % of total administrative RMB’000 expenses % of total administrative RMB’000 expenses % of total administrative RMB’000 expenses .. .. 6,484 1,848 35.6% 10.1% 7,221 1,024 41.1% 5.8% 6,711 958 21.8% 3.1% .. 1,231 6.7% 1,549 8.8% 1,776 5.7% . . . . . . . . . . . . 1,819 551 559 927 1,313 3,503 10.0% 3.0% 3.1% 5.1% 7.2% 19.2% 1,007 641 703 995 1,212 3,230 5.7% 3.6% 4.0% 5.7% 6.9% 18.4% 14,862 730 613 1,226 422 3,502 48.3% 2.4% 2.0% 4.0% 1.3% 11.4% Total . . . . . . . . . . . . . . . . . . 18,235 100.0% 17,582 100.0% 30,800 100.0% – 274 – FINANCIAL INFORMATION For the three years ended 31 December 2012, 2013 and 2014, our administrative expenses were RMB18.2 million, RMB17.6 million and RMB30.8 million, respectively. During the same periods, as a percentage of our revenue of continuing operations, our administrative expenses were 4.3%, 3.7% and 5.7%, respectively. Salaries and employee benefits were a major component of our administrative expenses, and accounted for 35.6%, 41.1% and 21.8% of our administrative expenses for the same periods. The increase in salaries and employee benefits was primarily the result of the general level of salaries and employee benefits for, and the number of, employees engaged in the administrative activities. Another major component of our administrative expenses during the Track Record Period was legal and professional fees incurred for the services rendered by different professional parties for our equity financings and the Listing. For the three years ended 31 December 2012, 2013 and 2014, such professional service fees amounted to RMB1.8 million, RMB1.0 million and RMB14.9 million, representing 10.0%, 5.7% and 48.3% of our administrative expenses for the same periods, respectively. Finance costs Our finance costs of our continuing operations represent interest on bank borrowings which are wholly repayable within one year. For the three years ended 31 December 2012, 2013 and 2014, our finance costs of our continuing operations were RMB1.7 million, RMB3.7 million and RMB1.2 million, respectively. Income tax expense Under the Cayman Islands and the BVI law, we are not subject to any income tax in the Cayman Islands and the BVI. Hong Kong profits tax is calculated at 16.5% of the estimated assessable profit during the Track Record Period. No provision for Hong Kong profits tax has been made as we have no assessable profit arises or derived from Hong Kong during the Track Record Period. Our income tax expense consists of enterprise income tax we paid/payable in the PRC. Pursuant to relevant income tax rules and regulations of the PRC, the applicable PRC enterprise income tax rates during the Track Record Period are 25.0%. Certain of our PRC subsidiaries which are recognised as primary processing of agricultural produce, namely Greenfresh Ecological Agriculture, Greenfresh Biological Technology, Shengtai Agricultural Development and Jingxiang Foods were exempted from the enterprise income tax in the PRC under the PRC EIT Law during the Track Record Period. For other subsidiaries, under the PRC EIT Law and its implementation regulations, the standard tax rate of the PRC entities was 25% during the Track Record Period. Our income tax expenses for the three years ended 31 December 2012, 2013 and 2014 were RMB10.6 million, RMB6.0 million and RMB2.3 million, respectively. Our effective tax rate was 10.4%, 3.9% and 1.3% during the same periods, respectively. – 275 – FINANCIAL INFORMATION The reconciliation between the income tax expense and the product of profit before tax multiplied by the PRC enterprise income tax rate is as follows: Year ended 31 December Profit before tax . . . . . . . . . . . . . . . . . . . . . . . Tax at the domestic income tax rate . . . . Tax effect of income that is not taxable . Tax effect of expenses that are not deductible . . . . . . . . . . . . . . . . . . Tax effect of temporary difference not recognised . . . . . . . . . . . . . . . . . . Tax effect of tax concession . . . . . . . . . . Tax effect of tax loss not recognised. . . . Tax effect of utilisation of tax losses not previously recognised . . . . . . . . . . . . Overprovision of current year . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 101,817 ..... ..... 25,454 (671) ..... 3,639 ..... ..... ..... – (17,812) – 153,833 38,458 (585) 391 – (32,217) – ..... ..... – – – – Income tax expense . . . . . . . . . . . . . . . . . . . . . 10,610 6,047 177,340 44,335 (568) 3,422 633 (45,771) 74 (8) 135 2,252 Our Directors confirm that, during the Track Record Period and up to the Latest Practicable Date, we had fulfilled all our tax obligations and did not have any unresolved tax disputes with the applicable tax authorities. Discontinued operation Prior to the Reorganisation, Fujian Greenfresh Foods held 100.0% of the equity interest of Minhui Trading. Minhui Trading is our subsidiary engaged in trading business in the PRC. In June 2012, Fujian Greenfresh Foods disposed of all equity interest that it held in Minhui Trading. As a result, trading operation conducted through this disposed subsidiary became our discontinued trading operation. Please see the sections entitled “Financial Information – Discontinued Operation and its Presentation in the Consolidated Financial Statements” and “History and the Corporate Structure”. – 276 – FINANCIAL INFORMATION The results of the discontinued trading operation in 2012, which have been included in the consolidated statements of profit or loss and other comprehensive income, were as follows: Period from 1 January 2012 to 25 June 2012 RMB’000 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business tax and auxiliary charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Profit . . . . . . . . . Other income . . . . . . . . . Selling expenses . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,868 (75,778) (4) . . . . 12,086 42 (267) (301) Profit from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,560 (533) Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,027 – Profit for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,027 RESULTS OF CONTINUING OPERATIONS Year ended 31 December 2014 compared to year ended 31 December 2013 Revenue Our revenue increased by 15.7%, from RMB471.5 million for the year ended 31 December 2013 to RMB545.7 million for the year ended 31 December 2014, as a result of increased sales of our button mushroom and straw mushroom and king trumpet mushroom and offset by the decreased sales of canned food and other processed food products. Our increased sales was largely driven by the growth of sales of our button mushroom and straw mushroom of 83.0% from RMB96.1 million for the year ended 31 December 2013 to RMB175.9 million for the year ended 31 December 2014, which was primarily driven by an increase in sales volume of our button mushroom and straw mushroom of 73.9% from 13.0 million kilograms for the year ended 31 December 2013 to 22.5 million kilograms for the year ended 31 December 2014, accompanied by an increase in average selling price of our button mushroom and straw mushroom by 5.4% from RMB7.4 per kilogram to RMB7.8 per kilogram. The increase in average selling price of button mushroom and straw mushroom was primarily due to an increase in the cultivation volume of high grade button mushroom from 2,004 tonnes for the year ended 31 December 2013 to 3,860 tonnes for the year ended 31 December 2014 cultivated at our industrial cultivation facilities in Chengdu, Sichuan province which entailed a higher average selling price. The increase in the cultivation volume of high grade button mushroom was in line with the increased cultivation capacity of button mushroom at our button mushroom industrial cultivation facilities in Chengdu, Sichuan province from 3,024 tonnes for the year ended 31 December 2013 to 4,838 tonnes for the year ended 31 December 2014. – 277 – FINANCIAL INFORMATION The increase in sales volume of our button mushroom and straw mushroom was primarily the result of (i) an increase in cultivation volume of our button mushroom and straw mushroom from 14,430 tonnes for the year ended 31 December 2013 to 28,134 tonnes for the year ended 31 December 2014 as a result of the significant expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in June 2013 and cultivation capacity of button mushroom at our industrial cultivation facilities in Chengdu, Sichuan province in July 2013, primarily due to an increase in the cultivation area to 892,191 sq.m. for the year ended 31 December 2013 at our cultivation facilities in Zhangzhou, Fujian province and an increase in the cultivation area from 21,600 sq.m. for the year ended 31 December 2013 to 28,800 sq.m. for the year ended 31 December 2014 at our industrial cultivation facilities in Chengdu, Sichuan province; and (ii) the increase in sales in eastern, central and southwestern regions of the PRC. The increased sales in eastern region were primarily due to the increased average sales per processed mushroom manufacturer as a result of the expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province though the number of processed mushroom manufacturers decreased from ten for the year ended 31 December 2013 to eight for the year ended 31 December 2014. The increased sales in central region were due to the expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province while the number of the distributors remained same being two distributors for the year ended 31 December 2014. The increased sales in southwestern region were primarily due to the increase in the number of distributors from five for the year ended 31 December 2013 to seven for the year ended 31 December 2014 as a result of the expansion of cultivation capacity of button mushroom at our industrial cultivation facilities in Chengdu, Sichuan province. The increase in sales volume of our button mushroom and straw mushroom was also contributed by (i) the increase in overall market demand for button mushroom and straw mushroom in the PRC driven by improved living standards, higher disposable incomes and improved health awareness to increase food expenditures in edible fungi; and (ii) increased recognition of our brand as a result of our marketing and promotional activities such as liaising with selected distributors in all regions where we sold button mushroom and straw mushroom by telephone calls to collect market intelligence including market demand and market prices of button mushroom and straw mushroom and assisting such distributors to improve sales capabilities and sales performance by providing such distributors with sales guidance and other market information, as well as participating in domestic and international trade shows and food exhibitions. Our increased revenue was also driven by the growth of sales of our king trumpet mushroom of 1.5% from RMB196.3 million for the year ended 31 December 2013 to RMB199.3 million for the year ended 31 December 2014, which was primarily driven by an increase in sales volume of our king trumpet mushroom of 12.9% from 23.6 million kilograms for the year ended 31 December 2013 to 26.6 million kilograms for the year ended 31 December 2014, partially offset by a decrease in average selling price per kilogram of 9.6% from RMB8.3 to RMB7.5 primarily due to the increased overall cultivation capacity and supply in the PRC which drove down the average selling price as king trumpet mushroom became increasingly popular and accepted in the PRC. – 278 – FINANCIAL INFORMATION The increase in sales volume of our king trumpet mushroom was primarily the result of (i) an increase in cultivation volume of our king trumpet mushroom from 16,828 tonnes for the year ended 31 December 2013 to 18,334 tonnes for the year ended 31 December 2014 as a result of the expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities of Zhangpu (No. 3 facility) in Zhangzhou, Fujian province and Changzhou, Jiangsu province in May 2013, from 1,134 tonnes and 1,304 tonnes for the year ended 31 December 2013 to 2,016 tonnes and 2,016 tonnes for the year ended 31 December 2014, respectively; and (ii) the increase in sales to our distributors in southern, northern, central and southwestern regions of the PRC. The increased sales in southern and central regions were in line with the increase in the number of distributors in southern and central regions from six and three for the year ended 31 December 2013 to seven and four for the year ended 31 December 2014, respectively. The increased sales in northern region were due to the increased demand from the distributor in such region for the year ended 31 December 2014 while the number of distributor remained same being one distributor for the year ended 31 December 2014. The increased sales in southwestern region were due to the increased average sales per distributor for the year ended 31 December 2014 though the number of distributors in southwestern region decreased from five for the year ended 31 December 2013 to two for the year ended 31 December 2014. The distributors we terminated in southwestern region in 2014 were small-scale distributors with minimal purchase amount, one-off distributors and/or distributors with unsatisfactory business operation capabilities. The increase in sales volume of our king trumpet mushroom was also contributed by (i) the increase in overall market demand for king trumpet mushroom in the PRC driven by improved living standards, higher disposable incomes and improved health awareness to increase food expenditures in edible fungi; and (ii) increased recognition of our brand as a result of our marketing and promotional activities such as liaising with selected distributors in all regions where we sold king trumpet mushroom by telephone calls to collect market intelligence including market demand and market prices of king trumpet mushroom and assisting such distributors to improve sales capabilities and sales performance by providing such distributors with sales guidance and other market information, as well as participating in domestic and international trade shows and food exhibitions. The revenue generated from the sales of our canned food decreased by 3.5% from RMB129.2 million for the year ended 31 December 2013 to RMB124.7 million for the year ended 31 December 2014, primarily attributable to a decrease in revenue generated from the sales of our canned food such as canned bamboo shoots, canned sweet corn and canned mixed mushroom from RMB7.7 million, RMB2.3 million and RMB5.6 million for the year ended 31 December 2013 to RMB2.7 million, RMB0.7 million and RMB1.0 million for the year ended 31 December 2014, respectively, as a result of a decrease of orders of such products from trading companies. The decrease in revenue was partially offset by an increase in average selling price of canned food by 1.3% from RMB7.5 per kilogram to RMB7.6 per kilogram primarily due to an increase in the average selling price of canned baby corn and canned mix vegetables by 8.9% and 30.0% from RMB7.9 per kilogram and RMB5.0 per kilogram for the year ended 31 December 2013 to RMB8.6 per kilogram and RMB6.5 per kilogram for the year ended 31 December 2014, respectively. The revenue generated from the sales of other processed food products decreased by 8.1% from RMB49.9 million for the year ended 31 December 2013 to RMB45.8 million for the year ended 31 December 2014, primarily attributable to a decrease in sales volume of our snacks as a result of the cessation of production of snacks in November 2013, because the return on snacks (taking the advertising and promotion expenses into account) did not meet our expectation and considering the required investment of resources in the marketing efforts to establish our brand of snack. Therefore we decided to focus on our main business of the cultivation and sales of fresh edible fungi produce. – 279 – FINANCIAL INFORMATION Changes in fair value of biological assets less cost to sell Our gain arising from changes in fair value of biological assets less cost to sell increased by 43.9%, from RMB146.7 million for the year ended 31 December 2013 to RMB211.1 million for the year ended 31 December 2014, primarily attributable to an increase in the cultivation volume of our fresh edible fungi produce as a result of the expansion of cultivation capacity of button mushroom at our cultivation facilities in Zhangzhou, Fujian province in June 2013 and our industrial cultivation facilities in Chengdu, Sichuan province in July 2013. Cost of sales Our cost of sales increased by 24.5% from RMB442.0 million for the year ended 31 December 2013 to RMB550.4 million for the year ended 31 December 2014. The increase in our cost of sales was primarily the result of an increase of our cost of raw materials by 11.5% from RMB215.8 million for the year ended 31 December 2013 to RMB240.7 million for the year ended 31 December 2014, mainly as a result of an increase in cultivation and production volume of our fresh edible fungi produce in response to increased demand and sales. The increase in our cost of sales was also attributable to an increase in the direct labour cost of 34.1% from RMB40.4 million for the year ended 31 December 2013 to RMB54.2 million for the year ended 31 December 2014 as a result of an increase in the labour contracting fees paid to the individual farmers for the cultivation services rendered as a result of the expansion of cultivation capacity of our button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in June 2013. The increase in our cost of sales can also be attributable to an increase in the cost of cultivation overheads of 41.4% from RMB32.3 million for the year ended 31 December 2013 to RMB45.7 million for the year ended 31 December 2014 as a result of the expansion of cultivation capacity of our button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in June 2013 and cultivation capacity of button mushroom at our industrial cultivation facilities in Chengdu, Sichuan province in July 2013. Business tax and auxiliary charges Our business tax and auxiliary charges was RMB0.9 million for the year ended 31 December 2014 which remained stable compared to RMB0.9 million for the year ended 31 December 2013. Gross profit and gross profit margin Our gross profit increased by 17.3% from RMB175.2 million for the year ended 31 December 2013 to RMB205.5 million for the year ended 31 December 2014, primarily as a result of an increase in the sales of our button mushroom and straw mushroom and an increase in the average selling price of button mushroom and straw mushroom. Our overall gross profit margin increased from 37.2% for the year ended 31 December 2013 to 37.7% for the year ended 31 December 2014. – 280 – FINANCIAL INFORMATION Gross profit generated from the sales of our button mushroom and straw mushroom increased by 91.0% from RMB50.0 million for the year ended 31 December 2013 to RMB95.6 million for the year ended 31 December 2014, mainly attributable to the increased cultivation and sales of button mushroom and straw mushroom as a result of the expansion of cultivation capacity of our button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in June 2013 and cultivation capacity of button mushroom at our industrial cultivation facilities in Chengdu, Sichuan province in July 2013. The gross profit margin of button mushroom and straw mushroom increased from 52.1% for the year ended 31 December 2013 to 54.4% for the year ended 31 December 2014, primarily due to an increase in average selling price of button mushroom and straw mushroom. Gross profit generated from the sales of our king trumpet mushroom increased by 1.3% from RMB82.9 million for the year ended 31 December 2013 to RMB84.0 million for the year ended 31 December 2014, mainly attributable to the increased cultivation and sales of king trumpet mushroom as a result of the expansion of cultivation capacity of our king trumpet mushroom at our cultivation facilities in Zhangpu (No.3 facility) in Zhangzhou, Fujian province and Changzhou, Jiangsu province, respectively, in May 2013. The gross profit margin of king trumpet mushroom remained stable being 42.2% for the year ended 31 December 2014 compared to the gross profit margin of king trumpet mushroom of 42.2% for the year ended 31 December 2013, primarily as a result of the combination of a decrease in the average selling price of our king trumpet mushroom and a decrease in average cost of king trumpet mushroom per kilogram. Gross profit generated from the sales of our canned food decreased by 16.3% from RMB26.5 million for the year ended 31 December 2013 to RMB22.2 million for the year ended 31 December 2014, mainly attributable to the decreased sales volume of our canned food such as canned bamboo shoots, canned sweet corn and canned mixed mushroom as a result of a decrease of orders of such products from trading companies. The gross profit margin of canned food decreased from 20.5% for the year ended 31 December 2013 to 17.8% for the year ended 31 December 2014, primarily due to an increase in average cost of canned food per kilogram. Gross profit generated from the sales of our other processed food products decreased by 72.7% from RMB16.6 million for the year ended 31 December 2013 to RMB4.5 million for the year ended 31 December 2014, mainly attributable to a decrease in the sales volume of our snacks as a result of the cessation of production of snacks in November 2013. The gross profit margin of other processed food products decreased from 33.3% for the year ended 31 December 2013 to 9.9% for the year ended 31 December 2014, primarily due to (i) an increase in the cost of button mushroom we purchased to produce brined mushroom; and (ii) a decrease in sales volume of our snacks which entailed a higher gross profit margin as a result of the cessation of production of our snacks in November 2013, because the return on snacks (taking the advertising and promotion expenses into account) did not meet our expectation and considering the required investment of resources in the marketing efforts to establish our brand of snack. Therefore we decided to focus on our main business of the cultivation and sales of fresh edible fungi produce. – 281 – FINANCIAL INFORMATION Other income Our other income increased by 45.2% from RMB6.8 million for the year ended 31 December 2013 to RMB9.9 million for the year ended 31 December 2014, primarily attributable to (i) an increase in input value-added tax deduction from RMB1.8 million to RMB4.7 million as a result of the increased intra-group purchase of fresh edible fungi produce for the purpose of manufacturing canned edible fungi and brined mushroom for the year ended 31 December 2014 and (ii) an increase in government subsidies and awards from RMB2.2 million for the year ended 31 December 2013 to RMB3.2 million for the year ended 31 December 2014 as a result of a subsidy of RMB2.5 million received by Greenfresh Ecological Agriculture for a recycling utilisation project. Selling expenses Our selling expenses decreased by 12.0% from RMB6.9 million for the year ended 31 December 2013 to RMB6.1 million for the year ended 31 December 2014, primarily as a result of a decrease in travelling and entertainment expenses of 50.1% from RMB1.1 million for the year ended 31 December 2013 to RMB0.5 million for the year ended 31 December 2014, which is mainly due to our enhanced effort to stringently control the travelling and entertainment expenses. The decrease in our selling expenses was also attributable to a decrease in our other expenses by 89.4%, from RMB1.0 million for the year ended 31 December 2013 to RMB0.1 million for the year ended 31 December 2014, which is mainly due to a decrease in trademark related expenses for the year ended 31 December 2014. Such decreases were partially offset by the increase in advertising and promotion expenses of 73.3% as a result of the consulting fees we paid to a marketing consultant who is an Independent Third Party in connection with marketing and promotion of our brands of edible fungi products. As a result of the above, our selling expenses as a percentage of our revenue of continuing operations decreased from 1.5% for the year ended 31 December 2013 to 1.1% for the year ended 31 December 2014. Administrative expenses Administrative expenses increased by 75.2% from RMB17.6 million for the year ended 31 December 2013 to RMB30.8 million for the year ended 31 December 2014, which was primarily due to an increase in legal and professional fee of 1,375.9% as a result of the preparation for the Listing. For the same reason, our administrative expenses as a percentage of our revenue increased from 3.7% for the year ended 31 December 2013 to 5.7% for the year ended 31 December 2014. Such increase was partially offset by a decrease in research and development expense of 65.2% primarily due to the investment in certain research and development projects such as the testing for industrial cultivation of button mushroom at our cultivation facilities in Zhangzhou, Fujian province was incurred in 2013. Finance costs Our finance costs decreased by 68.0% from RMB3.7 million for the year ended 31 December 2013 to RMB1.2 million for the year ended 31 December 2014, due to a decrease in interest on bank borrowings as a result of a decrease in bank borrowings for the year ended 31 December 2014. – 282 – FINANCIAL INFORMATION Income tax expense Our income tax expenses decreased by 62.8% from RMB6.0 million for the year ended 31 December 2013 to RMB2.3 million for the year ended 31 December 2014. Our effective tax rate decreased from 3.9% for the year ended 31 December 2013 to 1.3% for the year ended 31 December 2014. The decrease in income tax expense was mainly due to the decrease in revenue and profit of processed food products. The decrease in effective tax rate was mainly due to the increased proportion of income contributed by our PRC subsidiaries that enjoyed preferential tax treatment. Profit for the year from continuing operations As a result of the foregoing, our profit for the year from continuing operations increased by 18.5% from RMB147.8 million for the year ended 31 December 2013 to RMB175.1 million for the year ended 31 December 2014. Year ended 31 December 2013 compared to year ended 31 December 2012 Revenue Our revenue increased by 10.8%, from RMB425.4 million for the year ended 31 December 2012 to RMB471.5 million for the year ended 31 December 2013, as a result of increased sales of our king trumpet mushroom, button mushroom and straw mushroom, partially offset by the decreased sales of canned food and other processed food products. Our increased sales was largely driven by the growth of sales of our king trumpet mushroom of 44.7% from RMB135.6 million for the year ended 31 December 2012 to RMB196.3 million for the year ended 31 December 2013, which was primarily driven by an increase in sales volume of our king trumpet mushroom of 62.7% from 14.5 million kilograms for the year ended 31 December 2012 to 23.6 million kilograms for the year ended 31 December 2013, partially offset by a decrease in average selling price of king trumpet mushroom by 11.7% from RMB9.4 per kilogram to RMB8.3 per kilogram primarily due to the increased overall cultivation capacity and supply in the PRC which drove down the average selling price as king trumpet mushroom became increasingly popular in the PRC. The increase in sales volume of our king trumpet mushroom was primarily the result of (i) an increase in cultivation volume of our king trumpet mushroom from 12,216 tonnes for the year ended 31 December 2012 to 16,828 tonnes for the year ended 31 December 2013 due to the commencement of production and expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities of Zhangpu (No. 3 facility) in Zhangzhou, Fujian province in 2013 with a designed cultivation capacity of 1,134 tonnes, the expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities in Dandong, Liaoning province in 2013 from 2,457 tonnes for the year ended 31 December 2012 to 5,292 tonnes for the year ended 31 December 2013 and the commencement of production at our cultivation facilities in Changzhou, Jiangsu province in April 2013 with a designed cultivation capacity of 1,304 tonnes; and (ii) the increase in sales to our distributors in southern, northern, central, northeastern, southwestern and northwestern regions of the PRC. The increased sales in southern, central, southwestern and northwestern regions were in line with the increase in the number of distributors from – 283 – FINANCIAL INFORMATION four, two, two and two for the year ended 31 December 2013 to six, three, five and five for the year ended 31 December 2014, respectively, as a result of the commencement of our cultivation facilities of Zhangpu (No. 3) facility in Zhangzhou, Fujian province and our cultivation facilities in Changzhou, Jiangsu province. The increased sales in northern region were due to the increased demand from the distributor in such region for the year ended 31 December 2013 while the number of distributor remained same being one distributor for the year ended 31 December 2013. The increased sales in northeastern region were due to the increased average sales per distributor as a result of the expansion of cultivation capacity at our cultivation facilities in Dandong, Liaoning province though the number of distributors in northeastern region decreased from twenty one distributors for the year ended 31 December 2012 to ten distributors for the year ended 31 December 2013. The distributors we terminated in northeastern region in 2014 were small-scale distributors with minimal purchase amount, one-off distributors and/or distributors with unsatisfactory business operation capabilities. The increase in sales volume of our king trumpet mushroom was also contributed by (i) the increase in overall market demand for king trumpet mushroom in the PRC driven by improved living standards, higher disposable incomes and improved health awareness to increase food expenditures in edible fungi; and (ii) increased recognition of our brand as a result of our marketing and promotional activities such as liaising with selected distributors in all regions where we sold button mushroom and straw mushroom by telephone calls to collect market intelligence including market demand and market prices of king trumpet mushroom and assisting such distributors to improve sales capabilities and sales performance by providing such distributors with sales guidance and other market information, as well as participating in domestic and international trade shows and food exhibitions. Our increased revenue was also driven by the growth of sales of our button mushroom and straw mushroom of 66.7% from RMB57.6 million for the year ended 31 December 2012 to RMB96.1 million for the year ended 31 December 2013, which was primarily driven by an increase in sales volume of our button mushroom and straw mushroom of 36.6% from 9.5 million kilograms for the year ended 31 December 2012 to 13.0 million kilograms for the year ended 31 December 2013, accompanied by an increase in average selling price of button mushroom and straw mushroom by 21.3% from RMB6.1 per kilogram to RMB7.4 per kilogram. The increase in average selling price of button mushroom and straw mushroom was primarily due to an increase in the cultivation volume of high grade button mushroom from 38 tonnes for the year ended 31 December 2012 to 2,004 tonnes for the year ended 31 December 2013 cultivated at our industrial cultivation facilities in Chengdu, Sichuan province which entailed a higher average selling price. The increase in the cultivation volume of high grade button mushroom was in line with increased cultivation capacity at our industrial cultivation facilities in Chengdu, Sichuan province from 60 tonnes for the year ended 31 December 2012 to 3,024 tonnes for the year ended 31 December 2013. The increase in sales volume of our button mushroom and straw mushroom was primarily the result of (i) an increase in cultivation volume of our button mushroom and straw mushroom from 12,588 tonnes for the year ended 31 December 2012 to 14,430 tonnes for the year ended 31 December 2013 due to the commencement of production at our button mushroom industrial cultivation facilities in Chengdu, Sichuan province in October 2012 with a designed cultivation capacity of 60 tonnes for the year ended 31 December 2012 and further increased to 3,024 tonnes for the year ended 31 December 2013, the expansion of cultivation capacity of button mushroom at our traditional cultivation facilities in Chengdu, Sichuan province in November 2013 as a result of an increase in the cultivation area in those facilities from 223,445 sq.m. for the year ended 31 December 2012 to 677,005 sq.m. for the year ended 31 December 2013, and the expansion of cultivation capacity of button mushroom and straw mushroom at – 284 – FINANCIAL INFORMATION our cultivation facilities in Zhangzhou, Fujian province in May and August 2013 as a result of an increase in the cultivation area in those facilities from 422,872 sq.m. for the year ended 31 December 2012 to 892,191 sq.m. for the year ended 31 December 2013; and (ii) the increase in sales in eastern and southwestern regions of the PRC. The increased sales in the eastern region were primarily due to the increase in the number of processed mushroom manufacturers from seven for the year ended 31 December 2013 to ten for the year ended 31 December 2014 as a result of the expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province. The increased sales in southwestern region were in line with the increase of the number of distributors from four for the year ended 31 December 2013 to five for the year ended 31 December 2014 as a result of the expansion of cultivation capacity of button mushroom at our industrial cultivation facilities in Chengdu, Sichuan province. The increase in sales volume of our button mushroom and straw mushroom was also contributed by (i) the increase in overall market demand for button mushroom and straw mushroom in the PRC driven by improved living standards, higher disposable incomes and improved health awareness to increase food expenditures in edible fungi; and (ii) increased recognition of our brand as a result of our marketing and promotional activities such as liaising with selected distributors in all regions where we sold button mushroom and straw mushroom by telephone calls to collect market intelligence including market demand and market prices of button mushroom and straw mushroom and assisting such distributors to improve sales capabilities and sales performance by providing such distributors with sales guidance and other market information, as well as participating in domestic and international trade shows and food exhibitions. The revenue generated from the sales of our canned food decreased by 22.4% from RMB166.5 million for the year ended 31 December 2012 to RMB129.2 million for the year ended 31 December 2013, primarily attributable to a decrease in revenue generated from the sales of our canned food such as canned edible fungi, canned green bean and canned bamboo shoots from RMB93.2 million, RMB18.0 million and RMB13.3 million for the year ended 31 December 2012 to RMB60.8 million, RMB9.3 million and RMB7.7 million for the year ended 31 December 2013, respectively, as a result of a decrease of orders of such products from trading companies, accompanied by a decrease in average selling price of canned food by 8.5% from RMB8.2 per kilogram to RMB7.5 per kilogram primarily due to a decrease in the average selling price of canned button mushroom, which is a major kind of canned food we produced and sold, from RMB9.9 per kilogram for the year ended 31 December 2012 to RMB9.6 per kilogram for the year ended 31 December 2013. The revenue generated from the sales of other processed food products also decreased by 24.1% from RMB65.7 million for the year ended 31 December 2012 to RMB49.9 million for the year ended 31 December 2013, primarily attributable to a decrease in sales volume of our brined mushroom as a result of a decrease of orders of such products and a decrease in sales volume of snacks as we decided to discontinue the production of snacks. – 285 – FINANCIAL INFORMATION Changes in fair value of biological assets less cost to sell Our gain arising from changes in fair value of biological assets less cost to sell increased by 49.8%, from RMB97.9 million for the year ended 31 December 2012 to RMB146.7 million for the year ended 31 December 2013, primarily attributable to an increase in cultivation volume of our fresh edible fungi produce as a result of (i) the commencement of production and expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities of Zhangpu (No. 3 facility) in Zhangzhou, Fujian province in 2013, the expansion of cultivation capacity at our cultivation facilities in Dandong, Liaoning province in 2013 and the commencement of production at our cultivation facilities in Changzhou, Jiangsu province in April 2013; and (ii) the commencement of production at our button mushroom industrial cultivation facilities in Chengdu, Sichuan province in October 2012, the expansion of cultivation capacity of button mushroom at our traditional cultivation facilities in Chengdu, Sichuan province in November 2013 and the expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in May and August 2013. Cost of sales Our cost of sales increased by 10.6% from RMB399.7 million for the year ended 31 December 2012 to RMB442.0 million for the year ended 31 December 2013. The increase in our cost of sales was primarily due to an increase in the cost of cultivation overheads of 29.8% from RMB24.9 million for the year ended 31 December 2012 to RMB32.3 million for the year ended 31 December 2013 as a result of (i) the commencement of production and expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities of Zhangpu (No. 3 facility) in Zhangzhou, Fujian province in 2013, the expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities in Dandong, Liaoning province in 2013 and the commencement of production at our cultivation facilities in Changzhou, Jiangsu province in April 2013; and (ii) the commencement of production at our button mushroom industrial cultivation facilities in Chengdu, Sichuan province in October 2012, the expansion of cultivation capacity of button mushroom at our traditional cultivation facilities in Chengdu, Sichuan province in November 2013 and the expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in May and August 2013. The increase in our cost of sales was partially offset by a decrease in our cost of raw materials by 5.2% from RMB227.6 million for the year ended 31 December 2012 to RMB215.8 million for the year ended 31 December 2013, mainly as a result of a decrease in fresh fruit and vegetables and packaging materials due to a decrease in production volume of our canned food and other processed food products for the year ended 31 December 2013. Furthermore, manufacturing overheads decreased by 15.3% from RMB10.6 million for the year ended 31 December 2012 to RMB9.0 million for the year ended 31 December 2013 as a result of a decrease in production volume of our canned food and other processed food products for the year ended 31 December 2013. – 286 – FINANCIAL INFORMATION Business tax and auxiliary charges Our business tax and auxiliary charges decreased by 49.1% from RMB1.8 million for the year ended 31 December 2012 to RMB0.9 million for the year ended 31 December 2013, primarily attributable to a decreased in revenue generated from the sales of processed food products for the year ended 31 December 2013. Gross profit and gross profit margin Our gross profit increased by 43.8% from RMB121.8 million for the year ended 31 December 2012 to RMB175.2 million for the year ended 31 December 2013, primarily as a result of an increase in the sales of our king trumpet mushroom, button mushroom and straw mushroom. Our overall gross profit margin increased from 28.6% for the year ended 31 December 2012 to 37.2% for the year ended 31 December 2013. Gross profit generated from the sales of our king trumpet mushroom increased by 57.1% from RMB52.8 million for the year ended 31 December 2012 to RMB82.9 million for the year ended 31 December 2013, mainly attributable to the increased sales of king trumpet mushroom, button mushroom and straw mushroom as a result of the commencement of production and expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities of Zhangpu (No. 3 facility) in Zhangzhou, Fujian province in 2013, the expansion of cultivation capacity of king trumpet mushroom at our cultivation facilities in Dandong, Liaoning province in 2013 and the commencement of production at our cultivation facilities in Changzhou, Jiangsu province in April 2013. The gross profit margin of king trumpet mushroom increased from 38.9% for the year ended 31 December 2012 to 42.2% for the year ended 31 December 2013, primarily due to a decrease in average cost of king trumpet mushroom per kilogram. Gross profit generated from the sales of our button mushroom and straw mushroom increased by 156.5% from RMB19.5 million for the year ended 31 December 2012 to RMB50.1 million, mainly attributable to the increased sales of button mushroom and straw mushroom as a result of the commencement of production at our button mushroom industrial cultivation facilities in Chengdu, Sichuan province in October 2012, the expansion of cultivation capacity of button mushroom at our traditional cultivation facilities in Chengdu, Sichuan province in November 2013 and the expansion of cultivation capacity of button mushroom and straw mushroom at our cultivation facilities in Zhangzhou, Fujian province in May and August 2013. The gross profit margin of button mushroom and straw mushroom increased from 33.9% for the year ended 31 December 2012 to 52.1% for the year ended 31 December 2013, primarily due to an increase in average selling price of button mushroom and straw mushroom and a decrease in average cost of button mushroom and straw mushroom per kilogram. Gross profit generated from the sales of our canned food decreased by 11.3% from RMB29.9 million for the year ended 31 December 2012 to RMB26.5 million for the year ended 31 December 2013, mainly attributable to a decrease in the sales of our canned food such as canned edible fungi, canned green bean and canned bamboo shoots as a result of a decrease of orders of such products from trading companies. The gross profit margin of canned food increased from 18.0% for the year ended 31 December 2012 to 20.5% for the year ended 31 December 2013, primarily due to a decrease in average cost of canned food per kilogram. – 287 – FINANCIAL INFORMATION Gross profit generated from the sales of our other processed food products decreased by 22.5% from RMB21.4 million for the year ended 31 December 2012 to RMB16.6 million for the year ended 31 December 2013, mainly attributable to a decrease in the sales of our brined mushroom as a result of a decrease of orders of such products and a decrease in the sales of snacks as we decided to discontinue the production of snacks in 2013. The gross profit margin of other processed food products increased from 32.6% for the year ended 31 December 2012 to 33.3% for the year ended 31 December 2013, primarily due to an increase in the portion of sales volume of snacks which entailed a higher gross margin in the sales volume of our other processed food products as a result of the increase in production volume and marketing efforts. Other income Our other income increased by 17.9% from RMB5.8 million for the year ended 31 December 2012 to RMB6.8 million for the year ended 31 December 2013, primarily attributable to a substantial increase in the government subsidies from RMB0.6 million to RMB2.2 million as a result of one-off government monetary awards and subsidies of RMB1.6 million for well-known trademark and an agricultural industrialisation project in 2013 and an increase in interest income on bank deposits from RMB0.4 million for the year ended 31 December 2012 to RMB2.4 million for the year ended 31 December 2013. Selling expenses Our selling expenses increased by 17.2% from RMB5.9 million for the year ended 31 December 2012 to RMB6.9 million for the year ended 31 December 2013, primarily as a result of an increase in travelling and entertainment expenses of 58.3% from RMB0.7 million for the year ended 31 December 2012 to RMB1.1 million for the year ended 31 December 2013, which is mainly due to the increased marketing effort for our other processed food products in 2013. Such increase was partially offset by a decrease in the advertising and promotion expenses of 20.8%, primarily due to the decreased advertising and promotion expenses for our preserved vegetables and snacks in 2013. Our selling expenses as a percentage of our revenue of continuing operations remained stable at 1.5% for the year ended 31 December 2013 compared to 1.4% for the year ended 31 December 2012. Administrative expenses Administrative expenses decreased by 3.6% from RMB18.2 million for the year ended 31 December 2012 to RMB17.6 million for the year ended 31 December 2013, which was primarily due to a decrease in legal and professional fee of 44.6% as a result of decreased legal and professional fee in connection with our equity financing in 2013 and a decrease in rental expenses of 44.6% as a result of a decrease in the number of motor vehicles we rented in 2013. Our administrative expenses as a percentage of our revenue decreased from 4.3% for the year ended 31 December 2012 to 3.7% for the year ended 31 December 2013, as we continued to improve operating efficiency as a result of economies of scale. Such decrease was partially offset by the increase in salaries and employee benefits of our employees engaged in administrative activities of 11.4% as we continued to grow. Finance costs Our finance costs increased by 122.6% from RMB1.7 million for the year ended 31 December 2012 to RMB3.7 million for the year ended 31 December 2013, primarily as a result of an increase in interest on bank borrowings as a result of an increase in bank borrowings for the year ended 31 December 2013. – 288 – FINANCIAL INFORMATION Income tax expense Our income tax expense decreased by 43.0% from RMB10.6 million for the year ended 31 December 2012 to RMB6.0 million for the year ended 31 December 2013. Our effective tax rate decreased from 10.4% for the year ended 31 December 2012 to 3.9% for the year ended 31 December 2013. The decrease in income tax expense was mainly due to the decrease in revenue and profit of processed food products. The decrease in effective tax rate was mainly due to the increased proportion of income contributed by our PRC subsidiaries that enjoyed preferential tax treatment. Profit for the year from continuing operations As a result of the foregoing, our profit for the year from continuing operations increased by 62.0% from RMB91.2 million for the year ended 31 December 2012 to RMB147.8 million for the year ended 31 December 2013. Discontinued operation Profits from our discontinued trading operation decreased from RMB9.9 million for the year ended 31 December 2012 to nil for the year ended 31 December 2013 as we disposed Minhui Trading in 2012. LIQUIDITY AND CAPITAL RESOURCES Cash Flow The following table sets forth a summary of our cash flows information for the years indicated: Year ended 31 December Net cash generated from operating activities . . . Net cash used in investing activities . . . . . . . . . Net cash (used in)/generated from financing activities . . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 93,239 (42,067) 84,898 (51,362) 171,223 (57,582) (23,115) 14,023 68,031 Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of the year . . . . . . . . . . . . . . . . . . 28,057 47,559 181,672 79,231 107,288 154,847 Cash and cash equivalents at the end of the year . . . . . . . . . . . . . . . . . . . . 107,288 154,847 336,519 Cash flows generated from operating activities We derive our cash inflow from operating activities principally from the receipt of payments for the sale of our products. Our cash outflow from operating activities is principally for purchases of raw materials, salaries and employee benefits, cultivation overheads and manufacturing overheads. – 289 – FINANCIAL INFORMATION For the year ended 31 December 2014, we had net cash generated from operating activities of RMB171.2 million, which was primarily attributable to operating profit before working capital changes of RMB397.8 million and an increase in accruals and other payables of RMB8.6 million primarily due to (i) our increased salaries and employee benefits as a result of the increase in the number of our employees and general level of salaries and employee benefits for employees and (ii) legal and professional fee incurred for the purpose of the Listing. These cash inflows were partially offset by (i) an increase in biological assets of RMB212.9 million, primarily due to our continued increase in our cultivation capacity at our cultivation facilities; (ii) an increase in trade receivables of RMB12.0 million, primarily due to our increased sales of fresh edible fungi produce; and (iii) an increase in deposits, prepayments and other receivables of RMB9.1 million, primarily due to an increase in prepayment for canned food to be purchased by Greenfresh HK from canned food manufactures in the PRC because we were not granted credit term as Greenfresh HK commenced operation in 2014 and an increase in the receivables due from individual farmers related to our purchase of king trumpet mushroom. For the year ended 31 December 2013, we had net cash generated from operating activities of RMB84.9 million, which was primarily attributable to operating profit before working capital changes of RMB311.3 million and an increase in trade payables of RMB6.0 million primarily due to our increased purchase of raw materials as a result of an increase in volume of cultivation, production and sales of our products and increased purchase of king trumpet mushroom from individual farmers. These cash inflows were partially offset by (i) an increase in biological assets of RMB190.9 million, primarily due to our continued increase in our cultivation capacity at our cultivation facilities; (ii) a decrease in accruals and other payables of RMB8.5 million, primarily due to the settlement of acquisition price payable related to the acquisition of 5.0% equity interests in Zhangzhou Greenfresh from Mr. Dai Guanglong and settlement of prepayment of purchase of our canned food by Minhui Trading in 2012; and (iii) an increase in inventories of RMB7.2 million, primarily due to the increase in raw materials for the production of canned food as a result of the increase in the orders from trading companies for our products in 2013. For the year ended 31 December 2012, we had net cash generated from operating activities of RMB93.2 million, which was primarily attributable to operating profit before working capital changes of RMB220.3 million and a decrease in inventories of RMB15.3 million, primarily due to the decrease in work-in-progress and finished goods as a result of the decrease in the orders from trading companies for our canned food in the fourth quarter of 2012 and our tightening of control of inventories level in 2012. These cash inflows were partially offset by (i) an increase in biological assets of RMB97.3 million, primarily due to our continued increase in our cultivation capacity at our cultivation facilities; (ii) an increase in deposits, prepayments and other receivables of RMB23.7 million, primarily due to (a) an increase in rental prepayment of our button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province and our industrial cultivation facilities in Chengdu, Sichuan province; (b) an increase in rental deposit payment for the cultivation facilities at Dandong, Liaoning province; and (c) an increase in the prepayment to individual farmers for the purchase of king trumpet mushroom; and (iii) an increase in trade receivables of RMB17.1 million, primarily due to the increased sales of our processed food products in 2012. Cash flows used in investing activities Our cash outflow for investing activities primarily consisted of purchases of property, plant and equipment, purchases of prepaid land lease payments, money paid for acquisition of land use rights and advance to a Director. Our cash inflow for investing activities primarily consisted of interest received on bank deposit, repayment of loan from a director and proceeds from disposal of property, plant and equipment. – 290 – FINANCIAL INFORMATION For the year ended 31 December 2014, our net cash used in investing activities amounted to RMB57.6 million, which was primarily due to (i) the purchase of property, plant and equipment of RMB20.7 million which was mainly related to the construction of king trumpet mushroom bottle-cultivation facilities and dormitory building at our cultivation facilities of Jiaomei in Zhangzhou, Fujian province and the construction of production plants and office building at our production facilities in Zhangzhou, Fujian province and (ii) the prepayment for acquisition of a parcel of land in Zhangzhou, Fujian province of RMB38.7 million for Zhangzhou Biological Technology Food Industry Park. Such cash outflow were partially offset by the interest received on bank deposit of RMB1.8 million. For the year ended 31 December 2013, our net cash used in investing activities amounted to RMB51.4 million, which was primarily due to the purchase of property, plant and equipment of RMB31.6 million which was mainly related to the construction of king trumpet mushroom bottle-cultivation facilities and dormitory building at our cultivation facilities of Jiaomei in Zhangzhou, Fujian province and the construction of production plants and office building at our production facilities in Zhangzhou, Fujian province, and prepayment for acquisition of a piece of land in Hezhou, Guangxi Zhuang Autonomous Region of RMB43.8 million for the purpose of our expansion of cultivation capacity of king trumpet mushroom and canned food production capacity in the future. Such cash outflow were offset by (i) the repayment of a loan from Mr. Zheng Songhui of RMB21.6 million and (ii) the interest received on bank deposit of RMB2.4 million. For the year ended 31 December 2012, our net cash used in investing activities amounted to RMB42.1 million, which primarily due to (i) the prepaid land lease payments of RMB20.3 million which was mainly related to the purchase of land for our king trumpet mushroom cultivation facilities and production facilities of Jiaomei in Zhangzhou, Fujian province; (ii) the purchase of property, plant and equipment of RMB22.9 million, which was mainly related to the construction of production plants and office building at our production facilities in Zhangzhou, Fujian province, the construction of dormitory building at our cultivation facilities of Jiaomei in Zhangzhou, Fujian province and purchase of equipment and machinery; and (iii) the advance to a Mr. Zheng Songhui RMB1.3 million for investment purpose. These cash outflows were partially offset by the interest received on the bank deposit and an advance to Mr. Zheng Songhui of RMB2.4 million. Cash flows (used in)/generated from financing activities Our cash inflow for financing activities primarily consisted of new bank borrowings and capital injection upon issuance of shares. Our cash outflow for financing activities primarily consisted of repayments of bank borrowings and acquisition of equity interests of subsidiaries. For the year ended 31 December 2014, our net cash generated from financing activities amounted to RMB68.0 million, which was primarily related to the subscription of shares of our Company by Grand Ample of RMB69.7 million and new bank borrowing raised of RMB18.0 million. These cash inflows were offset by the repayment of bank borrowings of RMB20.0 million. For the year ended 31 December 2013, our net cash generated from financing activities amounted to RMB14.0 million, which was primarily related to the subscription of shares of our Company by COFCO Fund of RMB59.8 million and new bank borrowing raised of RMB20.0 million. These cash inflows were offset by the repayment of bank borrowings of RMB65.8 million. – 291 – FINANCIAL INFORMATION For the year ended 31 December 2012, our net cash used in financing activities amounted to RMB23.1 million, which was primarily related to the acquisition of 95.0% and 5.0% equity interests in Fujian Greenfresh Foods from Mr. Zheng Songhui and Mr. Zheng Tianming, respectively by Jingxiang Foods of RMB69.0 million under Reorganisation and the repayment of bank borrowing of RMB39.9 million. These cash outflows were offset by the new bank borrowings of RMB85.8 million. Current Assets and Liabilities The following table sets forth details of our current assets and current liabilities as at the dates indicated: As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 As at 30 April 2015 RMB’000 (Unaudited) Current assets Inventories . . . . . . . . . Biological assets . . . . . Trade receivables . . . . . Deposits, prepayments, and other receivables Due from a director . . . Due from shareholders . Bank and cash balances .......... .......... .......... 19,467 47,691 41,670 26,663 91,949 46,837 23,759 93,707 58,854 63,449 18,991 43,916 . . . . 15,067 21,632 328 107,288 65,257 – 328 154,847 113,039 – – 336,519 110,012 – – 416,842 Total current assets . . . . . . . . . . . . 253,143 385,881 625,878 653,210 . . . . . 10,139 19,744 65,800 – 5,674 16,176 11,254 20,000 2 1,134 16,480 19,844 18,000 – 212 13,502 14,818 10,000 – 160 Total current liabilities. . . . . . . . . . 101,357 48,566 54,536 38,480 Net current assets . . . . . . . . . . . . . . 151,786 337,315 571,432 614,730 . . . . . . . . . . . . . . . . Current liabilities Trade payables. . . . . . . . . . . Accruals and other payables . Bank loans . . . . . . . . . . . . . Due to a director . . . . . . . . . Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 292 – FINANCIAL INFORMATION We had net current assets of RMB151.8 million, RMB337.3 million and RMB571.4 million as at 31 December 2012, 2013 and 2014. We had net current assets of RMB614.7 million as at 30 April 2015, being the Latest Practicable Date for liquidity purposes. Our net current assets increased from RMB151.8 million as at 31 December 2012 to RMB337.3 million as at 31 December 2013. The increase was primarily attributable to (i) an increase of deposits, prepayments and other receivables of RMB50.2 million which was due to the prepaid land lease payment related to the acquisition of land use right of a parcel of land in Hezhou, Guangxi Zhuang Autonomous Region for developing our cultivation and production facilities for king trumpet mushroom and canned food in the future; (ii) an increase of bank and cash balances of RMB47.6 million which was due to the increased revenue generated from our sales of our products in 2013 and the issuance of shares to COFCO Fund at a consideration of US$9.5 million; (iii) an increase of biological assets of RMB44.3 million as a result of an increase in cultivation capacity at our button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province and the commencement of production at our cultivation facilities in Changzhou, Jiangsu province, accompanied by an increase in average selling price of button mushroom and straw mushroom in 2013; and (iv) a decrease of bank loans of RMB45.8 million due to the repayment of bank loans, partially offset by a decrease of amounts due from a director of RMB21.6 million due to the repayment of the advance by Mr. Zheng Songhui. Our net current assets increased from RMB337.3 million as at 31 December 2013 to RMB571.4 million as at 31 December 2014. The increase was primarily attributable to an increase in bank and cash balances of RMB181.7 million which was due to (i) the increased revenue generated from our sales of our products in 2014, (ii) the issuance of shares to Grand Ample at the consideration of RMB70.9 million in 2014 and (iii) the increase of deposits, prepayment and other receivables of RMB47.8 million mainly as a result of the prepayment for acquisition of a parcel of land in Zhangzhou, Fujian province of RMB38.7 million for Zhangzhou Biological Technology Food Industry Park, partially offset by an increase in accruals and other payables of RMB8.6 million as a result of legal and professional fee payable for the purpose of Listing. – 293 – FINANCIAL INFORMATION CERTAIN ITEMS OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Inventories Our inventories primarily consist of raw materials, work-in-progress and finished goods related to our fresh edible fungi produce and processed food products. The following table sets forth the breakdown of our inventories as at the dates indicated: As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . Work in progress . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . 4,755 11,594 3,118 11,633 10,648 4,382 8,213 14,389 1,157 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,467 26,663 23,759 Our inventories increased by 37.0% from RMB19.5 million as at 31 December 2012 to RMB26.6 million as at 31 December 2013 which was primarily attributable to an increase in raw materials as a result of an increase of orders of our canned food from trading companies near the year end of 2013. Our inventories decreased by 10.9% from RMB26.7 million as at 31 December 2013 to RMB23.8 million as at 31 December 2014 which was primarily attributable to (i) a decrease in the cost of raw materials as a result of the decreased cost of packaging materials with respect to our canned food in 2014 and the decreased stock of packaging materials with respect to our canned food in the fourth quarter of 2014 and (ii) a decrease in finished goods as a result of a decrease of orders of our canned from trading companies near the year end of 2014. We value inventories at the lower of cost and net realisable value. Cost is determined on weighted average basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of all production overheads expenditure, and where appropriate, labour contracting fees. Net realisable value is based on estimated selling prices in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. The following table sets forth our average inventory turnover days for the periods indicated: Year ended 31 December 2012 Average inventory turnover days (1) . . . . . . . . . . 2013 21.8 2014 16.1 15.5 Note: (1) Average inventory turnover days is calculated as the average of the beginning and ending inventory balances for the period, divided by the cost of sales (before biological fair value adjustments) for that period, multiplied by 365 days. – 294 – FINANCIAL INFORMATION The average inventory turnover days decreased from 21.8 days for the year ended 31 December 2012 to 16.1 days for the year ended 31 December 2013 and remained stable for the year ended 31 December 2014 being 15.5 days, which primarily as a result of our tightening of control of our cost of sales while our inventories remained stable over the same periods. As at 30 April 2015, RMB19.1 million, or 80.3% of inventories as at 31 December 2014 were sold or consumed. Biological assets Our biological assets consist of edible fungi and were stated at fair value less costs to sell as at the valuation dates. The following table sets forth the value of our biological assets as at the dates indicated: As at 31 December At the beginning of the year. . . Increases due to plantation. . . . Gain from changes in fair value costs to sell . . . . . . . . . . . . . Decreases due to harvest . . . . . .... .... less .... .... 2012 2013 2014 RMB’000 RMB’000 RMB’000 ........ ........ 48,240 135,518 47,691 211,283 91,949 225,134 ........ ........ 97,883 (233,950) 146,667 (313,692) 211,122 (434,498) 47,691 91,949 93,707 At the end of the year . . . . . . . . . . . . . . . . . . . The following table sets forth the realised and unrealised fair value gains on our biological assets and net profits from continuing operations excluding unrealised fair value gains during years indicated: Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 Fair value change of biological assets – realised . . . . . . . . . . . . . . . . . . . . . . . . . . – unrealised. . . . . . . . . . . . . . . . . . . . . . . . . 82,419 15,464 125,463 21,204 181,706 29,416 Net profits from continuing operations excluding unrealised fair value gains. . . . . . . 75,743 126,582 145,672 Gain from changes in fair value less cost to sell included those biological assets sold during the year (realised) and those biological assets not yet sold as at the respective period end date (unrealised). Biological assets were mushroom and were stated at fair value less costs to sell as at the reporting dates. The fair value was determined by JLL with reference to market-determined prices, cultivation areas, species, growing conditions, cost incurred and expected yield of crops. – 295 – FINANCIAL INFORMATION Market and cost approaches are adopted to value the agricultural produce of mushroom as at the end of respective years. During the growing period, cost approach is adopted. The costs of direct raw material, direct labour, labour service and leasing have been considered in the calculation of the fair values for the growing period and these costs are approximately to their fair value. During the harvesting period, market approach is adopted. Therefore, the fair values of the biological assets as at the end of respective years are calculated to be the product of market price and estimated the agricultural produce mushroom by deducting the reasonable cost related to selling. The fair value of our biological assets increased by 92.8% from RMB47.7 million as at 31 December 2012 to RMB91.9 million as at 31 December 2013, primarily due to an increase in cultivation capacity at our button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province and the commencement of production at our cultivation facilities in Changzhou, Jiangsu province, accompanied by an increase in average selling price of button mushroom and straw mushroom in 2013. The fair value of our biological assets increased by 1.9% from RMB91.9 million as at 31 December 2013 to RMB93.7 million as at 31 December 2014, primarily due to an increase in cultivation capacity at our industrial cultivation facilities in Chengdu, Sichuan province, accompanied by an increase in average selling price of button mushroom and straw mushroom in 2014. Trade receivables Our trade receivables primarily consist of receivables for products sold to our customers. The following table sets forth the breakdown of our trade receivables by business segments as at the dates indicated: As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 Continuing operations King trumpet mushroom, button mushroom and straw mushroom . . . . . . . . . . . . . . . . . . Canned food and other processed food products . . . . . . . . . . . . . . . . . . . . . . . 8,274 27,850 38,377 33,396 18,987 20,477 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,670 46,837 58,854 We grant different credit periods, ranging from 0 to 45 days to our customers depending on their credit history, historical sales performance, estimated future purchases, relationship history with us and business scale. – 296 – FINANCIAL INFORMATION Our trade receivables increased by 12.4% from RMB41.7 million as at 31 December 2012 to RMB46.8 million as at 31 December 2013, primarily attributable to the increased sales of our fresh edible fungi produce in 2013. Our trade receivables further increased to RMB58.9 million as at 31 December 2014, primarily attributable to the increased sales of our button mushroom in 2014. The following table sets forth an aging analysis of our trade receivables as at the dates indicated, based on the invoice date and net of allowance: As at 31 December 0 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 41,670 46,837 58,854 A majority of our trade receivables as at 31 December 2012, 2013 and 2014 were aged within 90 days, as most of the credit period granted to our customers were within 90 days. As at 31 December 2012, 2013 and 2014, trade receivables of RMB0.3 million, RMB2.6 million and nil were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The following table sets forth an aging analysis of our trade receivables outstanding which were not impaired as at the dates indicated: As at 31 December Up to 3 months . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 266 2,587 – As at 30 April 2015, RMB58.7 million, or 99.8% of trade receivables outstanding as at 31 December 2014 were subsequently settled. – 297 – FINANCIAL INFORMATION The following table sets forth our average trade receivables turnover days for the years indicated: Year ended 31 December 2012 Average trade receivables turnover days (1) . . . . . . . . . . . . . . . . . . . . . . Average trade receivables turnover days (from continuing operations) (2) . . . . . . . . . . . 2013 2014 34.1 34.3 35.3 33.8 34.3 35.3 Notes: (1) Average trade receivables turnover days is calculated as the average of the beginning and ending net trade receivables balances from continuing operations and discontinued operation for that period, divided by revenue for that period, multiplied by 365 days. (2) Average trade receivables turnover days is calculated as the average of the beginning and ending net trade receivables balances from continuing operations for that period, divided by revenue of continuing operations for that period, multiplied by 365 days. Our average trade receivables turnover days from continuing operations remained stable being 33.8 days for the year ended 31 December 2012 and 34.3 days for the year ended 31 December 2013, primarily attributable to our continued effort of settlement of trade receivables as our business grows. Our average trade receivables turnover days from continuing operations remained stable being 34.3 days for the year ended 31 December 2013 and 35.3 days for the year ended 31 December 2014, primarily attributable to our continued effort of settlement of trade receivables as our business grows. Deposits, prepayments and other receivables The deposits, prepayments and other receivables primarily consist of (i) deposit payments related to the purchase of raw materials, equipment and machinery and construction costs of cultivation and the production facilities in Zhangzhou, Fujian province; (ii) prepaid land lease payments for acquiring two parcels of land for our production facilities in Zhangzhou, Fujian province and Hezhou, Guangxi Zhuang Autonomous Region, respectively; (iii) prepayments for rental expenses for the leases of cultivation facilities in Zhangzhou, Fujian province and Chengdu, Sichuan province; and (iv) other receivables which primarily represent the receivables due from individual farmers related to our purchase of king trumpet mushroom and the rental deposit payment to the landlords at our cultivation facilities in Chengdu, Sichuan province and Dandong, Liaoning province. – 298 – FINANCIAL INFORMATION The following table sets forth a summary of our balance of prepayments, deposits and other receivables as at the dates indicated: As at 31 December Deposits . . . . . . . . . . . . . . . . . . . Money paid for acquisition of land Prepayments . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 . . . . 742 – 4,936 9,389 152 43,800 8,851 12,454 5,716 82,500 9,464 15,359 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,067 65,257 113,039 Our deposits decreased from RMB0.7 million as at 31 December 2012 to RMB0.2 million as at 31 December 2013, primarily attributable to a decrease in the deposit payment related to our construction of our production facilities in Zhangzhou, Fujian province. Our deposits significantly increased from RMB0.2 million for the year ended 31 December 2013 to RMB5.7 million as at 31 December 2014, primarily attributable to the deposit payment related to the purchase of canned food by Greenfresh HK and the deposit payment related to our purchase of equipment and machinery for the bottle-cultivation king trumpet mushroom at our cultivation facilities of Jiaomei in Zhangzhou, Fujian province. Our money paid for acquisition of land increased from nil as at 31 December 2012 to RMB43.8 million as at 31 December 2013, primarily attributable to the prepayment of the acquisition price related to the acquisition of a parcel of land in Hezhou, Guangxi Zhuang Autonomous Region for developing our cultivation and production facilities for king trumpet mushroom and canned food, in the future. Our money paid for acquisition of land as at 31 December 2014 related to the prepayment of the acquisition price of RMB43.8 million and RMB38.7 million related to the acquisition of two parcels of land in Hezhou, Guangxi Zhuang Autonomous Region and in Zhangzhou, Fuijian province, respectively, for Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park. – 299 – FINANCIAL INFORMATION Our prepayments increased from RMB4.9 million as at 31 December 2012 to RMB8.9 million as at 31 December 2013, primarily attributable to our increased rental prepayments of our cultivation facilities as a result of the expansion of our button mushroom and straw mushroom cultivation facilities in Zhangzhou, Fujian province and our button mushroom facilities in Chengdu, Sichuan province, and the prepayment of consulting fees paid to market consultant, an Independent Third Party, in connection with marketing and promotion of our brands of edible fungi products. Our prepayment increased from RMB8.9 million as at 31 December 2013 to RMB9.5 million as at 31 December 2014, primarily attributable to an increase in rental payment of our cultivation facilities as a result of the increased rent rate. Our other receivables increased from RMB9.4 million as at 31 December 2012 to RMB12.5 million as at 31 December 2013, primarily attributable to an increase in rental deposit payment to landlords of our cultivation facilities in Dandong, Liaoning province and Chengdu, Sichuan province. Our other receivables increased from RMB12.5 million as at 31 December 2013 to RMB15.4 million as at 31 December 2014, primarily attributable to an increase in the receivables due from individual farmers related to our purchase of king trumpet mushroom. Trade payables The following table sets forth our trade payables as at the dates indicated: As at 31 December Trade payables . . . . . . . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 10,139 16,176 16,480 Our trade payables primarily relate to purchase of raw materials from our suppliers, purchase of king trumpet mushroom from individual farmers and labour contracting fees paid to individual farmers for cultivation of button mushroom and straw mushroom with general credit terms of 15 to 30 days. We normally settle such payables by wire transfer. Our trade payables increased from RMB10.1 million as at 31 December 2012 to RMB16.2 million as at 31 December 2013, primarily attributable to our increased purchase of raw materials as a result of an increase in volume of cultivation, production and sales of our products and increased purchase of king trumpet mushroom from individual farmers. Our trade payables increased from RMB16.2 million as at 31 December 2013 to RMB16.5 million as at 31 December 2014 primarily attributable to our increased purchase of raw materials as a result of an increase in volume of cultivation, production and sales of our fresh edible fungi produce. – 300 – FINANCIAL INFORMATION The following table sets forth the aging analysis of our trade payables as at the dates indicated: As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 0 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . 91 to 180 days . . . . . . . . . . . . . . . . . . . . . . . . Over 1 year. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,862 277 – 16,151 1 24 16,067 20 393 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,139 16,176 16,480 As at 30 April 2015, RMB15.1 million, or 91.3% of trade payables outstanding as at 31 December 2014 were subsequently settled. The following table sets forth our average trade payables turnover days for the years indicated: Year ended 31 December 2012 Average trade payables turnover days (1) . . . . . . . . . . . . . . . . . . . . . . Average trade payables turnover days (from continuing operations) (2) . . . . . . . . . . . 2013 2014 18.2 10.9 10.8 8.0 10.9 10.8 Notes: (1) Average trade payables turnover days from continuing operations and discontinued operation is calculated as the average of the beginning and ending net trade payables balances for the period, divided by the cost of sales for that period, multiplied by 365 days. (2) Average trade payables turnover days from continuing operations is calculated as the average of the beginning and ending net trade payables balances for the period, divided by the cost of sales for that period, multiplied by 365 days. Our average trade payables turnover days from continuing operations increased from 8.0 days for the year ended 31 December 2012 to 10.9 days for the year ended 31 December 2013, primarily attributable to the increased purchase of raw material for our fresh edible fungi produce as a result of increased cultivation and sales volume of our fresh edible fungi produce. Our average trade payables turnover days from continuing operations remained stable being 10.8 days for the year ended 31 December 2014. – 301 – FINANCIAL INFORMATION Accruals and other payables Our accruals and other payables primarily consist of accrued salaries and employee benefits, other tax payables, construction cost payables, amount due to a former shareholder of a PRC subsidiary, deposit received and other payables. The following table sets forth our accruals and other payables as at the dates indicated: As at 31 December Accruals Salaries and employee benefits . . . . . . . . . . . . Other payables Other tax payables . . . . . . . . . . . . . Construction cost payables . . . . . . . Amount due to a former shareholder of a PRC subsidiary . . . . . . . . . . . Deposit received . . . . . . . . . . . . . . . Other payables . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 7,878 9,441 13,408 ........ ........ 2,396 – 1,570 122 1,470 392 ........ ........ ........ 2,100 6,280 1,090 – – 121 – – 4,574 11,866 1,813 6,436 19,744 11,254 19,844 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our accrued salaries and employee benefits amounted to RMB7.9 million, RMB9.4 million and RMB13.4 million as at 31 December 2012, 2013 and 2014, respectively, which mainly represented salaries, social welfare scheme contributions, bonus and commission accrued for the month of December of that year for our employees and the provision made for the social insurance contributions and housing provident fund contributions. Such general increase in accrued salaries and employee benefits was mainly due to the general increase in the number of our employees and the general level of salaries and employee benefits for employees. Construction cost payables amounted to nil, RMB0.1 million and RMB0.4 million as at 31 December 2012, 2013 and 2014, respectively, which mainly related to the construction cost of cultivation facilities, production facilities and dormitory building in Zhangzhou, Fujian province. – 302 – FINANCIAL INFORMATION Amount due to a former shareholder of a PRC subsidiary amounted to RMB2.1 million, nil and nil as at 31 December 2012, 2013 and 2014, respectively, which mainly represented the acquisition price payable related to the acquisition of 5.0% equity interests in Zhangzhou Greenfresh by Fujian Greenfresh Foods from Mr. Dai Guanglong. Deposit received amounted to RMB6.3 million, nil and nil as at 31 December 2012, 2013 and 2014, respectively, which mainly represented the prepayment of purchase of our canned food by an Independent Third Party. Other payables amounted to RMB1.0 million, RMB0.1 million and RMB4.6 million which represented (i) the professional and legal fee incurred in connection with the share issuance to COFCO Fund and (ii) the professional and legal fee incurred for the purpose of the Listing. RELATED PARTY TRANSACTIONS As at 31 December 2012, 2013 and 2014, Mr. Zheng Songhui, Mr. Zheng Songhui’s spouse had provided personal guarantee to our Group for obtaining certain banking facilities from the banks. As at 31 December 2012, 2013 and 2014, total bank loans of RMB65.8 million, RMB20.0 million and RMB18.0 million, respectively were drawn down respectively from these facilities. We received a confirmation letter dated 8 December 2014 issued by the relevant bank which irrevocably and unconditionally promised to release the guarantee provided by Mr. Zheng Songhui and his spouse upon the Listing. As at 31 December 2013, Mr. Zheng Tianming and Mr. Zheng Tianming’s spouse had provided personal guarantees to our Group for obtaining certain bank loan of RMB20.0 million. Such guarantees was released when the relevant bank loan was repaid in January 2014. During the Track Record Period, we had provided advances to Mr. Zheng Songhui for the purpose of investment. As at 31 December 2012, 2013 and 2014, the outstanding balances of such advances amounted to RMB21.6 million, nil and nil, respectively. All the advances are unsecured, interest-free and have no fixed repayment terms. During the Track Record Period, Mr. Zheng Songhui provided advance to us of RMB2,000 during the year ended 31 December 2012. Such advance was related to the payment of administrative expense on behalf of Greenfresh HK and was fully settled during the year ended 31 December 2014. Due from Shareholders represents the consideration for (1) 1 share with a par value of US$1.00 allotted and issued by the Company to Close Subscribers (Cayman) Limited, the initial subscriber, and was transferred to Song Rising; and (2) 34,999 shares, 7,500 shares, 3,000 shares, 3,000 shares and 1,500 shares with a par value of US$1.00 allotted and issued by the Company to Song Rising, Sunny Foods, Ms. GUO XUEYAN, Mr. Chan Kin Wa and Riemann Investment when the Company was incorporated on 28 March 2011, which has been settled on 18 December 2014. – 303 – FINANCIAL INFORMATION The following table sets forth the balances of the amounts due from/(to) related parties as at the dates indicated: As at 31 December Due from/(to) a Director . . . . . . . . . . . . . . . . . Due from Shareholders . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 21,632 328 (2) 328 – – Our Directors confirm that the related party transactions disclosed herein were conducted on an arm’s length basis, normal commercial terms and/or terms that are no less favorable than terms available from Independent Third Parties which are considered fair and reasonable and in the interest of our Shareholders as a whole and would not distort our results of operations during the Track Record Period or make the results of operations not reflective of our future performance. Working Capital Taking into account the financial resources available to us, including the estimated net proceeds from the Global Offering and our operating cash inflow, our Directors are of the opinion that we have sufficient working capital for our present requirements and for at least next 12 months from the date of this prospectus. CAPITAL EXPENDITURE Capital expenditures during the Track Record Period The following table sets forth our capital expenditures during the years indicated: Year ended 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 Additions to property, plant and equipment . . . . 22,903 31,588 20,723 Prepaid land lease payment . . . . . . . . . . . . . . . 36,347 – – Our capital expenditures for the three years ended 31 December 2012, 2013 and 2014 represented additions of property, plant and equipment made for our cultivation and production facilities in Zhangzhou, Fujian province for our king trumpet mushroom and canned food and prepaid land lease payment related to the acquisition of parcels of land in Zhangzhou, Fujian province for our king trumpet mushroom and canned food during the Track Record Period. We financed our capital expenditures primarily through our cash generated from our operating activities. – 304 – FINANCIAL INFORMATION Planned capital expenditures For the year ending 31 December 2015, we estimate that the capital expenditures will amount to approximately RMB496.5 million primarily for (i) the construction of new production facilities for our processed food products in Zhangzhou, Fujian province; (ii) the development of Guangxi Biological Technology Food Industry Park and Zhangzhou Biological Technology Food Industry Park, (iii) acquiring two king trumpet mushroom facilities in China, (iv) acquiring laboratory and testing equipment for our king trumpet mushroom research and development laboratory in Zhangzhou, Fujian province and (v) the construction of mushroom garden affiliated to our China Edible Fungi Scientific Museum at our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province. Our Group’s projected capital expenditures are subject to revision based upon any future changes in our business plan, market conditions, economic and regulatory environment. Please refer to the section headed “Future Plans and Use of Proceeds” in this prospectus for further information. CONTRACTUAL COMMITMENTS Capital Commitments The following table sets forth our capital commitments for the periods indicated: As at 31 December Prepaid land lease payment and property, plant and equipment – Contracted but not provided for . . . . . . . . . . . . . . . – Authorised but not contracted for . . . . . . . . . . . . . . Acquisition of king trumpet mushroom facilities – Authorised but not contracted for . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 As at 30 April 2015 RMB’000 (unaudited) 32,794 63,768 67,293 65,680 – – 334,950 334,950 – – 200,000 200,000 32,794 63,768 602,243 600,630 The capital commitments as at 31 December 2012, 2013 and 2014 were primarily related to (i) the acquisition of property, plant and equipment for our cultivation and production facilities in Zhangzhou, Fujian province for our king trumpet mushroom and canned food; (ii) the acquisition of parcels of land in Hezhou, Guangxi Zhuang Autonomous Region for our Guangxi Biological Technology Food Industry Park; and (iii) the purchase of equipment and machinery for bottle-cultivation king trumpet mushroom at our cultivation facilities in Zhangzhou, Fujian province. – 305 – FINANCIAL INFORMATION Lease and Other Commitments Operating lease and other payments represent rentals payable by us for our offices, cultivation and production facilities and the labour contracting fees paid to individual farmers for cultivation of our button mushroom and straw mushroom. Leases are negotiated for an average term of 1 to 50 years and rentals are fixed over the lease terms and do not include contingent rentals. Our Group had total future minimum lease and other payment under non-cancellable operating lease are repayable as follows: As at 31 December 2012 2013 2014 RMB’000 RMB’000 RMB’000 As at 30 April 2015 RMB’000 (unaudited) Within one year . . . . . . . . . . . . . . . . In the second to fifth years, inclusive . . . . . . . . . . . . . . . . . . . After five years . . . . . . . . . . . . . . . . 14,008 22,636 21,598 21,349 15,149 10,679 29,422 12,053 24,399 9,842 23,356 9,120 Total. . . . . . . . . . . . . . . . . . . . . . . . 39,836 64,111 55,839 53,825 We expect to fund our contractual commitments and capital expenditures primarily through our cash generated from our operating activities, bank borrowings and net proceeds of the Global Offering. We believe that these sources of funding will be sufficient to finance our contractual commitments and capital expenditures needs for the next 12 months. INDEBTEDNESS All our bank loans as at 31 December 2012, 2013 and 2014 were repayable on demand or due within one year. As at 31 December 2012, 2013 and 2014, our total outstanding balance of bank loans was RMB65.8 million, RMB20.0 million and RMB18.0 million, respectively. The following table sets forth a breakdown of our bank loans as at the dates indicated: As at 31 December Bank loans repayable on demand or within one year. . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 65,800 20,000 18,000 As at 30 April 2015 RMB’000 (unaudited) 10,000 During the Track Record Period, we primarily used our bank loans for general working capital. As at 30 April 2015, we did not have any unutilised banking facilities. – 306 – FINANCIAL INFORMATION Our bank loans decreased from RMB65.8 million as at 31 December 2012 to RMB20.0 million as at 31 December 2013, primarily attributable to the repayment of the majority of our bank loans in 2013. Our bank loans further decreased to RMB18.0 million as at 31 December 2014, primarily attributable to the repayment of part of our bank loans in 2014. As at 31 December 2012, 2013 and 2014, our bank loans of RMB65.8 million, RMB20.0 million and RMB18.0 million, respectively, were secured by personal guarantees provided by Mr. Zheng Songhui and Mr. Zheng Tianming and their spouses, former shareholder of a subsidiary and her spouse and a corporate guarantee provided by Longhuai Industry (Zhangzhou) Co., Ltd. (龍懷工業(漳州)有限公司), being a company owned by a friend of a director. Our bank loans are denominated in Renminbi and U.S. dollars. As at 31 December 2012, 2013 and 2014, the average effective interest rates of our bank loans per annum were 6.00% to 6.89%, 6.30% and 6.60%, respectively. There are no material covenants relating to our outstanding bank loan which would impact or restrict our ability to undertake additional debt or equity financing. Our Directors have confirmed that our Group had not had any material default with regard to our trade or other payables or any bank borrowings, and had not breached any covenants in our bank borrowings during the Track Record Period and up to the Latest Practicable Date. Our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, we had not experienced any difficulty in obtaining credit facilities or withdrawal of facilities, request for early repayment, default in payments or breach of financial covenants of bank borrowings. Our Directors have confirmed that we did not have any plan to raise material external debt financing as at the date of this prospectus. Except as disclosed above, as at 30 April 2015, we did not have any outstanding mortgages, charges, debentures, loan capital, bank overdrafts, loans, debt securities or other similar indebtedness, finance leases or hire purchase commitments, liabilities under acceptances or acceptance credits or any guarantees. We confirm that there had not been any material adverse change in our indebtedness position since 30 April 2015. CONTINGENT LIABILITIES Except as disclosed in this prospectus, our Group had no material contingent liabilities as at 30 April 2015. Our Group is not involved in any current material legal proceedings, nor is our Group aware of any pending or potential material legal proceedings involving our Group. If our Group was involved in such material legal proceedings, we would record any loss contingencies when, based on information then available, it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We confirm that there had not been any material change in the level of our contingent liabilities since 30 April 2015. – 307 – FINANCIAL INFORMATION KEY FINANCIAL RATIOS The following table sets forth certain financial ratios as at the dates or for the years indicated: As at or for the year ended 31 December 2012 2013 2014 Liquidity ratios Current ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . Quick ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.3 7.9 7.4 11.5 11.0 Capital adequacy ratios Gearing ratio (3) . . . . . . . . . . . . . . . . . . . . . . . . Net debt to equity ratio (4) . . . . . . . . . . . . . . . . 21.5% Net cash 3.9% Net cash 2.4% Net cash Profitability ratios Return on equity (5) . . . . . . . . . . . . . . . . . . . . . Return on assets (6) . . . . . . . . . . . . . . . . . . . . . . 29.8% 22.4% 28.8% 26.3% 23.1% 21.5% Notes: (1) Current ratio represents total current assets divided by current liabilities as at the end of the year. (2) Quick ratio represents total current assets less inventories divided by total current liabilities as at the end of the year. (3) Gearing ratio represents total borrowings divided by total equity as at the end of the year. (4) Net debt to equity ratio represents net debt divided by total equity as at the end of the year. Net debt is calculated as total borrowings less bank balances and cash. (5) Return on equity represents profit for the year from continuing operations divided by total equity as at the end of the year and multiplied by 100%. (6) Return on assets represents profit for the year from continuing operations divided by total assets as at the end of the year and multiplied by 100%. – 308 – FINANCIAL INFORMATION Current ratio and quick ratio Our current ratio and quick ratio increased from 2.5 and 2.3 as at 31 December 2012 to 7.9 and 7.4, respectively, as at 31 December 2013, primarily attributable to an increase in biological assets as a result of the continued expansion of our cultivation capacity of our edible fungi at our cultivation facilities, the increase of deposits, prepayments and other receivables as a result of the prepayment of acquisition price related to the acquisition of land in Hezhou, Guangxi Zhuang Autonomous Region as our cultivation and production facilities for our king trumpet mushroom and canned food and an increase in bank and cash balances as a result of an increase in revenue generated from our sales of our products and the issuance of shares to COFCO Fund at a consideration of US$9.5 million. Our current ratio and quick ratio increased from 7.9 and 7.4 as at 31 December 2013 to 11.5 and 11.0, respectively, as at 31 December 2014, primarily attributable to an increase in bank and cash balances as a result of an increase in revenue generated from the sales of our products and the issuance of shares to Grand Ample at a consideration of RMB70.9 million. Gearing ratio Our gearing ratio decreased from 21.5% as at 31 December 2012 to 3.9% as at 31 December 2013, primarily attributable to a significant decrease in bank loans in 2013 due to the repayment of a majority of our bank borrowings in 2013. Our gearing ratio decreased from 3.9% as at 31 December 2013 to 2.4% as at 31 December 2014, primarily attributable to a decrease in bank loans in 2014 due to the repayment of part of our bank borrowings in 2014. Net debt to equity ratio As at 31 December 2012, 2013 and 2014, we had total borrowings of RMB65.8 million, RMB20.0 million and RMB18.0 million, while our bank balances and cash amounted to RMB107.3 million, RMB154.8 million and RMB336.5 million, respectively. Accordingly, we were in a net cash position as at 31 December 2012, 2013 and 2014. Return on equity Our return on equity slightly decreased from 29.8% for the year ended 31 December 2012 to 28.8% for the year ended 31 December 2013, primarily as a result of the issuance of shares to COFCO Fund at a consideration of US$9.5 million which resulted in our total equity increased at a higher percentage than the increase in our profit from continuing operations. Our return on equity ratio decreased from 28.8% for the year ended 31 December 2013 to 23.1% for the year ended 31 December 2014, primarily as a result of the issuance of shares to Grand Ample at a consideration of RMB70.9 million which resulted in our total equity increased at a higher percentage than the increase in our profit from continuing operations. – 309 – FINANCIAL INFORMATION Return on assets Our return on assets ratio increased from 22.4% for the year ended 31 December 2012 to 26.3% for the year ended 31 December 2013, primarily as a result of the increase in profit from continuing operations as a result of the increased sales of our products. Our return on assets ratio decreased from 26.3% for the year ended 31 December 2013 to 21.5% for the year ended 31 December 2014, primarily as a result of issuance of shares to Grand Ample at a consideration of RMB70.9 million which resulted in our total assets increased at a higher percentage than the increase in our profit from continuing operations. OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS As at the Latest Practicable Date, we had not entered into any off-balance sheet transactions. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS We are exposed to various types of market risks in the ordinary course of our business, including foreign currency risk, credit risk, liquidity risk and interest rate risk. Our risk management program focuses on the unpredictability of financial markets and seeks to minimise the potential adverse effects of such risks on our financial performances. Foreign currency risk We have minimal exposure to foreign currency risk as most of our business transactions, assets and liabilities are principally denominated in the functional currencies of our Group, U.S. dollars, Hong Kong dollars and Renminbi. We currently do not have a foreign currency hedging policy in respect of other foreign currency transactions, assets and liabilities. We will monitor our foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise. Credit risk The carrying amount of the cash and bank balances, trade and other receivables, and amounts due from a Director and Shareholders included in the statement of financial position represents our Group’s maximum exposure to credit risk in relation to our financial assets. We has no significant concentrations of credit risk. We have policies in place to ensure that sales are made to customers with an appropriate credit history. Amounts due from a Director and Shareholders are closely monitored by the Directors. The credit risk on cash and bank balances is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. – 310 – FINANCIAL INFORMATION Liquidity Risk Our Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term. The following tables set forth maturity analysis of our Group’s financial liabilities as at the dates indicated: Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years HK$’000 HK$’000 HK$’000 HK$’000 As at 31 December 2012 Trade payables. . . . . . . . . . . . . . . . . Accruals and other payables . . . . . . . Bank loans . . . . . . . . . . . . . . . . . . . 10,139 19,744 68,196 – – – – – – – – – Total. . . . . . . . . . . . . . . . . . . . . . . . 98,079 – – – As at 31 December 2013 Trade payables. . . . . . . . . . . Accruals and other payables . Due to director . . . . . . . . . . Bank loans . . . . . . . . . . . . . . . . . 16,176 11,254 2 20,021 – – – – – – – – – – – – Total. . . . . . . . . . . . . . . . . . . . . . . . 47,453 – – – As at 31 December 2014 Trade payables. . . . . . . . . . . . . . . . . Accruals and other payables . . . . . . . Bank loans . . . . . . . . . . . . . . . . . . . 16,840 19,844 18,029 – – – – – – – – – Total. . . . . . . . . . . . . . . . . . . . . . . . 54,353 – – – . . . . . . . . . . . . . . . . . . . . – 311 – FINANCIAL INFORMATION Interest Rate Risk Our Group’s exposure to interest rate risk arises from our bank deposits. These deposits bear interests at variable rates varied with the then prevailing market condition. As at 31 December 2012, 2013 and 2014, we estimated that a general increase/decrease of 10 basis points in interest rates, with all other variables held constant, would have increased/(decreased) our Group’s profit after tax for the years as indicated: Year ended 31 December After-tax profit increase/(decrease) 10 basis points higher . . . . . . . . . . . . . . . . . . . (10) basis points lower . . . . . . . . . . . . . . . . . . 2012 2013 2014 RMB’000 RMB’000 RMB’000 89 (89) 129 (129) 252 (252) The sensitivity analysis above indicates the impact on our Group’s profit for the periods and retained profits that would have arisen assuming that there is an annualised impact on interest income and expense by a change in interest rates. The analysis has been performed on the same basis through the indicated periods. DIVIDEND POLICY During the Track Record Period, our Company did not declare any dividends to our then shareholders. The payment and the amount of any dividends, if paid, will depend on the results of operations, cash flows, financial condition, statutory and regulatory restrictions on the payment of dividends by us, future prospects and other factors that we may consider relevant. Holders of the Shares will be entitled to receive such dividends pro rata according to the amounts paid up or credited as paid up on the Shares. The declaration, payment and amount of dividends will be subject to our discretion. Dividends may be paid only out of our distributable profits as permitted under the relevant laws. To the extent profits are distributed as dividends, such portion of profits will not be available to be reinvested in our operations. There can be no assurance that we will be able to declare or distribute any dividend in the amount set forth in any plan of the Board or at all. The dividend distribution record in the past may not be used as a reference or basis to determine the level of dividends that may be declared or paid by us in the future. Going forward, we may distribute dividends by way of cash or by other means that our Directors consider appropriate. A decision to distribute any interim dividend or recommend any final dividend will be at the discretion of our Board. In addition, any final dividend will be subject to Shareholders’ approval. Our Board will review our Company’s dividend policy from time to time in light of the following factors in determining whether dividends are to be declared and paid: • financial results of our Company; • Shareholders’ interests; – 312 – FINANCIAL INFORMATION • general business conditions, strategies and future expansion needs; • our Company’s capital requirements; • the payment by our subsidiaries of cash dividends to our Company; • possible effects on liquidity and financial position of our Company; and • other factors our Board may deem relevant. Subject to, among others, the factors described above, our Directors currently intend to recommend dividends of around 30.0% of our net profit available for distribution to our Shareholders in the foreseeable future. DISTRIBUTABLE RESERVES As at 31 December 2014, our reserves available for distribution to our Shareholders were RMB725.1 million. The Companies Law provides that share premium account of an exempted company incorporated in the Cayman Islands, such as our Company, may be applied in such manner as it may from time to time determine, subject to the provisions, if any, of its memorandum and articles of association, provided that no distribution or dividend may be paid to its members out of the share premium account unless, immediately following the date on which the distribution or dividend is proposed to be paid, such company shall be able to pay its debts as they fall due in the ordinary course of business. LISTING EXPENSES We incurred listing expenses of RMB11.0 million for the year ended 31 December 2014 which was recognised as administrative expenses. We expect to incur further listing expenses of approximately RMB27.0 million including the underwriting commission and other fees in relation to the New Share (assuming an Offer Price of HK$4.88 per Offer Share, being the mid-point of the Offer Price range), out of which RMB7.6 million will be recognised as administrative expenses and RMB19.4 million will be charged against equity upon successful listing under the relevant accounting standards. We do not believe the remaining expenses will have a material impact on our results of operations. VALUATION OF BIOLOGICAL ASSETS The Independent Valuers We have engaged JLL, a firm of independent qualified professional valuers, to determine the fair value of our biological assets as at 31 December 2011, 2012, 2013 and 2014, respectively. The key members of JLL valuers include Mr. Simon M.K. Chan, Mr. Michael Q. Ding and Professor Li Nanyi. – 313 – FINANCIAL INFORMATION Mr. Simon M.K. Chan, Regional Director at JLL, is a Fellow of the Hong Kong Institute of Certified Public Accountants (HKICPA) and a Fellow of CPA Australia. He is also a Certified Valuation Analyst (CVA), a member of The International Association of Consultants, Valuers and Analysts (IACVA), a member of Canadian Institute of Mining, Metallurgy and Petroleum (CIM), and a member of The Australasian Institute of Mining and Metallurgy (AusIMM). Simon oversees the business valuation services of JLL and has over 15 years of accounting, auditing, corporate advisory and valuation experiences. He has provided a wide range of valuation services to numerous listed and listing companies of different industries in China, Hong Kong, Singapore and the United States. Simon has also participated in certain large scale IPOs of State-owned and privately-owned enterprises in China. He oversaw the valuation of dairy cows of China Modern Dairy Holdings Ltd. (1117.HK) for this company’s initial public offering and subsequent financial reports. He also led the valuation of biological assets, such as trees, rabbits, chickens and cows, for Hong Kong listed companies including Chenming Paper (1812.HK), Kandda Food (834.HK) and Huishan Dairy (6863.HK), as well as numerous private companies for their IFRS accounting proposes. Mr. Michael Q. Ding, Director at JLL, has over 8 years of working experience in the field of finance and investment, and provides services to multinational companies, including with respect to initial public offerings of various enterprises and has experience in the valuation of biological assets (trees for two Hong Kong listed companies), equity, financial instruments, intangible assets and current assets and liabilities. He is a member of the Royal Institution of Chartered Surveyors. Professor Li Nanyi, an associate professor in the Zhejiang A&F University (浙江農林大學), is a member of Mycological Society of China. She received her Master of Science in Microbiology from Henan Agricultural University (河南農業大學). She earned her Doctorate of Agronomy in Plant Pathology from the College of Agriculture and Biotechnology of the Zhejiang University (浙江大學). She had working experience in the Zhejiang Academy of Agricultural Postdoctoral Work Station (浙江省農科 院博士後工作站). Her main research focuses include cultivation of edible fungi, new edible fungi species breeding, identification and examination of sources of edible fungi species, detection of edible fungi virus and molecular marker-assisted breeding. She has also published various academic articles in different journals over the years. She was also awarded the third place of the Zhejiang Science and Technology Progress Award (浙江省科學技術進步三等獎) and the third place of the Liang Xi Forestry Science and Technology Award (梁希林業科學技術獎三等獎). Based on market reputation and relevant background research, our Directors and the Sole Sponsor is satisfied that JLL is independent from us and is competent in conducting a valuation on our biological assets. Valuation Method The market approach considers prices recently paid for similar assets, with adjustments made to market prices to reflect condition and utility of the appraised assets relative to the market comparative. Assets for which there is an established used market may be valued by this approach. The cost approach considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation or obsolescence present, whether arising from physical, functional or economic causes. The cost approach generally furnishes the most reliable indication of value for assets without a known used market. – 314 – FINANCIAL INFORMATION The income approach is the conversion of expected periodic benefits of ownership into an indication of value. It is based on the principle that an informed buyer would pay no more for the project than an amount equal to the present worth of anticipated future benefits (income) from the same or a substantially similar project with a similar risk profile. The Sole Sponsor held various discussions with JLL in relation to the valuation procedures, valuation techniques and information required to prepare their valuation report. The Sole Sponsor further compared the valuation in technique chosen with those used in other similar transactions and market practice. In the valuation by JLL, market and cost approaches are adopted to value the agricultural produce of edible fungi as at the valuation dates. In terms of the biological nature of edible fungi, the whole life cycle can be classified as growing period and harvesting period. We employed industrial cultivation method for our king trumpet mushroom. The entire cultivation process of king trumpet mushroom is approximately 60 days. We employed two kinds of cultivation methods for button mushroom, namely industrial cultivation and traditional cultivation. The length of cultivation process of button mushroom varies under these two cultivation methods. The following table set forth the growing period and harvesting period of king trumpet mushroom and button mushroom: Mushroom Classification Growing Period Harvesting Period King trumpet mushroom 0 to 43th day (1) 44th to 60th day (1) Button mushroom • Industrial cultivation: 0 to 38th day and the period of time of future crops as at the valuation date (2) • Industrial cultivation: the remaining days of a certain crop as at the valuation date (2) • Traditional cultivation: the period of time of future crops as at the valuation date (3) • Traditional cultivation: the remaining days of a certain crop as at the valuation date (3) Notes: (1) The periods vary due to different planation condition at different locations. (2) The entire industrial cultivation process of button mushroom takes approximately 60 days. The period from 0 to 38th day is the growing period. The sowing is conducted only once at the beginning of the entire industrial cultivation process. Button mushroom under industrial cultivation could be harvested three times during the period from 39th to 60th day which is divided into three crops. The period of time of such three crops is estimated to be approximately 3 days, 10 days and 10 days, respectively. Each crop is assumed to be harvested with equal quantity of button mushroom. After harvesting the third crop, a new 60-day cultivation process begins. The valuation scope only considers the button mushroom under industrial cultivation within 60 days before the valuation date. If button mushroom is within the period from 0 to 38th day as at the valuation date, it is considered to be in the growing period. If button mushroom is within the period of a certain crop out of the three crops as at the valuation date, the remaining days of such crop to be harvested are considered as harvesting period, the past days of such crop are not considered in the valuation scope because button mushroom in such past days have already been harvested. The period of time of future crops are considered as the growing period because we assume button mushroom of future crops is in the process of growing and has not reached maturity for harvesting as at the valuation date. – 315 – FINANCIAL INFORMATION (3) The entire traditional cultivation process takes approximately eight to nine months from August to April of the following year. The sowing is conducted only once at the beginning of the entire traditional cultivation process. Button mushroom under traditional cultivation could be harvested 11 times from November to April of the following year which is divided into 11 crops and the length of period of each 11 crops is different subject to the weather and geographical condition. After harvesting the last crop, a new cultivation process will begin in August. As at the valuation date, button mushroom under traditional cultivation is within the period of a certain crop out of 11 crops, the remaining days of such crop to be harvested are considered as harvesting period; the past days of such crop are not considered in the valuation scope because button mushroom in such past days have already been harvested. The period of time of future crops are considered as the growing period because we assume button mushroom of future crops is in the process of growing and has not reached maturity for harvesting as at the valuation date. During the growing period, cost approach is adopted. The costs of direct raw material, direct labour, labour service and leasing have been considered in the calculation of the fair values for the growing period. During the harvesting period, market approach is adopted. We understand that there is an active market for the edible fungi and market prices are available for domestic edible fungi. Therefore, the fair values of the biological assets as at the valuation dates are calculated to be the product of market price and estimated the agricultural produce edible fungi by deducting the reasonable cost related to selling. Key Assumptions and Inputs The key assumptions and inputs include the classification of cultivation methods, historical sales volume of edible fungi, market price of edible fungi and cost to sell. JLL also assumes that historical trend and data will be maintained and there will be no material change in the existing political, legal, technological, fiscal or economic condition which may adversely affect our business. Our Directors confirmed, and the Sole Sponsor concurred, that the components used by JLL in the valuation process are consistent with market factors and assumptions used in the measurement. The key assumptions and inputs for determining the fair value of our biological assets include the following: • Two kinds of cultivation methods have been employed, namely industrial cultivation and traditional cultivation for edible fungi fresh produce. Industrial cultivation method is applied to produce king trumpet mushroom and part of button mushroom. Traditional cultivation method is principally applied to produce button mushroom. • The sales volume of edible fungi as at valuation dates was calculated based on historical harvest and sales records. • The weighted average market price of edible fungi is adopted. The weighted average market price was calculated based on the historical selling prices of king trumpet mushroom and button mushroom. • Costs to sell include direct raw material, direct labour, labour service and leasing which was calculated based on historical data. – 316 – FINANCIAL INFORMATION JLL conducted the physical inspection for the health condition, quality and quantity of our biological assets as at 31 December 2014. The valuation of our biological assets as at 31 December 2011, 31 December 2012 and 31 December 2013 by JLL was performed retrospectively by relying on the accuracy and reliability of historical data of biological assets such as sales volume, selling prices and costs to sell provided by us. In particular, JLL has performed the following work with respect to the valuation of our biological assets: • In December 2014, JLL conducted inspection of king trumpet mushroom and button mushroom cultivation facilities, physically counted the number of the cultivation bags of king trumpet mushroom and compared with the same of the historical record, checked health condition and cultivation status of king trumpet mushroom and button mushroom; took king trumpet mushroom and button mushroom samples to observe their physical appearance; • JLL made reasonable enquiries with the Reporting Accountant and Internal Control Consultant engaged by our Company to confirm that our Company had performed regular stock-take with no material deviations and had no material deficiency on biological asset management policy and internal control on the inventory system; • JLL obtained and reviewed that our Company has kept proper record by daily log sheet on key factors affecting the growth of mushroom, such as temperature and humidity, which demonstrated the health condition and quality of the biological assets; and • JLL conducted market research and checked academic materials to ensure the historical selling prices of king trumpet mushroom and button mushroom sold by us were in line with market transactions of king trumpet mushroom and button mushroom. The valuation conducted by JLL is subject to the caveat that JLL relied substantially on the accuracy, completeness and reasonableness of the various assumptions and other data provided by us in preparation of the valuation report. While these assumptions as adopted in the valuation process have been in line with the actual results, there is no assurance that there will be no significant deviation in the future. Please refer to the section headed “Risk Factors – Our results of operations are subject to biological asset fair value adjustments, which can be highly volatile and are subject to a number of assumptions” in this prospectus. There are significant unobservable inputs which are mainly the expected future cash flow and the discount rate. The higher the future cash flows or the lower the discount rate, the higher the fair value determined. For the details of unobservable inputs used to measure our mushroom plantation, please refer to note 24 of the Accountants’ Report set out in Appendix I to this prospectus. The Sole Sponsor discussed with JLL in relation to the valuation bases and assumptions and understands that JLL has conducted the biological asset valuation in accordance with International Accounting Standard 41 – Agriculture, issued by the International Accounting Standards Board and with reference to the International Valuation Standards, issued by the International Valuation Standards Council. The key assumptions, as detailed above, are made based on the historical actual operation performance of the Company. JLL has obtained and discussed with us and the Reporting Accountants regarding the historical actual operation data from us, and considered and reviewed whether they are appropriate and reasonable to be used in the valuation. Our Directors confirm that the assumptions adopted are consistent with industry practice and in line with the actual figures during the Track Record Period. – 317 – FINANCIAL INFORMATION Further, the Reporting Accountants have performed the procedures in accordance with the HKSA 620 Using the Work of an Expert. The Reporting Accountants have made inquiries regarding the source data used and procedures undertaken by JLL in the valuations and obtained an understanding on the assumptions and methods used. Based on the procedures undertaken, the Reporting Accountants are satisfied that the valuation technique chosen and the source data used in the valuation are appropriate and reasonable. The Sole Sponsor has held various discussions with JLL in relation to the valuation methodology and assumptions adopted, the valuation techniques and the inputs used in the valuation by JLL to understand their valuation process and reviewed the qualification and relevant valuation experience of JLL and its professional valuers. The Sole Sponsor has further compared the valuation technique chosen, bases and assumptions of the valuation with those used in other similar transactions and market practice. In addition, the Sponsor has discussed with the Reporting Accountants regarding the valuation of biological assets by JLL and noted that the Reporting Accountants had performed procedures in accordance with the relevant auditing standards. Given the above, the Sponsor is satisfied that the valuation methodology and major inputs used in the valuation of the biological assets of our Company are appropriate and reasonable. Sensitivity Analysis The following tables illustrate the sensitivity of the fair value of our biological assets that would arise if the weighted average market price of king trumpet mushroom and button mushroom had changed during the periods indicated, assuming all other variables remained constant. The fair value of our biological assets increases when the weighted average market price increases, and decreases when the weighted average market price decreases. King Trumpet mushroom Weighted average market price was RMB10.8 per kilogram, RMB8.0 per kilogram and RMB7.1 per kilogram for the three years ended 31 December 2012, 2013 and 2014, respectively. Change in weighted average market price . . . . . . . -30% -15% 15% 30% Change in Valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . For the year ended 31 December 2013 . . . . . . . . . For the year ended 31 December 2014 . . . . . . . . . – 318 – (838,401) (660,553) (802,110) (419,201) (330,277) (401,055) 419,201 330,277 401,055 838,401 660,553 802,110 FINANCIAL INFORMATION Button mushroom Weighted average market price was RMB7.0 per kilogram, RMB7.2 per kilogram and RMB7.2 per kilogram for the three years ended 31 December 2012, 2013 and 2014, respectively. Change in weighted average market price . . . . . . . -30% -15% 15% 30% Change in Valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . (1,127,571) (563,785) 563,785 1,127,571 For the year ended 31 December 2013 . . . . . . . . . (3,118,896) (1,559,448) 1,559,448 3,118,896 For the year ended 31 December 2014 . . . . . . . . . (2,826,003) (1,413,002) 1,413,002 2,826,003 The following tables illustrate the sensitivity of the fair value of our biological assets in each of our cultivation facilities that would arise if the weighted average market price of king trumpet mushroom and button mushroom had changed during the periods indicated, assuming all other variables remained constant. The fair value of our biological assets increases when the weighted average market price increases, and decreases when the weighted average market price decreases. King trumpet mushroom in Zhangzhou, Fujian province Weighted average market price was RMB10.6 per kilogram, RMB7.8 per kilogram and RMB7.0 per kilogram for the three years ended 31 December 2012, 2013 and 2014, respectively. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . For the year ended 31 December 2013 . . . . . . . . . For the year ended 31 December 2014 . . . . . . . . . – 319 – (639,674) (518,396) (671,254) (319,837) (259,198) (335,627) 319,837 259,198 335,627 639,674 518,396 671,254 FINANCIAL INFORMATION King trumpet mushroom in Dandong, Liaoning province Weighted average market price was RMB12.1 per kilogram, RMB8.5 per kilogram and RMB7.4 per kilogram for the three years ended 31 December 2012, 2013 and 2014, respectively. Our cultivation facilities in Dandong, Liaoning province commenced operation in 2012. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . For the year ended 31 December 2013 . . . . . . . . . For the year ended 31 December 2014 . . . . . . . . . (205,645) (89,757) (92,616) (102,823) (44,879) (46,308) 102,823 44,879 46,308 205,645 89,757 92,616 King trumpet mushroom in Changzhou, Jiangsu province Weighted average market price was RMB8.1 per kilogram and RMB7.3 per kilogram for the two years ended 31 December 2013 and 2014, respectively. Our cultivation facilities in Changzhou, Jiangsu province commenced operation in 2013. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2013 . . . . . . . . . For the year ended 31 December 2014 . . . . . . . . . (49,427) (34,819) (24,714) (17,409) 24,714 17,409 49,427 34,819 Button mushroom at industrial cultivation facilities in Chengdu, Sichuan province Weighted average market price was RMB8.1 per kilogram, RMB7.8 per kilogram and RMB10.5 per kilogram for the three years ended 31 December 2012, 2013 and 2014, respectively. Our button mushroom industrial cultivation facilities in Chengdu, Sichuan province commenced operation in 2012. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . For the year ended 31 December 2013 . . . . . . . . . For the year ended 31 December 2014 . . . . . . . . . – 320 – (10,354) (58,626) (201,718) (5,177) (29,313) (100,859) 5,177 29,313 100,859 10,354 58,626 201,718 FINANCIAL INFORMATION Button mushroom in Zhangzhou, Fujian province Weighted average market price was RMB7.1 per kilogram, RMB7.2 per kilogram and RMB7.1 per kilogram for the three years ended 31 December 2012, 2013 and 2014. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . (877,590) (438,795) 438,795 877,590 For the year ended 31 December 2013 . . . . . . . . . (2,189,930) (1,094,965) 1,094,965 2,189,930 For the year ended 31 December 2014 . . . . . . . . . (2,347,699) (1,173,849) 1,173,849 2,347,699 Button mushroom in Ningdu, Jiangxi province Weighted average market price was RMB6.7 per kilogram for the year ended 31 December 2012. Our cultivation facilities in Ningdu, Jiangxi province was closed in 2013. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . (185,351) (92,675) 92,675 185,351 Button mushroom at traditional cultivation facilities in Chengdu, Sichuan province Weighted average market price was RMB6.5 per kilogram, RMB7.1 per kilogram and RMB7.1 per kilogram for the three years ended 31 December 2012, 2013 and 2014, respectively. Change in weighted average market price . . . . . . . -30.0% -15.0% 15.0% 30.0% Change in valuation results (RMB) For the year ended 31 December 2012 . . . . . . . . . For the year ended 31 December 2013 . . . . . . . . . For the year ended 31 December 2014 . . . . . . . . . – 321 – (57,305) (174,746) (300,607) (28,652) 87,373 (150,303) 28,652 87,373 150,303 57,305 174,746 300,607 FINANCIAL INFORMATION Stock-take and Internal Control Stock-take We perform a full stock-take of king trumpet mushroom twice a year, i.e. on 30 June and 31 December every year and a full stock-take of button mushroom on an annual basis, i.e. on 31 December every year at our cultivation facilities to ensure the physical existence and monitor the physical condition of our biological assets. For each full stock-take, we prepare a detailed stock-take plan with instructions. The team of a full stock-take include three members, namely warehouse staff, non-warehouse staff (normally staff from the finance department) and external auditor. The result of each full stock-take is documented on a stock count sheet which is signed by all three members who participated in the stock-take. The stock count sheet will be submitted to and kept by the finance department. Any variance between the results of the stock-take and the inventory record shall be reported to the management. The results of the stock-take will be recorded after the approval of the management. If the variance between the results of the full stock-take and the inventory record exceed 10.0%, a new full stock-take needs to be performed. During the Track Record Period, there was no material damage or death of our biological assets. Internal Control and Management System We have maintained a comprehensive policy for biological asset management. Our biological asset management policy covers, among other things, purchase and inspection of raw materials, monitoring the cultivation process, accounting records, record keeping and stock-take. To facilitate the implementation of our biological asset management policy, we employ an electronic information management system developed by a third-party developer, in collaboration with the accounting system, to keep comprehensive record of our biological assets. – 322 – FINANCIAL INFORMATION UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS The following is an unaudited pro forma statement at adjusted consolidated net tangible assets of our Group with has been prepared on the basis of the notes set out below, to illustrate how the Global Offering may have affected the net tangible assets attributable to owners of the Company had it occurred as at 31 December 2014. It has been prepared for illustrative purpose only and, because of its nature, may not give a true picture of the financial position of our Group. Based on an Offer Price of HK$4.58 per Share. . . . . . Based on an Offer Price of HK$5.18 per Share. . . . . . Consolidated audited net tangible assets attributable to owners of the Company as at 31 December 2014 Estimated net proceeds from the Global Offering (Note 1) Unaudited pro forma adjusted net tangible assets RMB’000 RMB’000 RMB’000 Unaudited pro forma adjusted net tangible assets attributable to owners of the Company per Share (Note 2) RMB HK$ 758,776 439,342 1,198,118 2.40 3.00 758,776 497,658 1,256,434 2.51 3.14 Notes: (1) The adjustment to the pro forma statement of net tangible assets reflects the estimated proceeds from the Global Offering to be received by the Company. The estimated proceeds from the Global Offering is based on the Offer Price of HK$4.58 and HK$5.18, respectively, being the lower and higher end price of the stated Offer Price range, and 125,000,000 Shares, net of underwriting fee and other estimated issue expenses of approximately RMB18.6 million and RMB20.3 million, respectively. (2) The number of Shares is based on a total of 500,000,000 Shares issued, adjusted as if the Global Offering had occurred at 31 December 2014. Our property interests as at 30 April 2015 have been valued by JLL, an independent property valuer, and the relevant property valuation report is set out in Appendix III “Property Valuation” to this prospectus. The above adjustment does not take into account the surplus arising from the revaluation of our property interests amounting to RMB23.6 million. The revaluation surplus was not incorporated in our financial statements for the year ended 31 December 2014. If the valuation surplus was recorded in our financial statements, an additional annual depreciation expense and amortisation charges of prepaid land lease payments would be charged by approximately RMB511,000. (3) The unaudited pro forma adjusted consolidated net tangible assets attributable to owners of the Company and the amounts per Share are arrived at after the adjustments referred to in the preceding paragraphs and on the basis that 500,000,000 shares are expected to be in issue following the Global Offering (including 125,000,000 shares newly issued upon the Global Offering) and the respective Offer Prices of HK$4.58 and HK$5.18 per Share. (4) The estimated net proceeds from the Global Offering and the unaudited pro forma adjusted consolidated net tangible assets attributable to owners of the Company per Share are converted from or into Hong Kong dollars at an exchange rate of RMB0.80 to HK$1.00, the prevailing rate of Hong Kong Association of Banks on 1 June 2015. No representation is made that the HK$ amounts have been, could have been or may be converted into RMB, or vice versa, at that rate. (5) No adjustment has been made to reflect any trading result or other transactions of our Group entered into subsequent to 31 December 2014. – 323 – FINANCIAL INFORMATION PROPERTY INTEREST AND PROPERTY VALUATION The following table sets forth the reconciliation of the net book value of our Group’s property interests comprising buildings and construction in progress as at 31 December 2014 to their market values as stated in the property valuation report as at 30 April 2015 as set out in Appendix III to this prospectus: RMB (’000) Net book value of property interests of our Group as at 31 December 2014 . . . . Movements during the four months ended 30 April 2015 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,941 Net book value of property interests of our Group as at 30 April 2015 . . . . . . . Valuation surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,548 23,622 Valuation of our Group’s property interests as at 30 April 2015 . . . . . . . . . . . . 156,170 1,800 (1,193) NO MATERIAL ADVERSE CHANGE After performing sufficient due diligence work which our Directors consider appropriate and after due and careful consideration, our Directors confirm that, up to the date of this prospectus, there has been no material adverse change in our financial or trading position or prospects since 31 December 2014, being the date on which our latest audited consolidated financial statements were prepared, and there is no event since 31 December 2014 which would materially affect the information as set forth in the Accountants’ Report in Appendix I to this prospectus. DISCLOSURE REQUIRED UNDER RULES 13.13 TO 13.19 OF THE LISTING RULES Our Directors confirm that, except as otherwise disclosed in this prospectus, as at the Latest Practicable Date, there have been no circumstances that would give rise to a disclosure requirement under Rules 13.13 to 13.19 of the Listing Rules had the Shares listed on the Stock Exchange. – 324 – FUTURE PLANS AND USE OF PROCEEDS FUTURE PLANS Please refer to the section headed “Business – Our Strategies” in this prospectus for a detailed description of our future plans. USE OF PROCEEDS The table below sets forth the estimated net proceeds of the Global Offering that we will receive after deduction of underwriting fees and commissions, fees and anticipated expenses payable by us in connection with the Global Offering: Assuming an Offer Price of HK$5.18 per Offer Share (being the high end of the Offer Price range stated in this prospectus) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assuming an Offer Price of HK$4.88 per Offer Share being the mid-point of the Offer Price range stated in this prospectus) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assuming an Offer Price of HK$4.58 per Offer Share (being the low end of the Offer Price range stated in this prospectus) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assuming the Over-allotment Option is not exercised Assuming the Over-allotment Option is exercised in full HK$ in million HK$ in million 603.3 719.9 566.9 676.7 530.4 633.5 We currently intend to apply the net proceeds of approximately HK$566.9 million for the following purposes assuming the Over-allotment Option is not exercised and assuming an Offer Price of HK$4.88 per Share, being the mid-point of the Offer Price range stated in this prospectus: • Approximately 31.1%, or HK$176.3 million will be used for developing the Guangxi Biological Technology Food Industry Park, which include (i) the land levelling and greening; (ii) the construction of facilities and acquisition and installation of relevant equipment for the cultivation of king trumpet mushroom; (iii) the construction of facilities and acquisition and installation of relevant equipment for the bottle-cultivation king trumpet mushroom; (iv) the construction of facilities and acquisition and installation of relevant equipment for the canned food; and (v) the construction of administrative building, staff dormitory and ancillary facilities. The total investment cost of the Guangxi Biological Technology Food Industry Park is expected to be RMB246.0 million (equivalent to approximately HK$307.5 million); • Approximately 37.7%, or HK$213.7 million will be used for developing the Zhangzhou Biological Technology Food Industry Park, which include (i) the acquisition of land and land levelling and greening; (ii) the construction of facilities and acquisition and installation of relevant equipment for the cultivation of king trumpet mushroom; (iii) the construction of facilities and acquisition and installation of the relevant equipment for canned food and (iv) the construction of administrative building, staff dormitory and ancillary facilities. The total investment cost of the Zhangzhou Biological Technology Food Industry Park is expected to be approximately RMB201.0 million (equivalent to approximately HK$251.3 million); – 325 – FUTURE PLANS AND USE OF PROCEEDS • Approximately 25.7%, or HK$145.7 million will be used for acquiring two king trumpet mushroom cultivation facilities in China; • Approximately 1.1%, or HK$6.3 million will be used for acquiring laboratory and testing equipment for the purpose of expansion of our king trumpet mushroom research and development laboratory in Zhangzhou, Fujian province; and • Approximately 1.1%, or HK$6.3 million will be used for the construction of mushroom garden as the science education base affiliated to our China Edible Fungi Scientific Museum at our king trumpet mushroom cultivation facility in Zhangzhou, Fujian province. • Approximately 3.3% or HK$18.6 million will be used for working capital and other general corporate purpose. The above allocation of the net proceeds will be adjusted on a pro-rata basis in the event that the Over-allotment Option is not exercised and the Offer Price is fixed at a higher or lower level compared to the mid-point of the estimated Offer Price range stated in this prospectus. In the event that the Over-allotment Option is exercised in full, the net proceeds will increase to approximately HK$676.7 million, assuming an Offer Price of HK$4.88 per Share, being the mid-point of the Offer Price range stated in this prospectus. In such event, we intend to allocate the net proceeds to the above purposes on a pro-rata basis. Assuming the Over-allotment Option is exercised in full, the above allocation of the net proceeds will be further adjusted on a pro-rata basis in the event that the Offer Price is fixed at a higher or lower level compared to the mid-point of the estimated Offer Price range stated in this prospectus. In each of the above circumstances, we expect that the respective portions of the net proceeds from the Global Offering will be fully utilised during the year ending 31 December 2016 for the above purposes. To the extent that the net proceeds are not immediately used for the above purposes, we intend to deposit the net proceeds into short-term demand deposits, interest-bearing bank accounts with licensed banks or financial institutions as permitted by the relevant laws and regulations. We estimate that the net proceeds to the Selling Shareholders from the Sale Shares (after deduction of proportional underwriting fees and estimated expense payable by our Selling Shareholders in relation to the Global Offering, assuming the Over-allotment Option is not exercised and assuming an offer price of HK$4.88 per Offer Share, being the mid-point of the indicative Offer Price range) will be approximately HK$112.4 million. Our Company will not receive any of the proceeds from the sale of the Sale Shares. The Selling Shareholders will not receive any of the net proceeds from the exercise of the Over-allotment Option. – 326 – CORNERSTONE INVESTOR THE CORNERSTONE PLACING We have entered into cornerstone investment agreement with the following cornerstone investor (the “Cornerstone Investor”), who has agreed to subscribe for such number of our Offer Shares (rounded down to the nearest whole board lot of 1,000 Offer Shares) which may be purchased with an aggregate amount of approximately HK$50.0 million (the “Cornerstone Placing”) at the Offer Price. Assuming an Offer Price of HK$4.88 (being the mid-point of the Offer Price range set out in this prospectus), the total number of Offer Shares to be subscribed by the Cornerstone Investor would be 10,245,000 Shares, representing approximately 6.83% of the Offer Shares initially available under the Global Offering and approximately 2.05% of the Shares in issue upon completion of the Global Offering and assuming that the Over-allotment Option is not exercised. The Cornerstone Placing will form part of the International Placing and the Cornerstone Investor will not subscribe for any Offer Share under the Global Offering (other than and pursuant to its cornerstone investment agreement). The Offer Shares to be subscribed for by the Cornerstone Investor will rank pari passu in all respects with the other fully paid Offer Shares in issue upon completion of the Global Offering and will be counted towards the public float of our Company. Immediately following the completion of the Global Offering, the Cornerstone Investor will not have any board representation in our Company, nor will the Cornerstone Investor become a substantial shareholder of our Company (as defined under the Listing Rules). The Offer Shares to be subscribed for by the Cornerstone Investor will not be affected by any reallocation of the Offer Shares between the International Placing and the Hong Kong Public Offering in the event of over-subscription under the Hong Kong Public Offering as described in the section headed “Structure of the Global Offering—The Hong Kong Public Offering” in this prospectus. To the best knowledge of our Company, the Cornerstone Investor is an Independent Third Party, not our connected person and not an existing shareholder or close associate of our Group. Details of the allocation to the Cornerstone Investor will be disclosed in the announcement of results of allocations in the Hong Kong Public Offering to be published on or around Wednesday, 17 June 2015. CORNERSTONE INVESTOR We set forth below a brief description of our Cornerstone Investor: Shenzhen He Xi Capital Investment Management Partnership (Limited Partnership) Shenzhen He Xi Capital Investment Management Partnership (Limited Partnership) (“He Xi Capital”) has agreed to subscribe through an asset manager that is a QDII, or procure such asset manager to subscribe on its behalf, such number of Shares (rounded down to the nearest whole board lot of 1,000 Shares) which may be purchased with an aggregate amount of HK$50.0 million) at the Offer Price. Assuming an Offer Price of HK$4.88, being the mid-point of the Offer Price range set out in this prospectus, the total number of Shares that He Xi Capital would subscribe for would be 10,245,000 Shares, representing approximately 2.05% of the Shares in issue immediately following the completion of the Global Offering, assuming that the Over-allotment Option is not exercised. – 327 – CORNERSTONE INVESTOR He Xi Capital is a capital investment management partnership registered in Shenzhen, Guangdong province in July 2013 specialised in capital investment, asset management and corporate advisory businesses. He Xi Capital is mainly engaged in investment in private equity and endeavours to become a well-known enterprise by provision of specialised and efficient service in China. CONDITIONS PRECEDENT The subscription of the Cornerstone Investor is subject to, among other things, the following conditions precedent: (a) the underwriting agreement for the Hong Kong Public Offering and the underwriting agreement for the International Placing having been entered into, become effective and having become unconditional (in accordance with their respective original terms, as subsequently varied by agreement of the parties thereto or waived, to the extent it may be waived, by the relevant parties) by no later than the time and date as specified in these underwriting agreements; (b) neither of the aforesaid underwriting agreements having been terminated; (c) no laws shall have been enacted or promulgated which prohibit the consummation of the transactions contemplated under the relevant cornerstone investment agreement and there shall be no orders or injunctions from a court of competent jurisdiction in effect precluding or prohibiting consummation of such transactions; and (d) the respective representations, warranties and confirmations of the Cornerstone Investor and our Company under the relevant cornerstone investment agreement are accurate and true and not misleading and that there is no material breach of the relevant cornerstone investment agreement on the part of the Cornerstone Investor or our Company. RESTRICTIONS ON THE CORNERSTONE INVESTOR’S INVESTMENT The Cornerstone Investor has agreed and undertaken that, without the prior written consent of our Company and the Sole Global Coordinator, it will not, whether directly or indirectly, at any time during the period of six months from the Listing Date, dispose of (as defined in the cornerstone investment agreement) any of the Shares subscribed for by it pursuant to the relevant cornerstone investment agreement. – 328 – UNDERWRITING HONG KONG UNDERWRITERS The Sole Global Coordinator Essence International Securities (Hong Kong) Limited Joint Bookrunners and Joint Lead Managers Essence International Securities (Hong Kong) Limited Haitong International Securities Company Limited Co-lead Manager SBI China Capital Financial Services Limited UNDERWRITING ARRANGEMENTS AND EXPENSES Hong Kong Underwriting Agreement Pursuant to the Hong Kong Underwriting Agreement, our Company is offering the Hong Kong Public Offer Shares for subscription, subject to the terms and conditions of this prospectus and the Application Forms relating thereto, at the Offer Price. Subject to, among other matters, the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the Shares in issue and to be issued as mentioned in this prospectus and the Offer Price having been determined by the Company and the Sole Global Coordinator at or prior to Thursday, 11 June 2015 or such other date or time as may be agreed between the Company and the Sole Global Coordinator (for itself and on behalf of the other Hong Kong Underwriters) but in any event not later than Saturday, 13 June 2015, the Hong Kong Underwriters have agreed to subscribe for or procure subscribers to subscribe for, on the terms and conditions of this prospectus and the Application Forms relating thereto, the Hong Kong Public Offer Shares now being offered for subscription under the Hong Kong Public Offering and which are not taken up under the Hong Kong Public Offering. – 329 – UNDERWRITING Grounds for termination The Sole Global Coordinator (for itself and on behalf of the other Hong Kong Underwriters) shall be entitled, in its sole and absolute discretion, by notice in writing to our Company to terminate the Hong Kong Underwriting Agreement with immediate effect if, at any time prior to 8:00 a.m. on the Listing Date: (i) there shall develop, occur, exist or come into effect: (a) any event, or series of events, beyond the reasonable control of the Hong Kong Underwriters (including, without limitation, acts of government, strikes, lock-outs, fire, explosion, flooding, civil commotion, acts of war, acts of God, acts of terrorism, riot, public disorder, economic sanctions, outbreak of diseases or epidemics including SARS and avian influenza and such related/mutated forms or interruption or delay in transportation) in or affecting Hong Kong, the PRC, the United States, the United Kingdom, the European Union (or any member thereof), the Cayman Islands, the BVI or any jurisdiction relevant to any member of our Group or the Global Offering (collectively, the “Relevant Jurisdictions”) which in the reasonable opinion of the Sole Global Coordinator has or would have the effect of making any part of the Hong Kong Underwriting Agreement (including underwriting) incapable of performance in accordance with its terms or which prevents the processing of applications and/or payments pursuant to the Global Offering or pursuant to the underwriting thereof; or (b) any change or development involving a prospective change, or any event or series of events likely to result in any change or development involving a prospective change in local, national, international, financial, economic, political, military, industrial, fiscal, regulatory or market conditions and matters and/or disaster or any monetary or trading settlement systems (including any moratorium, suspension or material restriction on trading in securities generally on the Stock Exchange, or a material fluctuation in the exchange rate of Hong Kong dollars against any foreign currency, or any interruption in securities settlement or clearance service or procedures in the Relevant Jurisdictions); or (c) any new law or change or development involving a prospective change in existing laws or any change or development involving a prospective change in the interpretation or application thereof by any court or other competent authority in any of the Relevant Jurisdictions; or (d) the imposition of economic sanctions, in whatever form, directly or indirectly, by, or for any of the Relevant Jurisdictions; or (e) a change or development occurs involving a prospective change in taxation or exchange control (or the implementation of any exchange control) in any of the Relevant Jurisdictions; or (f) any material change or development involving a prospective change, or a materialisation of, any of the risks set forth in the section headed “Risk Factors” in this prospectus; or (g) any litigation or claim of material importance of any third party being threatened or instigated against any member of our Group; or – 330 – UNDERWRITING (h) a valid demand by any creditor for repayment or payment of any indebtedness of any member of our Group or in respect of which any member of our Group is liable prior to its stated maturity; or (i) any loss or damage sustained by any member of our Group (howsoever caused and whether or not the subject of any insurance or claim against any person); or (j) a petition is presented for the winding up or liquidation of any member of our Group or any member of our Group makes any composition or arrangement with its creditors or enters into a scheme of arrangement or any resolution is passed for the winding-up of any member of our Group or a provisional liquidator, receiver or manager is appointed to take over all or part of the assets or undertaking of any member of our Group or anything analogous thereto occurs in respect of any member of our Group; or (k) any general moratorium on commercial banking activities in Hong Kong (imposed by the Financial Secretary of Hong Kong and/or the Hong Kong Monetary Authority or other competent authority) or any of the Relevant Jurisdictions, which in the sole reasonable opinion of the Sole Global Coordinator (for itself and on behalf of the other Hong Kong Underwriters): (1) is/are or shall have or could be expected to have a material adverse effect on the business, financial or other condition or prospect of our Group as a whole or in the case of sub-paragraph (e) above, to any present or prospective shareholder of the Company in his, her or its capacity as such; or (2) has/have or shall have or could reasonably be expected to have an adverse effect on the success, marketability or pricing of the Global Offering or the level of applications under the Hong Kong Public Offering or the level of interest under the International Placing; or (3) make(s) it inadvisable, inexpedient or impracticable for the Global Offering to proceed; or (ii) there has come to the notice of the Sole Global Coordinator: (a) that any statement, reasonably considered by the Sole Global Coordinator to be material, contained in any of this prospectus, the Application Forms and any documents in connection with the Global Offering was when the same was issued, or has become, untrue, incorrect or misleading in any material respect; or (b) that any matter has arisen or has been discovered which would, had it arisen or been discovered immediately before the date of this prospectus, constitute an omission therefrom reasonably considered by the Sole Global Coordinator to be material to the Global Offering; or (c) any material breach of any of the obligations imposed upon any party to the Hong Kong Underwriting Agreement or the International Underwriting Agreement (other than on any of the Hong Kong Underwriters or the International Underwriters); or – 331 – UNDERWRITING (d) any change or development reasonably considered by the Sole Global Coordinator to have or could be expected to have a material adverse effect on business affairs, prospects or the financial or trading position of our Group as a whole; or (e) any breach, reasonably considered by the Sole Global Coordinator to be material, of any of the warranties; or (f) any of RSM Nelson Wheeler, JLL, Walkers, Jun He Law Offices, RSMIC or Fujian Bo Hai Engineering Technology Co., Ltd has withdrawn its respective consent to the issue of this prospectus with the inclusion of its reports, letters, summaries of valuations and/or legal opinions (as the case may be) and references to its name included in the form and context in which it, respectively, appears, or Euromonitor has withdrawn its authorisation to the publication, issuing to the public and use of its name and data in this prospectus; or (g) approval for the listing of and permission to deal in the Offer Shares to be issued or sold (including any additional Offer Shares that may be issued pursuant to the exercise of the Over-allotment Option Shares) on the Stock Exchange is refused or not granted, other than subject to customary conditions, on or before the listing approval date, or if granted, the approval is subsequently withdrawn, qualified (other than by customary conditions) or withheld; or (h) our Company withdraws the Hong Kong Public Offer Documents (as defined in the Hong Kong Underwriting Agreement) or the International Placing Documents (as defined in the Hong Kong Underwriting Agreement) (or any other documents used in connection with the contemplated subscription and sale of the Offer Shares) or the Global Offering; or (iii) the International Underwriting Agreement and/or Price Determination Agreement shall not have been executed at or before 12:00 noon on Thursday, 11 June 2015 (or such other date or time as may be agreed between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the Hong Kong Underwriters and the International Underwriters) and in any event not later than Saturday, 13 June 2015 due to any reason whatsoever. Undertakings to the Stock Exchange Undertakings by our Company Pursuant to Rule 10.08 of the Listing Rules, the Company has undertaken to the Stock Exchange that, no further Shares or securities convertible into equity securities (whether or not of a class already listed) may be issued by the Company or form the subject of any agreement to such issue within six months from the Listing Date (whether or not such issue of Shares or our securities will be completed within six months from the Listing Date), except pursuant to the Global Offering or for the circumstances prescribed by Rule 10.08 of the Listing Rules. Undertakings by the Controlling Shareholders Pursuant to Rule 10.07 of the Listing Rules, each of the Controlling Shareholders undertakes to the Stock Exchange and to our Company that except pursuant to the Global Offering (including the offer for sale of the Sale Shares by the Selling Shareholders and the Over-allotment Option) and the Stock Borrowing Agreement, they will not at any time: – 332 – UNDERWRITING (a) during the period commencing on the date by reference to which disclosure of our interests in our Company is made in this prospectus and ending on the date falling six months from the Listing Date (the “First Six-month Period”), he/she/it shall not dispose of, or enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of the securities of our Company in respect of which he/she/it is shown by this prospectus to be the beneficial owners; or (b) in the six-month period commencing on the expiry of the First Six-month Period set out in paragraph (a) above (the “Second Six-month Period”), dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of the securities mentioned in paragraph (a) if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, he/she/it would cease to be a Controlling Shareholder of our Company. Pursuant to Note (3) to Rule 10.07(2) of the Listing Rules, each of our Controlling Shareholders has further undertaken to the Stock Exchange and to our Company that within the period commencing on the date by reference to which disclosure of his/her/its shareholdings is made in this prospectus and to the date which is 12 months from the Listing Date, they will: (a) when they pledge or charge any securities of our Company or interests therein beneficially owned by them in favour of any authorised institution pursuant to Note (2) to Rule 10.07(2) of the Listing Rules, immediately inform our Company of such pledge or charge together with the number of securities so pledged or charged; and (b) when they receive indications, either verbal or written, from the pledgee or chargee that any of the securities of our Company pledged or charged will be disposed of, immediately inform our Company of such indications. The Company will inform the Stock Exchange as soon as it is informed of the above matters by any of our Controlling Shareholders and disclose such matters in accordance with the publication requirements under Rule 2.07C of the Listing Rules as soon as possible after being so informed by any of our Controlling Shareholders. Undertakings pursuant to the Hong Kong Underwriting Agreement Undertakings by our Company Our Company undertakes to each of the Sole Sponsor, the Sole Global Coordinator and the Hong Kong Underwriters that it shall, and each of the Controlling Shareholders undertakes to each of the Sole Sponsor, the Sole Global Coordinator and the Hong Kong Underwriters to procure our Company to, ensure that no further Shares or securities convertible into equity securities of our Company (whether or not of a class already listed) may be issued by our Company or form the subject of any agreement to such an issue by our Company within six months from the Listing Date (whether or not such issue of Shares or securities of our Company will be completed within six months from the commencement of dealings), except in certain circumstances prescribed by Rule 10.08 of the Listing Rules. – 333 – UNDERWRITING Undertakings by our Controlling Shareholders Pursuant to the Hong Kong Underwriting Agreement, each of our Controlling Shareholders jointly and severally agrees and undertakes to each of our Company, the Sole Global Coordinator, the Sole Sponsor and the Hong Kong Underwriters that except with the prior written consent of the Sole Sponsor and the Sole Global Coordinator (for itself and on behalf of the other Hong Kong Underwriters) and unless pursuant to the sale of the Sale Shares by the Selling Shareholder as part of the International Placing and/or as a result of any exercise of the Over-allotment Option or the stock borrowing arrangement with the Sole Global Coordinator as contemplated under the Stock Borrowing Agreement which shall be effected in compliance with the requirements under Rule 10.07(3) of the Listing Rules and unless in compliance with the requirements of the Listing Rules: (a) during the First Six-month Period, the Controlling Shareholders shall not, and shall procure that the relevant registered holder(s) and their respective close associates and companies controlled by he/she/it and any nominee or trustee holding in trust for him/her/it shall not, (i) offer, pledge, charge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant or agree to grant any option, right or warrant to purchase or subscribe for, lend or otherwise transfer or dispose of, either directly or indirectly, any of the Shares or any securities convertible into or exercisable or exchangeable for, or that represent the right to receive any of the Shares or securities of our Company disclosed in this prospectus to be beneficially owned by him/her/it or the relevant company, nominee or trustee (including any interest in any shares in any company controlled by him/her/it) which is directly or indirectly a beneficial owner of any of the Shares or securities of our Company as disclosed in this prospectus as aforesaid (the “Relevant Securities”); (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of the Relevant Securities, whether any of the foregoing transactions is to be settled by delivery of the Relevant Securities, in cash or otherwise; (iii) agree (conditionally or unconditionally) to enter into or effect any transaction with the same economic effect as any of the transactions referred to in paragraphs (i) or (ii) above; (iv) announce any intention to enter into or effect any of the transactions referred to in paragraphs (i), (ii) or (iii) above; (b) he/she/it shall not, and shall procure that the relevant registered holder(s) and his/her/its close associates or companies controlled by him/her/it and any nominee or trustee holding in trust for him/her/it shall not, directly or indirectly in the Second Six-month Period, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any Relevant Securities if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, he/she/it would cease to be a Controlling Shareholder of our Company for purposes of the Listing Rules; (c) in the event of a disposal of any Shares or securities of our Company or any interest therein within the Second Six-month Period, he/she/it shall take all reasonable steps to ensure that such a disposal shall not create a disorderly or false market for any Shares or other securities of our Company; – 334 – UNDERWRITING (d) he/she/it shall, and shall procure that his/her/its close associates and companies controlled by him/her/it and nominees or trustees holding in trust for him/her/it shall, comply with all the restrictions and requirements under the Listing Rules on the sale, transfer or disposal by him/her/it or by the registered holder controlled by him/her/it of any Shares; (e) he/she/it shall comply with all applicable restrictions under the Listing Rules on the disposal by him/her/it or by the registered holder(s) of any Shares or other securities of our Company in respect of which he/she/it is disclosed in this prospectus to be interested therein; (f) neither he/she/it nor any of his/her/its respective close associates nor any companies controlled by him/her/it nor any nominee or trustee holding in trust for him/her/it has any present intention of disposing of any Shares or other securities of our Company in respect of which he/she/it is disclosed in this prospectus to be interested therein; (g) during the 12-month period from the Listing Date, when he/she/it pledges or charges any securities or interests in the Relevant Securities, he/she/it will immediately inform our Company and the Sole Global Coordinator in writing of such pledges or charges together with the number of securities and nature of interest so pledged or charged; and (h) during the 12-month period from the Listing Date, when he/she/it receives indications, either verbal or written, from any pledgee or chargee that any of the pledged or charged securities or interests in the securities of the Company will be sold, transferred or disposed of, immediately inform our Company and the Sole Global Coordinator in writing of such indications. International Underwriting Agreement In connection with the International Placing, it is expected that the Company, the Controlling Shareholders and the Selling Shareholders will, on or about Thursday, 11 June 2015, enter into the International Underwriting Agreement with, among other parties, the Sole Global Coordinator, the Sole Sponsor and the International Underwriters. Under the International Underwriting Agreement, it is expected that the International Underwriters would, subject to certain conditions set out therein, agree to subscribe for or procure subscribers to subscribe for the International Placing Shares. Under the International Underwriting Agreement, the Company intends to grant to the International Underwriters the Over-allotment Option, which is exercisable by Sole Global Coordinator (for itself and on behalf of the other International Underwriters) on or before Saturday, 11 July 2015, being the 30th day after the last day for the lodging of applications under the Global Offering, to require the Company to issue up to an aggregate of 22,500,000 additional Shares, representing 15% of the number of Offer Shares initially available under the Global Offering, at the Offer Price, among other things, to cover over-allocations in the International Placing, if any. Commission and expenses The Underwriters will receive an underwriting commission of 2.8% on the aggregate Offer Price of all the Offer Shares, out of which any sub-underwriting commission will be paid. – 335 – UNDERWRITING The underwriting commissions, listing fees, Stock Exchange trading fee and transaction levy, legal and printing and other professional fees and other expenses relating to the Global Offering are payable by our Company and the Selling Shareholders with reference to the number of New Shares and Sale Shares under the Global Offering respectively. The Sole Sponsor will receive financial advisory and documentation fees. The underwriting commission, financial advisory and documentation fee, Stock Exchange listing fees and trading fee, SFC transaction levy, legal and other professional fees together with applicable printing and other expenses relating to the Global Offering are estimated to amount to approximately HK$52.76 million in total (based on an Offer Price of HK$4.88 per Offer Share, being the mid-point of the indicative Offer Price range of between HK$4.58 and HK$5.18 per Offer Share, and on the assumption that the Over-allotment Option is not exercised), and approximately HK$43.12 million will be payable by the Company and approximately HK$9.64 million will be payable by the Selling Shareholders. Indemnity Our Company and the Controlling Shareholders have agreed to indemnify the Hong Kong Underwriters for certain losses which they may suffer, including losses arising from their performance of their obligations under the Hong Kong Underwriting Agreement and any breach by any of our Company and the Controlling Shareholders of the Hong Kong Underwriting Agreement. Underwriters’ interests in our Company As at the Latest Practicable Date and save as disclosed in this prospectus and other than pursuant to the Underwriting Agreements, none of the Hong Kong Underwriters was interested, directly or indirectly, in any shares or securities in any member of our Group or had any right or option (whether legally enforceable or not) to subscribe for, or to nominate persons to subscribe for, any shares or securities in any member of our Group. Following the completion of the Global Offering, the Hong Kong Underwriters and their affiliated companies may hold a certain portion of the Shares as a result of fulfilling their obligations under the Hong Kong Underwriting Agreement and the International Underwriters and their affiliated companies may hold a certain portion of the Shares as a result of fulfilling their obligations under the International Underwriting Agreement. – 336 – UNDERWRITING ACTIVITIES BY SYNDICATE MEMBERS The Underwriters of the Global Offering (the “Syndicate Members”) and their affiliates are diversified financial institutions with relationships in countries around the world. These entities engage in a wide range of commercial and investment banking, brokerage, funds management, trading, hedging, investing and other activities for their own accounts and for the account of others. In relation to our Shares, other activities could include acting as agent for buyers and sellers of our Shares, entering into transactions with other buyers and sellers in a principal capacity, proprietary trading in our Shares, and entering into over-the-counter or listing derivative transactions or listed and unlisted securities transactions (including issuing securities such as derivative warrants listed on a stock exchange) which have as their underlying, assets including our Shares. Those activities may require hedging activity by those entities involving, directly or indirectly, buying and selling our Shares. All such activities could occur in Hong Kong and elsewhere in the world and may result in the Syndicate Members and their affiliates holding long and/or short positions in our Shares, in baskets of securities or indices including our Shares, in units of funds that may purchase our Shares, or in derivatives related to any of the foregoing. In relation to issues by Syndicate Members or their affiliates of any listed securities having our Shares as their underlying, whether on the Stock Exchange or on any other stock exchange, the rules of the stock exchange may require the issuer of other securities (or one of its affiliates or agents) to act as a market maker or liquidity provider in the security, and these will also result in hedging activity in our Shares in most cases. All these activities may occur both during and after the end of the stabilising period described in the section headed “Structure of the Global Offering – Over-allotment Option and stabilisation” of this prospectus. These activities may affect the market price or value of our Shares, the liquidity or trading volume in our Shares, and the volatility of our Share price, and the extent to which this occurs from day to day cannot be estimated. It should be noted that when engaging in any of these activities, the Syndicate Members will be subject to certain restrictions, including the following: (a) the Syndicate Members (other than the Stabilising Manager or any person acting for it) must not, in connection with the distribution of the Offer Shares, effect any transactions (including issuing or entering into any option or other derivative transactions relating to the Offer Shares), whether in the open market or otherwise, with a view to stabilising or maintaining the market price of any of the Offer Shares at levels other than those which might otherwise prevail in the open market; and (b) the Syndicate Members must comply with all applicable laws and regulations, including the market misconduct provisions of the SFO, including the provisions prohibiting insider dealing, false trading, price rigging and stock market manipulation. – 337 – STRUCTURE OF THE GLOBAL OFFERING THE GLOBAL OFFERING This prospectus is published in connection with the Hong Kong Public Offering as part of the Global Offering. The Global Offering comprises: (a) the Hong Kong Public Offering of 15,000,000 Shares (subject to reallocation as mentioned below) for subscription by the public in Hong Kong as described in the paragraph headed “The Hong Kong Public Offering” of this section; and (b) the International Placing of an aggregate of 135,000,000 Shares comprising 110,000,000 New Shares and 25,000,000 Sale Shares (subject to reallocation and the Over-allotment Option as mentioned below) outside the United States to professional and institutional investors. Investors may apply for Offer Shares under the Hong Kong Public Offering or apply for or indicate an interest for Offer Shares under the International Placing, but may not do both. References in this prospectus to applications, Application Forms, application monies or the procedure for application relate solely to the Hong Kong Public Offering. The Offer Shares will represent 30% of the enlarged issued share capital of our Company immediately after completion of the Global Offering without taking into account the exercise of the Over-allotment Option or options which are granted under the Pre-IPO Share Option Scheme and may be granted under the Share Option Scheme. If the Over-allotment Option is exercised in full, the Offer Shares will represent approximately 33.01% of the enlarged issued share capital immediately after completion of the Global Offering and the exercise of the Over-allotment Option as set out in the paragraphs headed “Over-allotment Option and Stabilisation” in this section. THE HONG KONG PUBLIC OFFERING Number of Shares initially offered We are initially offering 15,000,000 New Shares for subscription by the public in Hong Kong at the Offer Price, representing 10% of the total number of Shares initially available under the Global Offering. Subject to the reallocation of Shares between the International Offering and the Hong Kong Public Offering, the Hong Kong Public Offer Shares will represent 3% of the enlarged issued share capital of our Company immediately following the completion of the Global Offering (assuming the Over-allotment Option is not exercised). The Hong Kong Public Offering is open to members of the public in Hong Kong as well as to institutional and professional investors. Professional investors generally include brokers, dealers, companies (including fund managers) whose ordinary business involves dealing in shares and other securities and corporate entities which regularly invest in shares and other securities. Completion of the Hong Kong Public Offering is subject to the conditions as set out in the paragraph headed “Conditions of the Hong Kong Public Offering” of this section. – 338 – STRUCTURE OF THE GLOBAL OFFERING Allocation Allocation of Shares to investors under the Hong Kong Public Offering will be based solely on the level of valid applications received under the Hong Kong Public Offering. The basis of allocation may vary, depending on the number of Hong Kong Public Offer Shares validly applied for by applicants. Such allocation could, where appropriate, consist of balloting, which would mean that some applicants may receive a higher allocation than others who have applied for the same number of Hong Kong Public Offer Shares, and those applicants who are not successful in the ballot may not receive any Hong Kong Public Offer Shares. The total number of Offer Shares available under the Hong Kong Public Offering (after taking account of any reallocation) is to be divided into two pools for allocation purposes: Pool A and Pool B with any odd board lots being allocated to Pool A. Accordingly, the maximum number of Hong Kong Public Offer Shares initially in Pool A and Pool B will be 7,500,000 and 7,500,000, respectively. The Offer Shares in Pool A will be allocated on an equitable basis to applicants who have applied for Offer Shares with an aggregate price of HK$5 million (excluding the brokerage, SFC transaction levy and the Stock Exchange trading fee payable) or less. The Offer Shares in Pool B will be allocated on an equitable basis to applicants who have applied for Offer Shares with an aggregate price of more than HK$5 million (excluding the brokerage, SFC transaction levy and the Stock Exchange trading fee payable). Investors should be aware that applications in Pool A and applications in Pool B may receive different allocation ratios. If Offer Shares in one (but not both) of the pools are under-subscribed, the surplus Offer Shares will be transferred to the other pool to satisfy demand in that other pool and be allocated accordingly. For the purpose of this paragraph only, the “price” for Offer Shares means the price payable on application therefor (without regard to the Offer Price as finally determined). Applicants can only receive an allocation of Offer Shares from either Pool A or Pool B but not from both pools. Multiple or suspected multiple applications and any application for more than 7,500,000 Hong Kong Public Offer Shares (being 50% of the 15,000,000 Hong Kong Public Offer Shares initially available under the Hong Kong Public Offering) are liable to be rejected. Reallocation The allocation of Offer Shares (other than the Sale Shares which are offered for sale by the Selling Shareholder pursuant to the International Placing) between the Hong Kong Public Offering and the International Placing is subject to adjustment. The allocation of the Offer Shares between the Hong Kong Public Offering and the International Placing is subject to the following adjustments: (a) if the number of the Offer Shares validly applied for under the Hong Kong Public Offering represents 15 times or more but less than 50 times the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, the number of Offer Shares to be reallocated to the Hong Kong Public Offering from the International Placing will be increased so that the total number of the Offer Shares available under the Hong Kong Public Offering will be 45,000,000 Offer Shares, representing 30% of the Offer Shares initially available under the Global Offering; – 339 – STRUCTURE OF THE GLOBAL OFFERING (b) if the number of the Offer Shares validly applied for under the Hong Kong Public Offering represents 50 times or more but less than 100 times the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, then the number of Offer Shares to be reallocated to the Hong Kong Public Offering from the International Placing will be increased, so that the total number of the Offer Shares available under the Hong Kong Public Offering will be 60,000,000 Offer Shares, representing 40% of the Offer Shares initially available under the Global Offering; and (c) if the number of the Offer Shares validly applied for under the Hong Kong Public Offering represents 100 times or more the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, then the number of Offer Shares to be reallocated to the Hong Kong Public Offering from the International Placing will be increased, so that the total number of the Offer Shares available under the Hong Kong Public Offering will be 75,000,000 Offer Shares, representing 50% of the Offer Shares initially available under the Global Offering. Any such clawback and reallocation between the International Placing and the Hong Kong Public Offering will be completed prior to any adjustment of the number of the Offer Shares pursuant to the exercise of the Over-allotment Option, if any. In each case, the additional Offer Shares reallocated to the Hong Kong Public Offering will be allocated between Pool A and Pool B and the number of Offer Shares allocated to the International Placing will be correspondingly reduced in such manner as the Sole Global Coordinator deems appropriate. In addition, the Sole Global Coordinator may reallocate Offer Shares from the International Placing to the Hong Kong Public Offering to satisfy valid applications under the Hong Kong Public Offering. If the Hong Kong Public Offering is not fully subscribed, the Sole Global Coordinator has the authority to reallocate all or any unsubscribed Hong Kong Public Offer Shares to the International Placing in such proportions as the Sole Global Coordinator deems appropriate. Conversely, the Sole Global Coordinator may at its sole discretion re-allocate Offer Shares from the International Placing to the Hong Kong Public Offering to satisfy valid applications under the Hong Kong Public Offering. Applications Each applicant under the Hong Kong Public Offering will also be required to give an undertaking and confirmation in the application submitted by him/her that he/she and any person(s) for whose benefit he/she is making the application has not applied for or taken up, or indicated an interest for, and will not apply for or take up, or indicate an interest for, any Offer Shares under the International Placing, and such applicant’s application is liable to be rejected if the said undertaking and/or confirmation is breached and/or untrue (as the case may be) or it has been or will be placed or allocated Offer Shares under the International Placing. – 340 – STRUCTURE OF THE GLOBAL OFFERING Applicants under the Hong Kong Public Offering are required to pay, on application, the maximum price of HK$5.18 per Offer Share in addition to the brokerage, SFC transaction levy and Stock Exchange trading fee payable on each Offer Share. If the Offer Price, as finally determined in the manner described in the paragraph headed “Pricing of the Global Offering” of this section, is less than the maximum price of HK$5.18 per Offer Share, appropriate refund payments (including the brokerage, SFC transaction levy and Stock Exchange trading fee attributable to the surplus application monies) will be made to successful applicants, without interest. Further details are set out below in the section headed “How to Apply for the Hong Kong Public Offer Shares” of this prospectus. THE INTERNATIONAL PLACING Number of Offer Shares offered The International Placing will consist of an initial offering of 135,000,000 Offer Shares comprising 110,000,000 New Shares and 25,000,000 Sale Shares, representing 90% of the total number of Offer Shares initially available under the Global Offering and 27% of our enlarged issued share capital immediately after completion of the Global Offering, assuming the Over-allotment Option is not exercised. The International Placing will be offered by us outside of the United States in reliance on Regulation S under the U.S. Securities Act, including to professional and institutional investors in Hong Kong. Allocation The International Placing will include selective marketing of the International Placing Shares to institutional and professional investors and other investors anticipated to have a sizeable demand for the International Placing Shares. Professional investors generally include brokers, dealers, companies (including fund managers) whose ordinary business involves dealing in shares and other securities and corporate entities which regularly invest in shares and other securities. Allocation of the International Placing Shares pursuant to the International Placing will be effected in accordance with the “bookbuilding” process described in the section entitled “Pricing of the Global Offering” below and based on a number of factors, including the level and timing of demand, the total size of the relevant investor’s invested assets or equity assets in the relevant sector and whether or not it is expected that the relevant investor is likely to buy further Offer Shares, and/or hold or sell its Offer Shares, after the listing of the Offer Shares on the Stock Exchange. Such allocation is intended to result in a distribution of the Offer Shares on a basis which would lead to the establishment of a solid professional and institutional shareholder base to the benefit of our Company and the Shareholders as a whole. The Sole Global Coordinator (for itself and on behalf of the other Underwriters) may require any investor who has been offered International Placing Shares under the International Placing, and who has made an application under the Hong Kong Public Offering to provide sufficient information to the Sole Global Coordinator so as to allow it to identify the relevant applications under the Hong Kong Public Offering and to ensure that it is excluded from any application of the Hong Kong Public Offer Shares under the Hong Kong Public Offering. – 341 – STRUCTURE OF THE GLOBAL OFFERING OVER-ALLOTMENT OPTION AND STABILISATION In connection with the Global Offering and pursuant to the International Underwriting Agreement, we expect to grant an Over-allotment Option to the International Underwriters. The Over-allotment Option The Over-allotment Option is exercisable by the Sole Global Coordinator (for itself and on behalf of the other International Underwriters), with the prior written consent of the Company, under the International Underwriting Agreement. Under the Over-allotment Option, which will be exercisable at any time for up to 30 days after the last day for lodging applications under the Hong Kong Public Offering, we may be required to issue at the Offer Price and otherwise on the same terms and conditions as the Offer Shares that are subject to the Global Offering up to an additional 22,500,000 Shares in aggregate, representing approximately 15% of the total number of Offer Shares initially available under the Global Offering. If the Over-allotment Option is exercised in full, the additional Shares made available under the Over-allotment Option will represent approximately 4.31% of the total Shares in issue immediately after completion of the Global Offering and the exercise of the Over-allotment Option. In the event that the Over-allotment Option is exercised, an announcement will be published in South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese). In order to facilitate settlement of over-allocations in the International Placing and for the purpose of stabilising of the market price of the Shares (if any), the Sole Global Coordinator may borrow up to 22,500,000 Shares, equivalent to the maximum number of Shares to be issued on the exercise of the Over-allotment Option in full, pursuant to the Stock Borrowing Agreement. The loan of Shares by the Sole Global Coordinator pursuant to the Stock Borrowing Agreement shall not be subject to the restrictions under Rule 10.07(1)(a) of the Listing Rules which restricts the disposal of Shares by our Controlling Shareholders subsequent to the date of this prospectus, subject to compliance with the following requirements in accordance with the provisions of Rule 10.07(3) of the Listing Rules: (a) the Stock Borrowing Agreement will be for the sole purpose of covering any short position prior to the exercise of the Over-allotment Option in connection with the International Placing; (b) the maximum number of Shares which may be borrowed from Song Rising must not exceed the maximum number of Shares which may be issued upon the full exercise of the Over-allotment Option; (c) the same number of Shares so borrowed must be returned to Song Rising or its nominees, as the case may be, on or before the third business day following the earlier of (i) the last day for exercising the Over-allotment Option, and (ii) the date on which the Over- allotment Option is exercised in full; (d) the borrowing of Shares pursuant to the Stock Borrowing Agreement will be effected in compliance with all applicable Listing Rules, laws and other regulatory requirements; and (e) no payments will be made to Song Rising by the Stabilising Manager in relation to the Stock Borrowing Agreement. – 342 – STRUCTURE OF THE GLOBAL OFFERING Stabilisation In connection with the Global Offering, the Stabilising Manager, or any person acting for it, on behalf of the International Underwriters, may over-allocate or effect transactions with a view to supporting the market price of the Shares at a level higher than that which might otherwise prevail for a limited period after the Listing Date. Such transactions, if commenced, may be discontinued at any time but any stabilising activity is required to be brought to an end no later than the 30th day after the last day for lodging Application Forms under the Hong Kong Public Offering. The Stabilising Manager has been or will be appointed as stabilising manager for the purposes of the Global Offering in accordance with the Securities and Futures (Price Stabilising) Rules made under the SFO and, should stabilising transactions be effected in connection with the Global Offering, this will be at the absolute discretion of the Stabilising Manager. Following any over-allocation of Shares in connection with the Global Offering, the Stabilising Manager or any person acting for it may cover such over-allocation by (among other methods) making purchases in the secondary market, exercising the Over-allotment Option in full or in part, or by any combination of purchases and the exercise of the Over-allotment Option. Any such purchases will be made in compliance with all applicable laws and regulatory requirements including the Securities and Futures (Price Stabilising) Rules made under the SFO. The number of Shares which can be overallocated will not exceed the number of Shares which are the subject of the Over-allotment Option, being 22,500,000 Shares representing 15% of the Shares initially available under the Global Offering. Stabilising action permitted in Hong Kong pursuant to the Securities and Futures (Price Stabilising) Rules, as amended, includes (i) over-allocating for the purpose of preventing or minimising any reduction in the market price of the Shares, (ii) selling or agreeing to sell the Shares so as to establish a short position in them for the purpose of preventing or minimising any reduction in the market price of the Shares, (iii) purchasing or subscribing for, or agreeing to purchase or subscribe for, the Shares pursuant to the Over-allotment Option in order to close out any position established under (i) or (ii) above, (iv) purchasing, or agreeing to purchase, any of the Shares for the sole purpose of preventing or minimising any reduction in the market price of the Shares, (v) selling or agreeing to sell any Shares in order to liquidate any position established as a result of those purchases and (vi) offering or attempting to do anything as described in (ii), (iii), (iv) or (v). Specifically, prospective applicants for and investors in Shares should note that: • The Stabilising Manager may, in connection with the stabilising action, maintain a long position in the Shares; • There is no certainty regarding the extent to which and the time period for which the Stabilising Manager will maintain such a position; • Liquidation of any such long position by the Stabilising Manager may have an adverse impact on the market price of the Shares; – 343 – STRUCTURE OF THE GLOBAL OFFERING • No stabilising action will be taken to support the price of the Shares for longer than the stabilising period which will begin on the Listing Date and is expected to expire at the end of Saturday, 11 July 2015, being the 30th day after the last day for lodging Application Forms under the Hong Kong Public Offering. After this date, when no further action may be taken to support the price of the Shares, demand for the Shares, and therefore the price of the Shares, could fall; • The price of any security (including the Shares) cannot be assured to stay at or above its offer price by the taking of any stabilising action; and • Stabilising bids may be made or transactions effected in the course of the stabilising action at any price at or below the Offer Price, which means that stabilising bids may be made or transactions effected at a price below the price paid by applicants for, or investors in, the Shares. A public announcement, as required by the Securities and Futures (Price Stabilising) Rules made under the SFO, will be made within seven days of the expiration of the stabilising period. All stabilising actions will be taken in accordance with the laws, rules and regulations in place in Hong Kong on stabilisation. Pricing of the Global Offering The International Underwriters will be soliciting from prospective investors indications of interest in acquiring Offer Shares in the International Placing. Prospective professional and institutional investors will be required to specify the number of the International Placing Shares under the International Placing they would be prepared to acquire either at different prices or at a particular price. This process, known as “book-building,” is expected to continue up to, and to cease on or around, the last day for lodging applications under the Hong Kong Public Offering. Pricing for the Offer Shares for the purpose of the various offerings under the Global Offering will be fixed on the Price Determination Date, which is expected to be on or about Thursday, 11 June 2015, and in any event on or before Saturday, 13 June 2015, by agreement between the Sole Global Coordinator (for itself and on behalf of the other Underwriters), and our Company (for ourselves and on behalf of the Selling Shareholders) and the number of Offer Shares to be allocated or sold under various offerings will be determined shortly thereafter. The Offer Price will not be more than HK$5.18 per Offer Share and is expected to be not less than HK$4.58 per Offer Share unless otherwise announced, as further explained below, not later than the morning of the last day for lodging applications under the Hong Kong Public Offering. Prospective investors should be aware that the Offer Price to be determined on the Price Determination Date may be, but is not expected to be, lower than the indicative offer price range stated in this prospectus. – 344 – STRUCTURE OF THE GLOBAL OFFERING The Sole Global Coordinator (for itself and on behalf of the other Underwriters) may, where considered appropriate, based on the level of interest expressed by prospective professional and institutional investors during the book-building process, and with the consent of our Company, reduce the number of Offer Shares offered in the Global Offering and/or the indicative offer price range below that stated in this prospectus at any time on or prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. In such a case, we will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the day which is the last day for lodging applications under the Hong Kong Public Offering, cause there to be published in the South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese), on the website of our Company (www.china-greenfresh.com) and the website of the Stock Exchange (www.hkexnews.hk) a notice of the reduction. Upon issue of such a notice, the number of Offer Shares offered in the Global Offering and/or the revised offer price range will be final and conclusive and the offer price, if agreed upon by the Sole Global Coordinator (for itself and on behalf of the other Underwriters) and our Company, will be fixed within such revised offer price range. Before submitting applications for the Hong Kong Public Offer Shares, applicants should have regard to the possibility that any announcement of a reduction in the number of Offer Shares being offered under the Global Offering and/or the indicative offer price range may not be made until the day which is the last day for lodging applications under the Hong Kong Public Offering. In the event there is a reduction in the Offer Shares and/or indicative Offer Price range, if the applicants have already submitted an application for the Hong Kong Public Offer Shares before the last day for lodging applications under the Hong Kong Public Offering, they will be allowed to subsequently withdraw their applications. In the absence of any such notice so published, the Offer Price, if agreed upon with our Company and the Sole Global Coordinator, will under no circumstances be set outside the offer price range as stated in this prospectus. The net proceeds of the Global Offering accruing to our Company (after deduction of underwriting fees and estimated expenses payable by our Company in relation to the Global Offering, assuming the Over-allotment Option is not exercised) are estimated to be approximately HK$566.9 million, assuming an Offer Price per Share of HK$4.88 (being the mid-point of the stated indicative Offer Price range of HK$4.58 to HK$5.18 per Offer Share) or if the Over-allotment Option is exercised in full, approximately HK$676.7 million, assuming an Offer Price per Share of HK$4.88 (being the mid-point of the stated indicative Offer Price range of HK$4.58 to HK$5.18 per Offer Share). The final Offer Price, the indications of interest in the Global Offering, the results of applications and the basis of allotment of the Hong Kong Public Offer Shares available under the Hong Kong Public Offering, are expected to be announced on Wednesday, 17 June 2015 in the South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese), on the website of our Company (www.china-greenfresh.com) and the website of the Stock Exchange (www.hkexnews.hk). UNDERWRITING AGREEMENTS The Hong Kong Public Offering is fully underwritten by the Hong Kong Underwriters under the terms of the Hong Kong Underwriting Agreement and is conditional upon the International Underwriting Agreement being signed and becoming unconditional. Our Company, our Controlling Shareholders, the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator and the International Underwriters expect to enter into the International Underwriting Agreement relating to the International Placing on or around the Price Determination Date. These underwriting arrangements, and the respective Underwriting Agreements, are summarised in the section headed “Underwriting” of this prospectus. – 345 – STRUCTURE OF THE GLOBAL OFFERING THE SHARES WILL BE ELIGIBLE FOR CCASS All necessary arrangements have been made to enable the Shares to be admitted into the CCASS. If the Stock Exchange grants the listing of, and permission to deal in, the Shares and our Company complies with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares on the Stock Exchange or any other date HKSCC chooses. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second Business Day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. CONDITIONS OF THE HONG KONG PUBLIC OFFERING Acceptance of all applications for the Hong Kong Public Offer Shares pursuant to the Hong Kong Public Offering will be conditional on: (a) the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the Shares being offered pursuant to the Global Offering (including the additional Offer Shares which may be made available pursuant to the exercise of the Over-allotment Option) (subject only to allotment); (b) the Offer Price having been fixed on or about the Price Determination Date; (c) the execution and delivery of the International Underwriting Agreement on or about the Price Determination Date; and (d) the obligations of the Underwriters under each of the respective Underwriting Agreements becoming and remaining unconditional and not having been terminated in accordance with the terms of the respective agreements, in each case on or before the dates and times specified in the respective Underwriting Agreements (unless and to the extent such conditions are validly waived on or before such dates and times) and in any event not later than 30 days after the date of this prospectus. If, for any reason, the Offer Price is not agreed between our Company (for ourselves and on behalf of the Selling Shareholders) and the Sole Global Coordinator (for itself and on behalf of the other Underwriters), or the International Underwriting Agreement is not entered into, the Global Offering will not proceed. The consummation of each of the Hong Kong Public Offering and the International Placing is conditional upon, among other things, the other offering becoming unconditional and not having been terminated in accordance with its terms. – 346 – STRUCTURE OF THE GLOBAL OFFERING If the above conditions are not fulfilled or waived prior to the times and dates specified, the Global Offering will lapse and the Stock Exchange will be notified immediately. Notice of the lapse of the Hong Kong Public Offering will be published by our Company in the South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese) on the next day following such lapse. In such eventuality, all application monies will be returned, without interest, on the terms set out in the section headed “How to Apply for the Hong Kong Public Offer Shares” of this prospectus. In the meantime, all application monies will be held in (a) separate bank account(s) with the receiving bank or other licensed bank(s) in Hong Kong licensed under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) (as amended). Share certificates for the Shares are expected to be issued on Wednesday, 17 June 2015 but will only become valid certificates of title at 8:00 a.m. on Thursday, 18 June 2015 provided that (i) the Global Offering has become unconditional in all respects and (ii) the right of termination as described in the section headed “Underwriting – Underwriting arrangements and expenses – Hong Kong Underwriting Agreement – Grounds for termination” of this prospectus has not been exercised. DEALINGS Assuming that the Hong Kong Public Offering becomes unconditional at or before 8:00 a.m. in Hong Kong on Thursday, 18 June 2015, it is expected that dealings in the Shares on the Stock Exchange will commence at 9:00 a.m. on Thursday, 18 June 2015. The Shares will be traded in board lots of 1,000 Shares each. – 347 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES 1. HOW TO APPLY If you apply for Hong Kong Public Offer Shares, then you may not apply for or indicate an interest for International Placing Shares. To apply for Hong Kong Public Offer Shares, you may: • use a WHITE or YELLOW Application Form; • apply online via HK eIPO White Form service at www.hkeipo.hk; or • electronically cause HKSCC Nominees to apply on your behalf. None of you or your joint applicant(s) may make more than one application, except where you are a nominee and provide the required information in your application. Our Company or the Sole Global Coordinator, HK eIPO White Form Service Provider and their respective agents may reject or accept any application in full or in part for any reason at their discretion. 2. WHO CAN APPLY You can apply for Hong Kong Public Offer Shares on a WHITE or YELLOW Application Form if you or the person(s) for whose benefit you are applying: • are 18 years of age or older; • have a Hong Kong address; • are outside the United States, and are not a United States Person (as defined in Regulation S under the U.S. Securities Act); and • are not a legal or natural person of the PRC. If you apply online through the HK eIPO White Form service, in addition to the above, you must (i) have a valid Hong Kong identity card number and (ii) provide a valid email address and a contact telephone number. If you are a firm, the application must be in the individual members’ names. If you are a body corporate, the application form must be signed by a duly authorised officer, who must state his representative capacity and stamped with your corporation’s chop. If an application is made by a person under a power of attorney, the Sole Global Coordinator (or its agents or nominees) may accept it at their discretion and on any conditions they think fit, including evidence of the attorney’s authority. – 348 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES The number of joint applicants may not exceed four for the Hong Kong Public Offer Shares and they may not apply by means of the HK eIPO White Form service for the Hong Kong Public Offer Shares. Unless permitted by the Listing Rules, you cannot apply for any Hong Kong Public Offer Shares if you are: 3. • an existing beneficial owner of shares of our Company and/or any of our subsidiaries; • a Director or chief executive officer of our Company and/or any of its subsidiaries; • an associate (as defined in the Listing Rules) of any of the above; • a connected person (as defined in the Listing Rules) of our Company or will become a connected person of our Company immediately upon completion of the Global Offering; or • have been allocated or have applied for or indicated an interest in any International Placing Shares under the International Placing or otherwise participate in the International Placing. APPLYING FOR HONG KONG PUBLIC OFFER SHARES Which application channel to use For Hong Kong Public Offer Shares to be issued in your own name, use a WHITE Application Form or apply online through www.hkeipo.hk. For Hong Kong Public Offer Shares to be issued in the name of HKSCC Nominees and deposited directly into CCASS to be credited to your or a designated CCASS Participant’s stock account, use a YELLOW Application Form or electronically instruct HKSCC via CCASS to cause HKSCC Nominees to apply for you. Where to collect the Application Forms You can collect a WHITE Application Form and a prospectus during normal business hours from 9:00 a.m. on Monday, 8 June 2015 to 12:00 noon on Thursday, 11 June 2015 from: (i) the following addresses of the following Hong Kong Underwriters: Essence International Securities (Hong Kong) Limited 39/F, One Exchange Square Central Hong Kong Haitong International Securities Company Limited 22/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong SBI China Capital Financial Services Limited Unit A2, 32/F, United Centre 95 Queensway Hong Kong – 349 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES (ii) any of the following branches of Industrial and Commercial Bank of China (Asia) Limited, the receiving bank for the Hong Kong Public Offering: Branch name Hong Kong Island Kowloon New Territories Branch address Central Branch 1/F, 9 Queen’s Road Central Causeway Bay Branch Shop A on G/F, 1/F, Hennessy Apartments, 488 & 490 Hennessy Road North Point Branch G/F, 436-438 King’s Road, North Point Tsimshatsui Branch Shop 1 & 2, G/F, No. 35-37 Hankow Road, Tsimshatsui Mongkok Branch G/F, Belgian Bank Building, 721-725 Nathan Road, Mongkok Kwun Tong Branch Shop 5 & 6, 1/F, Crocodile Centre, 79 Hoi Yuen Road, Kwun Tong Shatin Branch Shop 22J, Level 3, Shatin Centre Tseung Kwan O Branch Shop Nos. 2011-2012, Level 2, Metro City, Plaza II, 8 Yan King Road, Tseung Kwan O You can collect a YELLOW Application Form and this prospectus during normal business hours from 9:00 a.m. on Monday, 8 June 2015 until 12:00 noon on Thursday, 11 June 2015 from the depository counter of HKSCC at 1/F, One & Two Exchange Square, 8 Connaught Place, Central, Hong Kong or from your stockbroker. Time for lodging Application Forms Your completed WHITE or YELLOW Application Form, together with a cheque or a banker’s cashier order attached and marked payable to “ICBC (ASIA) NOMINEE LIMITED – CHINA GREENFRESH PUBLIC OFFER” for the payment, should be deposited in the special collection boxes provided at any of the branches of the receiving bank listed above, at the following times: Monday, 8 Tuesday, 9 Wednesday, 10 Thursday, 11 June June June June 2015 2015 2015 2015 — — — — 9:00 9:00 9:00 9:00 – 350 – a.m. a.m. a.m. a.m. to to to to 5:00 p.m. 5:00 p.m. 5:00 p.m. 12:00 noon HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES The application lists will be open from 11:45 a.m. to 12:00 noon on Thursday, 11 June 2015, the last application day or such later time as described in the paragraph headed “– Effect of bad weather conditions on the opening of the applications lists” of this section. 4. TERMS AND CONDITIONS OF AN APPLICATION Follow the detailed instructions in the Application Form carefully; otherwise, your application may be rejected. By submitting an Application Form or applying through the HK eIPO White Form service, among other things, you (and if you are joint applicants, each of you jointly and severally) for yourself or as an agent or a nominee on behalf of each person for whom you act: (i) undertake to execute all relevant documents and instruct and authorise our Company and/or the Sole Sponsor and/or the Sole Global Coordinator (or their agents or nominees), as agents of our Company, to execute any documents for you and to do on your behalf all things necessary to register any Hong Kong Public Offer Shares allocated to you in your name or in the name of HKSCC Nominees as required by the Articles of Association; (ii) agree to comply with the Companies Ordinance, Companies Ordinance (Miscellaneous Provisions) and the Articles of Association; (iii) confirm that you have read the terms and conditions and application procedures set out in this prospectus and in the Application Form and agree to be bound by them; (iv) confirm that you have received and read this prospectus and have only relied on the information and representations contained in this prospectus in making your application and will not rely on any other information or representations except those in any supplement to this prospectus; (v) confirm that you are aware of the restrictions on the Global Offering in this prospectus; (vi) agree that none of our Company, the Sole Sponsor, the Sole Global Coordinator, the Underwriters, their respective directors, officers, employees, partners, agents, advisers and any other parties involved in the Global Offering is or will be liable for any information and representations not in this prospectus (and any supplement to it); (vii) undertake and confirm that you or the person(s) for whose benefit you have made the application have not applied for or taken up, or indicated an interest for, and will not apply for or take up, or indicate an interest for, any International Placing Shares under the International Placing nor participated in the International Placing; (viii) agree to disclose to our Company, the Hong Kong Share Registrar, receiving bank, the Sole Sponsor, Sole Global Coordinator, the Underwriters and/or their respective advisers and agents any personal data which they may require about you and the person(s) for whose benefit you have made the application; – 351 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES (ix) if the laws of any place outside Hong Kong apply to your application, agree and warrant that you have complied with all such laws and none of our Company, the Sole Sponsor, the Sole Global Coordinator, the Underwriters nor any of their respective officers or advisers will breach any law outside Hong Kong as a result of the acceptance of your offer to purchase, or any action arising from your rights and obligations under the terms and conditions contained in this prospectus and the Application Form; (x) agree that once your application has been accepted, you may not rescind it because of an innocent misrepresentation; (xi) agree that your application will be governed by the laws of Hong Kong; (xii) represent, warrant and undertake that (i) you understand that the Hong Kong Public Offer Shares have not been and will not be registered under the U.S. Securities Act; and (ii) you and any person for whose benefit you are applying for the Hong Kong Public Offer Shares are outside the United States (as defined in Regulation S) or are a person described in paragraph (h)(3) of Rule 902 of Regulation S; (xiii) warrant that the information you have provided is true and accurate; (xiv) agree to accept the Hong Kong Public Offer Shares applied for, or any lesser number allocated to you under the application; (xv) authorise our Company to place your name(s) or the name of the HKSCC Nominees, on our Company’s register of members as the holder(s) of any Hong Kong Public Offer Shares allocated to you, and our Company and/or its agents to send any share certificate(s) and/or any e-Auto Refund payment instructions and/or any refund cheque(s) to you or the first-named applicant for joint application by ordinary post at your own risk to the address stated on the application, unless you have chosen to collect the share certificate(s) and/or refund cheque(s) in person; (xvi) declare and represent that this is the only application made and the only application intended by you to be made to benefit you or the person for whose benefit you are applying; (xvii) understand that our Company and the Sole Global Coordinator will rely on your declarations and representations in deciding whether or not to make any allotment of any of the Hong Kong Public Offer Shares to you and that you may be prosecuted for making a false declaration; (xviii) (if the application is made for your own benefit) warrant that no other application has been or will be made for your benefit on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or to the HK eIPO White Form by you or by any one as your agent or by any other person; and (xix) (if you are making the application as an agent for the benefit of another person) warrant that (i) no other application has been or will be made by you as agent for or for the benefit of that person or by that person or by any other person as agent for that person on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC; and (ii) you have due authority to sign the Application Form or give electronic application instructions on behalf of that other person as their agent. – 352 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES Additional instructions for YELLOW Application Form You may refer to the YELLOW Application Form for details. 5. APPLYING THROUGH HK eIPO WHITE FORM SERVICE General Individuals who meet the criteria in “Who can apply” section, may apply through the HK eIPO White Form service for the Offer Shares to be allotted and registered in their own names through the designated website www.hkeipo.hk. Detailed instruction for application through the HK eIPO White Form service are on the designated website. If you do not follow the instructions, your application may be rejected and may not be submitted to our Company. If you apply through the designated website, you authorise the HK eIPO White Form Service Provider to apply on the terms and conditions in this prospectus, as supplemented and amended by the terms and conditions of the HK eIPO White Form service. Time for submitting applications under the HK eIPO White Form You may submit your application to the HK eIPO White Form Service Provider at www.hkeipo.hk (24 hours daily, except on the last application day) from 9:00 a.m. on Monday, 8 June 2015 until 11:30 a.m. on Thursday, 11 June 2015 and the latest time for completing full payment of application monies in respect of such application will be 12:00 noon on Thursday, 11 June 2015 or such later time under the paragraph headed “Effect of bad weather conditions on the opening of the application lists” of this section. No multiple applications If you apply by means of HK eIPO White Form, once you complete payment in respect of any electronic application instruction given by you or for your benefit through the HK eIPO White Form service to make an application for Hong Kong Public Offer Shares, an actual application shall be deemed to have been made. For the avoidance of doubt, giving an electronic application instruction under HK eIPO White Form more than once and obtaining different application reference numbers without effecting full payment in respect of a particular reference number will not constitute an actual application. If you are suspected of submitting more than one application through the HK eIPO White Form service or by any other means, all of your applications are liable to be rejected. Section 40 of the Companies Ordinance (Miscellaneous Provisions) For the avoidance of doubt, our Company and other parties involved in the preparation of this prospectus acknowledge that each applicant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Companies Ordinance (Miscellaneous Provisions) (as applied by Section 342E of the Companies Ordinance (Miscellaneous Provisions)). – 353 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES Environmental Protection The advantage of HK eIPO White Form is to minimise the usage of paper via the self-serviced and electronic application process. The Company and the Sole Sponsor encourage you to utilise this application channel should you desire the Hong Kong Public Offer Shares to be issued under your own name. 6. APPLYING BY GIVING ELECTRONIC APPLICATION INSTRUCTIONS TO HKSCC VIA CCASS General CCASS Participants may give electronic application instructions to apply for the Hong Kong Public Offer Shares and to arrange payment of the money due on application and payment of refunds under their participant agreements with HKSCC and the General Rules of CCASS and the CCASS Operational Procedures. If you are a CCASS Investor Participant, you may give these electronic application instructions through the CCASS Phone System by calling 2979 7888 or through the CCASS Internet System (https://ip.ccass.com) (using the procedures in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time). HKSCC can also input electronic application instructions for you if you go to: Hong Kong Securities Clearing Company Limited Customer Service Centre 1/F, One & Two Exchange Square 8 Connaught Place, Central Hong Kong and complete an input request form. You can also collect a prospectus from the above address. If you are not a CCASS Investor Participant, you may instruct your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions via CCASS terminals to apply for the Hong Kong Public Offer Shares on your behalf. You will be deemed to have authorised HKSCC and/or HKSCC Nominees to transfer the details of your application to our Company, the Sole Sponsor, the Sole Global Coordinator and our Hong Kong Share Registrar. Giving electronic application instructions to HKSCC via CCASS Where you have given electronic application instructions to apply for the Hong Kong Public Offer Shares and a WHITE Application Form is signed by HKSCC Nominees on your behalf: (i) HKSCC Nominees will only be acting as a nominee for you and is not liable for any breach of the terms and conditions of the WHITE Application Form or this prospectus; (ii) HKSCC Nominees will do the following things on your behalf: • agree that the Hong Kong Public Offer Shares to be allotted shall be issued in the name of HKSCC Nominees and deposited directly into CCASS for the credit of the CCASS Participant’s stock account on your behalf or your CCASS Investor Participant’s stock account; – 354 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES • agree to accept the Hong Kong Public Offer Shares applied for or any lesser number allocated; • undertake and confirm that you have not applied for or taken up, will not apply for or take up, or indicate an interest for, any International Placing Shares under the International Placing; • (if the electronic application instructions are given for your benefit) declare that only one set of electronic application instructions has been given for your benefit; • (if you are an agent for another person) declare that you have only given one set of electronic application instructions for the other person’s benefit and are duly authorised to give those instructions as their agent; • confirm that you understand that our Company, our Directors, the Sole Sponsor and the Sole Global Coordinator will rely on your declarations and representations in deciding whether or not to make any allotment of any of the Hong Kong Public Offer Shares to you and that you may be prosecuted if you make a false declaration; • authorise our Company to place HKSCC Nominees’ name on our Company’s register of members as the holder of the Hong Kong Public Offer Shares allocated to you and to send share certificate(s) and/or refund monies under the arrangements separately agreed between us and HKSCC; • confirm that you have read the terms and conditions and application procedures set out in this prospectus and agree to be bound by them; • confirm that you have received and/or read a copy of this prospectus and have relied only on the information and representations in this prospectus in causing the application to be made, save as set out in any supplement to this prospectus; • agree that none of our Company, the Selling Shareholders, the Sole Sponsor, the Sole Global Coordinator, the Underwriters, their respective directors, officers, employees, partners, agents, advisers and any other parties involved in the Global Offering, is or will be liable for any information and representations not contained in this prospectus (and any supplement to it); • agree to disclose your personal data to our Company, the Hong Kong Share Registrar, receiving bank, the Sole Sponsor and the Sole Global Coordinator and/or its respective advisers and agents; • agree (without prejudice to any other rights which you may have) that once HKSCC Nominees’ application has been accepted, it cannot be rescinded for innocent misrepresentation; – 355 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES • agree that any application made by HKSCC Nominees on your behalf is irrevocable before the fifth day after the time of the opening of the application lists (excluding any day which is Saturday, Sunday or public holiday in Hong Kong), such agreement to take effect as a collateral contract with us and to become binding when you give the instructions and such collateral contract to be in consideration of our Company agreeing that it will not offer any Hong Kong Public Offer Shares to any person before the fifth day after the time of the opening of the application lists (excluding any day which is Saturday, Sunday or public holiday in Hong Kong), except by means of one of the procedures referred to in this prospectus. However, HKSCC Nominees may revoke the application before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong) if a person responsible for this prospectus under Section 40 of the Companies Ordinance (Miscellaneous Provisions) gives a public notice under that section which excludes or limits that person’s responsibility for this prospectus; • agree that once HKSCC Nominees’ application is accepted, neither that application nor your electronic application instructions can be revoked, and that acceptance of that application will be evidenced by our Company’s announcement of the Hong Kong Public Offering results; • agree to the arrangements, undertakings and warranties under the participant agreement between you and HKSCC, read with the General Rules of CCASS and the CCASS Operational Procedures, for the giving electronic application instructions to apply for Hong Kong Public Offer Shares; • agree with our Company, for itself and for the benefit of each Shareholder (and so that our Company will be deemed by its acceptance in whole or in part of the application by HKSCC Nominees to have agreed, for itself and on behalf of each of the Shareholders, with each CCASS Participant giving electronic application instructions) to observe and comply with the Companies Ordinance, Companies Ordinance (Miscellaneous Provision) and the Articles of Association; and • agree that your application, any acceptance of it and the resulting contract will be governed by the laws of Hong Kong. Effect of giving electronic application instructions to HKSCC via CCASS By giving electronic application instructions to HKSCC or instructing your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give such instructions to HKSCC, you (and, if you are joint applicants, each of you jointly and severally) are deemed to have done the following things. Neither HKSCC nor HKSCC Nominees shall be liable to our Company or any other person in respect of the things mentioned below: • instructed and authorised HKSCC to cause HKSCC Nominees (acting as nominee for the relevant CCASS Participants) to apply for the Hong Kong Public Offer Shares on your behalf; – 356 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES • instructed and authorised HKSCC to arrange payment of the maximum Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee by debiting your designated bank account and, in the case of a wholly or partially unsuccessful application and/or if the Offer Price is less than the maximum Offer Price per Offer Share initially paid on application, refund of the application monies (including brokerage, SFC transaction levy and the Stock Exchange trading fee) by crediting your designated bank account; and • instructed and authorised HKSCC to cause HKSCC Nominees to do on your behalf all the things stated in the WHITE Application Form and in this prospectus. Minimum purchase amount and permitted numbers You may give or cause your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions for a minimum of 1,000 Hong Kong Public Offer Shares. Instructions for more than 1,000 Hong Kong Public Offer Shares must be in one of the numbers set out in the table in the Application Forms. No application for any other number of Hong Kong Public Offer Shares will be considered and any such application is liable to be rejected. Time for inputting electronic application instructions CCASS Clearing/Custodian Participants can input electronic application instructions at the following times on the following dates: Monday, 8 Tuesday, 9 Wednesday, 10 Thursday, 11 June June June June 2015 2015 2015 2015 — — — — 9:00 8:00 8:00 8:00 a.m. to 8:30 p.m. (1) a.m. to 8:30 p.m. (1) a.m. to 8:30 p.m. (1) a.m. (1) to 12:00 noon Note: (1) These times are subject to change as HKSCC may determine from time to time with prior notification to CCASS Clearing/Custodian Participants. CCASS Investor Participants can input electronic application instructions from 9:00 a.m. on Monday, 8 June 2015 until 12:00 noon on Thursday, 11 June 2015 (24 hours daily, except on the last application day). The latest time for inputting your electronic application instructions will be 12:00 noon on Thursday, 11 June 2015, the last application day or such later time as described in the paragraph headed “Effect of bad weather conditions on the opening of the application lists” of this section. No multiple applications If you are suspected of having made multiple applications or if more than one application is made for your benefit, the number of Hong Kong Public Offer Shares applied for by HKSCC Nominees will be automatically reduced by the number of Hong Kong Public Offer Shares for which you have given such instructions and/or for which such instructions have been given for your benefit. Any electronic application instructions to make an application for the Hong Kong Public Offer Shares given by you or for your benefit to HKSCC shall be deemed to be an actual application for the purposes of considering whether multiple applications have been made. – 357 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES Section 40 of the Companies Ordinance (Miscellaneous Provisions) For the avoidance of doubt, our Company and all other parties involved in the preparation of this prospectus acknowledge that each CCASS Participant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Companies Ordinance (Miscellaneous Provisions) (as applied by Section 342E of the Companies Ordinance (Miscellaneous Provisions)). Personal data The section of the Application Form headed “Personal Data” applies to any personal data held by us, the Hong Kong Share Registrar, the receiving bank, the Sole Sponsor, the Sole Global Coordinator, the Underwriters and any of their respective advisers and agents about you in the same way as it applies to personal data about applicants other than HKSCC Nominees. 7. WARNING FOR ELECTRONIC APPLICATIONS The subscription of the Hong Kong Public Offer Shares by giving electronic application instructions to HKSCC is only a facility provided to CCASS Participants. Similarly, the application for Hong Kong Public Offer Shares through the HK eIPO White Form service is also only a facility provided by the HK eIPO White Form Service Provider to public investors. Such facilities are subject to capacity limitations and potential service interruptions and you are advised not to wait until the last application day in making your electronic applications. Our Company, our Directors, the Sole Sponsor, the Sole Global Coordinator and the Underwriters take no responsibility for such applications and provide no assurance that any CCASS Participant or person applying through the HK eIPO White Form service will be allotted any Hong Kong Public Offer Shares. To ensure that CCASS Investor Participants can give their electronic application instructions, they are advised not to wait until the last minute to input their instructions to the systems. In the event that CCASS Investor Participants have problems in the connection to CCASS Phone System/CCASS Internet System for submission of electronic application instructions, they should either (i) submit a WHITE or YELLOW Application Form, or (ii) go to HKSCC’s Customer Service Centre to complete an input request form for electronic application instructions before 12:00 noon on Thursday, 11 June 2015. 8. HOW MANY APPLICATIONS YOU CAN MAKE Multiple applications for the Hong Kong Public Offer Shares are not allowed except by nominees. If you are a nominee, in the box on the Application Form marked “For nominees” you must include: • an account number; or • some other identification code, for each beneficial owner or, in the case of joint beneficial owners, for each joint beneficial owner. If you do not include this information, the application will be treated as being made for your benefit. – 358 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES All of your applications will be rejected if more than one application on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or through the HK eIPO White Form service, is made for your benefit (including the part of the application made by HKSCC Nominees acting on electronic application instructions). If an application is made by an unlisted company and: • the principal business of that company is dealing in securities; and • you exercise statutory control over that company, then the application will be treated as being for your benefit. “Unlisted company” means a company with no equity securities listed on the Stock Exchange. “Statutory control” means you: 9. • control the composition of the board of directors of the company; • control more than half of the voting power of the company; or • hold more than half of the issued share capital of the company (not counting any part of it which carries no right to participate beyond a specified amount in a distribution of either profits or capital). HOW MUCH ARE THE HONG KONG PUBLIC OFFER SHARES The WHITE and YELLOW Application Forms have tables showing the exact amount payable for Shares. You must pay the maximum Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee in full upon application for Shares under the terms set out in the Application Forms. You may submit an application using a WHITE and YELLOW Application Form or through the HK eIPO White Form service in respect of a minimum of 1,000 Hong Kong Public Offer Shares. Each application or electronic application instruction in respect of more than 1,000 Hong Kong Public Offer Shares must be in one of the numbers set out in the table in the Application Form, or as otherwise specified on the designated website www.hkeipo.hk. If your application is successful, brokerage will be paid to the Exchange Participants (as defined in the Listing Rules), and the SFC transaction levy and the Stock Exchange trading fee are paid to the Stock Exchange (in the case of the SFC transaction levy, collected by the Stock Exchange on behalf of the SFC). For further details on the Offer Price, please refer to the section headed “Structure of the Global Offering” in this prospectus. – 359 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES 10. EFFECT OF BAD WEATHER CONDITIONS ON THE OPENING OF THE APPLICATION LISTS The application lists will not open if there is: • a tropical cyclone warning signal number 8 or above; or • a “black” rainstorm warning, in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Thursday, 11 June 2015. Instead they will open between 11:45 a.m. and 12:00 noon on the next Business Day which does not have either of those warnings in Hong Kong in force at any time between 9:00 a.m. and 12:00 noon. If the application lists do not open and close on Thursday, 11 June 2015 or if there is a tropical cyclone warning signal number 8 or above or a “black” rainstorm warning signal in force in Hong Kong that may affect the dates mentioned in the section headed “Expected timetable” of this prospectus, an announcement will be made in such event. 11. PUBLICATION OF RESULTS Our Company expects to announce the final Offer Price, the level of indication of interest in the International Placing, the level of applications in the Hong Kong Public Offering and the basis of allocation of the Hong Kong Public Offer Shares on Wednesday, 17 June 2015 in South China Morning Post (in English) and Hong Kong Economic Journal (in Chinese), on our Company’s website at www.china-greenfresh.com and the website of the Stock Exchange at www.hkexnews.hk. The results of allocations and the Hong Kong identity card/passport/Hong Kong business registration numbers of successful applicants under the Hong Kong Public Offering will be available at the times and date and in the manner specified below: • in the announcement to be posted on our Company’s website at www.china-greenfresh.com and the Stock Exchange’s website at www.hkexnews.hk by no later than 9:00 a.m. on Wednesday, 17 June 2015; • from the designated results of allocations website at www.tricor.com.hk/ipo/result with a “search by ID” function on a 24-hour basis from 8:00 a.m. on Wednesday, 17 June 2015 to midnight on Tuesday, 23 June 2015; • by telephone enquiry line by calling 3691 8488 between 9:00 a.m. and 6:00 p.m. from Wednesday, 17 June 2015 to Monday, 22 June 2015 (excluding Saturday and Sunday); • in the special allocation results booklets which will be available for inspection during opening hours from Wednesday, 17 June 2015 to Friday, 19 June 2015 at all the receiving bank branches. – 360 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES If our Company accepts your offer to purchase (in whole or in part), which it may do by announcing the basis of allocations and/or making available the results of allocations publicly, there will be a binding contract under which you will be required to purchase the Hong Kong Public Offer Shares if the conditions of the Global Offering are satisfied and the Global Offering is not otherwise terminated. Further details are contained in the section headed “Structure of the Global Offering” of this prospectus. You will not be entitled to exercise any remedy of rescission for innocent misrepresentation at any time after acceptance of your application. This does not affect any other right you may have. 12. CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOTTED HONG KONG PUBLIC OFFER SHARES You should note the following situations in which the Hong Kong Public Offer Shares will not be allotted to you: (i) If your application is revoked: By completing and submitting an Application Form or giving electronic application instructions to HKSCC or to the HK eIPO White Form Service Provider, you agree that your application or the application made by HKSCC Nominees on your behalf cannot be revoked on or before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is Saturday, Sunday or public holiday in Hong Kong). This agreement will take effect as a collateral contract with our Company. Your application or the application made by HKSCC Nominees on your behalf may only be revoked on or before such fifth day if a person responsible for this prospectus under Section 40 of the Companies Ordinance (Miscellaneous Provisions) (as applied by Section 342E of the Companies Ordinance (Miscellaneous Provisions)) gives a public notice under that section which excludes or limits that person’s responsibility for this prospectus. If any supplement to this prospectus is issued, applicants who have already submitted an application will be notified that they are required to confirm their applications. If applicants have been so notified but have not confirmed their applications in accordance with the procedure to be notified, all unconfirmed applications will be deemed revoked. If your application or the application made by HKSCC Nominees on your behalf has been accepted, it cannot be revoked. For this purpose, acceptance of applications which are not rejected will be constituted by notification in the press of the results of allocation, and where such basis of allocation is subject to certain conditions or provides for allocation by ballot, such acceptance will be subject to the satisfaction of such conditions or results of the ballot respectively. (ii) If our Company or its agents exercise their discretion to reject your application: Our Company, the Sole Sponsor and the Sole Global Coordinator, the HK eIPO White Form Service Provider and their respective agents and nominees have full discretion to reject or accept any application, or to accept only part of any application, without giving any reasons. – 361 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES (iii) If the allotment of Hong Kong Public Offer Shares is void: The allotment of Hong Kong Public Offer Shares will be void if the Listing Committee of the Stock Exchange does not grant permission to list the Shares either: • within three weeks from the closing date of the application lists; or • within a longer period of up to six weeks if the Listing Committee notifies our Company of that longer period within three weeks of the closing date of the application lists. (iv) If: • you make multiple applications or suspected multiple applications; • you or the person for whose benefit you are applying have applied for or taken up, or indicated an interest for, or have been or will be placed or allocated (including conditionally and/or provisionally) Hong Kong Public Offer Shares and International Placing Shares; • your Application Form is not completed in accordance with the stated instructions; • your electronic application instructions through the HK eIPO White Form service are not completed in accordance with the instructions, terms and conditions on the designated website; • your payment is not made correctly or the cheque or banker’s cashier order paid by you is dishonoured upon its first presentation; • the Underwriting Agreements do not become unconditional or are terminated; • our Company or the Sole Sponsor or the Sole Global Coordinator believe(s) that by accepting your application, it or they would violate applicable securities or other laws, rules or regulations; or • your application is for more than 50% of the Hong Kong Public Offer Shares initially offer under the Hong Kong Public Offering. – 362 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES 13. REFUND OF APPLICATION MONIES If an application is rejected, not accepted or accepted in part only, or if the Offer Price as finally determined is less than the maximum offer price of HK$5.18 per Offer Share (excluding brokerage, SFC transaction levy and the Stock Exchange trading fee thereon), or if the conditions of the Hong Kong Public Offering are not fulfilled in accordance with the section headed “Structure of the Global Offering” in this prospectus or if any application is revoked, the application monies, or the appropriate portion thereof, together with the related brokerage, SFC transaction levy and the Stock Exchange trading fee, will be refunded, without interest or the cheque or banker’s cashier order will not be cleared. Any refund of your application monies will be made on Wednesday, 17 June 2015. 14. DESPATCH/COLLECTION OF SHARE CERTIFICATES AND REFUND MONIES You will receive one share certificate for all Hong Kong Public Offer Shares allotted to you under the Hong Kong Public Offering (except pursuant to applications made on YELLOW Application Forms or by electronic application instructions to HKSCC via CCASS where the share certificates will be deposited into CCASS as described below). No temporary document of title will be issued in respect of the Shares. No receipt will be issued for sums paid on application. If you apply by WHITE or YELLOW Application Form, subject to personal collection as mentioned below, the following will be sent to you (or, in the case of joint applicants, to the first-named applicant) by ordinary post, at your own risk, to the address specified on the Application Form: • share certificate(s) for all the Hong Kong Public Offer Shares allotted to you (for YELLOW Application Forms, share certificates will be deposited into CCASS as described below); and • refund cheque(s) crossed “Account Payee Only” in favour of the applicant (or, in the case of joint applicants, the first-named applicant) for (i) all or the surplus application monies for the Hong Kong Public Offer Shares, wholly or partially unsuccessfully applied for; and/or (ii) the difference between the Offer Price and the maximum Offer Price per Offer Share paid on application in the event that the Offer Price is less than the maximum Offer Price (including brokerage, SFC transaction levy and the Stock Exchange trading fee but without interest). Part of the Hong Kong identity card number/passport number, provided by you or the first-named applicant (if you are joint applicants), may be printed on your refund cheque, if any. Your banker may require verification of your Hong Kong identity card number/passport number before encashment of your refund cheque(s). Inaccurate completion of your Hong Kong identity card number/passport number may invalidate or delay encashment of your refund cheque(s). Subject to arrangement on despatch/collection of share certificates and refund monies as mentioned below, any refund cheques and share certificates are expected to be posted on or around Wednesday, 17 June 2015. The right is reserved to retain any share certificate(s) and any surplus application monies pending clearance of cheque(s) or banker’s cashier’s order(s). – 363 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES Share certificates will only become valid at 8:00 a.m. on Thursday, 18 June 2015 provided that the Global Offering has become unconditional and the right of termination described in the section headed “Underwriting” of this prospectus has not been exercised. Investors who trade Shares prior to the receipt of share certificates or the share certificates becoming valid do so at their own risk. Personal collection (i) If you apply using a WHITE Application Form If you apply for 1,000,000 or more Hong Kong Public Offer Shares and have provided all information required by your Application Form, you may collect your refund cheque(s) and/or share certificate(s) from our Company’s Hong Kong Share Registrar, Tricor Investor Services Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, from 9:00 a.m. to 1:00 p.m. on Wednesday, 17 June 2015 or such other date as notified by us in the newspapers. If you are an individual who is eligible for personal collection, you must not authorise any other person to collect for you. If you are a corporate applicant which is eligible for personal collection, your authorised representative must bear a letter of authorisation from your corporation stamped with your corporation’s chop. Both individuals and authorised representatives must produce, at the time of collection, evidence of identity acceptable to the Hong Kong Share Registrar. If you do not collect your refund cheque(s) and/or share certificate(s) personally within the time specified for collection, they will be despatched promptly to the address specified in your Application Form by ordinary post at your own risk. If you apply for less than 1,000,000 Hong Kong Public Offer Shares, your refund cheque(s) and/or share certificate(s) will be sent to the address on the relevant Application Form on Wednesday, 17 June 2015, by ordinary post and at your own risk. (ii) If you apply using a YELLOW Application Form If you apply for 1,000,000 Hong Kong Public Offer Shares or more, please follow the same instructions as described above. If you have applied for less than 1,000,000 Hong Kong Public Offer Shares, your refund cheque(s) will be sent to the address on the relevant Application Form on Wednesday, 17 June 2015, by ordinary post and at your own risk. If you apply by using a YELLOW Application Form and your application is wholly or partially successful, your share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for credit to your or the designated CCASS Participant’s stock account as stated in your Application Form on Wednesday, 17 June 2015, or upon contingency, on any other date determined by HKSCC or HKSCC Nominees. • If you apply through a designated CCASS Participant (other than a CCASS Investor Participant) For Hong Kong Public Offer Shares credited to your designated CCASS Participant’s stock account (other than CCASS Investor Participant), you can check the number of Hong Kong Public Offer Shares allotted to you with that CCASS Participant. – 364 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES • If you are applying as a CCASS Investor Participant Our Company will publish the results of CCASS Investor Participants’ applications together with the results of the Hong Kong Public Offering in the manner described in “Publication of Results” above. You should check the announcement published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Wednesday, 17 June 2015 or any other date as determined by HKSCC or HKSCC Nominees. Immediately after the credit of the Hong Kong Public Offer Shares to your stock account, you can check your new account balance via the CCASS Phone System and CCASS Internet System. (iii) If you apply through the HK eIPO White Form service If you apply for 1,000,000 Hong Kong Public Offer Shares or more and your application is wholly or partially successful, you may collect your share certificate(s) from our Company’s Hong Kong Share Registrar, Tricor Investor Services Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, from 9:00 a.m. to 1:00 p.m. on Wednesday, 17 June 2015 or such other date as notified by our Company in the newspapers as at the date of despatch/collection of share certificate(s)/e-Auto Refund payment instructions/refund cheques. If you do not collect your share certificate(s) personally within the time specified for collection, they will be despatched promptly to the address specified in your application instructions by ordinary post at your own risk. If you apply for less than 1,000,000 Hong Kong Public Offer Shares, your share certificate(s) (where application) will be sent to the address specified in your application instructions on Wednesday, 17 June 2015, by ordinary post and at your own risk. If you apply and pay the application monies from a single bank account, any refund monies will be despatched to that bank account in the form of e-Auto Refund payment instructions. If you apply and pay the application monies from multiple bank accounts, any refund monies will be despatched to the address as specified in your application instructions in the form of refund cheque(s) by ordinary post at your own risk. (iv) If you apply via electronic application instructions to HKSCC Allocation of Hong Kong Public Offer Shares For the purposes of allocating Hong Kong Public Offer Shares, HKSCC Nominees will not be treated as an applicant. Instead, each CCASS Participant who gives electronic application instructions or each person for whose benefit instructions are given will be treated as an applicant. – 365 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES Deposit of share certificates into CCASS and refund of application monies • If your application is wholly or partially successful, your share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for the credit of your designated CCASS Participant’s stock account or your CCASS Investor Participant stock account on Wednesday, 17 June 2015, or, on any other date determined by HKSCC or HKSCC Nominees. • Our Company expects to publish the application results of CCASS Participants (and where the CCASS Participant is a broker or custodian, our Company will include information relating to the relevant beneficial owner), your Hong Kong identity card number/passport number or other identification code (Hong Kong business registration number for corporations) and the basis of allotment of the Hong Kong Public Offering in the manner specified in “Publication of results” above on Wednesday, 17 June 2015. You should check the announcement published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Wednesday, 17 June 2015 or such other date as determined by HKSCC or HKSCC Nominees. • If you have instructed your broker or custodian to give electronic application instructions on your behalf, you can also check the number of Hong Kong Public Offer Shares allotted to you and the amount of refund monies (if any) payable to you with that broker or custodian. • If you have applied as a CCASS Investor Participant, you can also check the number of Hong Kong Public Offer Shares allotted to you and the amount of refund monies (if any) payable to you via the CCASS Phone System and the CCASS Internet System (under the procedures contained in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time) on Wednesday, 17 June 2015. Immediately following the credit of the Hong Kong Public Offer Shares to your stock account and the credit of refund monies to your bank account, HKSCC will also make available to you an activity statement showing the number of Hong Kong Public Offer Shares credited to your CCASS Investor Participant stock account and the amount of refund monies (if any) credited to your designated bank account. • Refund of your application monies (if any) in respect of wholly and partially unsuccessful applications and/or difference between the Offer Price and the maximum Offer Price per Offer Share initially paid on application (including brokerage, SFC transaction levy and the Stock Exchange trading fee but without interest) will be credited to your designated bank account or the designated bank account of your broker or custodian on Wednesday, 17 June 2015. – 366 – HOW TO APPLY FOR THE HONG KONG PUBLIC OFFER SHARES 15. ADMISSION OF THE SHARES INTO CCASS If the Stock Exchange
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