PDF《BUSINESS》

OVERVIEW We were the second largest domestic ceramic sanitary ware brand in China'

s mid-to-high end ceramic sanitary ware market in terms of retail sales value in 2011, according to Frost &

Sullivan, with approximately 4.

4% of the market segment. Our ranking in terms of retail sales value increased from third in 2010, representing 2.1% of the total market segment. The mid-to-high end of the domestic market represented 47% of the total domestic market in terms of retail sales value for ceramic sanitary ware in

2011 according to Frost &

Sullivan. Our Bolina (航标) brand ranked second in terms of both domestic brand awareness and consumer preference among mid-to-high end domestic ceramic sanitary ware brands in the PRC in 2010, according to Frost &

Sullivan. We are primarily engaged in the design, development, production, marketing and distribution of sanitary ware branded products marketed under our own brand in the PRC and under third parties'

brands on an OEM and ODM basis to our international customers. Our products are divided into five major categories: (i) one-piece toilets;

(ii) two-piece toilets (with separate water tanks);

(iii) washbasins and stands;

(iv) other ceramic products such as urinals, bidets, squat pans and soap containers;

and (v) non-ceramic sanitary products that are designed by us and manufactured by third party subcontractors, including bath tubs, showers, faucets, hooks, bathroom cabinets, shower rooms and soap dishes. Business model and our products The initial phase of our business development predominantly focused on fulfilling production orders for ceramic sanitary ware products on an OEM basis for international brands. With our proven track record of providing high quality products and accumulation of know-how from our OEM business, we have also been entrusted with providing higher value-added ODM services to our international customers. We have built a solid and broad ODM and OEM customer base which includes American Standard, Gerber, Kelim, Crane (now part of American Standard) and Western Pottery. We have been recognised by American Standard as their Partners in Business C American Standard Brands since 2008. We believe our relationships with these leading international brands provide us with first hand access to the latest industry information on products, technologies and market trends, thereby enabling us to maintain a competitive advantage over many of our competitors. During the Track Record Period, we exported our products to countries including the United States, Canada, Korea, Argentina and various European countries. Our ODM business was an important contributor to our revenue, with revenue derived from our ODM business amounting to RMB152.6 million, RMB168.3 million and RMB162.0 million for the years ended

31 December 2009,

2010 and 2011, respectively. Leveraging our experience in the ODM and OEM ceramic sanitary ware market, we launched our Bolina (航标) brand and retail strategy in 2008. We position and target our brand at the mid-to-high end of the domestic market, with a focus on providing our branded sanitary wares in attractive designs with strong functionality. For sales and distribution of our own branded products in the PRC, we currently adopt a third party distributor model, which we believe facilitates the effective and efficient expansion of our retail presence and promotion of the overall brand awareness of our brand. We believe our third party distributor model allows us to expand our retail presence, reach a large customer base and increase our brand awareness faster and at a lower cost than if we were to distribute our products ourselves. We also believe the third party distributor model serves as a cushion on execution risk for us by leveraging the distributors'

knowledge of the local market to implement our retail strategy for our brand in China. We have expanded our distribution network rapidly, from

52 distributors and nine sub-distributors operating

74 points of sale as at

31 December

2009 to

158 distributors and

47 sub-distributors operating

321 points of sale as at

31 December 2011, and

170 distributors and

44 sub-distributors operating

359 points of sale as at the Latest Practicable Date. Our distribution network covers a wide area throughout the PRC. As a result, our own branded products business has grown rapidly with revenue increasing from RMB26.0 million for the year ended

31 December

2009 to RMB380.0 million for the year ended

31 December 2011, representing a CAGR of 282.3%. For the years ended

31 December 2009,

2010 and 2011, revenue from our own branded products accounted for 10.8%, 34.5% and 58.0%, respectively, of our total revenue. BUSINESS ―

96 ― With the increasing contribution of our branded products business to our revenue and profits, we expect to place less emphasis on our OEM business by redirecting and devoting our resources to the development of our own branded products. This reallocation of resources is part of our overall strategy to increase our retail and brand business in China while maintaining steady growth for our ODM business given that our branded products business provide higher added value to our customers and generate better margins and returns for us. The following table sets out a breakdown of our revenue by business segment and product category during the Track Record Period: Year ended

31 December

2009 2010

2011 RMB'

000 % RMB'

000 % RMB'

000 % Branded products 25,967 10.8 127,999 34.5 380,020 58.0 OEM 61,802 25.7 74,965 20.2 113,478 17.3 ODM 152,649 63.5 168,339 45.3 161,984 24.7 Total 240,418 100.0 371,303 100.0 655,482 100.0 Year ended

31 December

2009 2010

2011 RMB'

000 % RMB'

000 % RMB'

000 % Two-piece toilets (with water tanks) 193,778 80.6 228,540 61.6 273,229 41.7 One-piece toilets 28,857 12.0 118,248 31.8 278,066 42.4 Washbasins and stands 9,774 4.1 8,503 2.3 42,898 6.5 Other ceramic products including urinals and bidets 3,606 1.5 6,144 1.6 28,938 4.5 Non-ceramic sanitary products 4,403 1.8 9,868 2.7 32,351 4.9 Total 240,418 100.0 371,303 100.0 655,482 100.0 The following table sets out a breakdown of our revenue by the geographic location of the customers during the Track Record Period: Year ended

31 December

2009 2010

2011 RMB'

000 % RMB'

000 % RMB'

000 % Americas 185,747 77.3 218,862 58.9 245,970 37.5 PRC 25,005 10.4 126,657 34.1 378,415 57.7 Europe 16,213 6.7 14,220 3.8 15,644 2.4 Asia (excluding the PRC) 13,453 5.6 11,564 3.2 15,453 2.4 Total 240,418 100.0 371,303 100.0 655,482 100.0 BUSINESS ―

97 ― The revenue contribution arising from our sales to Niagara Conservation Corporation, Gerber, American Standard Canada, Kelim, Crane (now part of American Standard) and Western Pottery, which are our major customers referred to in this prospectus, was in aggregate RMB217.6 million, accounting for 58.6% of our total revenue in 2010, and RMB237.0 million, accounting for 36.2% of our total revenue in 2011. Strategic alliances According to Frost &

Sullivan, nationwide home renovation and furniture shopping mall chains are the most popular and effective distribution channel for sanitary ware products in the PRC due to the extensive geographic coverage, diversified product portfolio and the one stop shopping experience they offer. As part of our initiative to expand our branded product business, in

2011 we entered into a strategic development alliance agreement with Red Star Macalline (红星美凯龙), a nationwide home renovation and furniture shopping mall chain with approximately

100 shopping malls in

80 cities in China, which gives our distributors and sub-distributors priority to establish their points of sale in the shopping malls operated by Red Star Macalline (红星美凯龙) for a one year term. In May 2012, we renewed our agreement with Red Star Macalline (红星美凯龙) for another one year term. In August

2011 we entered into a similar strategic alliance agreement with Jinsheng (金盛集团), a regional home decoration mall and department store chain with

14 home decoration malls in China. According to our strategic alliance agreement with Jinsheng (金盛集团), Jinsheng (金盛集团) is required to keep us informed of any new shopping mall opened by it, and we are entitled to have a presence in all of the malls operated by Jinsheng (金盛集团) and to take advantage of additional benefits offered to us as its strategic partner, such as priority in allocation for points of sale, advertising space and media exposure. Our strategic alliance agreement with Jinsheng (金盛集团) is for a term of three years, subject to renewal upon expiry. As at the Latest Practicable Date, our distributors and sub-distributors had opened

63 points of sale in Red Star Macalline (红星美凯龙) shopping malls and five points of sale at malls operated by Jinsheng (金盛集团). Please refer to the section headed Business C Sales and Marketing C branded products C distribution of our own branded products in the PRC for additional details. We believe our strategic alliances with Red Star Macalline (红星美凯龙) and Jinsheng (金盛集团) will facilitate further penetration of our brand across different regions in the PRC and enhance awareness of our brand which we believe will further accelerate domestic sales of our own branded products. In December 2011, we entered into a strategic cooperation partnership agreement with Onelink (万菱实业), a real estate developer in the PRC with experience in developing and managi........