PDF《BUSINESS》

OVERVIEW We are a manufacturer of plastic pipes and pipe fittings in China.

We currently have

11 operational production facilities for plastic pipes and pipe fittings that are strategically located across China. Through these facilities and our sales network which consists of

29 sales offices and over

600 independent distributors, we cover customers across China. Range of products. We offer a comprehensive range of plastic pipes and pipe fittings. We are able to produce over

70 series and over 7,000 specifications of plastic pipes and pipe fittings with dimensions generally ranging from

16 mm to 3,000 mm in diameter. We primarily use PVC, PE, PP-R and other plastic resins to manufacture our products. Our plastic pipes and pipe fittings are used in a variety of piping systems, including those used for water supply, drainage, power supply and telecommunications, agriculture, gas supply, floor heating and fire-fighting. In addition, we provide our customers with a range of ancillary services, including pre-sale consultation, after-sales services, on-site guidance and technical support. Production facilities. We have a geographically-diverse network of production facilities in China. As of the Latest Practicable Date, we had

11 operational production facilities for plastic pipes and pipe fittings located in eight provinces across China. For the years ended

31 December 2007,

2008 and 2009, the effective annual production capacity of our production facilities was 298,100 tonnes, 426,000 tonnes and 661,800 tonnes of plastic pipes and pipe fittings, respectively. For the years ended

31 December 2007,

2008 and 2009, our production facilities for plastic pipes and pipe fittings achieved an average utilization rate of 86.1%, 87.6% and 87.5%, respectively, as calculated by actual production volume of such production facilities as of the end of the respective year divided by their effective annual production capacity. We have expanded our production capacity throughout the period consisting of the years ended

31 December 2007,

2008 and

2009 to try to capture the growing demand for our products and increase our market share. We completed a major capacity expansion at our Guangdong facility in 2008. We commenced operations at our new facilities in Hebei and Henan in

2008 and in Sichuan and Nanjing in 2009. As of

31 December 2009, the design annual production capacity of our production facilities was approximately 905,700 tonnes of plastic pipes and pipe fittings. We are in the process of constructing two additional production facilities: (1) one in Urumqi, which is expected to become operational in the fourth quarter of

2010 with a design annual production capacity of approximately 12,000 tonnes and which we plan to increase to 22,000 tonnes and 34,000 tonnes by

2011 and 2012, respectively, and (2) another in Changchun, which is expected to become operational in the first quarter of

2011 with a design annual production capacity of approximately 33,300 tonnes and which we plan to increase to 66,300 tonnes by 2012. The total costs incurred as of

31 March

2010 for our facilities in Urumqi and Changchun were RMB54.5 million and RMB72.2 million, respectively. We intend to primarily use our cash flows from operations, cash on hand and banking facilities to settle the remainder of these expenditures for these facilities by the end of 2012. Once the Urumqi and Changchun production facilities are operational, we expect to be able to better cover each of our seven geographic sales regions in China (consisting of Southern China, Central China, Northern China, Southwestern China, Eastern China, Northeastern China and Northwestern China) through our production facilities. See Financial Information ― Principal Income Statement Components ― Revenue for additional information on our geographic sales segments. BUSINESS THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed Warning on the cover of this Web Proof Information Pack. ―

79 ― A1A28(1)(a) 3rd Sch1 3rd Sch3 We also plan to expand our current operational production facilities and construct new production facilities in various regions in China in order to maintain our leading industry position and better meet the demands of both our existing customers and potential new customers. We plan to add design annual production capacity of approximately 245,000 tonnes, 370,000 tonnes and 330,000 tonnes in 2010,

2011 and 2012, respectively. See Production Facilities and Production Process ― Production Facilities in this section for further details on our expansion plan. According to CPPIA, we were the largest manufacturer of plastic pipes and pipe fittings in China in terms of sales revenue in 2008. Business model. We sell our products both directly to our customers (such as government entities, utility companies and real estate developers) and through independent distributors. As of the Latest Practicable Date, we had a nationwide sales network of over

600 independent distributors, which were supported by regional sales teams located at

29 sales offices across China. For the years ended

31 December 2007,

2008 and 2009, revenue generated by direct sales to customers accounted for 54.9%, 53.8% and 45.9% of our total revenue, respectively, while revenue generated by sales to distributors accounted for 45.1%, 46.2% and 54.1% of our total revenue, respectively. We typically enter into agreements with our distributors, pursuant to which we generally grant the distributor a non-exclusive right to distribute certain types of our products in a specified geographical area and set annual sales targets for each distributor. The agreements generally have one-year terms, subject to renewal by mutual agreement. Payment on or before delivery is generally required. Return of products is permitted under these agreements only by mutual agreement or if our products are defective. The terms of the distribution agreements are generally the same for each distributor, other than annual sales targets which may differ for different distributors and the relevant specified geographical areas. In addition to sales through our distribution network, we also make direct sales to customers. For further details, see Business ― Sales, Marketing and Distribution ― Direct Customers . Our plastic pipe products are sold under our Liansu brand. We believe that the Liansu brand has become a recognized brand name in China. In 2005, our Liansu brand was recognized as a China Well-known Trademark (中国驰名商标) by the Trademark Office of the State Administration for Industry and Commerce of the People'

s Republic of China (中华人民共和国国家工商行政管理总局商 标局). Research and development. We believe our research and development capabilities have been one of our primary competitive strengths. Guangdong Liansu Technology and Wuhan Liansu, our wholly-owned subsidiaries, were recognized as High and New Technology Enterprises (高新技术企 业) by the respective provincial science and technology department (科学技术厅), finance bureau (财政厅), office of state administration of taxation (国家税务局) and local taxation bureau (地方税务局) in Guangdong and Hubei in

2008 and 2009, respectively. Our research and development BUSINESS THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed Warning on the cover of this Web Proof Information Pack. ―

80 ― A1A28(8) team consisted of

604 experienced engineers and other technical and professional staff as of

31 March 2010. In addition, we have an advanced research and development center and a post-doctoral work station at our Shunde facility. For the years ended

31 December 2007,

2008 and 2009, we spent RMB11.6 million, RMB11.2 million and RMB20.8 million, respectively, on research and development. Financial results. We have achieved significant revenue and earnings growth in recent years. For the years ended

31 December 2007,

2008 and 2009, we had revenue of RMB 2,618.2 million, RMB 3,618.5 million and RMB 5,322.2 million, respectively, representing a CAGR of 42.6% from

2007 to 2009. Our net profit for the same periods was RMB 81.5 million, RMB 135.9 million and RMB 644.0 million, respectively, representing a CAGR of 181.1% from

2007 to 2009. Our overall gross profit margin increased from 12.7% in

2007 to 13.9% in

2008 as a result of a decrease of 2.1% in our raw material costs as a percentage of our revenue due to the improvement in production efficiencies, which was partially offset by an increase of 1.0% in our labor costs as a percentage of our revenue. Our overall gross profit margin increased from 13.9% in

2008 to 22.8% in

2009 as a result of raw material prices decreasing more than our average selling price in 2009, the continued improvement in our production efficiencies and economies of scale. We attribute such growth to our extensive production and sales networks, our comprehensive product offerings, our strong brand recognition, our research and development capabilities and our experienced management. As of

31 December 2007,

2008 and 2009, our bank borrowings amounted to RMB598.6 million, RMB468.7 million and RMB1,309.7 million, respectively. The increase in our bank borrowings from

2008 to

2009 was due primarily to increased investments in production facilities and the replacement of financing provided by related parties. COMPETITIVE STRENGTHS We attribute our success to the following key competitive strengths: We are an established market leader with large-scale operations and are able to cover our customers across China through our extensive production and sales networks We were the largest manufacturer of plastic pipes and pipe fittings in China in 2008, in terms of sales revenue, according to CPPIA. For the years ended

31 December 2007,

2008 and 2009, we produced approximately 256,801 tonnes, 372,970 tonnes and 579,384 tonnes of plastic pipes and pipe fittings, respectively. As of

31 December 2009, we had a design annual production capacity of approximately 905,700 tonnes of plastic pipes and pipe fittings from our

11 operational production facilities for plastic pipes and pipe fittings, which are located in eight provinces across China, i.e. Guangdong, Guizhou, Sichuan, Hubei, Jiangsu, Henan, Hebei and Heilongjiang. We are in the process of constructing two additional production facilities: (1) one in Urumqi, which is expected to become operational in the fourth quarter of

2010 with a design annual production capacity of approximately 12,000 tonnes and which we plan to increase to 22,000 tonnes and 34,000 tonnes by

2011 and 2012, BUSINESS THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed Warning on the cover of this Web Proof Information Pack. ―

81 ― respectively, and (2) another in Changchun, which is expected to become operational in the first quarter of

2011 with a design annual production capacity of approximately 33,300 tonnes and which we plan to increase to 66,300 tonnes by 2012. Our production faciliti........