Dutch Caribbean Securities Exchange, Listing Advisor 荷兰加勒⽐证券交易所上市保荐机构
Information Memorandum For the Listing of Kanghong International Trade Co., Ltd.
Incorporated under the laws of BVI Business Companies Act, 2004 (No. 16 of 2004) on May 2nd, 2018 with BVI company number: 1977961
www.chinacccg.com 0
Table of Contents
1. Summary of Certain Defined Terms ...... 2
2. Important Information and Notices ...... 3
3. Issuer and the List of Institutions Related to the Listing ...... 6
4. Company Overview ...... 7 4.1 Business Structure ...... 7 4.2 About the Company ...... 8 4.3 Company’s Operation ...... 8
5. Terms of the Issuance and Investment Overview ...... 10
6. Business Overview ...... 12 6.1 Executive Summary ...... 12 6.2 Products and Services ...... 13 6.3 Marketing Strategy ...... 15 6.4 Development Strategy ...... 17 6.5 Business Partners ...... 19 6.6 Permit and License ...... 20 6.7 Related Parties ...... 22 6.8 Main Competitors ...... 29
7. Company Advantages and Investment Highlights ...... 31 7.1 Strong Market Demand ...... 31 7.2 Wide Product Offerings ...... 31 7.3 Great Brand Reputation...... 31 7.4 Promising Expansion Plan ...... 31
8 Directors and Senior Management...... 32
9 Financial Statements ...... 36
10 Material Contract and Agreement ...... 78
11 Risk Factors and Litigation ...... 79
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1. Summary of Certain Defined Terms
“The Company / Kanghong” Kanghong International Trade Co., Ltd. (BVI Company Number: 1977961), a company incorporated under the laws of the British Virgin Islands and having its registered address at the offices of Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands, is the holding company that indirectly owns 100% of the outstanding shares of Shidian Kanghong Agricultural Technology Development Co., Ltd.
“KH” Shidian Kanghong Agricultural Technology Development Co., Ltd., a company incorporated under the laws of People’s Republic of China and having its registered address at Jiaochangba, Wanxing Village, Wanxing Town, Shidian County, Baoshan City, Yunnan Province, China, and an indirect wholly-owned subsidiary of the Company.
“DCSX” The Dutch Caribbean Securities Exchange.
“ACT” The BVI Business Companies Act, 2004 (No. 16 of 2004) including any modification, extension, re-enactment or renewal thereof and any regulations made thereunder.
“IFRS” International Financial Reporting Standards, the set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.
“LAD” Listing Advisor.
“Chucheng Capital” Shanghai Chucheng Investment Management Co. Ltd.
“Listing Rules” The Listing Rules of the DCSX.
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2. Important Information and Notices
Dear investors,
This Information Memorandum for listing has been approved by Kanghong International Trade Co., Ltd. (BVI Company Number: 1977961, the “Company”). The sole purpose of this Information Memorandum is to list the presently outstanding ordinary shares of the Company on the Dutch Caribbean Securities Exchange N.V. (“DCSX”) in Curacao (Dutch Caribbean). Curacao is a country within the Kingdom of the Netherlands. The listed shares will be replaced on a one to one basis by listed Depository Receipts (DR’s) upon completion of the official issuance of such DR’s in full accordance with the legal and procedural requirements of the issuance and listing of such DR’s as demanded by the DCSX.
This Information Memorandum does not contain all the information that a future investor should consider before investing. Potential investors should not regard the content of this Information Memorandum as advice on any matters relating to the investment, including but not limited to issues of legality, taxation, or finance, nor as recommendation, instruction for the subscription, purchase, holding or disposition of the securities. Every potential investor should consult his or her independent professional advisor to evaluate the strengths and risks of investing in the Company. You and your advisors must rely on your investigations about the Company's stocks and listing clauses to assess the advantages and risks.
This Information Memorandum does not constitute or form any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe to any securities. Neither this Information Memorandum nor the publication of the information contained herein is intended to be any inducement to sign any contract, and in no event shall it be construed so in any jurisdiction. This Information Memorandum may be withdrawn at any time before the proposed listing. This Information Memorandum is intended to provide information to prospective investors in their evaluation of the investment and should only be used for this purpose. The Company may consider future (initial) public offering, in which case, the Company will make more information available to investors in due course and as appropriate.
The Company expressly reserves the right to reject any or all tender offer or proposed investment in its sole discretion, and at any time to notify any potential investor to terminate the discussion. Furthermore, the Company reserves the right to withdraw, supplement, alter, modify, sort, or reduce the scope of, or the content of this Information Memorandum, in each case subject to the rules and regulations of the DCSX.
This Information Memorandum contains forward-looking statements concerning plans, objectives, goals, strategies presented by the Company in the form of projections or expectations of revenues, income (or loss), earnings (or loss) per share, or other financial projections. These statements include the words such as “'believe”, “estimate”, “expect”, “intend”, “may”, “will”, “shall”, “may”, or “should” and other expressions of similar nature, and they address matters that involve risks and uncertainties. Forward-looking statements are based on an assessment of the economic developments, operating conditions, and certain assumptions regarding the future events and actions that are current views of the Company and/or the Directors as of the date of this Information Memorandum. As a result, these forward-looking statements are not the guarantees of future performance, and many known and unknown risks, unexpected uncertainties, assumptions and other important factors other than the Company, the Directors and the Management of the Company could cause actual results to differ materially from those expressed in or implied by these forward-looking statements. Investors should be aware not to exclusively rely on such forward-looking statements. The Company does not undertake any obligation to update or revise any of the forward-looking statements contained in this Information Memorandum, whether as a result of new information, future events or otherwise. The Company does not make any representation, warranty or prediction that results anticipated by such forward-looking statements will be achieved., All subsequent written and forward-looking oral statements are based on the above and the cautionary statements contained in this Information Memorandum. 3
Certain statements, estimates and financial projections included in this Information Memorandum are based on a variety of assumptions which may or may not prove to be accurate or may be subject to disputes. Each potential investor should independently investigate and analyze the statements, estimates and financial projections in the document. The Company does not have any obligation to provide any other information to the recipient of this Information Memorandum. This Information Memorandum does not constitute a recommendation, endorsement or confirmation of the value of the securities being offered.
In certain jurisdictions, there may be restrictions on the distribution of this Information Memorandum and issuance of securities. Any person who reviews this Information Memorandum and wishes to invest in the securities is responsible for his or her understanding and compliance with all applicable laws and regulations of any relevant jurisdictions. The potential investors should also understand and ensure compliance with the relevant foreign exchange and tax regulations applicable to them, considering their citizenships, residences and other relevant factors.
The Ministry of Finance in Curacao, Dutch Caribbean, the Central Bank of Curaçao and Sint Maarten, and the Dutch Caribbean Securities Exchange (DCSX) or any other country/government authority and/or agency of Curacao are not responsible for any information contained in this Information Memorandum, and they do not make any representations or guarantees to the accuracy or completeness of the Information Memorandum. Moreover, neither the content nor the publication of this Information Memorandum is to be taken as an indication of any approval, authorization, warranty, commitment, statement, or certification of any country/government.
The Company and its Directors and Senior Management are responsible for the authenticity, accuracy, and completeness of the content of this Information Memorandum. The Listing Advisor (LAD), Shanghai Chucheng Investment Management Co., Ltd., mentioned in this Information Memorandum shall not take any responsibility for the authenticity, accuracy or completeness of any information (finance, law or other) contained in this Information Memorandum, and does not make any representation or provide any approval, commitment, statement, certification or guarantee with respect to any information in this Information Memorandum.
For the sake of completeness, it is reiterated that the securities to be listed by the Company through this Information Memorandum are the outstanding shares of the Company. These shares may and can be replaced on a one to one basis by listed Depository Receipts (DR’s) upon completion of the official issuance of such DR’s in full accordance with the legal and procedural requirements of the issuance and listing of such DR’s as demanded by the DCSX.
Each Depository Receipt represents one share, and each Depository Receipt enjoys all the beneficial rights to each corresponding share or stock. The Depository Receipt is a security that has the same rights in all respects as the Company's share. A separate contract must be agreed upon between the Company and the shareholders specifying the provisions for Depository Receipt holders and their detailed rights. All shares owned by the shareholders of the Company will be registered as Depository Receipts on the DCSX and in the Brokers’ system. The Company and all the shareholders shall undertake the responsibility of submitting all the information and details about shares and Depository Receipts accurately and completely to the DCSX and Brokers.
The DR holders will enjoy benefits on their holdings as if they were shareholders. The Company's Depository Receipt numbers will be consistent with the number of shares. Depository Receipts will be reserved in the form of electronic data. The DCSX and Brokers do not have the obligation to issue any Depository Receipts certificates to the shareholders. Only when the shareholders convert their shares to Depository Receipts these can become tradeable on the DCSX and Brokers’ system. The DCSX and Brokers will register and manage the Depository Receipts under the relevant rules. The Company promises that during the listing of the Company, the DCSX and its Brokers’ records shall prevail.
Potential investors should read the full text of this document and be aware that investing in the Company involves a certain degree of risk. Potential investors should also pay special attention to the “Risk Factors and Litigation” 4 section of this Information Memorandum. Prospective investors, before deciding to invest, should carefully consider all of their risks, including financial and tax issues, and consult professional advice from their accountants, lawyers, and other professional advisors. The Company is not in any capacity to recommend or decide whether the investors can or should invest in the Company. For such advice, each prospective investor must contact their independent professional consultant.
If you need any further information, please consult with your stock brokers and other professional advisors.
The date of this Information Memorandum is on September 7th, 2018.
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3. Issuer and the List of Institutions Related to the Listing
Issuer Kanghong International Trade Co., Ltd. Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands Contact Person: Chun Wang Tel: +86-0875-8867026 E-mail: [email protected]
Operating Entity in China Shidian Kanghong Agricultural Technology Development Co., Ltd. Huaxing Industrial Area, Youwang Town, Shidian County, Baoshan City, Yunnan Province, China Contact Person: Chun Wang Tel: +86-0875-8867026 E-mail: [email protected]
Listing Advisor Shanghai Chucheng Investment Management Co., Ltd. Room 601, Huaneng Union Tower, Lane No. 958 Lu Jiazui Ring Road, Pudong District, Shanghai, China Contact Person: Houhai Li Tel: +86-021-31663586 E-mail: [email protected]
Lawyer Beijing Yingke Law Firm Shanghai Office Yingke Law Building, 181, Jiangchang No.3 Road, Jing 'an District, Shanghai, China Contact Person: Zhihua Wang Tel: +86-021-36697980 Fax: +86-021-36697889 E-mail: [email protected]
Auditor Shanghai Shunzheng CPAs LP Room 1220, No.28, Yuanwen Road, Shanghai, China Contact Person: Fengshan Liu Tel: +86-021-62122672 E-mail: [email protected]
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4. Company Overview
4.1 Business Structure
Kanghong International Trade Co., Ltd., a company incorporated under the laws of the British Virgin Islands, is the company seeking to be listed on DCSX. Kanghong International Trade Co., Ltd. is the owner of 100% of the outstanding shares of Kanghong International Trade (HK) Co., Limited, a company incorporated under the laws of Hong Kong, which in turn is the owner of 100% of the outstanding shares of Shanghai Erxing Biotechnology Co., Ltd., a company incorporated and organized under the laws of China as a Wholly Owned Foreign Entity (“WOFE”). Shanghai Erxing Biotechnology Co., Ltd. owns 100% of the outstanding shares of Shidian Kanghong Agricultural Technology Development Co., Ltd. (“KH”), which is the operating company in China with assets and business operations.
Kanghong International Trade Co., Ltd. (Incorporated in the British Virgin Islands: BVI Company Number: 1977961)
100% Holding
Kanghong International Trade (HK) Co., Limited (Incorporated in Hong Kong)
100% Holding
Shanghai Erxing Biotechnology Co., Ltd. (Incorporated in Shanghai City, China)
100% Holding Shidian Kanghong Agricultural Technology Development Co., Ltd. (Incorporated in Yunnan Province, China)
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4.2 About the Company “Shidian Kanghong Agricultural Technology Development Co., Ltd.” is wholly owned by “Kanghong International Trade Co., Ltd.”, a company incorporated and registered under the laws of the British Virgin Islands. “Shidian Kanghong Agricultural Technology Development Co., Ltd.” is a company incorporated and organized under the laws of China on January 24th, 2013.
“Shidian Kanghong Agricultural Technology Development Co., Ltd.” holds a valid business license (Uniformed Social Credit Code: 9153052106555747L) issued by the Bureau of Market Supervision and Administration of Shidian Town, Baoshan City, Yunnan Province, China on June 27th, 2016.
Company Name: Shidian Kanghong Agricultural Technology Development Co., Ltd. Type of Company: Limited liability company (Natural person investment or holding) Address: Jiaochangba, Wanxing Village, Wanxing Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Yan Su Registered Capital: RMB 2 million Date of Establishment: January 24th, 2013. Operating Period: January 24th, 2013 to January 24th, 2043. Business Scope: Planting, primary processing and sales of edible fungi and agricultural products; Sales of daily groceries and building materials; Import and export trading. (Projects need to be approved under the laws and can only be operated after being approved by relevant governmental authorities.)
4.3 Company’s Operation Kanghong International Trade Co., Ltd., through its wholly-owned subsidiary Shidian Kanghong Agricultural Technology Development Co., Ltd. (hereafter referred as “KH”), is engaged in the research, processing and sales of edible fungi and fungal products. KH cultivates the fungal strains, sells and delivers the strains to contracted growers, purchases the fungi, and then sells the selected fungi and processed products. More details about the Company can be found in Section 6 “Business Overview” of this Information Memorandum. Detailed background information of the Directors and Senior Management Team can be found in Section 8 of this Information Memorandum.
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Picture 1. The company site of KH
9 5. Terms of the Issuance and Investment Overview
The information provided in this section is a summary of highlights contained elsewhere in this Information Memorandum and should be reviewed carefully together with other sections before an investment decision is made.
Company Nature
The Company is a limited liability company incorporated under the laws in the British Virgin Islands, on May 2nd, 2018. The Company owns 100% of the shares of its operating entity in China, Shidian Kanghong Agricultural Technology Development Co., Ltd. As of the submission date of this Information Memorandum, the Company’s shares are not listed on any other stock exchanges. The Company’s securities to be listed will be the Depository Receipts as explained in this Information Memorandum. Investing in shares or Depository Receipts or other securities involves risks, and investors should consider the risks involved.
Listing Advisor (LAD)
Shanghai Chucheng Investment Management Co., Ltd is a Chinese company and has been licensed as a DCSX Listing Advisor (LAD) by the DCSX. The Company has appointed Shanghai Chucheng Investment Management Co., Ltd as its Listing Advisor (LAD) under the Listing Rules of the DCSX. The mission of Shanghai Chucheng Investment Management Co., Ltd is to assist the Company in listing the securities of the Company on the DCSX. Shanghai Chucheng Investment Management Co., Ltd is not responsible for the authenticity, accuracy or completeness of any information (financial, legal or other) contained in this Information Memorandum, and it doesn’t make any representation or provide any approval, commitment, statement, certification or guarantee to the content of this Information Memorandum.
Listing on the DCSX and Fund-raising Purposes
As aforementioned, the Company intends to apply for listing via issuing Depository Receipts that will replace the listed shares on a one to one basis. With the listing of ultimately the Depository Receipts, no new shares will be issued at this stage. In other words, the Company is not to raise or receive new funds in connection with this listing. As indicated in the box below, the Company may wish to raise funds in the future through an issuance and listing of its new securities. The Company and/or its shareholders may in the future wish to trade the Depository Receipts corresponding to their existing shares through the DCSX. The authorized capital of the Company is 100,000,000 ordinary shares, the nominal value of the ordinary shares is 0.0005 USD per share, and the listing price of the shares is expected to be 0.4 USD per share. The market value of the Company is therefore estimated to be 40,000,000 USD. Projections and calculation on which the market value is based can be found in the second and third parts of Section 9 (“Financial Statements”) of this Information Memorandum.
The Company does not preclude the possibility of raising funds through the issuance of new shares in the future, in which case the Company will prepare and publish the relevant and necessary documents and procedures under the laws or listing rules, including the submission of a new Information Memorandum.
Sales Period Commitment
Currently, Directors on the Company’s Board collectively hold a total of 43.35% shares of the outstanding ordinary shares of the Company. To provide potential investors with certain level of comfort toward the long-term expectation of the Company, all Directors of the Company (hereinafter referred to as the “restricted shareholders”) have agreed not to trade any of their shares or other securities (if any) of the Company held by them in any form within 12 months from the date of listing of the Company’s shares on the DCSX and/or such shares being able to 10 trade (once converted to Depository Receipts). To ensure compliance of the foregoing agreement and the applicable laws, each restricted shareholder will agree not to sell or distribute the Company’s shares or other securities publicly or privately, and not to convert or exchange the shares or other securities held by them into any other securities, options or rights, during the restricted period.
However, as to the Company’s total issued share capital, the restricted commitment mentioned above will not apply to a possible tender offer. An offer to purchase more than 43.35% of the Company’s outstanding share capital will be regarded as a buyout offer, and if the Board of Directors decides to accept such offer, the share or other security transaction that the Company and the restricted shareholders enter into therewith will be exempt from the above commitment, provided that such a buyout is approved first by the DCSX.
The Stock Options
On the issuing date of this Information Memorandum, neither the Company nor the group has any other unrevealed stock option commitment that has not been disclosed.
The Registration/Transaction of the Depository Receipts
The Company will eventually through a yet to be appointed issuer (a Financial Institution acceptable to the DCSX) issue Depository Receipts corresponding to the issued and outstanding ordinary shares of the Company, though the DRs will not be evidenced by any certificates. With the listing of the Company’s Depository Receipts on the DCSX, the DCSX and its Brokers will register and manage the trading of the DRs. The DRs may be traded in the market, but the Company will not and cannot provide any guarantee with respect to their liquidity. The Company agrees that the Company and all the shareholders will submit the complete and accurate information about the shares and the required Depository Receipts to the Financial Institution that will issue the DR’s. After the listing, the registration and trading of the Depository Receipts must comply with the laws and regulations of the DCSX and other relevant regulators.
The Company agrees that the Depository Receipt holders have the same rights as registered ordinary shareholders. Meanwhile, when the Company holds a general meeting of shareholders, the Depository Receipt holders should also be notified, and allowed to exercise the same voting rights as holders of ordinary shares.
Listing Cost
The listing fees and all other directly attributed costs (including audit fees, legal fees, and other professional costs) associated with the listing are or will be paid by the Company using existing funds.
Inquiry
Any inquiry on / regarding this Information Memorandum about listings should be directed to the Listing Advisor (LAD), Shanghai Chucheng Investment Management Co., Ltd.
11 6. Business Overview 6.1 Executive Summary
Shidian Kanghong Agricultural Technology Development Co., Ltd. (hereafter referred as “KH”) is registered in Shidian Town, Baoshan City, Yunnan Province, China, established on January 24th, 2013, with the registered capital of RMB 2 million.
KH’s main business is to cultivate fungal strains, process edible fungi, sell fungi and processed products. KH cooperates with local farmers. It provides fungal strains to contracted growers, who then plant the strains. After harvesting with preliminary processing, such as drying, KH purchases the dried fungi from the growers. The dried fungi are ready for sale or will be further processed into products such as black fungus noodle and black fungus powder, etc.
Through the cooperation with growers, KH not only decreases its business cost but also promotes the local economy. At its very inception, KH set up a great goal of “leading the entire village to a better life”. Through the years, KH hass consistently pursued this goal by helping local farmers to learn advanced agricultural technology, providing them with good fungal species, funding local schools, and improving local facilities.
KH has won several important recognitions and awards as a result of its professional and outstanding performance in the field of edible fungi production. It was identified as a “Scientific & Technological Small & Medium Enterprise of Yunnan Province” by Yunnan Provincial Science and Technology Department in 2014 and was named as “the Leading Industrial Enterprise of Baoshan City” by Baoshan Industrial Agriculture Development Team in 2015. The plant base of KH has also been identified as a “Demonstration Base” by municipal and provincial departments and has been used as the research center for experts from Chinese Academy of Sciences and Yunnan Province.
KH attaches great importance to product quality and innovation, as well as brand development. KH holds 1 patent for invention, 2 patents for package designing and 8 patents for practical innovation. One of its products, Mulberry Branch Black Fungus, has been recognized as an “Important Innovative Product of Yunnan Province” by Yunnan Provincial Science and Technology Department since 2015. KH also holds a registered trademark “Fatty Su” (Registered Number: 14219423) for its products. KH aims to develop “Fatty Su” to a well-known fungus brand in China and ensure that customers from all over China could enjoy “the gift from nature and the taste of forest”.
Adhering to the core values of “Persistence, Integrity, Hard-working, and Sticking to the original goal” and the operation principle of “Ensuring the company, employees, growers and customers to all benefit from our business”, KH is consistently developing itself to become a better company with greater social responsibility.
Development History
Throughout its development history, KH has been expanding its business step by step.
On January 24th, 2013, Mr. Yan Su and Mr. Guangbiao Wu established and incorporated Shidian Kanghong Agricultural Technology Development Co., Ltd., aiming to lead the whole village to a better life. At the very beginning, KH only had a temporary factory without much equipment or facilities for large-scale production. Lacking experience and technical supervision, the first batch of black fungal strains were infected and did not result in any fungi.
In 2014, after the above setback, Mr. Su and Mr. Wu borrowed money from their families and friends to build 12 factories and install facilities. They also hired two technicians from Zhejiang Province to supervise the entire production process. However, due to a flood in the planting base and extreme weathers, 1.57 million fungal strains were heavily damaged. The direct economic loss was up to RMB 5.2 million.
Having learnt from past failures, Mr. Su realized that the most important aspect in fungal planting is technology. Therefore, in 2015, Mr. Su did considerable researches in the black fungi industry, sought and received great support from Kunming Edible Fungi Research Institute, and hired experienced experts to form a technology team. The team successfully cultivated a black fungal strain that suits the climate and weather conditions in Yunnan and won the Third Place Award in the Agriculture Group of Yunnan Innovative Entrepreneur Competition.
Backed by a solid technology team, KH has gradually grown from a start-up to a big company that shoulders significant social responsibility as well as offers a variety of products.
6.2 Products and Services
Auricularia auricula-judae, commonly known as Jew’s ear, wood ear, jelly ear or black fungus, is a species of edible fungus which is widely consumed in China as it is used in both Chinese cuisine and Chinese medicine. Black fungus has a mild flavor and is rich in protein, carbohydrates and minerals. Several researches also indicated that two glucans isolated from black fungus showed potent antitumor properties. Black fungus can be dried and rehydrated. Dried fungi can be preserved for a long period of time and still retain nutritional contents and the original flavor once rehydrated. It can also be used as an ingredient to produce other popular food products.
Shidian Town lies at the southern part of Hengduan Mountains, next to Nujiang River. With favorable climate and abundant natural resources, Shidian is a great place to grow black fungus and to set up plantations. KH takes great advantage of these conditions and has built up its business there.
KH provides a range of fungal products to consumers, including: 1). Mulberry Branch Black Fungus, 2). Black Fungus Essence Powder, and 3). Black Fungus Noodle.
Mulberry Branch Black Fungus Mulberry Branch Black Fungus is the organic black fungus growing from mulberry trees without using any fertilizers or pesticides. According to two quality tests conducted by Supervision and Testing Center for Edible Fungi Quality (Shanghai), Ministry of Agriculture (Test Report Number: 2014-W2560G; 2014-W2561G), compared with black fungi growing from other common wood (containing 14.1g of protein and 7.41g of glucan per 100g sample), mulberry branch black fungus has higher nutritional value for it contains more protein and glucans (14.7g of protein and 8.2g of glucan per 100g sample). For this product, KH offers several different packages, such as gift box and paper bag to cater to different customer groups. This product is produced by KH at its own facilities.
Picture 2. Mulberry Branch Black Fungus 13 Black Fungus Essence Powder
Ground to a grain size of 48 µm by ultra-micro grinder under the temperature of -27°C, black fungi are turned to essence powder. Since this method breaks down the cell walls of black fungi, the nutritional contents are fully released. Since this process is operated under an extremely low temperature, the nutritional value is very well preserved. Therefore, consumers can take in the nutrients of black fungi more easily by taking this essence powder. This product is produced by Lijiang Zhongyuan Green Food Co., Ltd. (hereafter referred as Zhongyuan) and has passed the quality test conducted by Yunnan Yunce Quality Testing Co., Ltd. (Test Report Number: YC1803217). KH has signed a contract with Zhongyuan. KH provides raw materials and pays the processing fee to Zhongyuan.
Picture 3. Black Fungus Essence Powder
Black Fungus Noodle
Black fungus noodle is made from black fungus powder and high-quality wheat flour. Noodle is a common staple for Chinese consumers. Since this product contains black fungus powder, it has higher nutritional value compared with ordinary noodles, and has therefore become popular among consumers. This product is produced by Longyang Yongda Food Product Processing Factory (hereafter referred as Yongda) and has passed the quality test conducted by Yunnan Institute of Product Quality Supervision & Inspection (Test Report Number: SP201800470). KH has signed a contract with Yongda, under which KH provides raw materials and pays the processing fee to Yongda.
Picture 4. Black Fungus Noodle
14 6.3 Marketing Strategy
KH’s basic marketing principles are “To spread knowledge and green concepts, To provide well-rounded product series and, To stay up-to-date and innovative”.
Specifically, first, KH not only sells its products but also actively spread the knowledge about the medical and nutritional functions of black fungus and the idea of sustainable development to the public via multiple channels.
Second, KH has identified different customer groups according to their preferences and consumption habits and provide different types of products to each group. For example, ordinary housewives prefer products with low prices; wealthy people prefer well-packaged and high-end products; elderly people are more interested in products that will be beneficial to their health. KH’s products also have different packages and prices to cater to different situation. For example, products in normal size and normal package are targeted at customers who will consume the products themselves; products in delicate packages could be a great gift to clients and guests; products in large packages are targeted at restaurants and canteens.
Third, KH employs three types of sales channels which not only cover the traditional approaches but also innovative ones. The first type is the traditional channel. KH cooperates with distributors and sales agents to sell products. KH also cooperates with several local schools to provide nutritious lunch for students. In this way, KH has built up a good reputation, which indirectly promotes its brand and sales. The second type is the online channel. KH has built up partnership with ule.com to distribute its products and is setting up its online store and a platform on its official account of WeChat. Also, KH is actively contacting Tmall.com and jd.com to get access to a bigger customer group. The third type is new retail channel. KH will set up experience restaurants called “Wood Ear Society” to further promote its products and health concepts. In these restaurants, customers could not only purchase the products mentioned in the previous part, but also could taste more food and dishes cooked with black fungi, such as black fungus noodle, black fungus pho, black fungus dumpling and black fungus steam bun. Customers could dine in, take away the food they order, or have it delivered to their homes. These dishes will be cooked in a centralized kitchen and then delivered to each restaurant, which will ensure food quality and food safety.
Picture 5. KH’s Online Store
Forth, KH has also set up an after-sale service system to maintain customer relationship. KH will invite each customer to register in its system and then analyze their consumption habits in order to gain a better understanding of their preferences and apply personalized promotion strategies. Also, KH will organize training for its sales staff, 15 distributors and sales agents, on which they would not only learn product information but also nutrition knowledge and the idea of sustainable development.
Fifth, KH has drawn up a promotion plan to promote its brand “Fatty Su” in three stages. The first stage is Warm- up, which is from January 2018 to December 2018. In this stage, KH will introduce the concept of “Healthy Life” to customers and the public via advertisements on mass media. The second stage is Heat-up, which is expected to be from January 2019 to December 2019. In this stage, KH will continuously promote the brand and the concept by employing more advertising channels and platforms, for example advertisements in railway stations, airports and TV programs. The third stage is Heat-preserving, which is expected to start from January 2020. In this stage, KH will keep the brand image active by regular promotion.
In short, KH applies multi-tiered plans and strategies to expand the market more efficiently and quickly.
Picture 6. the Design Sketch of “Wood Ear Society”
16 6.4 Development Strategy
As a company with strong sense of social responsibility, KH not only aims to develop itself but also strives to promote the economic growth in Shidian Town. To achieve these two goals, KH engages local farmers as its contracted growers, and pre-sells the growers at a low price the fungal strains which could be used to grow black fungi. To ensure the quality and the quantity of fungi, KH also provides free technical guidance to growers via local cooperatives (branches of KH which help KH to coordinate production, recruit growers and communicate with growers). The operation structure is illustrated in the flow chart below.
Selected and processed fungi
KH (overall managing, providing strains Consumers and equipment, selling products)
Cooperatives (coordinating production, recruiting Raw fungi growers, distributing strains, providing support)
Growers (using fungal strains to grow fungi, pre-processing fungi)
Chart 1. KH’s Operation Structure
Through this structure, KH gets connected with local farmers (growers) and therefore could lead them to develop altogether. By providing and distributing unified fungal strains the growers, KH therefore ensures the purity and quality of product. In addition, this structure creates more than 300 jobs in Shidian, thereby greatly enhancing the local economy.
To expand its business, enlarge its product offerings and lead the local economy further, KH has several plans which are briefly described below.
First, KH is expanding its production capability by building new factories and plantations. KH signed the Agreement on Investing and Developing the Construction Project of Sangzhi Black Fungal Strains with Annual Production of 30 million and Fine Processing with Shidian Government on September 11th, 2015. By June 30th, 2018, the infrastructures and factories were completed, and the facilities to produce fungal strains was near completion. In 2019 and 2020, KH will continue the construction and related facilities.
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Picture 7. KH’s Factory
Second, KH is to enlarge its product offerings by developing more products. KH signed the Cooperation Agreement on Product Development with Kunming Edible Fungi Research Institute on September 2nd, 2017. The institute is expected to complete the development of Black Fungus Tablet, Black Fungus Drink and so on by the end of 2018, and complete Black Fungus Capsule by the end of 2019. KH is also studying other edible fungi, for example lingzhi mushroom, and will develop products like lingzhi Mushroom Spore Powder and lingzhi Mushroom Spore Oil. KH has successfully planted lingzhi mushroom in its plantation, which has built up solid foundation for further production. Moreover, KH also has the plan to cooperate with cosmetics R&D institutes and pharmaceutical institutes to study more effects and values of black fungi and lingzhi mushrooms and develop skincare products and medicines using black fungi and lingzhi mushrooms as ingredients.
Picture 8. Lingzhi Mushroom in KH’s Plantation
18 6.5 Business Partners
KH has established partnerships with the following institutes and companies to develop or produce products:
• Kunming Edible Fungi Research Institute • Yunnan Yunjun Technology (Group) Co., Ltd. • Lijiang Zhongyuan Green Food Co., Ltd. • Longyang Yongda Food Product Processing Factory • Kunming Jinmo Trade Co., Ltd. • Yunnan Anzhi Express Co., Ltd. (Gto Express Company Yunnan Branch) • China Post Shidian Town Branch
Kunming Edible Fungi Research Institute Kunming Edible Fungi Research Institute (hereafter referred as KM Institute) is a professional agent researching and studying edible fungi and developing fungal products. KM Institute provides professional guidance on technology to KH and develops deep-processed fungal products according to KH’s requirement, while KH is responsible for market analysis and research funds.
Yunnan Yunjun Technology (Group) Co., Ltd. Yunnan Yunjun Technology (Group) Co., Ltd. (hereafter referred as Yunjun) is a company researching, developing and processing fungal products. Yunjun provides technical support and professional training to KH and cooperates with KH to develop fungal products, while KH is responsible for market analysis, product promotion, research equipment, research materials and research funds.
Lijiang Zhongyuan Green Food Co., Ltd. Lijiang Zhongyuan Green Food Co., Ltd. (hereafter referred as Zhongyuan) is a company processing and selling fungal products and agricultural products. KH provides black fungi to Zhongyuan and contracts with Zhongyuan to process Black Fungus Essence Powder.
Longyang Yongda Food Product Processing Factory Longyang Yongda Food Product Processing Factory (hereafter referred as Yongda) is a company processing agricultural products and food products. KH provides black fungi to Yongda and contracts with Yongda to process Black Fungus Noodles.
Kunming Jinmo Trade Co., Ltd. Kunming Jinmo Trade Co., Ltd. (hereafter referred as Jinmo) is a company designing and producing packages and commercial brochures. KH contracts with Jinmo to design and produce packages for its products including the packing boxes, gift boxes, commercial brochures, plastic packages and so on.
Yunnan Anzhi Express Co., Ltd. (Gto Express Company Yunnan Branch) Yunnan Anzhi Express Co., Ltd. (Gto Express Company Yunnan Branch) (hereafter referred as Anzhi) is a company providing delivering services. KH has got the franchise from Anzhi to set up an express delivery station in its own company to distribute its products at a low cost.
China Post Shidian Town Branch China Post is a state-owned company providing posting and delivering services. It owns an online shopping platform – ule.com with a huge customer base. KH promotes and sells its products on ule.com.
19 6.6 Permit and License Business License
(Duplicate copy) Uniform Social Credit Code: 9153052106555747L
a) Company Name: Shidian Kanghong Agricultural Technology Development Co., Ltd. b) Type of Company: Limited liability company (Foreign Enterprise Legal Person Sole Proprietorship) c) Address: Huaxing Industrial Area, Youwang Town, Shidian County, Baoshan City, Yunnan Province, China d) Legal Representative: Yan Su e) Registered Capital: RMB 2 million f) Date of Establishment: January 24th, 2013. g) Operating Period: January 24th, 2013 to January 24th, 2043. h) Business Scope: Planting, primary processing and sales of edible fungi and agricultural products; Sales of daily groceries and building materials; Import and export trading. (Projects needed to be approved under the laws can be operated after approved by relevant departments.)
Issued by Bureau of Market Supervision and Administration of Shidian County on August 14th, 2018.
20 Food Business Operation License (Duplicate Copy) Description a). Operator Name: Shidian Kanghong 1. Food Business Operation License is the legitimate certificate of the permit for food business Agricultural Technology Development that an operator gets. Co., Ltd. 2. The License has original and duplicate copies, which have the same legal effect. The b). Social Credit Code (Identity Card original License should be hung or placed on a prominent position at the operating site. Number): 9153052106555747L 3. The License must not be forged, modified, resold, leased, lent, or transferred in any other c). Legal representative (Person in illegal forms. Charge): Yan Su 4. The operator should carry out business within the approved scope. d). Address: No.23, Group 2, Jiucheng 5. The operator should accept the supervision and management of the Food and Drug Community, Jiucheng County, Shidian Supervision and Administration Department. Town, Baoshan City, Yunnan Province 6. The operator should apply to change the License when the permitted items are changed. e). Operation Address: 7. The operator should timely apply for an extension at the former department in 30 working Zhaojia Village, Huaxing Community, days before the License expires. Youwang County, Shidian Town, h). License Number: JY15305210013112 Baoshan City, Yunnan Province i). Daily Supervision Management Organization: Market Supervision f). Main Body Type: Administration Bureau of Youwang County Food Business Operator j). Daily Supervisors: Shaode Duan, Shaoming Qian g). Food Type: k.) Complain Call:12331 Sales of pre-packaged food (exclude l). License Issuing Authority: Market Supervision Administration Bureau of Shidian frozen food), sales of bulk food (exclude County frozen food) m). Issuer: Shaoming Qian Valid until July 24th, 2021 July 25th, 2018
21 6.7 Related Parties Information below is provided by China National Enterprise Credit Information Publicity System and updated by www.qichacha.com (Updated by September 7th, 2018).
Yunnan Erguan Biotechnology Co., Ltd.
Yunnan Erguan Biotechnology Co., Ltd. is the subsidiary company of KH. Mr. Xincheng Wang, the Executive Director of the Company, is the shareholder and general manager of this company. Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this company.
Company Name: Yunnan Erguan Biotechnology Co., Ltd. Uniform Social Credit Code: 91530102MA6N79511C Type of Company: Other Limited Liability Company Address: No. 102-507, Block 1, Jinding Technology Area, No. 690, Xuefu Road, Wuhua District, Kunming City, Yunnan Province. Legal Representative: Jianneng He Registered Capital: RMB 1 Million Date of Establishment: May 30th, 2018 Operating Period: May 30th, 2018 to non-limited date Business Scope: Research and development, application and technological consulting of biotechnology and agricultural technology; domestic trading, goods distributing; online selling; goods and technology import and export (excluding goods and technologies prohibited to be imported, exported, or operated by the State) (Projects needed to be approved under the laws can be operated after approved by the relevant departments).
Although Yunnan Erguan Biotechnology Co., Ltd. has partly overlapping business scope with KH, 90% of its shares are held by KH and its operation is under KH’s management. Therefore, these two companies are not in competition.
Yunnan Fatty Su Trading Co., Ltd.
Yunnan Fatty Su Trading Co., Ltd. is the subsidiary company of KH. Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this company.
Company Name: Yunnan Fatty Su Trading Co., Ltd. Uniform Social Credit Code: 91530521MA6KWUTE13 Type of Company: Limited Liability Company (Natural investment or holding) Address: Huaxing Industrial Area, Youwang Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Shunli Zeng Registered Capital: RMB 1 Million Date of Establishment: August 3rd, 2017 Operating Period: August 3rd, 2017 to non-limited date Business Scope: Planting, processing and selling edible fungi, tea, coffee; wholesale and retail of food, healthcare food, nutrient supplements, agriculture products, cosmetics, groceries, construction materials, machineries, and electronic products; export and import trading; company management and technological services consulting; courtesy services; public relation planning. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Yunnan Fatty Su Trading Co., Ltd. has partly overlapping business scope with KH, 90% of its shares are held by KH and its operation is under KH’s management. Therefore, these two companies are not in competition. 22 Baoshan Yaotong Agricultural Development Co., Ltd.
Baoshan Yaotong Agricultural Development Co., Ltd. is the subsidiary company of KH. Ms. Chun Wang, the Executive Director of the Company, is the legal representative, shareholder and director of this company. Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this company.
Company Name: Baoshan Yaotong Agricultural Development Co., Ltd. Uniform Social Credit Code: 91530502MA6KGH3L0X Type of Company: Limited Liability Company (Natural investment or holding) Address: No. 1302, Block 5, Baolong Longtingyuan, West side, north part of Yongchang Road, Longyang Distirct, Baoshan City, Yunnan Province. Legal Representative: Chun Wang Registered Capital: RMB 1 Million Date of Establishment: April 11th, 2017 Operating Period: April 11th, 2017 to April 10th, 2037 Business Scope: Planting, processing and selling agricultural products and edible fungi; Sales of groceries, construction materials (excluding metal materials). (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Baoshan Yaotong Agricultural Development Co., Ltd. has partly overlapping business scope with KH, 90% of its shares are held by KH and its operation is under KH’s management. Therefore, these two companies are not in competition.
Honghe Kanghong Agricultural Technology Co., Ltd.
Honghe Kanghong Agricultural Technology Co., Ltd. is the subsidiary company of KH. Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this company.
Company Name: Honghe Kanghong Agricultural Technology Co., Ltd. Uniform Social Credit Code: 91532523MA6KCBKGXA Type of Company: Limited Liability Company (Natural investment or holding) Address: Tangxiang New District, Pinbian Miao Autonomous County, Honghe Hani and Yi Autonomous Prefecture, Yunnan Province. Legal Representative: Tianliang Zhou Registered Capital: RMB 1 Million Date of Establishment: March 1st, 2017 Operating Period: March 1st, 2017 to February 28th, 2037 Business Scope: Planting, processing and selling edible fungi; Research and development of edible fungi planting technology; Technical exchange and training services; Purchasing and selling edible fungi and agricultural products; Sales of edible fungi equipment, utensils, metal materials, groceries, construction materials, home appliance; Goods and technologies export and import. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Honghe Kanghong Agricultural Technology Co., Ltd. has partly overlapping business scope with KH, 90% of its shares are held by KH and its operation is under KH’s management. Therefore, these two companies are not in competition.
23 Lincang Kanghong Agricultural Technology Development Co., Ltd.
Lincang Kanghong Agricultural Technology Development Co., Ltd. is the subsidiary company of KH. Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this company.
Company Name: Lincang Kanghong Agricultural Technology Development Co., Ltd. Uniform Social Credit Code: 91530924MA6K9LTB7W Type of Company: Limited Liability Company (Natural investment or holding) Address: No.111, Jingdianruncheng, Guangshan Road, Nansan Town, Zhenkang County, Lincang City, Yunnan Province. Legal Representative: Biyuan Duan Registered Capital: RMB 1 Million Date of Establishment: December 30th, 2016 Operating Period: December 30th, 2016 to non-limited date Business Scope: Planting, processing and selling edible fungi; Research and development of edible fungi planting technology; Technical exchange and training services; Purchasing and selling edible fungi and agricultural products; Sales of edible fungi equipment, utensils, metal materials, groceries, construction materials, home appliance; Goods and technologies export and import (excluding goods and technologies that the State prohibits to import or export, or that can only be operated by limited companies). (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Lincang Kanghong Agricultural Technology Development Co., Ltd. has partly overlapping business scope with KH, 90% of its shares are held by KH and its operation is under KH’s management. Therefore, these two companies are not in competition.
Puer Kanghong Agricultural Technology Development Co., Ltd.
Puer Kanghong Agricultural Technology Development Co., Ltd. is the subsidiary company of KH. Mr. Yan Su, the Chairman of the Board of the Company, is the Chairman of this company. Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this company.
Company Name: Puer Kanghong Agricultural Technology Development Co., Ltd. Uniform Social Credit Code: 91530826MA6K52FQ7J Type of Company: Limited Liability Company (Natural investment or holding) Address: No.111, Laobaizhai, Luojie Village, Guoqing County, Jiangcheng Hani and Yi Autonomous County, Puer City, Yunnan Province. Legal Representative: Shaolin Duan Registered Capital: RMB 1 Million Date of Establishment: December 30th, 2016 Operating Period: March 18th, 2016 to March 17th, 2046 Business Scope: Planting, pre-processing and selling agricultural products and edible fungi; Sales of groceries, construction materials; Import and export trading. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Puer Kanghong Agricultural Technology Development Co., Ltd. has partly overlapping business scope with KH, 70% of its shares are held by KH and its operation is under KH’s management. Therefore, these two companies are not in competition.
24 Shidian Haihang Agriculture Planting Professional Cooperative
Mr. Yan Su, the Chairman of the Board of the Company, is the legal representative of this cooperative.
Company Name: Shidian Haihang Agriculture Planting Professional Cooperative Uniform Social Credit Code: 93530521MA6K5C2D5H Type of Company: Farmer Cooperative Address: Jiaochangba, Wanxing Village, Wanxing Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Yan Su Members’ Capital: RMB 2.6 Million Date of Establishment: December 12th, 2014 Business Scope: Helping members to carry out business activities, coordinating the supply and sales among members, providing pre-production, during-production and post-production services, coordinating and guiding brand promotion activities, technical services, products sales, and so on. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Shidian Haihang Agriculture Planting Professional Cooperative does not have overlapping business scope with KH and its operation is actually beneficial to KH. Therefore, these two companies are not in competition.
Shidian Wanfeng Agricultural Machinery Service Professional Cooperative
Mr. Yan Su, the Chairman of the Board of the Company, is the director of this cooperative.
Company Name: Shidian Wanfeng Agricultural Machinery Service Professional Cooperative Uniform Social Credit Code: 9353052159711320XE Type of Company: Farmer Cooperative Address: Sujia Village, Renhe Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Yingbao Li Members’ Capital: RMB 3.09 Million Date of Establishment: May 22nd, 2012 Business Scope: Providing agricultural machinery to agricultural production; carrying out technical training, exchange and consulting services; planting agricultural products; organizing to purchase and sell products produced by the members. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Shidian Wanfeng Agricultural Machinery Service Professional Cooperative has partly overlapping business scope with KH, it mainly focuses on agricultural machinery services and its operation is actually beneficial to KH. Therefore, these two companies are not in competition.
Baoshan Kanghong Agricultural Products Planting Professional Cooperative
Mr. Guangbiao Wu, the Executive Director of the Company, is the director of this cooperative. Mr. Zongren Li, the Vice Present of the Company, is the legal representative and director of this cooperative. Ms. Ping Zhang, the Chief Administrative Officer of the Company, is the director of this cooperative.
Company Name: Baoshan Kanghong Agricultural Products Planting Professional Cooperative Uniform Social Credit Code: 93530521064284030T Type of Company: Farmer Cooperative Address: Huaxing Industrial Area, Youwang Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Zongren Li 25 Members’ Capital: RMB 2.41 Million Date of Establishment: April 1st, 2013 Business Scope: Organizing members to plant vegetables and fruits; packing agricultural products; purchasing and selling products of members; organizing to purchase and supply fertilizers to members; introducing new technologies, new species and carrying out technical training, technology exchange and consulting services related to agricultural production. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Baoshan Kanghong Agricultural Products Planting Professional Cooperative has partly overlapping business scope with KH, it mainly focuses on organizing members and its operation is actually beneficial to KH. Therefore, these two companies are not in competition.
Shidian Fuqun Black Fungus Planting Professional Cooperative
Mr. Zongren Li, the Vice Present of the Company, is the legal representative and director of this cooperative.
Company Name: Shidian Fuqun Black Fungus Planting Professional Cooperative Uniform Social Credit Code: 93530521MA6K68EY8B Type of Company: Farmer Cooperative Address: Yanzijiao, Longtang Group, Meiziqing, Jiufang Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Zongren Li Members’ Capital: RMB 1.35 Million Date of Establishment: May 23rd, 2016 Business Scope: Organizing members to plant and sell black fungi. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Although Shidian Fuqun Black Fungus Planting Professional Cooperative has partly overlapping business scope with KH, it mainly focuses on organizing members and its operation is actually beneficial to KH. Therefore, these two companies are not in competition.
Yunnan Yibu Science and Technology Co., Ltd.
Ms. Chun Wang, the Executive Director of the Company, is the shareholder and director of this company.
Company Name: Yunnan Yibu Science and Technology Co., Ltd. Uniform Social Credit Code: 91530102688590650K Type of Company: Limited Liability Company (Natural investment or holding) Address: No. 1-1705, 17th Floor, Block B, Xiaochenggushi, No. 250, North Huancheng Road, Panlong District, Kunming City, Yunnan Province. Legal Representative: Xingwen Yang Registered Capital: RMB 1 Million Date of Establishment: June 10th, 2009 Operating Period: June 10th, 2009 to June 9th, 2019 Business Scope: Development, application and technical consulting of computer software and hardware; sales of computer appliances, electronic products and groceries. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Yunnan Yibu Science and Technology Co., Ltd. does not have overlapping business scope with KH and therefore, these two companies are not in competition.
26 Shidian Zhuzhule Pig Farm
Ms. Ping Zhang, the Chief Administrative Officer of the Company, is the legal representative, shareholder and director of this farm.
Company Name: Shidian Zhuzhule Pig Farm Uniform Social Credit Code: 91530521MA6K54J48Q Type of Company: Individual Holding Company Address: Shazipo Group, Wanxing Village, Wanxing Town, Shidian County, Baoshan City, Yunnan Province. Legal Representative: Ping Zhang Date of Establishment: March 22nd, 2016 Business Scope: Breeding and selling pigs; selling groceries and construction materials. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Shidian Zhuzhule Pig Farm does not have overlapping business scope with KH and therefore, these two companies are not in competition.
Honghe Tianyu Fire Prevention and Safety Technology Engineering Co., Ltd.
Ms. Yiyun Chen, the Chief Financial Officer of the Company, is the shareholder of this company.
Company Name: Honghe Tianyu Fire Prevention and Safety Technology Engineering Co., Ltd. Uniform Social Credit Code: 91532526MA6K73L49G Type of Company: Limited Liability Company (Natural investment or holding) Address: No. 344 (2nd Floor), Tuobai Village, Putian Community, Miyang County, Mile City, Honghe Hani and Yi Autonomous Prefecture, Yunnan Province. Legal Representative: Yongjian Huang Registered Capital: RMB 8 Million Date of Establishment: July 26th, 2016 Operating Period: July 26th, 2016 to July 25th, 2036 Business Scope: Fire prevention facility project; Designing, installing and maintaining of intellectualized building project and mechanical and electrical facilities. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Honghe Tianyu Fire Prevention and Safety Technology Engineering Co., Ltd. does not have overlapping business scope with KH and therefore, these two companies are not in competition.
Yunnan Daoji Equity Investment and Fund Management Co., Ltd.
Mr. Jie Ma, the Independent Non-Executive Director of the Company, is the legal representative, shareholder, director and general manager of this company.
Company Name: Yunnan Daoji Equity Investment and Fund Management Co., Ltd. Uniform Social Credit Code: 9153010308041232X0 Type of Company: Limited Liability Company (Natural investment or holding) Address: No. 1912, Block B, Shishangjiayuan, Panlong District, Kunming City, Yunnan Province. Legal Representative: Jie Ma Registered Capital: RMB 5 Million Date of Establishment: October 21st, 2013 Operating Period: October 21st, 2013 to October 20th, 2023 27 Business Scope: Setting up equity investment companies, raising equity investment fund, being entrusted to manage equity investment fund, being engaged in financial management and relevant consulting services, and other business that are approved or allowed by register department. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Yunnan Daoji Equity Investment and Fund Management Co., Ltd. does not have overlapping business scope with KH and therefore, these two companies are not in competition.
Kunming Miaoyou Financial Consulting Co., Ltd.
Mr. Jie Ma, the Independent Non-Executive Director of the Company, is the shareholder and director of this company.
Company Name: Kunming Miaoyou Financial Consulting Co., Ltd. Uniform Social Credit Code: 9153010367362036X7 Type of Company: Limited Liability Company (Natural investment or holding) Address: No. 501, Unit 2, Block 3, Area A, Yitai, Jinse Avenue, Panlong District, Kunming City, Yunnan Province. Legal Representative: Ruihan Yan Registered Capital: RMB 100 Thousand Date of Establishment: April 21st, 2008 Operating Period: April 21st, 2008 to non-limited date Business Scope: Bookkeeping (business should be operated within the scope defined by certificates and licenses), economic information consulting. (1. Without the approval of relevant departments, fund shall not be raised publicly; 2. Deals about securities products and financial products shall not be carried out publicly; 3. Loan shall not be released; 4. The company shall not guarantee for other companies except the invested companies; 5. The company shall not promise investors a loss-free investment or the minimum income) (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
Kunming Miaoyou Financial Consulting Co., Ltd. does not have overlapping business scope with KH and therefore, these two companies are not in competition.
Kunming Huaxin Civil Financing and Registering Services Co., Ltd.
Mr. Jie Ma, the Independent Non-Executive Director of the Company, is the director of this company.
Company Name: Kunming Huaxin Civil Financing and Registering Services Co., Ltd. Uniform Social Credit Code: 915301003162614859 Type of Company: Limited Liability Company (Natural investment or holding) Address: No. C09, Block 1C, Tianyuhuayan, Putao Street, Wanhua Road, Panlong District, Kunming City, Yunnan Province. Legal Representative: Lyu Zhao Registered Capital: RMB 5 Million Date of Establishment: September 16th, 2014 Operating Period: September 16th, 2014 to September 16th, 2024 Business Scope: Registering, publishing investment and finance information; Connecting civil investors and parties that has financial requirements, like small and medium enterprises, individual merchants and so on; Financial intermediary services: providing business consulting, financing planning, supervision and so on; equity transfer intermediary services; financial consulting services. (Projects needed to be approved under the laws can be operated after approved by the relevant departments.)
28 Kunming Huaxin Civil Financing and Registering Services Co., Ltd. does not have overlapping business scope with KH and therefore, these two companies are not in competition.
6.8 Main Competitors Information below is provided by China National Enterprise Credit Information Publicity System and updated by www.qichacha.com (Updated by September 7th, 2018).
KH’s main competitors are listed below:
Heilongjiang Beiwei Fungus Technology Group Co., Ltd.
Company Name: Heilongjiang Beiwei Fungus Technology Group Co., Ltd. Uniform Social Credit Code: 91231000669045331C Type of Company: Other Limited Liability Company (Unlisted) Address: No. 01, First Floor, Community 1, North Xinhua, Hailin City, Heilongjiang Province. Legal Representative: Zhenhua Qi Registered Capital: RMB 138.56 Million Date of Establishment: March 11th, 2008 Operating Period: March 11th, 2008 to March 10th, 2028 Business Scope: Processing and selling other aquatic products (seasoning fish products), other food products [grain products (packed), ground grain products (packed), rice (packed), pastry (bakery, mooncakes)], vegetable product [edible fungus products (dried edible fungi, seasoning edible fungi), pickle], candy products (candy), dried fruit, soya sauce; purchasing fungi and vegetables, goods export and import; food whole-sale and retail; producing and selling beverage; starch and starch products; starch (packed).
Heilongjiang Weiduobao Food Co., Ltd.
Company Name: Heilongjiang Weiduobao Food Co., Ltd. Uniform Social Credit Code: 91231081X06392201W Type of Company: Limited Liability Company (Unlisted, Natural investment or holding) Address: No. 200, Yingxin Street, Suifenhe City, Mudanjiang City, Heilongjiang Province. Legal Representative: Shaoli Yang Registered Capital: RMB 24 Million Date of Establishment: February 26th, 1997 Operating Period: February 26th, 1997 to non-limited date Business Scope: Sales of food products, seasonings, tea and tea products, vegetable products, fruit products, fried food and nut products, aquatic products, and bean products (the aforementioned items can be operated after the permit is achieved); Planting and selling edible fungi; Socioeconomic information consulting, selling pre-processed agricultural products; Goods export and import, technology export and import; carrying out export and import business by the means of small amount deals with neighboring countries and areas (excluding goods and technologies that are limited or prohibited to export or import by the State).
Heilongjiang Beidahuang Land Reclamation Group Corporation
Company Name: Heilongjiang Beidahuang Land Reclamation Group Corporation Uniform Social Credit Code: 9123300071107724XC Type of Company: Ownership by the Whole People Address: No. 8, Qianshan Road, Nangang District, Harbin, Heilongjiang Province. Legal Representative: Shoucong Wang 29 Registered Capital: RMB 10.215 Billion Date of Establishment: April 10th, 1994 Operating Period: April 10th, 1994 to non-limited date Business Scope: Agriculture, forestry, animal husbandry, fishery, mining, production processing, transportation, construction engineering, real estate development, material supply and marketing, warehousing, finance and insurance, culture, education and health, social services; contracting overseas agricultural engineering and international bidding projects at home; export of equipment and materials needed for the above overseas projects; sending labor needed for agricultural industries to the foreign countries; exhibition, wholesale, import and export of cereals, beans and potatoes; wholesale, import and export of rice, flour products and cooking oil.
These three companies are very competitive in the edible fungus industry for their great production capabilities, good brand reputations, and wide product ranges. However, KH has several advantages that set it apart from these competitors and make it a more desirable choice to potential customers.
Competitive Advantages
I. Good Reputation with Official Recognitions
KH is the leading company in the edible fungus industry of Yunnan Province and has achieved several important recognitions and awards. KH was identified as a “Scientific & Technological Small & Medium Enterprise of Yunnan Province” by Yunnan Provincial Science and Technology Department in 2014 and was named as “the Leading Industrial Enterprise of Baoshan City” by Baoshan Industrial Agriculture Development Team in 2015. The plant base of KH has also been identified as a “Demonstration Base” by municipal and provincial departments and has been used as the research center for experts from Chinese Academy of Sciences and Yunnan Province. These titles and awards have made KH a more trustworthy company.
II. Strong Product Development Capability
KH has worked with professional institutes and companies to develop products that can satisfy different customers’ needs. KH also has several innovative products that have no competitiors in the market for now, for example Black Fungus Essence Powder and Black Fungus Noodle. KH is also developing more unique products such as Black Fungus Tablet, so as to broaden its product range and enhance its competitiveness.
III. Advantageous Geographic Location
KH is located in Shidian Town, Yunnan Province. Shidian Town lies at the southern part of Hengduan Mountains, next to Nujiang River. The favorable climate and abundant natural resources including forests and water make Shidian a perfect place to grow fungi. Also, Yunnan has historically been an strategically important place in Asia connecting China and South Asia, which provides possibilities for KH to expand its business overseas.
IV. Well-built Logistics System
KH has set up its own logistics services through cooperating with Yunnan Anzhi Express Co., Ltd. which has access to the logistics system of Gto Express, a nation-wide delivery company. This has greatly expedited the delivery of products from KH to its distributors, as well as to the end consumers. Therefore, KH will gradually expand its business out of Yunnan Province and become a well-known brand in China.
30 7. Company Advantages and Investment Highlights
7.1 Strong Market Demand
Chinese people have a long history of eating black fungi and therefore there is a strong demand in the market. According to the statistics from China Edible Fungi Association, the business volume of black fungi rose from 1.11 million tons in 2007 to 6.80 million tons in 2016. With Chinese food culture being introduced to other countries, the consumption of black fungi in the overseas market has also increased. KH is well positioned to tap this strong market demand.
7.2 Wide Product Offerings
In the market, most of the black fungi are sold as dried black fungi. However, KH has cooperated with several institutes and companies to develop various black fungi products, in order to enrich the product offerings and provide more options to customers. In addition, black fungus is not merely a kind of food, but also has medicinal values. KH is researching on developing more products of black fungi to widen its product range and therefore staying competitive in the market.
7.3 Great Brand Reputation
Most black fungi in the market do not have any brand and many companies that process and sell black fungi are not aware of the importance of brand reputation. However, KH has attached great importance to its brand establishment. KH’s brand “Fatty Su” has achieved a great reputation due to the satisfying product quality, wide product range and multitiered brand promotion. KH hopes, when customers consider buying black fungi products, they will think of “Fatty Su”; when they see “Fatty Su”, they will think of quality black fungi products. Building upon the good brand reputation, KH aims to take a bigger market share and attract more customers.
7.4 Promising Expansion Plan
By the end of 2017, KH had 340 contracted growers with 867,000 m2 planting area yielding 845 tons of black fungi per year. KH plans to set up cooperatives in more villages and recruit more growers to expand its business scale, and KH is actively negotiating with local governments. According to KH’s plan, the number of contracted growers will gradually grow to 1000 by the end of 2020, with 2,400,000 m2 planting area yielding 2340 tons of black fungi per year. Such a great yield will ensure KH could have enough materials to develop more processed products which will bring more revenues and profits.
31 8. Directors and Senior Management
Directors
Name Position
Mr. Yan Su Chairman of Board of Directors
Mr. Xincheng Wang Executive Director
Ms. Chun Wang Executive Director
Mr. Guangbiao Wu Executive Director
Mr. Jie Ma Independent Non-Executive Director
Mr. Guanshi Gao Independent Non-Executive Director
Mr. Yan Su, Chairman of Board of Directors
Mr. Yan Su is the Chairman of Board of Directors of the Company. Mr. Su graduated from the Open University of China, majoring in Administrative Management. He worked as the manager in the People’s Insurance Company of China Limited from 2008 to 2012. Then he founded KH with his partners in 2013. In 2017, Mr. Su was selected as the representative of the 4th National People’s Congress of Baoshan City and joined the 9th Shidian Town Committee of the Chinese People’s Political Consultative Conference. In the same year, Mr. Su was also employed by Yunnan Province Edible Fungi Association as the vice-president. Mr. Su is good at company management and development planning.
Mr. Xincheng Wang, Executive Director
Mr. Xincheng Wang is the Executive Director of the Company. Mr. Wang has over 30 years’ work experience. He has worked in various companies in Beijing and Yunnan and gained rich experience in purchasing, sales, manufacturing management, public relationship maintenance and company management. In 2008, Mr. Wang finished Executive Master of Business Administration in Tsinghua University. In 2018, Mr. Wang joined KH and took the duty of Chief Executive Officer, responsible for overall management.
32 Ms. Chun Wang, Executive Director
Ms. Chun Wang is the Executive Director of the Company. Ms. Wang graduated from Beijing Institute of Technology, majoring in Chemical Engineering and Technology. Ms. Wang has over 15 years of experience in administrative work, company management, staff training, and client relationship maintenance. In 2017, she joined Baoshan Yaotong Agricultural Development Co., Ltd. the subsidiary of KH, responsible for overall management and strategy planning. In 2018, Ms. Wang was promoted to be the Chief Operating Officer of KH.
Mr. Guangbiao Wu, Executive Director
Mr. Guangbiao Wu is the Executive Director of the Company. Mr. Wu graduated from Yunnan Trade and Economics School, studying Processing and Marketing of Edible Fungi. After graduation, he worked as the assistant agronomist in Kunming Edible Fungi Research Institute for 5 years, responsible for developing, planting and promoting new fungi species, managing planting base and studying wild fungi species. In 2014, he worked as Technology Director in KH, responsible for managing and leading the technology team, training staff and farmers. Mr. Wu holds the Intermediate Edible Fungi Professional Qualification Certificate, Advanced Fungi Gardener Certificate, Professional Farmer Training Certificate, and Food Security Director Training Certificate.
Mr. Jie Ma, Independent Non-Executive Director
Mr. Jie Ma is the Independent Non-Executive Director of the Company. Mr. Ma graduated from Kunming University of Science and Technology, majoring in Mechanical Manufacturing. After graduation, he worked as business manager, customer manager, accountant director and bank director in the Bank of China, Kunming Nanyao Branch for 12 years. Then he entered the field of investment in 2003 and worked as general manager, investment consultant in several companies. Mr. Ma has rich experience in investment, bank business and company management, also holds a Certificate of Accounting Professional.
Mr. Guanshi Gao, Independent Non-Executive Director
Mr. Guanshi Gao is the Independent Non-Executive Director of the Company. Mr. Gao graduated from Sichuan University, majoring in Organic Chemistry. After graduation, Mr. Gao worked as a researcher in Kunming Edible Fungi Research Institute and then Yunnan Supply and Marketing Cooperatives Science Institute for 36 years, responsible for studying fungi, extracting processing and analyzing functional chemicals in fungi. Mr. Gao has hosted 8 national and provincial science and research projects, taken part in over 10 science and research projects, published over 20 research papers, and holds 6 certified patents. He is also the member of Expert Committee of Yunnan Edible Fungi Association and technology consultant for over 10 companies. Mr. Gao is able to provide valuable suggestions to the Company.
33 Senior Management
Name Position
Mr. Xincheng Wang Chief Executive Officer, CEO
Mr. Zongren Li Vice President
Ms. Ping Zhang Chief Administrative Officer, CAO
Ms. Yiyun Chen Chief Financial Officer, CFO / the Board Secretary
Ms. Chun Wang Chief Operating Officer, COO
Mr. Xincheng Wang, Chief Executive Officer
Mr. Xincheng Wang is the Chief Executive Officer of the Company. Mr. Wang worked as the sales manager in Beijing Building Materials Factory from 1985 to 1991, then worked as the vice general manager in Beijing Fengtai Overseas Trading Company from 1992 to 1993, responsible for sales management. After that, Mr. Wang worked as a free trader for 12 years. Then he joined Yunnan Wanjiahuan Group Limited, responsible for public relationship maintenance, in which he gained rich experience in contacting government, banks and other departments. In the January of 2018, Mr. Wang joined KH. With versatile skills and rich experience, Mr. Wang is best-positioned to lead the Company go further.
Mr. Zongren Li, Vice President
Mr. Zongren Li is the Vice President of the Company. Mr. Li graduated from Kunming University of Science and Technology, majoring in Metallurgy. After graduation, he worked as the chief of section in Yunnan Yunlvrunxin Aluminum Industry Co., Ltd., responsible for manufacturing management. In 2016, he joined KH and took the duty of vice president, responsible for overall management.
Ms. Ping Zhang, Chief Administrative Officer
Ms. Ping Zhang is the Chief Administrative Officer of the Company. Ms. Zhang graduated from Yunnan Normal University, majoring in Security Investment. After graduation, she worked as the pension manager in the government of Wanxing Village, Shidian Town, Baoshan City, Yunnan Province for 5 years. In 2013, Ms. Zhang joined KH and worked as the chairwoman of the labor union and administrative officer, responsible for hosting activities in the labor union, maintaining the relationship with the government and administrative work.
34 Ms. Yiyun Chen, Chief Financial Officer / the Board Secretary
Ms. Yiyun Chen is the Chief Financial Officer and the Board Secretary of the Company. Ms. Chen graduated from Yunnan University of Finance and Economics, majoring in Finance. Ms. Chen has over 20 years of experience in finance and has worked as CFO for several companies. Ms. Chen is the Certified Internal Auditor, Certified Public Accountant, and Certified Project Data Analyst. She also holds the certificate of Senior Accountant and Senior Credit Risk Manager. With rich experience and certified qualifications, Ms. Chen is able to manage the financial issues of the Company. With great communication skills and wide connections, Ms. Chen is also able to deal with secretary work.
Ms. Chun Wang, Chief Operating Officer
Ms. Chun Wang is the Chief Operating Officer of the Company. After graduation, she worked as the manager assistant in Beijing Yongyou Software Co., Ltd. Yunnan Branch for 4 years, responsible for administrative work. Then, she worked as vice general manager in Yunnan Langchao Software Co., Ltd. for 6 years, responsible for client relationship maintenance. After that, she worked as manager in People’s Insurance Company of China Limited for 3 years. With rich experience and well-built connections, Ms. Wang is able to manage the Company’s operation very well.
35 9. Financial Statements Auditor’s Report
36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67
68 69 70 71 72
73 Three-Year Projection Summary of Three-Year Projection (in RMB) Unit: Million RMB 2018 2019 2020 Total Liabilities 12.76 18.20 24.05 Net Asset 67.19 72.05 81.71 Total Asset 79.95 90.25 105.76 Asset-liability Ratio 15.96% 20.17% 22.74% Revenue 37.38 64.50 102.36 Net Profit 3.44 6.86 12.66
Three-Year Projected Profit Composition (in RMB) Unit: Million RMB Profit from Profit from Profit from Black Profit from Profit from Profit from Selected Dried Black Fungus Fungus Essence Ordinary Dried New Wood Ear Gross Profit Black Fungi Noodle Powder Black Fungi Products Society 2018 3.84 0.77 0.94 2.10 0.00 0.00 7.65 2019 7.20 3.85 7.53 0.00 0.92 0.51 20.01 2020 10.08 5.13 12.05 0.00 1.54 1.93 30.73
Summary of Three-Year Probjection (in USD) Unit: Million USD 2018 2019 2020 Total Liabilities 1.87 2.66 3.52 Net Asset 9.82 10.53 11.94 Total Asset 11.69 13.19 15.46 Asset-liability Ratio 15.96% 20.17% 22.74% Revenue 5.46 9.43 14.96 Net Profit 0.50 1.00 1.85
Three-Year Projected Profit Composition (in USD) Unit: Million USD Profit from Profit from Profit from Black Profit from Profit from Profit from Selected Dried Black Fungus Fungus Essence Ordinary Dried New Wood Ear Gross Profit Black Fungi Noodle Powder Black Fungi Products Society 2018 0.56 0.11 0.14 0.31 0.00 0.00 1.12 2019 1.05 0.56 1.10 0.00 0.14 0.08 2.93 2020 1.48 0.75 1.76 0.00 0.23 0.28 4.50
Note: This projection in USD is based on the exchange ratio between USD and RMB on August 2nd, 2018, 1 US Dollar equals 6.83 RMB.
74 Basis for Profit Projection
According to the Auditor’s Report, the net profit of KH in 2017 is RMB 3.55 million, which is about 1.94 times of the net profit in 2016 (RMB 1.83 million). Due to the fact that the first season is not the harvest time, the net profit of KH in the first season of 2018 is only up to RMB 0.43 million.
Since KH has invested in developing new products, expanding the product range and establishing new sales channels, the total net profit in 2018 is projected to stay at the same level as the net profit in 2017, that is RMB 3.44 million. However, as more products are introduced to the market, the product range becomes wider and the new sales channels come into use, KH will achieve more revenue and therefore the net profit will increase accordingly. It is projected that the net profit will be RMB 6.86 million in 2019 and RMB 12.66 in 2020, and the increase rate is about 1.85 and 1.99 times.
KH’s profit mainly consists of 6 parts: selected dried black fungi, black fungus noodle black fungus essence powder, ordinary dried black fungi, new products and Wood Ear Society.
The selected dried black fungi are better than ordinary dried black fungi in quality and therefore have higher value and margin, which will the bring gross profit of RMB 3.84 million in 2018. As KH will set up more organic plantations, recruit more growers and therefore expand the planting area, the yield of black fungi will increase. In 2019, the gross profit brought by selected black fungi is projected to be RMB 7.2 million and in 2020 it will climb to RMB 10.08 million.
Black fungus noodle is projected to bring the profit of RMB 0.77 million in 2018. With the establishment of “Wood Ear Society”, a restaurant brand that sells black fungus products, the sales of Black fungus noodle are believed to increase sharply in 2019 and 2020, which will bring profit of RMB 3.85 million in 2019 and RMB 5.13 million in 2020.
Black fungus essence powder is projected to bring the profit of RMB 0.94 million in 2018. Since this product has a high margin, KH will promote actively in its sales channels. The projected profit of this product is RMB 7.53 million in 2019 and RMB 12.05 million in 2020.
Ordinary dried black fungi are a traditional product of KH but has low margin. It is projected that this product will bring profit of RMB 2.10 million in 2018. However, since KH is planning to use black fungi to develop and manufacture more innovative products with higher value and margin, the sales of this product will be stopped in 2019 and 2020.
In 2018, KH is actively developing more new products like black fungus tablet, black fungus drink and black fungus capsule. These products will be promoted actively and will bring actual profits from 2019. The projected profit is RMB 0.92 million in 2019 and RMB 1.54 million in 2020.
KH is also actively establishing its chain restaurants “Wood Ear Society” and is expected to gain profit from this business from 2019. The projected profit is RMB 0.51 million in 2019 and RMB 1.93 in 2020.
In total, the gross profit of KH is projected to be RMB 7.65 million in 2018, RMB 20.01 million in 2019 and RMB 30.73 million in 2020. The net profit is projected to be RMB 3.44 million in 2018, RMB 6.86 million in 2019 and RMB 12.66 million in 2020.
75 Market Value
According to the Company's three-year projection, the total number of shares will be 100 million, each share will be 0.40 USD, and the total market value of the Company will be 40.44 million USD. The projection of the market value of the Company will be described in this section.
Methodology The discounted cash flow method (DCF) is adopted to project the market value. DCF is a method that uses the concept of time value of money to value a project, company, or assets. This method is suitable for the Company which has great development potential and strong core competitiveness. Therefore, DCF is the method applied to project the market value of the Company.
Approach The calculation process of the market value consists of two sections: one is the total profit of three years, the other one is the present value of perpetual annuity which equals the profit of product sales and other services. The formula is shown below. “P” stands for the present value of perpetual annuity. “A” stands for the annual return and “i” stands for the interest rate.
The present value of perpetual annuity:
Analysis
The formula for market value: [(Total three-year projected net profit) + P (A, i)] / RE Input
Symbol Description Data
F2018 Projected net profit in 2018 RMB 3.44 million
F2019 Projected net profit in 2019 RMB 6.86 million
F2020 Projected net profit in 2020 RMB 12.66 million “A” For the calculation, the profit in 2020 will be RMB 12.66 million regarded as the annual return for the present value of perpetual annuity. “i” For “i”, the rational interest rate is used, referred 5.0% to the interest rate from the bank financial products.
nd, “RE” The exchange ratio on August 2 2018 from 6.83 USD to RMB used by the Company
Calculation for Market Value [(3.44+6.86+12.66) + P (12.66, 5.0%)]/6.83= 40.44 million USD Calculation for Share Price 40.44 million USD/ 100 million shares =0.40 USD per share
Limitation This projection has its limitation due to potential biases in the calculation process because it lacks consideration of risks and other uncertainties. Meanwhile, some unpredictable factors can also affect the result, such as the changing exchange ratio and inflation. Therefore, limitation of this projection should be made aware of to the decision makers.
Conclusion Based on the concept of the time value of money, the market value is calculated on the total projected profit from 76 2018 to 2020 and the perpetual annuity which uses the projected profit in 2020 with the rational interest rate referred to the interest rate of the bank financial products. The market value is around 40.44 million USD with 100 million shares (the total number of shares listed in this company), and the share price is 0.40 USD.
Disclaimer: Above projections are based on data and information provided by the Company, which might contain biases from the unilateral subjective projection of the Board of Directors and the management team. The projections are also based on the macroeconomic and social environment, the specific industry’s situation, market situation and the Company’s current position. Hence, the above projections do not provide any warranty. Therefore, the listing advisor, lawyer, and auditor will also not be liable for these projections. The Company and the management team want to pursue an excellent financial condition, but the risks and uncertainties can affect the result. Therefore, the Company cannot guarantee the outcome would be the same as the above projections. Consequently, all investors should be aware of these risks and uncertainties and should not solely rely on these predictions when making their decisions. Investors must carry out independent analysis and judgments.
77 10. Material Contract and Agreement
According to the information provided by the Company, the Company’s performance and completion of the major contracts during the reporting period are shown below.
Loan Contract
KH has signed a loan contract with Shidian Rural Credit Cooperative. According to the contract, the Cooperative loans up to RMB 6 Million to the Company from November 24th, 2016 to November 24th, 2019. KH uses the loan to purchase black fungi from growers.
Contracts with Growers
KH has signed contracts with 340 growers. According to the contract, KH provides fungal strains, basic equipment and technical guidance to growers and purchase dried black fungi at the price of RMB 65 Yuan (before the Spring Festival) or RMB 60 Yuan (after the Spring Festival), while growers should sell all the harvested black fungi to KH and provide records and relevant data to KH for further research and analysis.
Strategic Partnership Agreements
KH has signed strategic partnership agreements with Madeng Town, Jianchuan County Government, Jiufang Town, Shidian County Government, Guoqing Town, Jiangcheng County Government, and Wanxing Town, Shidian County Government. According to the agreements, KH provides fungal strains, basic equipment and technical guidance to growers recruited by the governments, while the governments assist KH to promote the business, to recruit more growers, and provide necessary financial support for growers in need.
Product Development Contracts
KH has signed product development contracts with Kunming Edible Fungi Research Institute and Yunnan Yunjun Technology (Group) Co., Ltd. According to the contracts, KH provides market analysis and research funds, while Kunming Edible Fungi Research Institute and Yunnan Yunjun Technology (Group) Co., Ltd. are responsible to develop innovative products according to KH’s requirements.
Product Processing Contracts
KH has signed product processing contracts with Lijiang Zhongyuan Green Food Co., Ltd. (hereafter referred as Zhongyuan) and Longyang Yongda Food Product Processing Factory (hereafter referred as Yongda). Zhongyuan is responsible to produce Black Fungus Essence Powder with the black fungi provided by KH. Yongda is responsible to produce Black Fungus Noodles with the black fungi provided by KH.
Other Cooperation Contracts
KH has also signed several cooperation contracts on different business with other companies. Kunming Jinmo Trade Co., Ltd. provides package designing and producing services to KH. Yunnan Anzhi Express Co., Ltd. has franchised KH to set up an express delivery station and use its delivery system. China Post Shidian Town Branch has franchised KH to promote and sell products on its online shopping platform ule.com.
Other Receivables and Payables
According to the relevant information provided by the Company and the Auditor’s Report, other receivables and payables of the Company are legitimate, valid and related due to regular production and business activities.
78 11. Risk Factors and Litigation
Investors to buy our securities should consider the risks below.
Business Risks
(a) Operational risks: The Directors and Senior Management team of the Company is responsible for the development direction of the Company. There is a risk that they may fail to make proper decisions to ensure the Company is on the right course. Also, KH connects with growers via cooperatives. There is a risk that the cooperatives fail to carry out the business activities well, which may cause loss to the Company. However, the Company is open to suggestions from staff and clients and is actively enhancing the connection with cooperatives and growers so as to lower the aforementioned risks.
(b) Risks related to products: KH has developed and is developing some unique products that no other companies have. However, there is a risk that these products may not be widely accepted by consumers, which may cause loss to the Company. Also, some products are produced by KH’s partners. There is a risk that these partners might produce poor-quality products. However, KH has several plans to lower such risks. First, KH has conducted thorough market researches and collected customers’ feedbacks. Second, KH will introduce a new product in its restaurants to test the popularity before producing and promoting it in large scale. Third, KH will employ the third party to conduct quality tests before products are sold or distributed.
Market Risks
Insufficient analysis of market demand and fierce market competition might result in declines in sales of the Company’s products. However, the Company’s senior management will set up and improve the risk assessment mechanism to ensure this kind of risks under control.
Environmental Risks
Planting bags are used to grow fungi. 80% of the used bags are burnt as fuels, 10% are processed to organic fertilizers and 10% are deserted which has caused environmental problems to local ecological system, which indirectly affects the Company’s operation. The Company is actively studying how to process wasted planting bags to poultry feed so as to lower such risks.
Risks Related to Natural Disasters
The production of black fungi is directly related to climate and weather. Natural disasters such as flood, drought, typhoon and so on could decrease the yield of black fungi and directly affect the Company’s business. The Company is actively cooperating with research institutes to develop species of higher anti-adversity, so as to resist some natural disasters.
Risks Related to National Policy
The Chinese government is currently exercising a reform and gradually opening our market to the world, this means our national economy policies, taxation system and so on will also experience changes gradually. The changes in policy might affect the operation and performance of the Company.
79 Stock Market Risks
The risks of stock market are ever presenting, and the fluctuation of stock prices may result loss to investors. There are numerous factors that can affect stock prices, including our company’s performance, changes in national economy policies, changes in the national financial situation, changes in interest rate, inflation and deflation and other unpredictable factors. Investors should be aware of the risks of the stock market before buying our securities.
Other Risks
Investments
Investing involves certain risk considerations, including currency fluctuations, lack of liquidity and price volatility of the stock markets, government involvement and influence on the private sector, political and economic factors, leverage and other factors. These might adversely affect the Company’s activities and the value of its investments. There are particular risks relating to the investment and trading of equity and debt instruments, which include the uncertainties involved in trading in emerging markets. The ability to trade profitably in emerging markets may be affected by world events, changes in foreign policies and other economic and political factors that are outside the control of the Company. Set forth below are certain factors, which should be taken into consideration before investors make the decision to buy shares of the Company. While the Management believes the following to be comprehensive, it is not intended to include all of the risks that may be encountered. Accordingly, potential investors are advised to consult their financial advisors before buying any shares of the Company.
General
The transactions that the Company will engage in may involve risks. Growing competition in the market may limit the ability to take advantage of opportunities. No assurance can be given that the Company strategies employed will be successful or that shareholders will realize net profits on their respective investments.
General Uncertainty and Risks
There are some unpredictable factors that might affect the business. The previous sales cannot be the guaranteed indicator for the future. Sales might increase or decrease in the future.
Economic Conditions
The success of any investment activity may be affected by general economic conditions.
Exchange Rate Fluctuations
The Company’s accounts are denominated in US Dollars. Investments of the Company may be in currencies other than the US Dollars, such as the Chinese RMB. Similarly, certain expenses of the Company including organizational, offering, operating expenses and the fees of the Management and service providers, will incur in Chinese RMB. Accordingly, the Company is at risk and liable for any gain or loss incurred due to the exchange rate fluctuation, for example, the investment for automation equipment, brand development and human resources, as referred in Section 6. Thus, shareholders and investors should realize the risk of exchange rate-fluctuations.
Litigation
The Company might be named as a defendant in a lawsuit or in a regulatory action stemming from the conduct of its business and activities of a company personnel. In the event that such litigation occurs, the Company would bear 80 the costs of defending itself, and understands the risk of unsuccessful results of the litigation. It should be noted that the Company and Management have consulted with lawyers, accountants and other experts regarding the constitution of the Company and the business of its subsidiaries. Each prospective investor should consult his own legal, tax and financial advisors regarding their desire to make an investment in the Company.
IN VIEW OF THE COMPLEXITIES OF APPLICABLE TAX LAWS, EACH PROSPECTIVE FUTURE
INVESTOR / SHAREHOLDER OF SHARES OF THE COMPANY IS STRONGLY URGED TO CONSULT
ITS OWN TAX ADVISORS ON THE POSSIBLE TAX CONSEQUENCES OF BUYING, HOLDING, SELLING
OR TRANSFERRING SHARES UNDER THE LAWS OF THEIR COUNTRY OF CITZENSHIP, RESIDENCE OR DOMICILE
The Company’s litigation, arbitration or administrative penalties
According to the “China Judgements Online”: http://wenshu.court.gov.cn/, by August 17th, 2018, Shidian Kanghong Agricultural Technology Development Co., Ltd. does not have any litigation record.
81 82 Dutch Caribbean Securities Exchange, Listing Advisor
荷兰加勒⽐证券交易所上市保荐机构
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