Future Plans
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THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained herein is incomplete and subject to changeand it must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack. FUTURE PLANS FUTURE PLANS In order to meet the increasing demand for our products and to capture growth opportunities in the fast-growing construction industry in Shaanxi province, we plan to further expand our production capacity through construction of new production facilities and acquisitions. We completed the construction of a production line in Mianxian county in July 2010 with an annual production capacity of 1.1 million tons and are currently constructing two production lines in Pucheng and Xixiang counties in Shaanxi province, with a total annual production capacity of 2.2 million tons. We expect the construction of the Pucheng line to be completed by the end of September 2010 and the Xixiang line by the end of February 2011. It normally takes 12 to 18 months to construct a cement production line and a trial run of three months to ramp up to full B3.Q12(iii) operation. Trial run of our production lines normally commence as soon as construction is completed and usually takes three months. B2.Q12(i) The table below sets forth the details of our two production lines currently in construction: Actual Capital Planned Total Expenditure Estimated B1.Q9(b) Production Annual Budgeted Incurred as Capital B2.Q12(i) Lines Under- Production Target Production Capital of April 30, Expenditure Construction Location Owned By Capacity Commencement Date Expenditure 2010 in Future (in million (RMB in (RMB in (RMB in tons) millions) millions) millions) B4.Q9(a)(i) Pucheng . Pucheng county Shaanxi Yaobai 1.1 August/September 2010 330-380 [164] [166-216] Xixiang....Xixiang county Xixiang Yaobai 1.1 January/February 2011 370-420 [57] [303-363] B6.Q9(ii) For our production facilities in Danfeng, Mianxian and Yangxian counties which have commenced operations and our production facilities in construction at Pucheng and Xixiang counties, our sales personnel are already conducting marketing activities. We also plan to utilize our new production capacities to produce cement products for a number of government infrastructure projects which we have obtained contract to supply cements. We have appointed a manager in charge of each of our new production lines, and these managers will report to our Board and senior management. The procurement of raw materials and sales management of the new production lines will be centralized and handled by our senior management in the head office together with our other current production lines, with support in local sales activities from new sales offices we will set up for our Mianxian and Xixiang production lines. The financial reporting of our subsidiaries for the new production lines will adopt the same system and procedures we have currently adopted in our other subsidiaries and accounting personnel from our headquarter will assist the personnel of our respective subsidiaries in establishing the required financial reporting systems and procedures and supervise its operation. Our PRC legal counsel, Zong Heng Law Firm, has confirmed that we have obtained all necessary approvals from relevant authorities in the PRC for the construction of these production lines and that these production lines are in compliance with the relevant PRC government policies regulating the cement industry. B2.Q9(ii) We plan to use approximately HK$[409] million (equivalent to approximately RMB360 million) for the B2.Q9(i),(iii) construction of our new production line in Xixiang county and approximately HK$[511] million (equivalent to approximately RMB450 million) in total to install residual heat recovery systems and fund any future acquisitions. Except as disclosed in “Business — Potential Acquisition,” we have not identified any specific acquisition targets. — 238 — THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained herein is incomplete and subject to changeand it must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack. FUTURE PLANS B5.Q9(iv) For each potential acquisition, our marketing department will first prepare a market research report of the markets where the potential target operates its business. Such report will be reviewed and considered by our senior management. After a decision is made by our senior management to proceed with the potential acquisition, our investment and development personnel will commence initial contact with the potential target and negotiation of major terms of the acquisition. Such major terms are subject to approval of our Board. After such approval is obtained, our investment and development personnel, legal and financial advisers (if any) will commence due diligence on the potential target and, if the results of such due diligence are satisfactory, negotiate the remaining terms of the acquisition and enter into formal acquisition agreement. B5.Q9(iii) Our expansion plan described above is based on the following considerations: • the “Western Development Plan” (西部大開發) implemented by the PRC government and the RMB4 trillion economic stimulus package will continue to attract investment in infrastructure projects in Shaanxi province. It is important for us to maintain our leading position and expand our market coverage in Shaanxi province to benefit from these new opportunities; • our new production lines in Mianxian, Pucheng, Xixiang and Yangxian counties are strategically located to ensure our further coverage of the southern Shaanxi markets. We expect the utilization rates of our Xunyang and Zhen’an production lines to increase in view of the completion of construction of our conveyor belt for delivery of limestone excavated from our limestone quarry to our Xunyang proudction line and [●]. The commencement of operation of our new productions lines in Mianxian, Pucheng, Xixiang and Yangxian counties are not expected to affect the utilization rates of our Xunyang and Zhen’an production lines as they target different markets. The cement industry is highly localized because cement is expensive to transport due to its weight. Our Board had conducted detailed analysis for each new production facility including analyzing the economic growth of the region where the new production facilities will be located, the competition we will face from the existing cement producers and the potential market demand of cement. As a result of the “Western Development Plan” (西部大開發) implemented by the PRC government and the RMB4 trillion economic stimulus package, we expect that the fixed asset investment will continue to grow rapidly in Shaanxi province and the demand for cement will remain high in view of the substantial number of major government-led infrastructure projects that will commence in Shaanxi province, including Baoji Hanzhong Bazhong Railway (寶雞 — 漢中 — 巴中鐵路), Hanzhong Yangpingguan Double Track Railway (漢中 — 陽平關鐵路複線) and Hanzhong Airport (漢中機場). We believe such opportunity is important for us to capture the substantial growth in cement consumption and to establish seamless market coverage in southern Shaanxi province where we believe has significant potential for future growth. Our new production facilities in Mianxian, and Xixiang and Yangxian counties are all located in Hanzhong region in southern Shaanxi province which was a new market to us prior to the commencement of our new aforesaid production facilities and where we believe that the demand for cement products will continue to grow in view of the government-led infrastructure projects mentioned B6.Q9(i) above. According to Digital Cement Net, it is expected that the demand of cement from governmental infrastructure projects between 2010 and 2012 will amount to approximately 4.5 million tons while new production lines with approximately 2.2 million tons NSP technology cement production capacity which represents the production capacity of our Mianxian and Yangxian production lines will be added in Hanzhong region in 2010. Notwithstanding the substantial increase of new capacity, according to Digital Cement Net, Hanzhong region has — 239 — THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained herein is incomplete and subject to changeand it must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack. FUTURE PLANS approximately 0.8 million tons of obsolete clinker production capacities to be phased out between 2009 and 2010. Our Directors believe that the future demand of cement products in Hanzhong region is able to consume the additional capacity. Based on our analysis, raw materials, coal and electricity supplies are readily available and our central procurement arrangement would ensure a stable and low-cost supply of raw materials for our cement production. Our new production line in Pucheng county is located in Weinan region in southern Shaanxi province where a number of government-led infrastructure projects will commence, including Xi’an — Hefei Double Track Railway (Shaanxi section), Huangling — Houma Railway via Hancheng and Tongguan — Xi’an Highway Extension Project. According to Digital Cement Net, it is expected that the demand for cement from governmental infrastructure projects between 2010 and 2012 will amount to approximately 2.8 million tons while new production lines with approximately 4.0 million tons NSP technology cement production capacity (excluding