Description of Sino Agro Food Inc's Business Segments
Integrated Cattle Farm division (SJAP)
Operated by SJAP, the Integrated Cattle Farm division is the business unit of
Sino Agro Food active in beef cattle rearing and value added processing of domestic
and imported beef meat.
Beef cattle rearing
Within the beef cattle farm division, the Company applies a co-operative farming
model creating an intermediary supply pipeline to ramp up production at lower
marginal cost to its operations.
The cattle grown by the Company are primarily Simmental, Charolais, and Angus.
In general, local farmers buy 12 to 15 month old cattle from the Company’s
cattle agents, and the Company commits to repurchasing the cattle between 21
months to 24 months old.
SJAP now has twelve cattle houses, with its smaller buildings housing a minimum
of 200 head and larger cattle houses accommodating up to 350 head.
Within the Chinese agriculture market, small farmers lack commercial scale and
expertise and therefore benefit from a strategic alliance. The Company works
with the local government, soliciting their help to introduce and initiate a
farmers’ co-operative, such as in the Huangyuan County, Xining City. This
concept of strategic alliance with smallholder farmers under a co-operative
farming model was originated and has been based on the following key characteristics
and value enablers:
· The Company assesses the ability of the regional farmers to grow crops
and pastures as its nominated contractors, using the Company’s land that
is leased to the Company free of rent by the local government or using the farmer’s
own land. The regional farmers use the Company’s plant and equipment for
their planting and harvesting. The Company provides the farmers with supervision
and associated services, seeds and organic fertilizer on credit terms, and also
purchases crops and pastures from them.
· The Company also uses this regional farmers’ concept when growing
cattle. The farmers are the Company’s contractors using the Company’s
bulk livestock feed and concentrated livestock feed on credit terms. The Company
buys the mature cattle, which the regional farmers raised on the Company’s
livestock feed.
· Ultimately, the Company is aiming to obtain cattle that will be qualified
as “organically raised cattle,” in order to produce organic beef
products on a commercial scale.
Feed
On February 28, 2013, SJAP completed its development of the Concentrated Livestock
Feed (“CLF”) manufacturing factory, and started the production and
sales of CLF. This CLF complements SJAP’s bulk livestock feed to provide
the local cattle and sheep farming industry with a completed feed formula that
can cater to the rearing of cattle and sheep at various growing cycles (e.g.,
specially formulated mixes with efficient nutrients for dairy cows and sheep,
weaning, fattening and mature cattle and sheep). The advantage of the formulated
feed combination is that the cattle and sheep growers will realize cost savings
in production knowing precisely the amount of concentrated feed that will be
needed by their livestock, thus avoiding wasted excess concentrated feed due
to over feeding, which results in worthless excess fat in mature animals. In
this respect, the Chinese central government has placed an order with SJAP to
reserve up to 5,000 MT of CLF annually as part of the country’s annual
reserve emergency livestock feed inventory. Thus, since March 2013 onward, SJAP
has generated additional revenue generated from the sales of CLF.
SJAP sells its organic fertilizer and bulk livestock feed mainly to its cooperative
and regional farmers in addition to using it to rear its own grown cattle, but
because its geographic location is so far away from other major provinces there
are high costs associated with selling its fertilizer, bulk livestock feed and
live cattle other than to local purchasers. Conversely, equivalent imports from
other provinces must be purchased at a higher cost, providing SJAP with a competitive
edge. Furthermore, Qinghai Province is a region rearing millions of cattle and
sheep per year, providing an ample market for SJAP’s fertilizer and livestock
feed.
In the longer term, the Company believes that wholesale prices of SJAP’s
livestock feed will maintain a steady growth rate of 5% to 10% per annum influenced
mainly by rising labor cost of the country.
Before the abattoir and related facilities were operational, the Company sold
mostly live cattle to or through various cattle wholesalers to existing wholesale
and distribution markets that did not require much marketing efforts and networking.
In China, beef is customarily distributed through various tiers of established
wholesalers and distributors that source their beef from various slaughter and
deboning houses located across many districts in China. Most of these wholesalers
sell multiple types of frozen or freshly chilled meats (including pork and poultry,
etc.), and some slaughterhouses specialize in and solely supply beef. These
wholesalers and distributors supply beef to regional supermarket chain stores,
retailing wet and frozen food markets, the catering industry, etc. Therefore,
after having established its own slaughterhouse and deboning factory, SJAP is
expected to automatically become the primary supplier of beef. As such, many
existing wholesalers and distributors will source their beef supplies directly
from the Company. With the current ever increasing demands of quality beef meats
due to the increase of middle class consumers, the Government’s enforcement
of food safety regulation, and of anti-smuggling and illegal imports of beef,
the right opportunity exists for SJAP to market its high-quality beef product.
Therefore, the Company is confident it will successfully sell its beef meats
in domestic markets. Also, a portion was exported to South Asian countries (i.e.,
Malaysia, Singapore, Hong Kong, Middle East countries and Thailand etc.) in
2014, as the Local Government encourages the Company to do.
Organic Fertilizer (HSA) division
The operation in Linli District, Hunan Province, is run by HSA, a 76% owned
Chinese subsidiary. HSA conducts the following business activities, both of
which are in the development stage:
· manufacturing and sales of organic and mixed fertilizer,
· cultivation of pastures and crops in preparation for the establishment
of beef cattle farms, and
· rearing of beef cattle
By January 2013, the first organic fertilizer production plant was established
and started its production of organic fertilizer. On March 5, 2013, HSA secured
the rights to use an enzyme developed by a Hong Kong company some twenty years
ago that has been utilized by global manufacturers of organic fertilizer. The
advantage of this particular enzyme is that when it is applied to the organic
fertilizer it has the ability to convert part of the organic raw materials into
potash and phosphate without having to add in chemically formulated potash and
phosphate, such that the Company’s end fertilizer can be qualified as
pure organic fertilizer made with 100% natural organic raw materials. With this
pure organic fertilizer, HSA is in a position to fully explore the potential
market for fish in farm lakes and thereby to attempt to align itself with the
government’s policy of encouraging lake fish farmers to use pure organic
fertilizer instead of chemical fertilizers. In addition, cost savings from avoiding
the use of chemical potash and phosphate will, in management’s belief,
result in a better profit margin for the Company. Sales of pure organic fertilizer
commenced at the end of Q1 2013.
Currently, chemical fertilizers in the region are sold at wholesale between
RMB 3,000 to 3,600 per MT depending upon their chemical composition, compared
to organic fertilizer from HSA selling at an average of RMB 1,200 to RMB 1,300
per MT. The Company’s new 100% pure organic fertilizer with up to 8% potash
is currently being marketed between RMB 2,000 to RMB 2,200 per MT targeting
to reach an average up to RMB2,600 per MT such that its prices will be at the
mid-range between organic and chemical fertilizer.
HSA produced 50,000 MT of organic fertilizer and organic mixed fertilizer in
2014 under its newly completed production plant and facilities, and aims to
ultimately increase its capacity to about 90,000 MT per year in stages. The
main hardship related to selling fertilizer is the requirement to provide longer
credit terms (sometimes up to 180 days) to the Company’s end buyers because
these end users normally can afford to pay for them only after they sell their
products. Therefore, the Company must assess creditworthiness of its prospective
customers, and only consider the farmers who can be deemed creditworthy, and
who follow the Company’s requirements for planting their fields and harvesting
crops each year.
Development of HSA in Linli District, Hunan Province, follows SJAP’s business
model. HSA is situated in a much better growing environment than SJAP, a farming
rich province in central China. Thus, HSA benefits from cheaper logistics costs,
close proximity to large markets, and a more favorable climate (milder winters
and longer summers versus SJAP’s long bitterly cold winters and short
summers). However, financial support from the Government is more difficult to
obtain in the Hunan Province because more entities share the Government’s
support provisions.
HSA endures both higher development costs and longer time to construct its facilities
when compared to SJAP, whose property had 40 older (yet salvageable) buildings,
which it has renovated to meet its needs.
Hunan Province is one of the biggest primary producing provinces of China with
over four million primary producers that grow rice, tea, tobacco, grapes, citrus,
cotton, seedlings, sunflowers, herb plants and many varieties of cash crops.
Hunan also has a long-standing history in lake aquaculture producing millions
of tons of fish and other seafood annually (e.g., total primary production is
over RMB 450 Billion, or about USD 75 Billion, recorded in 2011 as announced
by Hunan Province Agriculture Department).
At the Company’s newly built fertilizer factory, the 100% pure organic
mixed fertilizer (“POMF”) is generating stable income and revenues
reached targets in 2015 of over 13,037 MT of Organic Fertilizer, 36,232 MT of
Organic Mixed Fertilizer and 180 MT of retailed packed fertilizer, collectively
amounting to just under 50,000 MT.
Cattle farms (MEIJI) division
Currently there are two operations in this segment, Cattle Farm 1 and Cattle
Farm 2. Sales for 2015 amounted to 14,947 head of cattle.
Cattle Farm 1: Cattle Farm 1 was built as a demonstration farm to show that
cattle can be raised in a semi-tropical climate using the Company’s semi-grazing
and housing method. Using the Company’s semi-free growing management system,
the cattle are allowed to graze in the field during the early morning and kept
indoors and out of the sun during the hot summer days. This method has proven
reliable, with the growth rate of the cattle measuring slightly higher than
the cattle at SJAP (i.e., averaging around 0.28 kg per day per cattle more).
Cattle Farm 2: Cattle Farm 2 is a beef cattle farm situated in Guangdong Province,
Guangzhou City. Cattle Farm 2 is operated by a private company formed in China
with Chinese citizens acting as its legal representative as required by Chinese
law. EAPBCF will become a Sino Agro Food subsidiary when its SFJVC is officially
formed. This is expected to occur during 2016 or 2017 pending availability of
free cash flow of the Company; however, no guarantee can be made that the SFJVC
will be formed.
Cattle Farm 2 is complementary to Cattle Farm 1, having an additional 76 acres
of land suitable for growing the Company’s type of pasture (a cross between
elephant grass and yellow grass) that has a very high yield rate of over 35
MT per 1/6 acre per year, and containing an average of over 9 percent protein
that is very suitable for consumption by cattle. Between the two farms, under
normal seasons, they have a capacity to produce up to 30,000 MT of pasture/year
collectively that is capable to feed up to 5,000 head of cattle/year based on
the consumption rate on average of 6 MT/head.
MEIJI is the marketing and distribution agent for all cattle farms that are
and will be developed by MEIJI using its “Semi-free growing” management
systems and aromatic-feed programs and systems to grow beef cattle.
Similar to CA in its business model, MEIJI purchases fully-grown cattle from
Cattle Farm 1 and sells them to the cattle wholesalers. MEIJI also buys young
cattle from other farmers and sells the young stock to Cattle Farm 1. All cattle
farms developed by MEIJI will utilize its “semi-free growing” management
system and aromatic-feed programs and systems to raise beef cattle.
Yellow Cattle (Beef meat) is traditionally a high-end market in China, as it
is mainly sold in higher end markets. This situation is rapidly changing, though,
owing to urbanization and rising incomes, the rising demand for such quality
beef, such that we foresee that eventually, locally grown and produced high
quality beef from local breeds like the Yellow Cattle will establish its “Brand”
and in turn premium prices in China similar to how many locally bred Japanese
Cattle found their market niches in Japan.
Plantation division
JHST is an SFJVC that is 75 percent owned by SIAF. Situated at Enping City,
Guangdong Province, it is consolidated as a subsidiary, and is the owner and
operator of a Plantation where mainly Hylocereus Undatus, or Dragon Fruit, is
grown.
Hylocereus Undatus is a cactus commonly referred to as dragon fruit. JHST conducts
two main operations: (i) growth and sales of flowers that are consumed as vegetables
in China, and (ii) drying and value added processing and sales of HU flower
products (used in health-related soups and teas). JHST cultivates 187 acres
of Hylocereus Undatus in the Guangdong Province.
HU cacti take three years to reach maturity, though they will flower a little
even in their first year, and can produce for as long as twenty years. JHST
began planting in late 2007, and by 2015 all of the plants are mature (averaging
over four years). HU blooms for a very short period, sometimes only one night,
and flowers must be 20 to 25 cm long when picked before they turn from green
to white. HU is a delicate crop and the harvest season runs from July through
October.
Marketing & Trading Division
The Company distributes imported meat and seafood through two completed and
operational facilities from which it has acted as turnkey project developer
to construct and manage these operations:
1) Wholesale and distribution facilities (“Wholesale Center 1”)
for Guangzhou City NaWei Trading Co. Ltd (“NWT”), an unrelated Chinese
third party owned company situated at the Guangzhou City, LiWan District, New
Wholesale Market.
2) The Shanghai Distribution Center which was built to accommodate a capacity
of 50 metric tons of meat per day and to distribute 5,000 metric tons of seafood
within two years.
In 2013, the Company also constructed a trading complex (the “Trading
Center”) for the Import and Export at another building adjacent to Wholesale
Centers 1 and 2. The Trading Center has imported frozen and fresh chilled and
live seafood (i.e., cuttlefish, squid, prawns, salmon, crabs and eels) from
Malaysia, Thailand, Russia and Madagascar and other local coastal fishing towns.
The seafood was sold to Wholesale Center 1, which distributed and sold it into
various reputable food chain outlets, wholesale market stores and supermarket
chains in the Guangzhou City, Shanghai City as well as in the southern coastal
towns of the Guangdong Province.
Primarily, the Company distributes meat imported from Australia and seafood
from Madagascar through these operations, with an expanding number of suppliers
from other countries.
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