this web proof information pack is in draft form. …traders from the pearl river delta economic...

OVERVIEW

We are primarily engaged in manufacturing and sales of particleboards. Particleboardsare made with raw materials such as undersized log, wood branches and agriculture andforestry residues, and hence they are in general considered to be environmentally-friendly andresources saving reconstituted wood-based panels. Our customers are mainly home or officefurniture manufacturers, sport equipment manufacturers and wood-based panel processors andtraders from the Pearl River Delta economic region, the Yangtze River Delta economic regionand Fujian province. Our old particleboard production lines have an aggregate annualparticleboard production capacity of approximately 140,000 m3. Our new particleboardproduction line, which was completed and commenced Test Operation in September 2013, hasan approved annual production capacity of approximately 220,000 m3. According to theShenzhen Zhongshang Report, [as at [●], there are only 11 particleboard manufacturers,including us, in the PRC that have installed or are installing Dieffenbacher ’s press systems; andthere are only 14, 4 and 2 particleboard production lines in the PRC, Guangdong province andFujian province respectively with an annual production capacity of 200,000 m3 or more, andwhich have imported overseas equipment installed or in the process of being installed. Ourmajor revenue drivers include (i) our product competitiveness and our wide product range ofparticleboards, (ii) our customer relationship and market recognition, and (iii) our advancedproduction line with scaled production capacity.

Our new production line

Our new particleboard production line is installed with advanced technology andmachinery mainly imported from Dieffenbacher, a world leading supplier of wood-based panelmachinery and press systems, with an approved particleboard annual production capacity ofapproximately 220,000 m3. According to Dieffenbacher, the machines we purchased from it arethe latest particleboard production machines developed by it. The new production line is ingeneral more efficient, particularly in terms of energy and raw material savings, which enablesus to produce particleboards at lower cost but with better and more stable quality. There will bean ancillary formaldehyde production workshop on the new production line that produces highquality and concentration formaldehyde which are generally unavailable in the open marketbecause its highly unstable chemical structure makes it unsuitable for transportation. Theapplication of high concentration formaldehyde in our production will improve our productquality, and decrease formaldehyde emission, thereby rendering our product moreenvironmentally friendly, and increase our production efficiency through energy and costsavings. Our Directors believe that the new production line will assist us in capitalising on theabundant forestry resources in the Shaoguan area, capturing the growing China particleboardmarket and staying ahead of our competitors.

Our location

Our production base is strategically located in Renhua county, Shaoguan city. Renhuacounty, with a gross area of approximately 2,223 km2, is located in the northern mountain regionof the Guangdong province with forest covering approximately 77% of the entire Renhuacounty, being approximately 1,700 km2, which provides us with abundant wood resources.Renhua county is also located at the conjunction of Guangdong, Hunan and Jiangxi provinces.Our production base is located next to the provincial highway S246 and approximately 45kmfrom the Beijing-Zhuhai Expressway, facilitating us with convenient freight and delivery fromour suppliers and to our customers.

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

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Our production

Our production base has a site area of approximately 254,571 sq.m., comprisingproduction workshops, office building, warehouses, [and various buildings and structuresunder construction]. Our new particleboard production line has an approved annual productioncapacity of approximately 220,000 m3. Its production operations are undertaken at one chippingand flaking workshop, one heat drying workshop, one screening workshop, one gluingworkshop, one pressing workshop, one sanding and sizing workshop, one mechanicalworkshop, one energy plant workshop and other ancillary facilities. Our old production lineshave an annual production capacity of approximately 140,000 m3 and we have reachedutilisation rate of approximately 96%, 87% and 70% for the financial years ended 31 December2011 and 2012 and the six months ended 30 June 2013, respectively. As at [30 September 2013],our production team comprised of [119] staff members. Our production lead time for producingparticleboards is generally approximately 3 to 7 days.

Our product quality

We have strived to manufacture and supply high quality particleboard products thatcould meet the Particleboard PRC GB Standards and Particleboard International Standards.With our old production lines, we have already met the Californian Particleboard Standards ofRegulations of the U.S. and our particleboard products are already qualified to use the AdoptingInternational Standard Product mark (PRC GB/T 4897-2003 of the Particleboard PRC GBStandards and the European EN 312-2003 of the Particleboard International Standards). Ournew production line, is able to produce Premium Quality Particleboards that could comply withall the Particleboard PRC GB Standards and Particleboard International Standards.

Our customers

Our particleboard products are primarily sold to domestic PRC market with a largeproportion of our sales derived from the Pearl River Delta economic region, includingGuangzhou, Shenzhen, Dongguan, Zhongshan and other cities of the Guangdong province, theYangtze River Delta economic region, including Shanghai, Zhejiang and Jiangsu provinces, andFujian province. Our customers are mainly home or office furniture manufacturers, sportequipment manufacturers, and wood-based panel processors and traders. Our particleboardsare mainly used by our customers to produce furniture and sport equipment for sale in the PRCmarket or export to the U.S., Canada, Australia and Europe. For the years ended 31 December2011 and 2012 and the six months ended 30 June 2013, our particleboard sales amounted toapproximately HK$153.1 million, HK$163.0 million and HK$69.3 million respectively. Thegrowth in our particleboard sales for the years ended 31 December 2011 and 2012 represented aannual growth of approximately 6.5%.

Our raw materials

Our primary raw materials used for the production of particleboards include (i) ResidualWood, which primarily includes undersized log, the wood branches, wood off-cuts andresidues, forestry residues and wood waste; and (ii) chemicals, which include, amongst others,urea and formaldehyde. For the financial year ended 31 December 2011 and 2012 and the sixmonths ended 30 June 2013, our total purchase of raw materials amounted to approximately


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HK$123.8 million, HK$103.0 million and HK$49.3 million, respectively. The total purchase ofraw materials for the six months period ended 30 June 2013 included the purchase of steel for theconstruction of the new production line in an aggregate amount of approximately HK$7.2million. Such amount was excluded from the calculation of cost of sales for the period ended 30June 2013. For the same period, our single largest supplier accounted for approximately 7.7%,7.0% and 13.8% of our total purchase of raw materials for the period, respectively, and our fivelargest suppliers accounted for approximately 22.5%, 21.6% and 39.3% of our total purchase ofraw materials for the period, respectively.

COMPETITIVE STRENGTHS

We believe that we possess the following competitive strengths to develop our business:

We have a new advanced production line and scaled production capacity

The equipment and machinery of our new production line are mainly imported fromGermany and Switzerland. Dieffenbacher is our major vendor for the equipment andmachinery of our new production line. According to Shenzhen Zhongshang Report,Dieffenbacher is a renowned leading international developer and manufacturer for presssystems and complete manufacturing plants for the wood-based panel industry. Since itsestablishment in 1873, Dieffenbacher has become one of the three largest manufacturers ofwood-based panel machinery and a leading supplier of wood-based panel machinery andpress systems in the world. The equipment or machinery we have installed for our newproduction line also include, amongst others, a Satos wide belt sanding machine forcalibration and fine sanding of particleboard, a cutting system and an energy plant. Thenew production line is in general more efficient in particular in terms of energy and rawmaterial savings, which enables us to produce particleboards at lower costs but withbetter and more stable quality.

Our new production line has an approved particleboard annual production capacityof approximately 220,000 m3. According to the Shenzhen Zhongshang Report, as at [●],there are only 11 particleboard manufacturers, including us, in the PRC that have installedor are installing Dieffenbacher ’s press systems; and there are only 14, 4 and 2particleboard production lines in the PRC, Guangdong province and Fujian provincerespectively with an annual production capacity of 200,000 m3 or more and which haveimported overseas equipment installed or in the process of being installed.

Our Premium Quality Particleboards could comply with all Particleboard PRC GBStandards and Particleboard International Standards

We have strived to manufacture and supply high quality particleboard productsthat could meet the Particleboard PRC GB Standards and Particleboard InternationalStandards. With our old production lines, we have already met the CalifornianParticleboard Standards and our particleboard products are already qualified forAdopting International Standard Product mark (the PRC GB/T 4897-2003 of theParticleboard PRC GB Standards and the European EN 312-2003 of the ParticleboardInternational Standards). Our Directors believe that with our new production line, we areable to produce Premium Quality Particleboards that could comply with all theParticleboard PRC GB Standards and Particleboard International Standards.


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We have stringent quality control

We place strong emphasis on product quality by implementing quality control andproduction control in order to maintain our competitive edge. We have a dedicated qualitycontrol team consisting of [2] quality assurance supervisors and a group of [9] qualitycontrol personnel as at [30 September 2013] to closely monitor the production process andperform product quality inspection and testing. [One] of our quality control supervisorshas over [10] years relevant experience.

To maintain stringent quality control over the whole production process, from theprocurement of raw materials to the final inspection of finished goods before delivery, wehave established comprehensive quality control protocol for product quality inspection.During the Track Record Period and up to the Latest Practicable Date, to the bestknowledge of our Directors, we have [not] experienced any material quality control issuesor any material product return from our customers due to any quality issue of ourproducts.

We enjoy a stable supply of Residual Wood due to our strategic location

Residual Wood is a major raw material for producing particleboards. Havingabundant and stable supplies of Residual Wood is critical to the operational success andfinancial performance of our business and also critical to other particleboardmanufacturers in our industry. We are strategically located at Renhua county, Shaoguan.Renhua county, with gross area of approximately 2,223 km2, is located in the northernmountain region of the Guangdong province with forest covering approximately 77% ofthe size of Renhua county, being approximately 1,700 km2, which provides us withabundance of wood resources. According to the statistics from the ForestryAdministration of Renhua County, as at the end of 2012, Renhua county has commodityforests of approximately 1,100 km2 and eco-forests of approximately 600 km2. There hadbeen no forest depletion in Renhua County in 2011 and 2012 as the forestry coverage forthe county increased from 76.1% in December 2011 to 77.3% in December 2012. The overallforestry coverage for Shaoguan city is approximately 73.3% in 2012. Compared to othercities in Guangdong province, such as Guangzhou which has forestry coverage of only41.8%, our Directors consider that the Residual Wood supplies in Renhua County andShaoguan City are abundant. As advised by the PRC Legal Advisers, there are noprovisions under the PRC laws mandatorily stipulating that the local Residual Woodresources should be principally or preferentially supplied to local enterprises.

The Forestry Bureau of Shaoguan City has confirmed that the minimum woodresidues and industrial wood residues available for cutting and collection in ShaoguanCity for the year 2014 is over 1.5 million tons; whilst we expect our usage in 2014 will beapproximately 430,000 tons. Such usage represents approximately 28.7% of the total woodresidues and industrial wood residues available in Shaoguan City in 2014. As there is noother particleboard manufacturer with annual production capacity of over 200,000m3 inRenhua County and there are only 3 particleboard manufacturers with annual productioncapacity of over 200,000m3 in Shaoguan City including us, our Directors consider that ourincrease in production capacity will not materially affect the supply-demand equilibriumof Residual Wood in Renhua County and Shaoguan City.


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In addition, we may source Residual Wood from our [●], including ShaoguanHongwei Forestry and Shaoguan Hongji Forestry, which are companies owned by Mr.Wong Kin Ching (黄建澄), son of Mr. Wong and Mrs. Wong through an arrangement byway of letters of intent with Shaoguan Hongwei Forestry and Shaoguan Hongji Forestryrespectively, whereby they have agreed to give priority to supply Residual Wood toHongwei (Renhua) in quantities requested by Hongwei (Renhua), subject to theirrespective available Residual Wood inventories. Where there is any disruption to oursupply of Residual Wood for any reason, Shaoguan Hongwei Forestry and ShaoguanHongji Forestry may be called upon by us to supply Residual Wood to Hongwei (Renhua)in priority over their other customers. Particulars of the supply of Residual Wood byShaoguan Hongwei Forestry and Shaoguan Hongji Forestry to us are set out in the sectionheaded “[●]” in this [●]. This will help to ensure that we have a stable supply of ResidualWood at a reasonable price.

We are a Forest Stewardship Council certified manufacturer

We have strived to create corporate prestige by following the internationalenvironmental practices created by the Forest Stewardship Council (“FSC”). We haveobtained certificate for the “FSC Standard for Chain of Custody Certification”(FSC-STD-40-004 V2-1) and the complementary FSC “Standard for Sourcing reclaimedmaterial” (FSC-STD-40-007 V2-0) (valid from February 2013 to February 2018). With suchcertifications we are qualified to apply the FSC label to our products when certainprescribed criteria are met. The FSC label, when applied, provides a credible guarantee toour customers, including end users, that such FSC labelled particleboards originate fromwell-managed forests, controlled sources, reclaimed materials, or a mixture of these. TheFSC certifications therefore facilitate the transparent flow of goods through the supplychain from the purchase of reclaimed material to the manufacturing and sale of FSCcertified particleboard.

In order to obtain the above FSC certifications, an international inspection andverification services provider had evaluated, amongst others, our Residual Woodsourcing, our Residual Wood purchased and storage and our production control to assess,amongst others, (i) whether the FSC certified Residual Wood we procured is so certified,(ii) whether the FSC uncertified Residual Wood we procured is from a controlled sourceand the recycle material has been verified, (iii) whether all points during our productionprocess where mixing between certified and uncertified Residual Wood might occur havebeen identified, and (iv) whether there are safeguards put in place to ensure mixingbetween the certified and uncertified Residual Wood does not occur at each critical controlpoint.


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After obtaining the FSC certifications, we are subject to annual inspection carriedout by the inspection and verification services provider to ensure the integrity of the chainof custody is properly maintained. In order to maintain aforesaid requirements imposedby FSC, we have taken measures including, amongst others, (i) assigning appropriateresponsibilities to our relevant personnel regarding the FSC chain of custody, (ii)providing our staff training relating to the standards and requirements under the FSCcertifications, and (iii) setting up an area exclusively for the documentation of FSC-relateddocuments. A new application will be required to renew our certifications upon expirationin February in 2018. As of the Latest Practicable Date, our Directors are not aware of anycircumstances that will cause any impediments to our future renewal of our FSCcertifications.

During the Track Record Period, our Directors confirm that we have not faced anytermination or suspension on the use of FSC certifications , and furthermore, we have notsold any FSC-labelled products to our customers as we plan to promote our FSC labelledproducts after the completion of our new production line.

Our strategic location enables us to reach our markets, customers and suppliers easily

We are strategically located at Shaoguan, Guangdong province, which is at theconjunction of Guangdong, Hunan and Jiangxi provinces. Our production base is locatednext to the provincial highway S246 and approximately 45km from the Beijing-ZhuhaiExpressway, facilitating us with convenient freight and delivery from our suppliers and toour customers. Lying to the east of Shaoguan is the Yangtze River Delta economic regionand to the south of Shaoguan is the Pearl River Delta economic region. We believe the highurbanisation level and economic development of these regions will provide a positivebusiness environment for us.

We have an experienced and professional management team and production personnel

Our business growth and success are attributable to our experienced and dedicatedmanagement team with extensive project management experience and industryknowledge and expertise in the particleboard and wood-based panel industry. Ourmanagement is led by Mr. Wong, our Chairman and Controlling Shareholder, who hasapproximately 20 years of management and operational experience in the particleboardand wood-based panel industry. In addition, our Executive Directors and seniormanagement team have demonstrated a loyal, continuing and enthusiastic commitment toour Group. Some of our Executive Directors and senior management have served ourGroup for over 10 years. In addition, some of them pursued higher education or trainingcourses to ensure that they are equipped with relevant professional and technicalknowledge. We believe the experience of our Executive Directors and senior managementteam will enable us to capture market opportunities and execute our business strategies.

As at the [Latest Practicable Date], we had a team of [119] production personnel, ofwhom [30] personnel have, on average, [13] years of relevant knowledge and experiencein particleboard and wood-based panel production. To facilitate the operations of our newproduction line, we have recently recruited [40] production or engineering personnel tostation in our factory to provide professional technical support for the manufacturingprocess.


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We are well positioned to benefit from (i) the increase in PRC’s disposable income; and(ii) the growing PRC’s furniture manufacturing industry and building decorationindustry

We operate in a large and fast growing PRC economy with increasing consumerspending potential. According to the International Monetary Fund, the nominal GDPincreased from approximately RMB12.0 trillion in 2002 to approximately RMB51.9 trillionin 2012, representing a CAGR of 15.7% over the period. Pursuant to the National Bureau ofStatistics of China the per capita annual disposable income of urban population increasedfrom approximately RMB7,703 in 2002 to approximately RMB24,565 in 2012, representinga CAGR of 12.3% over the period; and the floor space of completed urban residentialbuildings increased from approximately 688 million square meters in 2007 toapproximately 1,025 million square meters in 2011, representing a CAGR of 10.5% over theperiod. According to the Shenzhen Zhongshang Report, per capita consumer expenditureon wood-based furniture in the PRC steadily increased from approximately RMB106 in2008 to RMB250 in 2012, representing a CAGR of approximately 23.9%. The ShenzhenZhongshang Report further notes that other positive growth drivers in the PRC, includingthe increasing urbanisation, the growing demand for building decoration and theimplementation of the indemnificatory housing policy, will provide sustainable growthfor both furniture manufacturing industry and building decoration industry, which areconsidered to be the two major markets for particleboards.

The rapid growth of the furniture industry is one of the main reasons for thedramatic growth of particleboard outputs in China. According to the ShenzhenZhongshang Report, China has become the biggest furniture manufacturer and exporterin the world, with a total furniture industry output value of RMB560 billion and furnitureexport of USD48.8 billion in 2012.

The building decoration industry, the second largest market for particleboards, hasbeen growing continuously and relatively steadily and at a rate higher than the GDPgrowth rate of China. According to the Shenzhen Zhongshang Report, in 2012, the totalconstruction output value for the building decoration industry in the PRC reachedRMB2,630 billion. Furthermore, according to the Shenzhen Zhongshang Report, the scaleof real property investment and development is expected to grow at a pace that exceedsthe economic growth in the PRC, which in turn, will sustain the growth of the buildingdecoration industry, and the furniture industry.

We are well positioned to benefit from various PRC government policies on thewood-based panel industry

The domestic wood-based panel industry, including the particleboard market, wasalso boosted by favourable PRC government policies in recent years. For example, theTwelfth Five-Year Guideline of Forestry Development (林業發展「十二五」規劃) releasedby the State Forestry Administration of the PRC promotes, amongst others, (i) technologyadvancement, (ii) technical enhancement, (iii) the import and usage of advancedtechnology and equipment, (iv) enhancement of automation on machineries, (v) theupgrade of products, and (vi) the use of undersized log and wood residues to producewood-based panels. We believe that such government guideline provides a favourable


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business environment for us, as an early entrant in the particleboard industry, and thesustained growth and development of our business in China.

As confirmed by the relevant PRC authority in 2012, our new production line whichutilises Residual Wood as raw materials to produce particleboard products is a foreigninvestment project encouraged by the PRC government. Hence, Hongwei (Renhua) hasbeen approved to enjoy the preferential policy of exemption from custom duties for theimport of self-use equipment below an amount approved by the relevant authority.

Meanwhile, Hongwei (Renhua) utilises certain resources listed in the Catalogue asits major raw materials to produce its products and as these products are not restricted orprohibited by the state and are consistent with the relevant state or industrial standards,Hongwei (Renhua) is therefore considered to be a resource comprehensive utilisationenterprise and has been approved by the State Taxation Bureau of Renhua County (仁化縣國家稅務局) to enjoy the following preferential policies pursuant to the relevant PRC lawsand regulations:

i) Between 1 January 2009 and 31 December 2012, enterprise income tax waslevied on 90% of the revenue of Hongwei (Renhua) from the sale ofwood-based panels produced by it using Residual Wood as raw materials; inwhich only 90% of the revenue for the year is used to compute the taxableincome of Hongwei (Renhua).

ii) Between 1 January 2011 and [31 December 2012], refund of 80% of the valueadded tax levied on the sale of wood-based panels produced by it usingResidual Wood as raw materials; in which the tax bureau refunds 80% of theVAT we paid. The VAT payable is calculated as the output VAT we collectedfrom sales of product less the input VAT paid on purchases.

As at the Latest Practicable Date, Hongwei (Renhua) possesses a renewed certificateas a resource comprehensive utilisation enterprise which will expire in December 2014. IfHongwei (Renhua) also successfully applies for the relevant tax preferential policies, itwill be eligible again for the abovementioned preferential policies.


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BUSINESS STRATEGIES

We intend to further enhance our presence in the particleboard industry and capturemarket share in the Premium Quality Particleboard segment. To achieve these goals, we willadopt the following strategies:

Increasing our competitiveness by expanding our product range

We plan to expand our business to target the higher priced Premium QualityParticleboard segment, as we believe such market segment is able to generate a higherprofit margin when compared with the ordinary particleboard market segment. Our newproduction line commenced Test Operation of Premium Quality Particleboard inSeptember 2013.

According to the Shenzhen Zhongshang Report, homogeneous particleboards, as atype of high-end particleboards with premium quality, have just been available in the PRCin the last few years with only a few manufacturers producing them. The ShenzhenZhongshang Report has indicated that with its strong adaptability, the outlook of thehomogeneous particleboard is positive. We will expand to this segment to further enhanceour brand recognition as a supplier of premium quality particleboard products. Webelieve our ability to produce Premium Quality Particleboard will enable us to capture abroader spectrum of the PRC particleboard market.

We also intend to increase our emphasis on customised particleboard productswhich have not previously contributed significantly to our total revenue during the TrackRecord Period. Our new production line has installed production software, acontinuous-press machine and a cutting system which enable us to manufactureparticleboards of various sizes up to 9 feet width and 18 feet length. Such particleboards ofvarious sizes can be utilised as interior walls or partitions in the building decorationindustry as well as in the furniture manufacturing industry. We believe that our capabilityto manufacture various sizes and customised particleboard products will enable us tomeet changing market demands and to expand our target markets.

Strengthening and expanding our sales network across the PRC

We will continue to focus on strengthening and expanding our sales networks in thePRC. Our sales and marketing efforts are currently targeted towards the Pearl River Deltaeconomic region, including Guangzhou, Shenzhen, Dongguan, Zhongshan and othercities of the Guangdong province, the Yangtze River Delta economic region, includingShanghai, Zhejiang and Jiangsu provinces, and Fujian province. We have salesrepresentation in the Pearl River Delta and Yangtze River Delta economic regions. Thesetwo economic regions and Fujian province will continue to be our key markets and we willendeavour to enlarge our market share by increasing our sales efforts to approachpotential furniture manufacturer customers in these regions.


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Existing markets

Target markets

Guangdong

Hunan

Jiangsu

Zhejiang

Fujian

Jiangxi

Anhui

Guangxi

Guizhou

Hubei

Henan

Shaoguan

Sichuan

Shanghai

Chongqing

We plan to establish additional sales focus teams targeting (i) central China,including mainly Hunan, Hubei and Jiangxi provinces, (ii) south-west China and (iii)direct sales channels to target specific potential customers. As at 31 December 2012, wehad an established sales and marketing team of [7] personnel and we have expanded theteam to [10] personnel as at [30 September 2013] to facilitate our sales expansion plan. Weplan to establish a branch for sales in Wuhan, Hubei province, to serve our potentialcustomers in the central China region in 2014. In addition, we plan to set up a direct salesteam to identify and approach specific potential customers across the PRC whospecifically demand high or premium quality particleboard products in their respectiveproduction. We will continue to explore opportunities in other areas of the PRC which arenot currently covered by our sales team, such as the south-west China region, which webelieve our products can be competitive.

We believe these expansion of sales teams will enable us to further penetrate theparticleboard market in the PRC, strengthen our brand recognition and enlarge ourparticleboard market share in the PRC.


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Expanding supplier base for the supply of Residual Wood

We have established good relationships with our Residual Wood suppliers. For thefinancial year ended 31 December 2011 and 2012, we had over [50] and over [40] ResidualWood suppliers, respectively, and we have maintained up to 6 years of businessrelationship with our top ten Residual Wood suppliers as at the Latest Practicable Date.

Currently, our Directors estimate that approximately [95]% of our existing ResidualWood suppliers are located at Renhua county of Shaoguan and within approximately 80km distance from our production base. We intend to maintain our good relationships withour existing Residual Wood suppliers. To strengthen and maintain the businessrelationship with our Residual Wood suppliers, we also plan to provide tree sprouts toselected Residual Wood suppliers as gifts. The tree sprouts we provide will be sourcedfrom local tree sprout farms that have already obtained the relevant quarantinecertificates. We plan to purchase approximately 100,000 tree sprouts each year for a totalof approximately HK$40,000 and provide them as gifts to our selected Residual Woodsuppliers. We will not require our Residual Wood suppliers to enter into any agreement toensure future supplies of Residual Wood in return. We have never and do not plan toimpose any obligation on our selected Residual Wood suppliers to supply Residual Woodback to us from what is grown from the said tree sprouts or any Residual Wood at all, inreturn for the gifts. We have never and do not plan to impose any restriction on ourselected Residual Wood suppliers as to how our selected Residual Wood suppliers shouldtreat the gifts. The PRC Legal Advisers advise that there is no rules or regulations in thePRC restricting the gifting of tree sprouts and the arrangement to provide tree sprouts toour suppliers as such gifts do not violate the PRC laws.

We are also actively seeking for additional Residual Wood suppliers in other areas ofChina to stabilise wood supply to meet the needs of our new production line. We plan toset up Residual Wood procurement centres in Fujian, Hunan and Jiangxi provinces withthe first one to be set up in Hunan province by [the end of 2014]. The procurement centreswill be part of the procurement operation of Hongwei (Renhua). The PRC Legal Advisersadvise that there is no rules or regulations in the PRC restricting procurement of woodresources from other provinces of the PRC and the procurement process does not violatethe PRC laws. We will apply for the relevant business registration or/and the operatinglicence from the respective local authorities if and when required. The procurementcentres in Fujian, Hunan and Jiangxi provinces will serve as an expansion of our ResidualWood sourcing channels. We expect to source Residual Wood from Residual Woodsuppliers within approximately [600] km distance from our production base.

Our rationale of the strategic plan to is to establish a backup resource in the unlikelyevent that there is a disruption to its supply of Residual Wood in Guangdong province.Notwithstanding the foregoing, our Directors believe that we are able to access theabundant Residual Wood resources in Shaoguan itself and have been able to enjoy a stablesupply of Residual Wood throughout the Track Record Period. Our Directors consider thatthe quantity of Residual Wood we procure in Fujian, Hunan and Jiangxi will notsignificantly disturb the Residual Wood supply and demand equilibrium at those regionsnor would our business operation at Renhua county be significantly affected by anypotential constraints of forestry resources and wood supplies at those regions.


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We had established understandings with logistics service providers that we plan toengage them to collect Residual Wood from procurement centres in Fujian, Hunan andJiangxi provinces. Our logistics service providers confirm that they experienced moreloadings going out from Shaoguan to the other parts of China than the loadings from theother parts of China to Shaoguan. Commercially, these logistics service providers wouldlike to secure consignments to carry on their return trip to ensure they will not return withempty vehicles to Shaoguan in order to lower their operating costs. It is practical for us toengage these logistics service providers to collect the Residual Wood from theprocurement centres in Fujian, Hunan and Jiangxi provinces on their return trips toShaoguan at a cost with discounts of up to 50% compared to a regular delivery trip as sucharrangements are mutually beneficial to both parties.

We estimate that the total cost per ton of Residual Wood acquired from Fujian,Hunan and Jiangxi provinces, including the logistics cost, will be approximately 10% to20% higher, compared to Residual Wood acquired in Shaoguan. However, we estimatethat in 2014, the amount of Residual Wood we will acquire from the procurement centre inother provinces will be less than 10% of the estimated total amount of Residual Wood towe will acquire. Comparing this strategic plan to a scenario of which we purely acquireResidual Wood in Guangdong province, our overall increase in annual Residual Woodacquisition cost is estimated to be approximately 1% to 2% in 2014, which our Directorsconsider to be quite insignificant. Despite the expected slight cost increase, through thisstrategic plan, our Directors believe that having a greater pool of suppliers will enable usto benefit from (i) getting access to other sources of Residual Wood suppliers, (ii)diversifying the risk of concentrating Residual Wood suppliers in one location, and (iii)strengthening our competitiveness in the market.

Enhancing our product research and development

With our drive to enhance our particleboard product quality and to develop newproducts, we will continue to invest in product research and development by building aR&D Centre to improve our technological know-how and capabilities for the research anddevelopment of, amongst others, customised products, products with special propertiessuch as moisture resistant and fire resistant products, top quality adhesive chemical andglueing techniques and production technology.

As at the Latest Practicable Date, we had a research and development team of [4]research personnel and professionals and we plan to expand the team to [5] by 2014.

Strengthening our brand recognition

We intend to strengthen our brand recognition under the trademarks “ ”,“ ” and “ ”, and promote us as a premium quality manufacturer and a stablesupplier of particleboards which could meet all the Particleboard PRC GB Standards andParticleboards International Standards. We believe that our strategic focuses on largescale production and offer of High Quality Particleboards and Premium QualityParticleboards can contribute to our positive market reputation and brand recognition byour customers and potential customers in the PRC.


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To increase the recognition of our brands amongst furniture manufacturers and endconsumers, we will, on selective basis, launch advertising campaigns on magazines andinternet sites relating to the home furniture and particleboard industries. We will alsoparticipate in product promotion activities, international and domestic furniture andparticleboard trade fairs, conferences and exhibitions, such as the Asia InternationalFurniture Material Expo. and the China International Furniture Fair (Guangzhou). Weplan to cooperate with some of our furniture manufacturer customers to conduct directmarketing to end customers to strengthen our brand recognition so that they recognise thewooden products which use our particleboards are of high or premium, and quality aswell as with low or ultra low formaldehyde emission, and to promote our particleboardsas their preferred raw material for producing furniture products.

In addition, we plan to promote our brands as environmentally responsible brandnames. We have strived to create a corporate image of being environmentally friendly byfollowing the international environmental practices created by the Forest StewardshipCouncil. We have obtained “FSC Standard for Chain of Custody Certification”(FSC-STD-40-004 V2-1) and the certification of the complementary FSC “Standard forsourcing reclaimed material for use in FSC Product Groups or FSC Certified Projects”(FSC-STD-40-007 V2-0) (valid from February 2013 to February 2018). With suchcertifications, we are qualified to apply the FSC label on our products when certainprescribed criteria are met. The FSC label, when applied, provides a credible guarantee toour customers, including end consumers, that our products originate from well-managedforests, controlled sources, reclaimed materials, or a mixture of these. However, ourDirectors confirm that we have not sold any FSC-labelled products to our customersduring the Track Record Period as we plan to promote our FSC-labelled products after thecompletion of our new production line.

We believe that with stronger brand recognition, we will be able to secure moresales, and thus create greater value for our Company and our Shareholders.

NEW PRODUCTION LINE

To leverage on Mr. Wong’s approximately 20 years of experience and reputation in theparticleboard industry, in 2012 our management decided to further expand our productioncapacity by introducing advanced production technology and equipment, to capitalise on theabundant forestry resources in Renhua county, capture the growing China particleboard marketand stay ahead of our competitors. As such, a new production line at our production base inShaoguan was constructed and commenced Test Operation at the end of September 2013 andcommenced Full Production at the beginning of December 2013. Based on the confirmationissued by the relevant environmental protection authority and as advised by the PRC LegalAdviser to our Company, Hongwei (Renhua) has obtained the permit to discharge pollutants forthe new production line for a period of one year commencing from 29 October 2013.

The new production line is installed with advanced technology and machinery mainlyimported from Dieffenbacher, a world leading supplier of wood-based panel machinery andpress systems, with an approved particleboard annual production capacity of approximately220,000 m³. According to Dieffenbacher, these machines are the latest particleboard productionmachines developed by it. The new production line is in general more efficient, especially interms of energy and raw material savings, which enables us to produce particleboards at lowercost but with better and more stable quality.


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There will be an auxiliary formaldehyde production workshop on the new production linethat is capable of producing high quality and high concentration formaldehyde. These highquality and high concentration formaldehyde in general could not be purchased in the openmarket because its highly unstable chemical structure makes it unsuitable for transportation.The estimated total investment amount of the formaldehyde workshop is approximatelyRMB[7.0] million and it is expected to be in operation by the first quarter of 2014. Theformaldehyde production workshop has a designed annual production capacity ofapproximately 17,000 tons of 45% high concentration formaldehyde. The formaldehydeproduced from the workshop will be fully used by us. The application of high concentrationformaldehyde in our production will improve our product quality, and decrease formaldehydeemission, thereby rendering our products more environmentally friendly, and increasing ourproduction efficiency through energy and cost savings.

The reasons for the use of high concentration formaldehyde instead of the lowconcentration formaldehyde are twofold. First, the process of producing the high concentrationformaldehyde is more environmentally friendly. During the production of glue, ordinaryformaldehyde (which has a concentration of approximately 36.5%), has to go through a refineryprocess which produces waste water. On the contrary, the use of high concentrationformaldehyde to produce glue eliminates any discharge of waste water, and thus is much moreenvironmental friendly. There is also energy and cost savings from the elimination of therefinery process. Secondly, the use of high concentration formaldehyde enhances thesolidification of glue and particles. In turn, it reduces the usage of formaldehyde when forminga particleboard and thus reduces the cost and formaldehyde emission level of the particleboardproduced.

Our new production line uses an advanced glue mixing and blending technology, whichseeks to maximise the reduction in the amount of glue consumption by way of calculatingprecisely the amount of glue required for each type of product with the preciseness levelreaching a smallest unit of 0.01g. The glue mixture is mixed with the particles using a highpressure mist gun to spread the glue more evenly, which will reduce the overall glue usageduring the production process. In addition, we installed an advanced low speed glue mixingmachine which enables longer mixing time and ensures particles will mix with the glue moreevenly, such that the amount of glue required is reduced. The use of better quality formaldehydeproduced from the formaldehyde workshop and the aforesaid glue mixing and blendingtechnology will reduce the amount of glue used while reducing our formaldehyde emissionlevels simultaneously.

Premium Quality Particleboards

The new production line was designed to be able to produce Premium QualityParticleboards. Premium Quality Particleboards are homogeneous particleboards that couldmeet all the Particleboard International Standards and the Particleboard PRC GB Standardswhile High Quality Particleboards produced from our old production lines are particleboardsthat meet the European Particleboard Standards or the Californian Particleboard Standards orthe Particleboard PRC GB Standard. The overall differences between them are that PremiumQuality Particleboards (i) are homogeneous particleboards, (ii) can meet the JapaneseParticleboard Standards, and (iii) have other good quality characteristics.

(i) According to the Shenzhen Zhongshang Report, homogenous particleboard were anew series of particleboards originally developed in Europe in the 1990’s. According


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to the Shenzhen Zhongshang Report, homogeneous particleboards have only beenavailable in the PRC in the last few years with only a few manufacturers producingthem and its outlook is positive.

Homogeneous particleboards have better physical characteristics and betterperformance properties compared to ordinary particleboards. For example,homogeneous particleboards have homogeneous particles spread evenly over thewhole particleboard and less density difference between the surface and core layerssuch that the particleboards have less vulnerability for deformation, more stableperformance and stronger strength. The application of these particleboards extendto, amongst others, higher end home and office furniture and building decorationuses. Our target customers for these particleboards include large scale high endhome and office furniture manufacturers which are more willing to pay a pricepremium for stable performance, premium quality particleboards.

The production process of homogeneous particleboards and ordinaryparticleboards are primarily the same, but the production difference arises from theuse of different machinery and the production and quality control system installedin the production line. For instance, [the chipping and flaking machinery of our newproduction line can produce the core particles and fine particles that arehomogeneous respectively; and our new production line is installed with anautomatic control system to weigh on and spread the particles evenly to ensure themats are formed with even density.

(ii) By meeting the most stringent formaldehyde emission requirement specified inJapanese Particleboard Standards, the formaldehyde emission quantity of thePremium Quality Particleboard is less than and equal to 0.4 mg per litre. Accordingto the United States Environmental Protection Agency, chronic exposure toformaldehyde by inhalation may cause hazardous effects in human bodies, whichhave been associated with respiratory symptoms and eye, nose, and throatirritation. In addition, occupational studies have noted statistically significantassociations between exposure to formaldehyde and increased incidence of lungand nasopharyngeal cancer. As a result, our Directors consider that world renownedand high end furniture manufacturers prefer to use Premium Quality Particleboardsas their raw material to produce furniture, such that their furniture would appeal tothe high end luxury market, as well as markets targeting health consciouscustomers.

(iii) As compared with High Quality Particleboards, Premium Quality Particleboardshave higher static bending strength and higher internal bond strength and withlower formaldehyde emission quantity, lower swelling properties (which refers tothe dimensional changes of the particleboard as a result of the changes inatmospheric humidity) and lower density.

Our Directors are of the view that our target customers for High Quality Particleboard arethose customers who require particleboards for their production (or export to end customers fortheir production) of medium end furniture, sport equipment and other end products. The HighQuality Particleboards we manufacture can satisfy their requirements in respect of quality


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standards whilst with a relatively lower pricing compared to Premium Quality Particleboards,thus allowing them to achieve their own economics; while the target customers for PremiumQuality Particleboards are those customers who require particleboards for their production (orexport to end customers for their production) of high end furniture, sport equipment and otherend products. According to our Directors, some of our existing customers produce both mediumend as well as high end furniture, sport equipment and other end products. As such, they willhave demands for both our High Quality Particleboards and Premium Quality Particleboards.

Our Directors consider that the Premium Quality Particleboards, on average, have a pricepremium of approximately 25% over our High Quality Particleboards and a cost saving ofapproximately 5% on the raw materials used when producing the same quantity of our HighQuality Particleboards. However, manufacturing expenses, which is included in the cost ofsales, for the Premium Quality Particleboards will be higher initially considering there isdepreciation on the new production line. As the new production line will be producing belowthe full production capacity initially, the manufacturing expense per unit of particleboardmanufactured will be higher initially, resulting in a lower profit margin in the short run. OurDirectors consider that in the long run the overall profitability of our Premium QualityParticleboards production will be around 2.7% higher in profit margin than that of our HighQuality Particleboards production. Our Directors estimate that approximately HK$[35] millionwill be required as working capital for the production of Premium Quality Particleboards for thefinancial year ending 31 December 2014, such capital requirement can be satisfied by theunutilised bank facilities available to us. The amount of working capital required for the newproduction line in 2013 is approximately HK$14.5 million, which is mainly financed by bankloan. Such amount of additional working capital will increase our Company’s total debtoutstanding and debt-to-equity ratio as at 31 December 2013.

In addition, the new production line allows us to manufacture particleboards of variousdimensions and specifications up to 9 feet width and 18 feet length, which can be utilised asinterior walls or partitions in the building decoration industry as well as in the furnituremanufacture industry. Our Directors believe that our capacity to manufacture customisedparticleboard products of varying specifications will enable us to meet changing marketdemands and to expand our target markets.

Our Directors believe that our Premium Quality Particleboards will be able to complywith all the Particleboard PRC GB Standards and Particleboard International Standards, whichwill increase our market share, solidify our market position, differentiate us from ourcompetitors as an environmentally friendly enterprise and strengthen our reputation in theindustry.

Production technology

The new particleboard production line adopts continuous hot press technology.Compared with multiple-deck hot press technology commonly used in China, continuous hotpress technology is suitable for large-scale production, more efficient, and energy and rawmaterials saving, and produces particleboards with much better and more stable quality.


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The new production line and machinery are mainly imported from Germany andSwitzerland. The equipment or machinery we have installed mainly includes, amongst others,latest particleboard production machines developed by Dieffenbacher, a Satos wide belt sandingmachine for calibration and fine sanding of particleboards, a cutting system and an energyplant. The new production line is in general more efficient, especially in terms of energy and rawmaterials savings, which enables us to produce particleboards at lower costs but with better andmore stable quality.

The major vendor of our new production line is Dieffenbacher in Germany. According tothe Shenzhen Zhongshang Report, Dieffenbacher has become one of the three largestmanufacturers for wood-based panel machinery and a leading supplier of wood-based panelmachinery and press systems in the world since its establishment in 1873. [As at [●]], there areonly [10] other particleboard manufacturers in the PRC that have installed or are installingDieffenbacher ’s press systems. An important feature of the Dieffenbacher systems we use for thenew production line is the Dieffenbacher continuous-press. According to our Directors, thissystem enables us to produce particleboards that satisfy our required thickness tolerance andsurface characteristics. Further advantages of the press system noted by our Directors are theease of access for maintenance and cleaning works, and the low maintenance requirements forthe press system. Our Directors are of the view that the aforesaid competitive advantages of theDieffenbacher machines and systems would not be available from other domestic or importedmachineries. According to Dieffenbacher, the machines we purchased from it are the latestparticleboard production machines developed by it.

Estimated capital expenditure

The capital commitments for the acquisition of property, plant and equipment for the newproduction line was approximately HK$[58.1] million as at 30 June 2013. Our Directors estimatethat, up to 30 November 2013, we had incurred approximately HK$[371] million in respect of theconstruction of the new production line. The total amount of capital expenditure for the newproduction line has been financed by internal resources and bank borrowings from variousbanks including ICBC and ABC.

Breakeven analysis

Our Directors estimate that the breakeven time of the new production line isapproximately one month, which is considered to be the point at which the monthly revenuefrom the sales of particleboard produced from the new production line is at least equal to themonthly costs of producing particleboards from the new production line, including, amongstothers, raw material cost, labour cost and manufacturing cost.

Our Directors estimate that our annual breakeven sales quantity is approximately206,000 m3, such that the estimated 2014 annual revenue from such sales quantity will be at leastequal to the estimated 2014 annual costs and expenses of operating the new production line,including, amongst others, raw material cost, labour cost, manufacturing cost, distributionexpenses, administration expenses and finance cost. Our Directors estimate that our monthlysales quantity of particleboards from the new production line will gradually increase during thefinancial year ending 31 December 2014. Our Directors estimate that by June 2014, the monthlysales quantity from the new production line will be at least at 17,200 m3, which is the annualbreakeven sales quantity of 206,000 m3 divided by 12 months.


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Our Directors estimate that the payback period of the new production line isapproximately 6 years, which is considered to be the amount of time it takes for the accumulatednet profit generated from the new production line to cover the costs of purchasing and installingthe new equipment and machineries, interest cost in relation to the acquisition of equipment andmachineries, and operating costs of the new production line up to that period.

Business plans to cope with the new production line

Sales

To cope with the expansion in production capacity from our new production line, up to theLatest Practicable Date, we have entered into framework supply documents with [10] customersto secure indicative orders of approximately [134,000] m3of our particleboard from the newproduction line for the financial year ending 31 December 2014. In addition, we endeavour toexpand our sales team to induce more sales orders from the Pearl River Delta and Yangtze RiverDelta economic regions and the new orders from central China, south-west China and directsales channels. Please refer to the paragraphs headed “Strengthening and expanding our salesnetwork across the PRC” in this “Business” section for more detail.

Procurement of Residual Wood

To cope with our increasing demand of Residual Wood for the increase in our productioncapability, we have established an understanding and entered into framework supplyagreements with 3 Independent Third Party forestry companies to supply Residual Wood in2014. We have also made an arrangement by way of letters of intent with Shaoguan HongweiForestry and Shaoguan Hongji Forestry, whereby they have agreed to give priority to supply usResidual Wood in quantities requested by us, subject to their respective available ResidualWood inventories. Please refer to the “[●]” section of this [●] for more detail. We also havebusiness strategies to secure stable supply of Residual Wood, details of which can be found inthe paragraphs headed “Expanding supplier base for the supply of Residual Wood” in this“Business” section of this [●].

Quality control

Our new production line has installed several advanced in-progress automatic qualitycontrol systems which ensure the finished particleboards produced from the new productionline meet our required quality standard. Amongst the automatic quality control systemsinstalled is the loop control system. During the mat-forming process, while spreading therespective layers of particles, the loop control system measures the weight of the mat andautomatically scalps off excessive particles or fills in additional particles to ensure the wholemat formed at each respective layer will have an even weight and density. In addition, we haveinstalled quality control systems in the new production line which automatically filter outparticleboards that fail our quality measures. Please refer to the paragraphs headed “Qualitycontrol and production control” in this section of the [●] for more information of our overallquality control policy and measured adopted.


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Management reporting

To cope with the management control over our new production line, we have installed areporting system which provides technical information and production data and analysis on theoperation of our new production line. Information that the system generates includes, amongstothers, (i) statistics and analysis of the raw material input and production output, (ii) historicaltrending analysis, (iii) production batch reports with contents including, amongst others,duration of production, raw materials consumption, raw material rejects and defective productrejects incurred during the batch production, (iv) downtime analysis, and (v) plant availabilityevaluation. Our Directors believe that the implementation of such reporting system willimprove the efficiency of our new production line and assist timely decision-making of ourmanagement.

Human resources

To cope with the needs of the new production line, we have been recruiting additionalstaff with relevant experience in the particleboard industry covering, amongst others,production supervisors, electrical technicians and mechanical engineers. As at the LatestPracticable Date, we have recruited over [40] employees for the new production line. Theyinclude the vice general manager of Hongwei (Renhua), Mr. Zhang Hui, who holds a bachelordegree in Industrial Electrical Automation from Fuzhou University and has in-depth experiencein production facilities and production management of the manufacturing of wood-basedpanels, especially of particleboard. In addition, Dieffenbacher also provides on-site training forour senior management, technicians and production personnel.

Benefits

Our Directors believe that the implementation of the new production line provides us,amongst others, with the following benefits:

(i) we are able to produce particleboards with better and more stable quality;

(ii) our production is more efficient in energy and raw material savings, thus loweringour production cost;

(iii) our products are more environmentally friendly and could comply with all theParticleboard PRC GB Standards and Particleboard International Standards;

(iv) we are able to produce customised particleboards and particleboards of variousdimensions and specifications, that most other particleboard manufacturers in thePRC may not be able to produce [as at the Latest Practicable Date]; and

(v) allows us to expand our market share and solidify our market position in theparticleboard industry due to the wider product offering.

Our Directors believe that the implementation of the new production line is beneficial toour Company and our Shareholders as a whole.


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PRODUCTS AND BRAND

Products

During the Track Record Period and up to the Latest Practicable Date, we manufacturedand sold High Quality Particleboards and Premium Quality Particleboards.

High Quality Particleboard Premium Quality Particleboard

Particleboards are made with raw materials such as undersized log, wood branches andagriculture and forestry residues, and hence they are in general considered to beenvironmentally friendly and resources saving reconstituted wood-based panels derived fromundersized log, wood branches, wood off-cuts and residues, agriculture and forestry residuesand wood waste. Particleboards are primarily used in, amongst others, the manufacture offurniture, panels for flooring, doors and decoration, packing and construction.

High Quality Particleboards

During the Track Record Period, we sold High Quality Particleboards produced by our oldproduction lines in dimensions of width and length of 4x8, 4x9, 5x8, 5x9 and 6x8 feet andthickness ranging from 6 millimetre to 28 millimetre.

Premium Quality Particleboards

Our new production line produces Premium Quality Particleboards that could meet all theParticleboard PRC GB Standards and Particleboard International Standards. As of the LatestPracticable Date, we have produced and sold Premium Quality Particleboards in dimensions ofwidth and length of [●] and thickness ranging from [●] millimetre to [●] millimetre. For detailon characteristics of Premium Quality Particleboards and the difference between High QualityParticleboards and Premium Quality Particleboards, please refer to “Business — PremiumQuality Particleboards” of this [●].

Our products are mainly used by furniture manufacturers to produce office and homefurniture such as cabinet boxes, shelves and tables, and by sport equipment manufacturers toproduce sport equipment such as table tennis tables.


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Brands

All of our products carry the “ ”, “ ” or “ ” trademark. We have registered orapplied for registration of the above trademarks in the PRC and in Hong Kong.

PRODUCTION

Our production lines are located at Shaoguan, Guangdong province, the PRC. Ourproduction base, with a site area of approximately 254,571 sq.m., comprises of productionworkshops, office building, warehouses, and [various buildings and structures underconstruction].

New production line

The operation of our new production line is carried out at one chipping and flakingworkshop, one heat drying workshop, one screening workshop, one gluing workshop, onepressing workshop, one sanding and sizing workshop, one mechanical workshop, one energyplant workshop and other ancillary facilities.

As at the Latest Practicable Date, the principal machinery owned and installed in our newproduction line includes the following:

Item Machine Principal featureNumber of

unit(s)

1 Blender Blending adhesives with the respective fine surfacelayer particles and core layer particles

2

2 Forming station Spreading adhesive mixed particles to form particlemats

1

3 Continuous hotpresser

Solidifying glue and particles continuously to formparticleboards

1

4 Sanding machine Calibration and fine sanding of particleboards 2

5 Energy plant Providing energy for the particleboard production lineby using wood waste generated during productionor supplemental wood waste

1


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Old production lines

The table below sets out the actual production quantity of particleboards and utilisationrate of our old production lines during the Track Record Period:

For the yearended

31 December2011

For the yearended

31 December2012

For the sixmonths ended

30 June 2013

Number of old production linesowned 2 2 2

Production capacity for the period 140,000 m3 140,000 m3 140,000 m3

Approximate output volume 134,000 m3 122,000 m3 49,000 m3

Approximate annualisedutilisation rate 96% 87% 70%

Our Directors consider that our utilisation rate dropped in the financial year ended 31December 2012 and the six months ended 30 June 2013 was due to the shift in our customers’demand for different sizes (such as thinner and smaller sizes) of our particleboards such that thetotal output volume in m3 was reduced. In general, there was also slower growth in the PRCeconomy during the same periods which affected our production volume. Our directors are ofthe view that the operation of the new production line will not have a significant impact on theoperation of our existing production line. Our new production line produces the PremiumQuality Particleboards whilst the existing production line produces High QualityParticleboards. Our Directors believe that the customers for these two products are different.The Premium Quality Particleboards have better quality and performances and in general, a25% price premium over the High Quality Particleboards. As such, the Premium QualityParticleboards are for the more higher end customers who are willing to pay the price premium;which should be distinguished from the customers of the High Quality Particleboards. OurDirectors consider that there is no significant impact on the demand for High QualityParticleboards and the operation of our existing production line as a result of the introduction ofthe Premium Quality Particleboards. As the old production line continues to be in operation forthe production of High Quality Particleboards to meet the demand of the existing customers,our Directors consider that there will be no asset impairment for our old production line as aresult of the establishment of the new production line.

The operation of our old production lines are carried out at one chipping and flakingworkshop, one gluing workshop, two pressing workshops, one sanding workshop and otherancillary workshops.


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As at the Latest Practicable Date, our principal machinery used in the old production linesincludes the following:

Item Machine Principal featureNumber of

unit(s)Age

(years)

1 Mat former Spreading adhesive mixed particles toform particle mats

2 5–9

2 Hot presser Solidifying glue and particles to form thefinal state of particleboard

2 5–9

3 Sandingmachine

Calibrating particleboards to precisesmoothness and thickness

3 2–5

Our Directors estimate the lifespan of the aforesaid equipment to be 10 years in general.With respect to our certain mat former and hot presser that are approaching the end of theirlifespans, we plan to invest approximately HK$250,000 to replace and upgrade some parts of themachines in the second quarter of 2014 to extend their lifespan for approximately 5 additionalyears.

Our facilities maintenance team carries out regular inspection and maintenance, and ourmachinery and equipment are in good condition as at the Latest Practicable Date. Please refer tothe paragraph headed “Machinery and equipment maintenance” in this section for more detail.We also provide our technicians and production personnel with appropriate training to ensurethat they are equipped with the requisite technical knowledge to operate the equipment andmachinery.


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Production process

The following diagram sets forth the key procedures typically adopted by us in ourparticleboard production process:

Packing

Receiving Residual Wood

Quality check

Chipping

Flaking

Heat drying

Screening

Glue mixing and blending

Mat forming

Pre-pressing

Final hot pressing

Cooling andsizing

Sanding

Quality check

Quality check

Quality check


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Chipping and flaking

Residual Wood is one of our major raw materials. We keep Residual Wood in our log yardto allow water moisture from the Residual Wood to naturally evaporate to a lower level, afterwhich we transport them into a chipper for chipping. The chipping process primarily involvescutting the Residual Wood into smaller pieces with length and width of approximately 25mm to45mm and thickness of approximately 5mm to 15mm. After chipping, we put the chips into aflaker to produce fine flakes. The resulting flakes generally have length of approximately 20mmto 45mm, width of approximately 5mm to 15mm, and thickness of approximately 0.1mm to0.5mm.

Heat drying and screening

Flakes are inserted into a dryer for heat drying. Subsequently, we screen the dried flakesby filter which separates the dried flakes into fine surface layer particles and core layer particlesbefore being stored in silos.

Glue mixing and blending

The major components for producing the glue to be used in our production processinclude urea and formaldehyde. Formaldehyde is a major chemical which contributes to theadhesiveness of the glue. We mix the glue components in our mixing tank and transfer theready-to-use glue mixture into tanks. The core particles and the fine particles are mixedseparately in different blenders.

According to our Directors, any over dose of formaldehyde in the glue mixture wouldincrease cost and formaldehyde emission levels, which may result in non-compliance withparticleboard quality and formaldehyde emission standards. In view of this, we have built anew formaldehyde workshop to produce high quality and concentration formaldehyde whichwould allow us to use less formaldehyde for the making of the glue mixture. In addition, wehave spent resources to research and develop our own formula for the mixing of gluecomponents which enhances our particleboard quality. Our Directors consider that ourself-developed formula for the mixing of glue components is amongst our competitive strengthscontributing to the high quality of our particleboard products, while allowing us to meet theParticleboard PRC GB Standards and Particleboard International Standards.

Mat forming

Our mat comprises three layers with two surface layers covering the core layer on bothsides. We spread the mixed adhesive surface layer and core layer particles to form a mat by airand mechanical formers. The mats that fail quality check are screened out.

Pre-pressing

We send the mat to a continuous pressing machine for pre-pressing to secure the form ofthe mat. We may cut the pre-pressed mat into various standard sizes for easy transportation tothe final pressing machine.


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Final hot pressing

We send the pre-pressed mats to the hot pressing machine to solidify the glue andparticles to form the final state of our particleboards. With multiple-deck hot pressing of the oldproduction lines, the pre-pressed mats are cut before feeding into the multiple-deck hot pressingmachine to form boards with identical precise thickness. With a continuous hot-pressingmachine installed in our new production line now, the pre-pressed mats would continuouslyroll out into the continuous hot-pressing machine, which operates automatically to compress themats based on different thicknesses required.

Cooling and sizing

We then place the particleboards on a star cooler machine to allow the glue to set. We cutand trim the particleboards to accurate dimensions and check for bonding conformance andthickness.

Sanding and packing

We then sand the particleboards to fine surface finishes with sanding machines. Weperform quality checks and tests to ensure the quality of the particleboards. Please refer to thesection below headed “Business — Quality Control and Production Control — Quality Controlduring production” of this [●] for details of our quality checks and tests.

The quality approved particleboards are then graded and packed for inventory ordelivery. Our production lead time for producing particleboard is approximately [3 to 7] days.]

Fuel and utilities

Our primary fuel and utilities requirements are electricity and petroleum. Electricity isprimarily used in machinery operation while petroleum is primarily used in transportationvehicles in the factory for moving our Residual Wood and inventories and for construction ofour new production plant.

Our electricity is mainly supplied by a subsidiary of Guangdong Power Grid in Shaoguancity. During the Track Record Period, we did not enter into any master supply agreement ofelectricity with the power grid. Our Directors confirm that we have no restriction on themaximum amount of electricity usage during the Track Record Period. For the financial yearended 31 December 2012, we used approximately 14.6 million kilowatt-hour of electricity. Ourelectricity usage amounted to approximately HK$13.6 million, HK$11.2 million and HK$[3.7]million for the financial years ended 31 December 2011 and 2012 and the six months ended 30June 2013, respectively. During the Track Record Period, our Directors confirm that we did notexperience any material interruption of operation as a result of electricity shortage orsuspension.

Our petroleum is mainly supplied by a Shaoguan branch of a major petroleum andpetro-chemical producer in China. Our total purchase with this petroleum supplier wasapproximately HK$[3.7] million, HK$[3.2] million and HK$[0.5] million for the financial yearsended 31 December 2011 and 2012 and six months ended 30 June 2013, respectively. The usage of


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petroleum dropped in the six months ended 30 June 2013 as a result of reduction in usage ofvehicles for the construction of our new production plant as the construction is closed tocompletion. During the Track Record Period, we entered into annual master supply agreementswith the petroleum supplier which set out the indicative quantity and the grade of petroleumproducts that we intended to procure. Major terms on the master supply agreement with thepetroleum supplier dated January 2013 include, amongst others, (i) the quality of petroleumproducts supplied by the petroleum supplier must comply with the existing PRC nationalstandard, (ii) the prices of the petroleum products are based on market price at the time of ourpurchase orders, and (iii) the amount of procurement is approximately 10,000 litres of gasolineand 200,000 litres of diesel oil. The master supply agreement also included, amongst others,other commercial terms relating to ordering, delivery and payment. There were no penalties forany short fall in quantity of petroleum products received from the petroleum supplier duringthe Track Record Period. Our Directors confirm that during the Track Record Period we did notexperience any material interruption of operation as a result of electricity suspension orpetroleum shortage.

QUALITY CONTROL AND PRODUCTION CONTROL

As a part of our competitive strength, we have established a professional and dedicatedquality control team consisting of [2] quality control supervisors and a group of [9] qualitycontrol personnel, including [3] Residual Wood quality control personnel and [6] quality controlpersonnel for the production process, to closely monitor the production, production controlprocess and perform product quality inspection and testings. [One] of our quality controlsupervisors has over [10] years’ relevant experience.

To maintain stringent quality control over the whole production process, from theprocurement of raw materials to final inspection of finished goods, we have established acomprehensive quality control protocol for product quality inspection. During the Track RecordPeriod and up to the Latest Practicable Date, to the best knowledge and belief of our Directors,we have [not] experienced any material quality control issues or any material return of productsthat we supplied to our customers due to any quality issue. Our quality control and productioncontrol procedures are described in detail below.

Quality control during purchase of raw materials

We have in place a set of procedures for assessing the suitability of our potential suppliers.We will only procure raw materials from suppliers who have met our assessment requirements.

Our major raw materials consist of Residual Wood and chemicals. For Residual Wood, ourResidual Wood quality control personnel perform visual checking on the quality of ResidualWood on every delivery from Residual Wood suppliers. We only accept Residual Wood thatmeets our standards. Residual Wood that are rotten or covered with mosses would be screenedout at the time of delivery.

For chemicals, we conduct sample testing on delivery of formaldehyde and urea and otherchemicals from new suppliers or when we consider necessary to ensure the chemicals we receivemeet our required quality specifications for each specific chemical component. The chemicalswe acquire are mainly urea and formaldehyde. Most of the chemicals we procure are produced


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in accordance with the PRC national standards. Specifically, the urea we procure is mainlyproduced in accordance with GB2440-2001 standard with, amongst others, nitrogenconcentration of at least 46.3%; the formaldehyde we procure are in accordance withGB/T9009-1998 standard with, amongst others, formaldehyde concentration of at least 36.5%.Depending on the type of chemical we use, we may require our suppliers to provide a qualityinspection report on the chemicals supplied by them. To the best knowledge of our Directors,during the Track Record Period, we did not receive any chemical from our suppliers which didnot meet our quality specification.

Quality control during production

Our quality control personnel conduct quality control procedures at different stages of ourproduction process.

At the sanding and packing stage, our quality control personnel perform checkingvisually and with tools to determine the smoothness of our particleboards. We perform sampletests on the specifications and dimensions to ensure our particleboards meet the requirements ofour customers.

We perform sample testing or appoint third party organisations to perform sample test onformaldehyde emission and other requirements of the particleboard quality standards,including, amongst others, density, moisture content, swelling and other specified physicalproperties. Only those particleboards that meet our requirements of the particleboard qualitystandards could be graded and packed for inventory or delivery.

Machinery and equipment maintenance

We have a group of [36] personnel responsible for electrical and mechanical engineering.They possess knowledge of machinery mechanical operation, and carry out regular inspectionsand maintenance of machinery and equipment to ensure optimum performance of ourmachinery and equipment. We perform major maintenance, which generally lasts forapproximately 2 weeks, on every machinery and equipment in our production lines once a yearduring the Chinese new year holidays. We also perform regular small scale maintenances once amonth, which generally last for approximately 1 day. The maintenance and repair cost incurredduring the financial years ended 31 December 2011 and 2012 and the six months ended 30 June2013 is HK$[290,000], HK$[127,000] and HK$[140,000], respectively.

Production control

Our production control team consists of [4] production managers, [3] production shiftsupervisors, [1] mechanical supervisor, [22] mechanics and [14] electrical and mechanicalengineering personnel. The [4] production managers are responsible for production andproduction control. The [3] production shift supervisors, [1] for each shift of production,perform regular on-site inspection on the quality, quantity and safety of production, and reportto the production managers for any major production problems. The mechanical supervisorleads the [22] mechanics to solve any mechanical problems to ensure the smooth operation ofour machinery.


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The production control team members of a production shift will meet members of the nextshift immediately before the beginning of the next shift, to provide information on the status ofproduction of the shift just completed, and arrange the production of the next shift.

SALES AND MARKETING

Our market

Our particleboard products are primarily sold to the domestic PRC market with a largeproportion of our sales derived from the Pearl River Delta economic region, includingGuangzhou, Shenzhen, Dongguan, Zhongshan and other cities of the Guangdong province, theYangtze River Delta economic region, including Shanghai, Zhejiang and Jiangsu provinces, andFujian province. According to the Shenzhen Zhongshang Report, the growth of per capitaparticleboard consumption in the PRC exceeds those of all other countries in the world, andsuch growth is expected to continue. We will continue to focus on our domestic markets byexpanding our existing markets and exploring new markets in Hunan, Hubei and Jiangxiprovinces in order to expand our market share in the PRC. For the years ended 31 December 2011and 2012 and the six months ended 30 June 2013, our particleboard sales amounted toapproximately HK$153.1 million, HK$163.0 million and HK$43.4 million respectively. Thegrowth in our sales for the year ended 31 December 2012 represented an annual growth ofapproximately 6.5%.

Our customers include home or office furniture manufacturers, sport equipmentmanufacturers, and wood-based panel processors and traders. Our particleboards are mainlyused by our customers to produce furniture or sport equipment (such as table tennis tables) forsale in the PRC market or export to the U.S., Canada, Australia and Europe. We receivedpurchase orders from over [600] customers during the Track Record Period. Our Directorsconsider that our large customer base is established as a result of Mr. Wong’s approximately 20years of experience, our senior management’s in-depth knowledge of the wood-based panelbusiness and our sales network.

Our sales and marketing staff attend major national and international fairs such as theAsia International Furniture Material Expo. and the China International Furniture Fair(Guangzhou). Our sales and marketing staff also meet with major customers periodically todiscuss and exchange ideas on business and market trends. Our Directors believe that we haveestablished effective communication and cooperation channels with our key customers to sharemarket intelligence in a timely manner.

Our Directors consider that we have established a reputation amongst our majorcustomers as a trust-worthy and competitive manufacturer who can meet customers’requirements on quality and provide a stable supply of products.

Sales

We have a sales and marketing department, comprising [10] staff members as at [30September 2013], [5] of whom have over [7] years of experience in sales and marketing in theparticleboard industry. The sales and marketing supervisor is primarily responsible for advisingthe senior management on marketing and pricing strategies and overall sales planning whilst


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our sales and marketing team are primarily responsible for taking purchase orders from ourcustomers, negotiating sales terms, following up on purchase orders, liaising on warehousingand delivery, providing after-sales services such as advising on product technicality and qualityassurance, obtaining feedback from our customers and conducting site visits at customers’factories.

Most of our sales are conducted on inventory sales basis upon receiving purchase ordersfrom our customers. We also manufacture according to confirmed purchase orders which set outthe specific specifications. Our customers normally place purchase orders with us within oneweek to one month in advance of delivery. We negotiate the sales terms including pricing byreference to a number of factors, such as the cost of raw materials, sales quantity, productionschedule, customers’ reputation and credibility. For new customers, we may provide productsamples to them and they may visit our factory to increase their confidence in our productioncapability and quality. After receipt of purchase orders from customers which typically specifytheir purchasing quantity, product specifications, purchasing price and delivery date, ouraccounting department will review the purchase orders. We then arrange delivery of themanufactured products to our customers. Some of our customers may provide us with theirestimated purchasing quantity about one month to three months in advance, and suchinformation will be provided to the production department for analysis and productionplanning. For further details of our pricing and payment terms, please refer to “Pricing” and“Payment terms with our customers” below.

We may also enter into annual or semi-annual framework sales documents with some ofour customers. The framework sales documents typically specify the quality standards,payment methods, and method of delivery, for the intended purchases within the term of thesedocuments. However, purchases will be agreed and confirmed by purchase orders, whichtypically specify the exact purchasing quantity, specifications, purchase price and delivery date.

Our Directors confirm that during the Track Record Period, we sold directly to ourcustomers and we did not appoint any distributor to distribute our products.

Marketing

Our marketing strategies are to increase sales with our existing customers and to explorenew markets for new customers. We have been undertaking the following channels of marketingactivities:

Direct marketing activities

We contact our target customers mainly through our sales network. We meet withour customers directly and promote our products to obtain orders from them. Our salesteam closely communicate with our customers in order to understand their needs andresolve their issues on the spot. These include regular visits to customers’ offices to collectfeedback on product quality and provide after-sales services in order to maintain andimprove our customer relationships.


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Participation in exhibitions and trade fairs and organising site visits

We participated in various domestic and international exhibitions and trade fairsand furniture exhibitions such as the Asia International Furniture Material Expo. and theChina International Furniture Fair (Guangzhou) during the Track Record Period. We tookthese opportunities to keep abreast of market developments and trends in the wood-basedpanel and furniture industries, to promote our products and brand and to meet potentialcustomers.

Customers

During the Track Record Period, we manufactured and supplied particleboards to over[600] customers. Our customers include domestic home or office furniture manufacturers, sportequipment manufacturers, and wood-based panel processors and traders. We did not enter intoany distributorship, franchising or consignment arrangements with the customers during theTrack Record Period. Our ten largest customers were mainly home or office furniture and sportequipment manufacturers principally engaged in the manufacture of home or office furnitureand sport equipment (such as table tennis tables) for sale in the China market or export tooverseas markets including the U.S., Canada, Australia and Europe. Their respective principalplaces of operation covered, amongst others, Guangdong, Fujian and Zhejiang provinces in thePRC. The approximate breakdown of our sales by customer type during the Track Record Periodis as follows.

For the financial yearended 31 December

For the six monthsended 30 June

2013Customer type 2011 2012HK$’000 % HK$’000 % HK$’000 %

Furnituremanufacturers 76,805 50 83,879 51 38,216 55

Wood-based panelprocessors 27,441 18 24,117 15 8,335 12

Traders 25,981 17 28,147 17 11,606 17Sport equipment

manufacturers 6,123 4 10,701 7 3,994 6Other 16,718 11 16,139 10 7,162 10

Total 153,068 100 162,983 100 69,313 100

During the Track Record Period and up to the Latest Practicable Date, [we have notencountered any material customer complaints on our product quality.]

For the years ended 31 December 2011 and 2012 and the six months ended 30 June 2013,sales to our ten largest customers accounted for approximately [30.2]%, [37.6]% and [48.8]% ofour total revenue for the period, respectively; sales to our five largest customers accounted forapproximately 20.5%, 24.2% and 32.8% of our total revenue for the period, respectively; andsales to our largest customer accounted for approximately 9.3%, 10.5% and 11.4% of our totalrevenue respectively during the same periods.


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Traders

As at [the Latest Practicable Date], [●] out of [●] trader customers were located inGuangdong Province while the remaining [●] trader customers were spread over four otherregions in the PRC covering Shanghai, Fujian Province, Jiangsu Province and Zhejiang Province.The table below sets out our revenue generated from traders customers (by province) for each ofthe two years ended 31 December 2011 and 2012 and for the six months ended 30 June 2013:

Year ended 31 December Six months ended2011 2012 30 June 2013

No. oftrader

customers HK$’000% of

revenue

No. oftrader


revenue

No. oftrader


revenue

Guangdong Province 27 14,089 9.2 30 14,403 8.8 15 7,410 10.7Shanghai 6 2,733 1.8 11 6,972 4.3 5 1,989 2.9Fujian Province 6 4,527 3 4 289 0.2 2 136 0.2Jiangsu Province 1 111 0.1 – – – – – –Zhejiang Province 3 4,521 3 6 6,483 4 4 2,071 3

Total 43 25,981 17.0 51 28,147 17.3 26 11,606 16.7

Selection of our trader customers

We have adopted a uniformed approach on the selection and assessment of our potentialcustomers, including trader customers, prior to starting business relationship with them. Fordetails, please refer to the paragraph headed “Sales” in this section of the [●].

Sales agreements

Like all our other customers, we may enter into annual or semi-annual framework salesdocuments with some of our trader customers, and purchases will only be agreed and confirmedby purchase orders. The duration of our framework sales documents and purchase orders rangefrom [●] months to [●] months during the Track Record Period.

The framework sales documents typically specify the payment methods and method ofdelivery (among others) for the intended purchases within the term of these documents. There isno termination clause or right-of-return clause. During the Track Record Period, we have notexperienced any product return by our trader customers.

We have no control over the on-sale of our particleboard products. Neither do theframework sales documents nor the purchase orders indicate any restriction or condition on theon-sale of our particleboard products. There is no obligation on the part of our trader customersin relation to sales and inventory reports and estimates, sales and expansion target,geographical and other exclusivity, and sales returns in relation to the on-sale of ourparticleboard products.


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The selling price of our particleboard products supplied to our trader customers asprescribed in the framework agreements and purchase orders is determined on the same basesfor those supplied to our other customers. For details on our pricing policy, please refer to theparagraph headed “Pricing” in this section of the [●].

Our trader customers, like our other customers, settled the payment through banktransfers or bank acceptance notes. The credit period we granted to our trader customers variedfrom [●] days to [●] days during the Track Record Period. For further details, please refer to theparagraph headed “Customers payment methods” in this section of the [●].

Revenue recognition

Revenue from the sale of goods to our trader customers is recognised when the goods aredelivered and titles have passed, which is the same accounting policy applied to our othercustomers.

We maintain a stable business relationship with our customers. We have developedbusiness relationships with our top ten largest customers for the financial year ended 31December 2012 for up to [6.8] years and on average of approximately [3.7] years as at [30September 2013]. We have a team of [10] sales and marketing personnel [as at 30 September2013] to closely interact with our customers throughout the entire sales cycle. Our Directorsbelieve our customers recognise our product quality, stable supply, short production lead timeand timely delivery, and such recognitions help preserve the loyalty of our customers andreinforce commitment from our customers to place further purchase orders with us.

We usually do not enter into long-term sales contracts with our customers in order tomaintain flexibility in terms of selling price as it fluctuates depending on market conditions.Our sales are confirmed when our customers place purchase orders with us. For new customers,in order to manage our exposure to the potential credit risks, our sales personnel conductbackground checks against such potential customers, such as requiring them to provide us withvalid business licences, checks on their credibility and sales performance in the region in whichthey carry on their businesses and requesting than to make a prepayment before purchases.After we have established stable business relationships with these new customers, we willreassess their credit risk based on their historical payment records.

[As at the Latest Practicable Date, none of our Directors, their respective associates or ourShareholders had any interest in any of our five largest customers during the Track RecordPeriod. Our Directors confirm that the top five largest customers of our Group are allIndependent Third Parties,] and during the Track Record Period, we did not have anysignificant dispute with or had any major cancellation of orders by our customers nor did weexperience any material sales returns.

Pricing

We generally determine the selling price of our particleboard products by adding a marginto the estimated cost of sales, after having taking into account other factors including, amongstothers, the prevailing market price and the prevailing demand and supply sentiments in themarket. To further enhance our pricing strategy, we established a pricing committee in


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September 2013 which comprises our Directors and senior management to discuss and reviewquarterly our pricing strategies with reference to, including but not limited to, estimated costsof sales, prices of raw materials, targeted profit margin, market demand on particleboards andrelevant government policies. Our sales and marketing team prepares a monthly reportregarding particleboards market information and the pricing committee reviews product pricesevery month. It is our policy to pass onto our customers any price fluctuations in raw materials,particularly Residual Wood.

Our resources management department is responsible to collect Residual Wood marketinformation and analyse the market price of Residual Wood for formulating our Residual Woodpurchasing strategies. When the resource management department received a noticeable marketpressure for the increase of Residual Wood procurement price, the resource managementdepartment notifies our Directors. The resource management department will then negotiatewith the existing Residual Wood suppliers for a mutually agreed Residual Wood procurementprice, and after a consensual decision amongst our Directors and the senior management to anacceptable procurement price is made, the resource management department notifies ourResidual Wood suppliers approximately 2 days in advance for a new procurement price. OurDirectors estimate the timing difference between the increase in the cost of our raw materialsand the subsequent increase in our particleboard selling price is approximately 2 months, as itwould take approximate such time to deplete existing inventory which carries a lower cost. Onthe other hand, our sales and marketing team notifies our customers approximately 7 days inadvance of a raise in our particleboard selling price such that our customers can plan theirpurchases. During these 7 days, our customers can still enjoy the benefit to purchase ourparticleboards at the existing price. Our Directors consider that by providing this grace periodfor our customers to purchase our particleboards at a lower price, our customers will be moretolerable to our price increase, and thus will continue their purchase of our particleboardssubsequently.

To the best knowledge and belief of our Directors, we are not aware of any existing legal orregulatory controls in the PRC which regulate the price of particleboard products and we havefull discretion in setting the price of particleboard products. The average selling price per m3 ofour particleboards for the financial year ended 31 December 2012 increased by approximately9.8% from that for the financial year ended 31 December 2011.

Customers payment methods

Our customers normally settle accounts receivables with us by bank transfers or bankacceptance notes. The payment method and credit period are agreed after taking intoconsideration our customers’ known financial position, credit track record, purchasing quantityand future business prospects. Our senior management regularly review the credit terms givento our customers and identify credit risky customers. During the Track Record Period, the creditperiod we granted to our customers generally varied from 30 to 90 days.

Our accounting department is responsible for preparing our sales invoice immediatelyafter the delivery of our products to our customers, and monthly customer account statementsfor our customers, as well as monitoring the settlement status of our accounts receivables. In theevent that there is an overdue balance, our sales and marketing personnel or senior managementwill liaise with our customers to seek prompt settlement of the overdue balances or tounderstand our customers’ cash flow position in order to arrange a settlement solution.


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During the Track Record Period, we did not have general provisions for impairment oftrade and bills receivables. Trade and bills receivables are evaluated on an individual basis withspecific provision for impairment of trade and bills receivables made where necessary. Weconsider payment history, recent news and information regarding the specific customer as basesfor our assessment of the recoverability of the outstanding trade and bills receivables. OurDirectors confirm that [we did not] experience any impairment on receivables from ourcustomers during the Track Record Period and up to the Latest Practicable Date.]

Logistics

During the Track Record Period, we outsourced the entire transportation function for thedelivery of our products to customers in China to four Independent Third Party logistics serviceproviders. These logistics service providers are responsible for arranging transportation andensuring that our products are delivered to our customers’ destination in good condition. Ourlogistics service providers are liable for any damage to our particleboard products duringtransportation and any economic loss caused by the delay of delivery to our customers. Throughthese arrangements, we are able to reduce our capital investment in logistics and reduce the riskof any liability or loss during transit.

Under the most recent agreements entered into between the logistics service providersand us, the freight rate is primarily fixed for the period from 2012 to 2015. The freight rate isapproximately RMB65 per m3 for the deliveries to the Pearl River Delta economic region,approximately RMB180 per m3 for the deliveries to the Yangtze River Delta economic region,and approximately RMB145 per m3 for the deliveries to the Fujian province. [Our Directorsconfirm that during the Track Record Period, we have not experienced any major deliverycapacity limitation from the logistics service providers. Our Directors consider that the logisticsservice providers will have sufficient delivery capacity to cope with any increase in sales anddeliveries of our products as a result of our increased production capacity under the newproduction line.]

PROCUREMENT

Raw materials

As at [30 September 2013], we had a team of [4] procurement personnel responsible for theprocurement of raw materials, including assessing the quality of raw materials, negotiating theterms of our purchases, placing purchase orders, following up on purchase orders, andarranging for the warehousing of raw materials. Our primary raw materials used for theproduction of particleboards include (i) Residual Wood; and (ii) chemicals, which include,amongst others, urea and formaldehyde.


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Residual Wood

Residual Wood includes unprocessed undersized log, wood branches, wood off-cuts andresiduals, forestry residuals and wood wastes from other industrial manufacturing andprocessing activities. Pictures of Residual Wood we use are illustrated below:

tree trunk wood residues

The Residual Wood that we use should be distinguished from the tree trunks on which thePRC government implements a forestry cutting quota system. Whilst Residual Wood includesthe by-products from the cutting of tree trunks, there are also other sources of Residual Woodsuch as dead and dying trees, fallen branches and tree tops and other wood wastes from otherindustrial manufacturing and processing activities. The Residual Wood we use is not subject tothe forestry cutting quota system.

Residual Wood is our major raw material for the production of particleboards. Ourresources management department is responsible for (i) formulating Residual Wood purchasingstrategies to manage the fluctuations in Residual Wood prices, (ii) assessment of thequalifications of Residual Wood suppliers, (iii) procurement of Residual Wood, (iv) evaluationof the performance of Residual Wood suppliers, and (v) liaison with the Forestry Bureau ofRenhua County. The resources management department collects Residual Wood marketinformation, analyses the market price of Residual Wood and formulates Residual Wood


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purchasing strategies for senior management to consider. The resources managementdepartment also maintains alternative sources of Residual Wood Suppliers to allow us todetermine better prices. In addition, we have entered into framework supply agreements with 3Independent Third Party forestry companies and an arrangement by way of letters of intentwith Shaoguan Hongwei Forestry and Shaoguan Hongji Forestry to supply Residual Wood in2014, which helps us to manage the fluctuations in Residual Wood prices and supply. For details,please refer to the paragraphs headed “Business plans to cope with the new production line” inthe “Business” section of the [●]. The resources management department has 3 employees, andis headed by Ms. Liu Yan, who is also the Vice general manager of our Company. The resourcesmanagement department would ensure the Residual Wood purchased by us are from legitimatesources through established standard procedures, details of which can be found under theparagraph headed Residual Wood suppliers” in the “Business” section of this [●].

For the financial years ended 31 December 2011 and 2012 and the six months ended 30June 2013, we purchased approximately HK$[74.4] million, HK$[60.6] million and HK$[26.5]million of Residual Wood respectively. Our Directors consider that the cost of Residual Woodaccounted for approximately [45]%, [49]% and [54]% of the total cost of producingparticleboards in the financial years ended 31 December 2011 and 2012 and the six months ended30 June 2013, respectively. Our Directors estimate that currently most of our Residual Wood isprocured from the local area with a proximity of 80 km from our production base in Renhuacounty. The average Residual Wood purchase price we paid in the financial year ended 31December 2012 increased by approximately 15% from that in the financial year ended 31December 2011. In line with industry practice, our Directors generally manage fluctuations inResidual Wood cost primarily by passing on such increases in Residual Wood cost onto ourcustomers, as the selling price of our particleboards is usually determined, amongst others, byadding a margin to the estimated cost of sales.

We control the quality of Residual Wood by visual checks at the time of delivery. ResidualWood that is rotten or covered with mosses or that cannot meet our requirements would bescreened out. Our management considers that our Residual Wood can be kept at our open yardfor a period of 6 months to 1 year. We intend to maintain our inventory of Residual Wood toallow water moisture from the Residual Wood to evaporate naturally to a lower level and also tomaintain our supply of Residual Wood.

Chemicals

Chemicals are mainly used to produce adhesive for gluing particles to formparticleboards. The chemicals we purchase are mainly urea and formaldehyde. Most of thechemicals we purchase are products produced in accordance with PRC national standards.Specifically, the urea we procure is mainly produced in compliance with GB2440-2001 PRCnational standard with amongst others, nitrogen concentration of at least 46.3%, and theformaldehyde we procure complies with the GB/T9009-1998 national standard with, amongstothers, formaldehyde concentration of at least 36.5%. We acquire chemicals all year round.There is no seasonality factor in the supply of chemicals. To control our cost, we closely monitorthe chemicals market prices. For the financial years ended 31 December 2011 and 2012 and thesix months ended 30 June 2013, we purchased approximately HK$37.0 million, HK$35.3 millionand HK$[13.1] million of urea and formaldehyde respectively. Our Directors consider that thecost of urea and formaldehyde accounted for approximately 31%, 27% and 26% of the cost of


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particleboards produced in the financial years ended 31 December 2011 and 2012 and the sixmonths ended 30 June 2013, respectively. Over the Track Record Period there was no significantincrease or decrease in the purchase prices of urea and formaldehyde we paid.

Our suppliers

Most of our suppliers are located in the PRC. For the financial year ended 31 December2011 and 2012 and the six months ended 30 June 2013, our total purchases of raw materialsamounted to approximately HK$123.8 million, HK$103.0 million and HK$49.3 million,respectively. The total purchase of raw materials for the six months period ended 30 June 2013included the purchase of steel for the construction of the new production line in an aggregateamount of approximately HK$7.2 million. Such amount was excluded from the calculation ofcost of sales for the period ended 30 June 2013. For the same periods, our single largest supplieraccounted for approximately 7.7%, 6.9% and 13.8% of our total purchases of raw materials,respectively, and our five largest suppliers accounted for approximately 22.5%, 21.6% and 39.3%of our total purchases of raw materials, respectively. We have maintained business relationshipswith some of our top ten suppliers for the financial year ended 31 December 2012 for up to 7years. We believe our stable business relationship with our suppliers is one of our strengthswhich allows us to maintain our stable supply of raw materials. We have establishedcomprehensive internal control procedures to govern the purchase of raw materials.

Residual Wood suppliers

For each of the financial years ended 31 December 2011 and 2012, we had more than 40Residual Wood suppliers. Our Residual Wood suppliers are mainly individual farmers. As of theLatest Practicable Date, we have been in, on average, approximately 3.4 years and 3.2 yearsbusiness relationship with our top 10 largest Residual Wood suppliers for the financial yearended 31 December 2011 and 2012 respectively. Our top 10 largest Residual Wood suppliers forthe financial years ended 31 December 2011 and 2012 and the six months ended 30 June 2013contributed to approximately [35]%, [37]% and [82]% of our total purchase of Residual Wood forthe period respectively. The reason for the increase from 2012 to 2013 is that we accepted a fewnew suppliers during the 1st half 2013. Amongst the new suppliers, there is one supplier whosupplied Residual Wood to us in an aggregate of approximately RMB5.5 million. Ourproduction base is surrounded by natural wood resources and our Directors estimate that 95%of our existing Residual Wood suppliers are located in Renhua county within 80 km radius fromour production base. During the Track Record Period, we did not experience any Residual Woodsupply disruption.

To further ensure that we purchase Residual Wood from legitimate sources, we haveestablished and adopted the following standard procedures with respect to selecting legitimateResidual Wood suppliers. As advised by the Forestry Bureau of Renhua County and as furtherelaborated under the section headed “Laws and Regulations”, the wood transport permit servesas a proof that the relevant wood is originated from legitimate sources. These standard


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procedures are therefore developed with a view to ensuring our Residual Wood supplierspossess the relevant licences and permits, in particular the wood transport permits. Ourstandard procedures are as follows:

1. Our resources management department is responsible for the assessment of eachResidual Wood supplier to ensure that the supplier meets our requirements and,importantly, has the relevant licences/permits for tree cutting and woodtransportation;

2. The district supervisor of our resources management department is responsible forchecking the necessary licences/permits for making a preliminary assessmentwhich include, among others (i) a properly typed and signed tree cutting licencewith information of the Residual Wood suppliers and official seal from the relevantforestry bureau authority, (ii) a properly typed and signed wood transportationpermit with information of the Residual Wood suppliers and the wood material intransportation and official seal from the relevant forestry bureau authority, (iii)business licence, and (iv) personal identification document;

3. If the tree cutting licence and wood transportation permit are not available forinspection, our resources management department will confirm with the ForestryBureau of Renhua County to ensure that particular supplier is holding relevantlicences/permits for supplying Residual Wood to us;

4. After the district supervisor conducts preliminary assessment on the Residual Woodsupplier, he will carry out on-site inspection of the supplier. The district supervisorwill then prepare an assessment evaluation report to the manager of the resourcesmanagement department for further assessment;

5. Assessment meetings are held among the department head, manager, supervisorand relevant staff to decide whether to accept or reject each Residual Wood supplier;

6. Once a Residual Wood supplier is accepted, relevant information will be input intothe computer master file of suppliers for future management and reference;

7. An annual assessment on each Residual Wood supplier is also conducted by theresources management department, raw material inventory department andproduction department to review and re-assess the qualification of each ResidualWood supplier to ensure it is consistent with our requirements. During such annualassessment, our resources management department will further make enquiry withthe Forestry Bureau of Renhua County to ensure that such supplier possess therelevant tree cutting licence and/or wood transportation permit;

8. If it comes to the attention of the resources management department that certainResidual Wood suppliers have been dis-qualified at any time, we will either (i)reduce our purchase orders, (ii) amend the terms of the supply agreement, or (iii)discontinue to order from such supplier, depending on the severity ofdis-qualifications; and

9. If we cannot obtain the relevant tree cutting licence and wood transportation permitfrom Residual Wood supplier to prove that the Residual Wood supplies are fromlegitimate source, we will approach the Forestry Bureau of Renhua County forconfirmation before we purchase from such supplier.


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During the assessment process, if we are in doubt about the legality of thelicences/permits and documents submitted to us by the Residual Wood suppliers, we will seekthe advice and confirmation from the Forestry Bureau of Renhua County, which is responsiblefor supervision of and granting of licences/permits for tree cutting and wood transportation inRenhua County. The Forestry Department of Guangdong Province and the Forestry Bureau ofRenhua County have confirmed that, during the Track Record Period, Hongwei (Renhua) haspurchased its Residual Wood from legitimate sources.

Our Residual Wood suppliers who are individual farmers generally enter into annualsupply agreements with us which are binding as to the price and the minimum supplies ofResidual Wood for the year and they generally supply more Residual Wood than the amountindicated as minimum supplies. The price in these supply agreements are determined based onthe prevailing market price at the area where Hongwei (Renhua) is located. Where there arefluctuations in the market price during the year, we are entitled to revise the price accordingly.

For the financial year ended 31 December 2011, our top 20, out of more than 40, ResidualWood suppliers, in aggregate, committed to supply approximately 138,000 tons of ResidualWood under the corresponding framework supply agreements and they had, in aggregate,supplied approximately 147,000 tons of Residual Wood during the year, representingapproximately 83% of our Residual Wood usage for the financial year ended 31 December 2011.For the financial year ended 31 December 2012, our top 20, out of more than 40, Residual Woodsuppliers in aggregate committed to supply approximately 82,000 tons of Residual Wood underthe corresponding framework supply agreements and they had, in aggregate, suppliedapproximately 98,000 tons of Residual Wood during the year, representing approximately 61%of our Residual Wood usage for the financial year ended 31 December 2012.

We acquire Residual Wood all year round. Our Residual Wood suppliers are responsible todeliver the Residual Wood from their wood farm to our production base. The supplies ofResidual Wood tend to be higher during the autumn and winter seasons as the Residual Woodsuppliers would focus on plantation and harvest of crops and other agricultural products, butlower during the spring and summer seasons as the rain in such seasons make it difficult forwood cutting and transportation. We have a log yard for the storage of Residual Wood. As of [31December 2012], our Residual Wood inventory amounted to approximately HK$17.5 million,which our management considers sufficient for the particleboard production for the coming 3months. We intend to keep inventory of Residual Wood to allow the water moisture from theResidual Wood to evaporate naturally to a lower level and also to reduce the potential risk ofsupply disruption.

The price of Residual Wood we pay is mainly referenced to the reasonable market pricearound the region of our production base at the time of delivery. Our Directors believe that wecurrently do not see severe competition in the demand of Residual Wood resources in our area.Our payment period for Residual Wood generally varies from 30 days advanced payment to 30days credit period after delivery. Residual Wood suppliers are normally paid by bank transfers.

We have also entered into an arrangement by way of letters of intent with ShaoguanHongwei Forestry and Shaoguan Hongji Forestry, whereby they have agreed to give priority tosupply Residual Wood to us, subject to their respective available Residual Wood inventories.Please refer to the “[●]” section of this [●] for more details. Our Directors consider that the


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terms of the arrangement by way of letters of intent with Shaoguan Hongwei Forestry andShaoguan Hongji Forestry are different from the terms of the existing Residual Wood supplyagreements in that the price of each purchase under an arrangement by way of letters of intentwith Shaoguan Hongwei Forestry and Shaoguan Hongji Forestry shall be determined withreference to the prevailing market price at the area Hongwei (Renhua) is located which shall notbe higher than the wholesale price at which Shaoguan Hongwei Forestry and Shaoguan HongjiForestry supply similar Residual Wood to other customers in such area. However, our ResidualWood suppliers who are individual farmers generally enter into annual supply agreements withus, which are binding as to the exact price and the minimum supplies of Residual Wood for theyear. Where there are fluctuations in the market price during the year, we are then entitled tonotify these farmers to revise the price accordingly.

Chemical suppliers

In each of the financial years ended 31 December 2011 and 2012, we had over 20 chemicalsuppliers for urea and formaldehyde. In the six months ended 30 June 2013, we had more than 10chemical suppliers for urea and formaldehyde. With such a large number of suppliers, we areable to enhance our bargaining power on price, avoid over-reliance on a single chemicalsupplier and reduce risk on disruption of supply of chemicals. Most of our chemical suppliersare local PRC chemical producers in Shaoguan city, Guangdong province, Hunan and Jiangxiprovinces.

To ensure our annual supply of chemicals, we have entered into annual framework supplyagreements with all of our top five chemical suppliers for the financial years ended 31 December2012 and for the six months ended 30 June 2013. The quantity of chemicals indicated in eachframework supply agreement is an indication of intended procurement for the year and we arenot legally bound to take full delivery of the indicated quantity. In order to maintain flexibilityin terms of pricing, we generally do not fix prices in our annual framework supply agreements.We may enter into individual purchase orders with the chemical suppliers when we place orderswith them. The individual purchase order specifies the price and the quantity of chemicals weprocure. We believe this arrangement allows us to ensure the stable supply of chemicals at areasonable price.

The price that we pay for the chemicals is usually at market price. The delivery time forprocuring chemicals from our major suppliers, usually ranges from three to five days afterplacement of order. Credit period for our payment varies from 30 to 90 days. Our chemicalsuppliers are usually paid by bank transfers or bank acceptance notes.

During the Track Record Period and up to the Latest Practicable Date, we did notexperience any major difficulty in sourcing for, or encounter any major disruption to ourbusiness as a result of shortage of raw materials. As confirmed by the Directors, our top fiveResidual Wood suppliers and chemical suppliers, during the Track Record Period are allIndependent Third Parties.

INVENTORY

Our inventory primarily consists of raw materials and particleboard finished goods. As at31 December 2011 and 2012 and six months ended 30 June 2013, our inventory amounted toapproximately HK$29.8 million, HK$32.2 million and HK$30.8 million, respectively.


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Inventory policy on Residual Wood

We have implemented an inventory policy on Residual Wood with the primary objectiveto ensure adequate level of Residual Wood for our particleboard production. During the TrackRecord Period and up to the Latest Practicable Date, we have not engaged in any Residual Woodtrading activities.

In the beginning of every year, our management establishes an annual Residual Woodpurchasing plan which addresses the amount of Residual Wood we shall acquire for each monthof that particular year. In developing the plan, our management take into consideration of (i) theactual Residual Wood purchasing statistics and trends for the previous year, (ii) the ResidualWood inventory in the beginning of that particular year, and (iii) our Directors and seniormanagement’s estimates on the demand of our particleboard for each month of the year and ourproduction schedule to meet the demand. Our Directors and senior management primarilyestimate the demand of our particleboards based on (i) framework sales documents enteredwith our customers, (ii) our understandings of the prospective demands from our customers,and (iii) the particleboard market information report prepared by our sales and marketing team.Once the annual Residual Wood purchasing plan is finalised, we then liaise with our ResidualWood suppliers from various regions, establish understandings on supply quantity and enterinto respective annual framework supply agreements with the suppliers. We have adopted thefollowing measures to reduce any material variance between the actual Residual Woodpurchasing to the annual purchasing plan:

(i) we timely adjust our purchasing plans in case of any material changes in the marketconditions which affect our Residual Wood purchases or our particleboard sales;

(ii) we monitor our inventory records through regular reviews and physicalinspections; and

(iii) we monthly review the inventory levels which is conducted by the resourcesmanagement department to ensure sufficiency of supply for production in thecoming two to three months.

Our resources management department, sales and marketing department and productiondepartment conduct quarterly meeting to review the master purchasing plan see if anyadjustment is required.

Inventory control

We have established proper warehouse management procedures and guidelines whichcover various aspects such as incoming, outgoing and storage of our raw materials and finishedgoods inventories.

Upon receipt of raw materials, we have personnel responsible to perform testing ondelivery to ensure the raw materials we receive meet our required quality specifications andstandards. The accepted raw materials are then taken for stocking and the actual quantity of theraw materials are recorded in our inventory system. Forms must be filled in by staff using theraw materials for production. Dedicated personnel are responsible for verifying the quantityand value of the incoming and outgoing raw materials in the inventory system.


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We perform sample tests on various aspects of the particleboard quality standards inrespect of the particleboards we produce. Only particleboards that meet all quality requirementsand standards can be graded and packed for inventory. Every batch of accepted particleboardinventory is specified with, amongst others, its quality standards, quality grade, quantity, batchnumber and production date, and the information on every batch is recorded in our inventorysystem. Generally, we maintain an inventory of our particleboard products to meetapproximately a minimum of one to two month’s demand. Whenever our inventory ofparticleboard for any particular specification is low or when we anticipate receiving more salesorder for products of that particular specification, our production team will commenceproducing particleboards of that specification to replenish our inventory. Every outgoing batchof our particleboard inventory is recorded in our inventory system and dedicated personnel areresponsible for verifying the information.

Our inventories are measured at the lower of cost and net realisable value. Cost ofinventories is determined on a weighted average cost basis. Stock takings of the inventory areconducted at least once a year. There was no write-down of inventories for the financial yearsended 31 December 2011 and 2012 and the six months ended 30 June 2013. We did not make anygeneral provision for inventories during the Tack Record Period.

COMPETITION

The particleboard manufacture industry has a relatively high entry barrier. According tothe Shenzhen Zhongshang Report, construction of large-scale particleboard productionfacilities and manufacturing equipment supplied by domestic manufacturers requires abundantcapital in the early stages. If a new entrant would like to introduce advanced overseasmanufacturing equipment, the capital investment would be more substantial. In addition, theLand Use Project Restrictions Catalogue (2012) (限制用地項目目錄(2012)) issued by the Ministryof Land and Resources of the PRC (中華人民共和國國土資源部) and National Development andReform Commission of the PRC (中華人民共和國國家發展和改革委員會) has imposed a minimumproduction capacity requirement for the construction of new particleboard production line.Thus our industry has a relatively high entry barrier.

The particleboard industry has been growing steadily in the PRC over 2008 to 2012.According to the Shenzhen Zhongshang Report, the production volume increased fromapproximately 9.1 million m3 in 2008 to approximately 12.9 million m3 in 2012, representing aCAGR of approximately 9.1%.

We have competitive advantages in production technology, equipment and capacity.According to the Shenzhen Zhongshang Report, the PRC particleboard market is quitefragmented in terms of production capacity due to numerous manufacturers and it isanticipated that small scale production lines will be eliminated. According to the ShenzhenZhongshang Report, [as at [●], there are only 11 particleboard manufacturers, including us, inthe PRC that have installed or are installing Dieffenbacher ’s press systems; and there are only14, 4 and 2 particleboard production lines in the PRC, Guangdong province and Fujian provincerespectively with annual production capacity of 200,000 m3 or more which have overseasimported equipment installed or in the process being installed. Our new production line has anapproved particleboard annual production capacity of approximately 220,000 m3 and themachines we purchased from Dreffenbacher are the latest particleboard production machinesdeveloped by it.


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According to our Directors, our primary competitions are other particleboardmanufacturers located in Guangdong and Fujian provinces in the PRC given that customers ingeneral will take into consideration the transportation cost involved.

According to the Shenzhen Zhongshang Report, as at Latest Practicable Date, there areonly 2 other particleboard manufacturers with particleboard annual production capacity of over200,000 m3 in Shaoguan city, while our Directors confirm that these 2 particleboardmanufacturers do not have operation at Renhua county. Although we face direct competitionfrom these 2 particleboard manufactures, our founder and Controlling Shareholder, Mr. Wong,has approximately [20] years of experience in the particleboard manufacturing and salesbusiness, while one direct competitor was established only in 2009, and the other directcompetitor used to produce medium density fiberboards and is just transforming to produceparticleboards.

We may also face competition from global and other PRC manufacturers who maysuccessfully develop and supply particleboard products that could comply with theParticleboard PRC GB Standards and Particleboard International Standards.

Our Directors believe we are capable of competing effectively with our competitors basedon, amongst others, our quality, advanced technology and equipment, production scale, ouraccumulated years of experience in the particleboard industry, our experienced managementteam, established relationships with our customers and our stable supply of Residual Wood.

INTERNAL CONTROL

Tax compliance

In order to ensure the compliance with all relevant tax rules and regulations injurisdictions where we operate, being Hong Kong and the PRC, we have implemented strictinternal control measures with reference to all relevant tax and regulations of Hong Kong andthe PRC.

[We have appointed tax representative or consultant to handle our tax matters in HongKong and the PRC.] In addition, we have [3] personnel responsible for monitoring compliancewith the relevant tax rules and regulations, reviewing tax filings prior to submission to therelevant government authorities in the PRC and reviewing the latest rules and regulations fromthe website of the relevant tax authorities regularly [as well as advices from the taxrepresentative/consultant.] If there are any relevant amendments and updates, they will alsoprovide a briefing to responsible staff for their better understanding thereof.

Compliance with all relevant rules and regulations

In order to ensure our ongoing compliance with all relevant rules and regulations of HongKong and the PRC, [we have appointed professional advisers including certified publicaccountants, [tax consultants] and legal advisers.] Other compliance issues relating to ouroperation including, but not limited to, tax compliance, financial reporting to governmentdepartments and company secretarial matters are handled by Mr. Liu Jiayong, an ExecutiveDirector, Ms. Huang Xiuyan, an Executive Director and our compliance officer and Ms. Leung


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Wai Ling, Wylie, our company secretary, in accordance with the direction of our Board andadvice of our professional advisers. We also require our Directors and senior management toattend various seminars and training classes on relevant rules and regulations organised bylocal authorities and professional organisations.

Compliance with the code of conduct

To ensure compliance with our code of conduct relating to, among other things,environmental, labour, health, safety and confidentially matters, we have implemented thefollowing initiative:

i. members of our management staff are required to sign on a declaration to confirmtheir understanding of our code of conduct and all employees are required to followthe rules set out in the employee handbook which sets out our code of conduct;

ii. department head would monitor the performance of each staff, and may imposepenalty or terminate the employment of any staff who breach the code of conduct;

iii. we have established relevant policies and internal control procedures to safeguardthe confidentiality and propriety information of our production process, suppliersand customers; and

iv. we have provided to our staff internal trainings relating to the particleboardindustry.

INTELLECTUAL PROPERTY

We regard trademarks, trade secrets and other intellectual property rights as ourimportant assets. As of [the Latest Practicable Date], we have registered [2] trademarks in thePRC, and applied for the registration of [3] trademarks in the PRC and [3] trademarks in HongKong. Details of which are set out in the paragraphs headed “Our intellectual property rights”in Appendix V to this [●].

We have registered [2] domain addresses as of [the Latest Practicable Date]. Details ofwhich are set out in the paragraph headed “Our intellectual property rights” in Appendix V tothis [●].

PROPERTY INTERESTS

Real properties

As at the Latest Practicable Date, we owned buildings, structures and construction inprogress located in Da Ling Industrial Park, Renhua Town, Renhua County, Shaoguan City,Guangdong Province, the PRC. As at 30 September 2013, the buildings have a total gross floorarea of approximately 39,222.49 sq.m. All real estate title certificates relating to the ownership ofthese buildings have been obtained. We have other various buildings and structures under


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construction, which are excluded in the measurement of the total gross floor area. All relevantcertificates relating to the construction of these buildings and structures have been obtained.The breakdown of the gross floor area of the buildings currently in use are as follows:

Gross floor area(sq.m.)

Factory 33,527.70Warehouse 4,745.09Office building 949.70

Total 39,222.49

As at the Latest Practicable Date, we held land use rights in 6 parcels of land at Da LingIndustrial Park, Renhua Town, Renhua County, Shaoguan City, Guangdong Province, the PRC(中國廣東省韶關市仁化縣仁化鎮大嶺工業園) with a total site area of approximately 254,570.60sq.m., for which the relevant land use rights certificates have been obtained.

Other property interests

Save as disclosed in this section, as at the Latest Practicable Date, there is no leasearrangement of land use rights or buildings by other party to Hongwei (Renhua). Details of ourproperty interests are set out in “Appendix III — Property Valuation” to this [●].

EMPLOYEES

As at [30 September 2013], we had a total of [187] full-time employees. The following tablesets forth the number of employees by function as at [30 September 2013].

DivisionNumber ofEmployees

Director and senior management [7]Sales, marketing, procurement and resources management [15]Production, research and development and quality assurance [124]Accounting, administration, human resources, warehouse and others [41]

Total [187]

Remuneration

During the Track Record Period, the remuneration payable to our employees includedfees, salaries, retirement benefit scheme contributions and other benefits. For the financial yearended 31 December 2011 and 2012 and the six months ended 30 June 2013, the approximatelyHK$[6.6] million, HK$[8.1] million and HK$[3.6] million, respectively. We determine theemployee’s remuneration based on factors such as qualifications, duty, contributions and years


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of experience. The key principles of the remuneration policy are to remunerate employees in amanner that is market competitive, consistent with best practice and supports the interests ofShareholders. We aim to align the interests of our senior executives with those of shareholdersby remunerating senior executives through performance and long-term incentive plans inaddition to their fixed remuneration.

Employee training

With the aim to encourage our employees to continuously develop themselves by furthereducation, we provide our employees with in-house training relevant to their current roles oranticipated tasks in our Group. In particular, we provide our technicians and productionpersonnel with appropriate training to ensure that they are equipped with the requisitetechnical capabilities to operate the equipment and machinery. In addition, Dieffenbacher alsoprovides on-site training to our senior management, technicians and production personnel forthe new production line. Some of our Executive Directors and senior management receivedhigher education or attended training courses to ensure that they are equipped with relevantprofessional and technical knowledge. We value our employees as our assets in which we investour resources in order for them to make a greater contribution to our success.

Share Option Scheme

Our Company has conditionally adopted the Share Option Scheme in which certaineligible participants may be granted options to acquire Shares. Our Directors believe that theShare Option Scheme will assist in our recruitment and retention of quality executives andemployees. A summary of the principal terms of the Share Option Scheme is set out in thesection headed “Appendix V — Statutory and General Information” to this [●].

INSURANCE

Property insurance

Our Group maintains insurance coverage against the risk of loss and damage to [ourbuildings, equipment and inventories]. For the financial year ended 31 December 2011 and 2012and the six months ended 30 June 2013, the property insurance premium we paid amounted toapproximately HK$[71,000], HK$[159,000] and HK$[218,000], respectively. Our Group has [not]made any material claims on our property insurance during the Track Record Period and up tothe Latest Practicable Date.

Employee social insurance

We are required by the PRC Social Insurance Law to provide social insurance, includingbasic pension insurance, basic medical insurance, work-related injury insurance,unemployment insurance and maternity insurance to our employees in the PRC. For thefinancial year ended 31 December 2011 and 2012 and the six months ended 30 June 2013, theemployee social insurance premium we paid amounted to approximately HK$[191,000],HK$[319,000] and HK$[655,000], respectively. For further details of employee social insurance,please refer to the paragraphs headed “Non-compliance” in the “Business” section below.


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We are not required under the PRC law to maintain, and we do not maintain, businessinterruption insurance for any of our products. During the Track Record Period and up the theLatest Practicable Date, we did not receive any material claim from our customers and/or theircustomers relating to any liability arising from or relating to the use of our products. [We believethat our insurance coverage is adequate].

ENVIRONMENTAL PROTECTION

We are committed to conducting our operation in a manner that aims to comply with theapplicable environmental laws and regulations in each jurisdiction in which we operate. Pleaserefer to the section headed “Laws and Regulations” of this [●] for further information aboutthese laws and regulations. During the Track Record Period and [up to the Latest PracticableDate], aside from the use of formaldehyde and the relatively small amount of formaldehydeemission in our production in 2011 and 2012 which does not exceed the environmentalprotection standard under the applicable PRC laws, our production has not used or emitted anyharmful, restricted and toxic chemicals. [We have eliminated the formaldehyde emission in ourproduction in 2013 as a result of upgrade in production process.] The only waste product wedischarge is sanitary waste water, which is drained to domestic sewage. Such discharge ofsanitary waste water does not exceed the environmental protection standard under theapplicable PRC laws. We take steps to ensure that waste products produced as a result of ouroperations are properly disposed of so as to minimise adverse effects to the environment. Wehave [installed waste treatment facilities] and implement waste treatment procedures at ourproduction facilities to treat waste discharged during the production process. Our factory hasnot received any formal complaints from local residents and non-governmental organisationsalleging environmental issues during the Track Record Period [and up to the Latest PracticableDate]. There was no delay or disruption in our operations caused by any non-governmentalgroups or individuals in respect of environmental matters during the Track Record Period [andup to the Latest Practicable Date].

Hongwei (Renhua) is subject to PRC national and local environmental laws andregulations. Prior to Hongwei (Renhua)’s establishment, and the installation of the newproduction line, including the formaldehyde workshop, Hongwei (Renhua) was required toprepare the appropriate environmental impact assessment report and obtain approval on suchreport from the relevant PRC environmental protection authorities as well as pass theexamination of construction of environmental protection facilities (if any) by the environmentalprotection authorities. Hongwei (Renhua) has obtained, in all material aspects, the necessaryenvironmental impact assessment approvals and passed the examination of construction ofenvironmental protection facilities by the relevant environmental protection authorities.

In relation to the formaldehyde workshop, Hongwei (Renhua) is subject to environmentallaws and regulations relating to air emissions, effluent discharges and solid wastes. Hongwei(Renhua) will re-apply for a pollutant discharge permit in relation to the formaldehydeworkshop, which prescribes the types of pollutant allowed to be discharged, when theconstruction of the formaldehyde workshop is completed. Hongwei (Renhua) will be requiredto comply with air emissions standards for formaldehyde and methanol emission during itsformaldehyde production. Included as a part of the formaldehyde workshop, we will constructa fully enclosed chamber that will capture all possible discharge of formaldehyde and methanolemission and other air pollutants. The estimated environmental protection costs for theformaldehyde workshop will be approximately RMB150,000, which is mainly used for thebuilding of a storage pool to store formaldehyde in case of an accident and a cooler system.


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Based on the past experience of our management, the nature of our industry and futuredevelopment trends in this industry, our Directors believe that our current environmentalconservation facilities are adequate to satisfy the relevant environmental laws and regulationsand our Directors do not expect any major or significant expenditure to be incurred in thisrespect. During the Track Record Period, we incurred expenses related to environmentalprotection in the amount of HK$19,000, HK$55,000 and HK$28,000 respectively. We estimatethat the expenses of this nature will not exceed HK$[55,000] for the financial year ending 31December 2013.

As advised by the PRC Legal Advisers to the Company, based on the confirmation issuedby the relevant environmental protection authority, to the best of their knowledge, during theTrack Record Period and up to the [Latest Practicable Date], we have not breached any relevantmaterial environmental protection laws and regulations in the PRC which would result in anypenalty being imposed on us.

NON-COMPLIANCE

Social insurance

According to the PRC Social Insurance Law which became effective on 1 July 2011, thereare five basic types of social insurance, which include basic pension insurance, basic medicalinsurance, unemployment insurance, work-related injury insurance and maternity insurance.Both employees and employers make contributions for the first three kinds of insurances andonly employers make contributions for the latter two kinds. Prior to 1 July 2011, the InterimRegulations Concerning the Levy of Social Insurance Fees (社會保險費徵繳暫行條例)promulgated and implemented on 22 January 1999 by the State Council was applicable.

According to the abovementioned social insurance laws and regulations , if a companyfails to pay the full amount of social insurance as scheduled, the relevant authorities may orderthe company to make the social insurance payment or make up the difference within astipulated period and (i) in respect of any overdue social insurance incurred before 1 July 2011,if payment is not made within the stipulated period, it may levy a surcharge equal to 0.2% of theoverdue social insurance for each day from the date on which the social insurance becameoverdue; and (ii) in respect of any overdue social insurance incurred on or after 1 July 2011, itmay levy a surcharge equal to 0.05% of the overdue social insurance for each day from the dateon which the social insurance became overdue, and if payment is not made within the stipulatedperiod, the relevant authorities may impose a fine of one to three times the amount of overduesocial insurance on the company and require the company to make social insurancecontributions for its employees.

Our business operating and production base are located in the PRC and we are required toprovide social insurances to our employees in the PRC under the PRC laws and regulations. Dueto different levels of acceptance of the social insurances by employees, we did not make socialinsurances contributions for all employees of Hongwei (Renhua) during the Track RecordPeriod. As at 30 June 2013, the aggregate outstanding amount for social insurancescontributions for our employees of Hongwei (Renhua) was approximately HK$2.7 million,which the amount has been fully included as the social insurance provision in the financialstatements. In the event that we contribute the outstanding amount for social insurances within


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the time limit prescribed by relevant authorities, we may still be liable to pay the surcharge asadvised by our PRC Legal Advisers. Therefore, we estimated the potential surcharge that couldbe imposed to us for the Track Record Period amounted to approximately HK$717,000. We havemade the relevant social insurance contributions for all employees of Hongwei (Renhua) sinceMarch 2013.

[Up to the Latest Practicable Date, we have not received any complaint from ouremployees in the PRC for lack of contributions for social insurances.] The Social InsuranceRenhua Branch of Shaoguan City (韶關市社會保險仁化辦事處) and the Human Resources andSocial Security Bureau of Renhua County (仁化縣人力資源和社會保障局) issued confirmationson 9 April 2013 and 18 September 2013 respectively that Hongwei (Renhua) will not berequested to make the outstanding contributions and no administrative penalty will be imposedon Hongwei (Renhua). On 24 September 2013, a higher level of confirmation was obtained fromthe Human Resources and Social Security Bureau of Shaoguan City (韶關市人力資源和社會保障局) which states that (i) since March 2013 and up to the date of the confirmation, Hongwei(Renhua) has made the relevant social insurance contribution for all its employees and (ii) up tothe date of the confirmation, there had been no records of penalty, allegation, dispute, legalaction or complaints in relation to Hongwei (Renhua)’s social insurance issues. Pursuant to thePRC Social Insurance Law, social insurance administrative department of local people’sgovernment at county level or above is in charge of social insurance administration work oflocal administrative areas; other relevant departments of local people’s government at countylevel or above are in charge of relevant social insurance administration work within the scope oftheir respective duties. Further, as advised by the Human Resources and Social Security Bureauof Shaoguan City, the social insurance governing authorities at county level have the authorityto manage, supervise and inspect on issues related to social insurance in the local administrativearea. Based on the above, our PRC Legal Advisers are of the view that, the Social InsuranceRenhua Branch of Shaoguan City and the Human Resources and Social Security Bureau ofRenhua County as the governing authorities of social insurance in Renhua County have theauthority to issue the abovementioned confirmations and therefore, the likelihood thatHongwei (Renhua) will be requested to undertake the abovementioned legal consequences isrelatively low.

To the best of our Directors’ knowledge and belief after having made all reasonableenquiries, during the Track Record Period and up to the Latest Practicable Date, we have notreceived any request from the Social Insurance Renhua Branch of Shaoguan City, the HumanResources and Social Security Bureau of Renhua County and the Human Resources and SocialSecurity Bureau of Shaoguan City, to make the outstanding contributions nor have the relevantgovernment authorities impose any administrative penalty on Hongwei (Renhua). In addition,our Controlling Shareholder has agreed to indemnify us against all losses suffered or incurredby us as a result of or in connection with the social insurance due to or payable for employees ofour Group that any member of our Group has failed to make or pay prior to March 2013.

Housing fund

According to the Regulations on the Administration of Housing Fund (住房公積金管理條例) which became effective on 3 April 1999 and amended on 24 March 2002, a PRC company isrequired to conduct housing fund registration with the local housing fund administrationcentre, open housing fund bank accounts for its employees and make contributions to housing


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fund for its employees. In the event that a company fails to do so, the company may be orderedto rectify the same within a time limit and if the company fails to do so within such prescribedtime limit, a penalty ranging from RMB10,000 to RMB50,000 may be imposed. If the companystill fails to do so, the relevant authorities may apply to the court for enforcement of the unpaidamount.

Our business operating and production base is located in the PRC and we are required toprovide housing fund contributions to our employees in the PRC under applicable PRC lawsand regulations. Hongwei (Renhua) did not conduct the housing fund registration prior toFebruary 2013 and failed to make such mandatory contribution for its employees prior to March2013. As at 30 June 2013, the aggregate outstanding amount for housing fund contribution forour employees at Hongwei (Renhua) was approximately HK$750,000, which the amount hasbeen fully included as the housing fund provision in the financial statements. As advised by ourPRC Legal Advisers, the maximum amount of fine that could by imposed on us for suchnon-compliance is RMB50,000. We completed the requisite registration with the relevanthousing fund authorities in February 2013 and have made the relevant housing fundcontributions for all employees of Hongwei (Renhua) since March 2013.

[Up to the Latest Practicable Date, we have not received any complaint from ouremployees in the PRC for lack of contributions for housing fund.] The competent housing fundauthority, Shaoguan Housing Fund Administration Centre (韶關市住房公積金管理中心), issued aconfirmation on 27 August 2013 that it will not request Hongwei (Renhua) to make theoutstanding contribution or impose any administrative penalty on Hongwei (Renhua). Based onthis confirmation, the PRC Legal Advisers to the Company is of the view that the likelihood thatHongwei (Renhua) will be requested to undertake the abovementioned legal consequences isrelatively low.

Save as disclosed above, as advised by the Company’s PRC Legal Advisers, based on theconfirmations from the relevant governmental authorities, to the best of their knowledge,Hongwei (Renhua) has complied in all material respects with relevant laws and regulations inrelation to taxation matters, environmental protection and lumber managing and processingduring the Track Record Period and up to the [Latest Practicable Date].

MEASURE TO ENSURE FUTURE COMPLIANCE

In order to ensure future compliance, we have adopted the following internal controlmeasures:

(i) in 19 March 2013, we engage HLB Hodgson Impey Cheng Risk Advisory ServicesLimited to perform a review on the internal control system of our Group. Suchinternal control review was conducted from 8 April 2013 to 30 April 2013 and ourCompany has enhanced our new internal procedures as suggested by HLB HodgsonImpey Cheng Risk Advisory Services Limited. A review on the implementation ofthe new internal control procedures was conducted from 15 July 2013 to 19 July2013.


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(ii) our internal control consultant has also been engaged to provide and has providedus with (a) an analysis of our Group’s non-compliance incidents in the PRC; (b) anoverview of PRC social insurance laws and regulations and the PRC administrativeregulations on housing provident fund; and (c) an analysis of the relevant remedialand/or internal control measures adopted or to be adopted by our Group to preventoccurrence of similar incidents in the future.

Given that (i) the breaches occurred solely due to past oversight or unfamiliarity with theapplicable laws and regulations and did not involve dishonesty nor fraud on the part of ourDirectors; and (ii) our Directors have taken all necessary actions to rectify the non-compliance assoon as practicable after such non-compliance incidents had been brought to their attention, the[●] and the Directors are of the view the non-compliance incidents do not in any way impingeon our Directors’ integrity and character and do not affect their suitability to act as directors ofa listed issuer under [●] and the suitability of the Company for [●].

Indemnity

Our Controlling Shareholder has agreed to indemnify us against all losses suffered orincurred by us as a result of or in connection with the social insurances and housing fundcontributions due to or payable for employees of our Group that any member of our Group hasfailed to make or pay prior to March 2013. In addition, we undertake to comply with theapplicable laws and regulations to make relevant contributions in the future.

We have a specific unit under our human resources department to deal with humanresources affairs. Our human resources personnel are responsible for ensuring compliance withthe relevant social insurances and housing fund laws and regulations. They collect payrollinformation of our employees and calculate the amounts of social insurances and housing fundcontributions to be paid on a timely basis, and from time to time liaise with the relevant localauthorities to assess our compliance situation as well as update our Group with the localregulations and requirements applicable to us.

Saved as disclosed in this [●], to the best of the Directors’ knowledge and belief afterhaving made all reasonable enquiries, [during the Track Record Period and up to the LatestPracticable Date, we were in compliance in all material respects with applicable Hong Kong andPRC laws and regulations.]

LITIGATION

[As of the Latest Practicable Date, our Company is not involved in any outstandingmaterial litigation, arbitration or administrative proceedings. We confirm that, no suchlitigation, arbitration or administrative proceedings of material importance is pending orthreatened by or against any members of our Group.]


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