Sino Agro Foods (OTC BB:SIAF)

Through its three divisions, Sino Agro Foods (Pink Sheets:SIAF) produces and distributes high margin agricultural organic products in the People’s Republic of china. The company aims to leverage its competitive advantages that are driven by the cost reductions and advanced technology of its cattle, horticultural and fishery operations to achieve long-term growth in revenues and earnings per share. Sino believes that the favorable profiles of its targeted industry segments, combined with an innovative vertical model and Chinese government support, will set the stage for accelerated growth starting in 2010.

Cattle Operations Profit Center - ZhungXing Cattle Husbandry

ZhungXing Cattle Husbandry has three product lines:

• Bulk (Raw Material) Liquid Milk
• Feedstock (Cattle)
• Fertilizer

Competitive Advantage

Cost reductions are driven by:

• The “Reusable Supply Chain” business model
• The strategic purchase of cattle
• Government/Investor supported project relationships (Joint Venture)

Advanced technology is driven by:

• The ownership of a patented “Intellectual Property” used to manufacture organic stock-feed and fertilizer.

Cattle. Presently, the majority of SIAF revenues are generated through the sale of wholesale bulk organic liquid milk. The Company sells its milk to leading domestic customers, such as Mengniu Dairy Group and Yili Dairy Group, who process the milk into final edible products.

Sale of stock-feed and fertilizer products have not been a main driver of revenue generation. However, they play a significant role in SIAF business model based on producing high margin organic products with little waste. SIAF feels that the market opportunity for its feed-stock line is magnified by the inefficient methods currently utilized to raise cattle. SINO contends that its feed-stock leads to better quality cattle that can be more quickly brought to the market.

Reusable Supply Chain- Main driver of its cost advantage.

ZhungXing operates within a unique self-sustaining process known as a reusable supply chain. A symbiotic relationship exists between SIAF and the farming community that fuels an efficient circular progression.

The production of feedstock can begin with the acquisition of hay that must be mixed with plant waste derived from discarded foliage generated as byproducts from farmer operations. Because they have no use for the waste, the farmers are willing to sell it to Sino at favorable prices (30% discount to other sources.) Using its proprietary chemical-free technology, Sino adds a special enzyme to the ‘mix’, creating organic stock feed that can be given to its own cattle or sold to farmers.

The process does not end here. Sino also utilizes the supply chain to manufacture fertilizer from:

• Byproducts created during the stock feed extraction process
• Cattle waste from its own operations
• Cattle waste it purchases from farmers at favorable prices

Strategic Cattle Purchase. SIAF also realizes cost advantages from agreements to purchase farmers’ cattle circulated through the supply chain. Instead of raising cattle from scratch, SIAF buys cattle from participating farmers, generally after the first 3 to 4 months of breeding. This part of the business plan effectively passes off the initial costs associated with raising the cattle to the farmers and limits Sino’s exposure to cattle mortality risks.

This combined with the reusable supply chain obliges farmers to, in essence, partially finance Sino’s operations.

“The beauty of this process is that each small farmer provides four parts raw plant material in exchange for one-part food supply. Sino's technology is capable of producing four parts of feed from all four parts of raw plant material; in other words no by-product waste. So, Sino is able to retain the other three parts of feed after giving the local farmer their one part in the exchange.”

Joint Venture. SIAF has entered a Joint Venture agreement with Chinese state owned SanJiang Agriculture CO. Ltd. (JIANG), who will utilize SIAF technology to produce Beef and Lamb products, stock feed and fertilizer. The JV is financed 40% by SIAF, 40% by Jiang, 20% investors.

The manufactured fertilizer, as will be explained later, is used in its own operations as well as sold to farmers. The byproducts from the fertilizer are also pushed back into the supply chain.

JIANG is attracted to SIAF business model that the JV will utilize. SIAF will enjoy cost advantages from the project that, in exchange for the right to use SIAF green manufacturing technology and management oversight, SanJiang will provide production space, equipment and labor. (Farmer cooperatives)

Going Forward. By the middle of 2010 and beyond, SIAF expects its cattle product mix to change due to:

• The addition of beef and lamb products through its own operations as well as the sale of cattle to the Joint Venture project.
• Emphasis of a proprietary line of high margin finished organic dairy products to be sold to retail and distribution networks.
• Evaluation of opportunities in the fertilizer market.

Projected Wholesale Goals

Projected Retail Goals

SIAF grows and processes green Dragon fruit flowers. Dragon fruit (http://en.wikipedia.org/wiki/Dragon_fruit) is very popular in Asian culture. Although other growers cultivate the fruit, SIAF only cultivates the flowers, or Hylocereus Undatus (HU). A good comparison for the HU flowers would be Asparagus for Westerners. It is used as a vegetable in soups, salads and other dishes. It also has perceived medicinal and health benefits.

Competitive Advantage

Cost reductions are driven by:

• The “Reusable Supply Chain” business model
• Plant life longevity (18 years)

Advanced technology is driven by:

• Newly built dryers specifically designed and operated to dry the HU flowers using cheap “clean coal” energy and a duct system that evenly distributes hot air through the processing facility.
• Special growing technologies that utilize spacing, concrete support systems and irrigation to grow the flowers efficiently
  

Reusable Supply Chain (Horticulture). The long life cycle of HU flower gives SIAF a predictable, low cost source of supply that can lead to a long term revenue stream.

Barriers to Entry. SIAF believes that the dragon flower market contains barriers to entry resulting from:

• HU flower acreage in China that has been reduced to 5k acres from 50k. (This creates a nice barrier to entry and benefits SIAF who has approximately 550 HU acres.)
• Long harvesting period of 3 three years suggests that it will take longer for potential competitors to penetrate the market.

Growth & Sustainability. SIAF feels the growth potential of its horticulture segment is quite promising for at least three reasons:

• SIAF is only utilizing 150 of its 550 HU acres.
• Its flowers are becoming more mature which will increase crop yields.
• The company recently purchased dryers to preserve flowers and prevent spoiling, allowing them to be sold all year round.

For more information on the pricing of HU flowers, please see Q&A section.

Fishery Profit Center – Capital Awards Inc.

Currently CA provides consultant services for operations engaged in raising and/or harvesting fish. CA generates minimal revenues, but SIAF has plans to expand its operations to include a full boutique of profit centers.

Competitive Advantage

Cost reductions are driven by:

• Minimal production space requirements.
• Logistics savings due to minimal transportation requirements.

Advanced technology is driven by:

• Exclusive rights to license “A Power RAS” technology in China, a fish growing system that includes water treatment for all components as well as standard operating procedures needed for effective management of the systems.

The Chinese government and citizen demand for higher quality foods coupled with inefficient fishery operations has prompted SIAF to enter this industry.

This segment’s competitive advantage lies in the exclusive right to a technology license covering the harvesting of fish using a chemical free recycling water process (Recycling Aquaculture System or RAS). The main revenue source will come from the operation of SIAF’s own fisheries and the management of third party fisheries that will purchase the right to use the RAS license. (SIAF feels that it can leverage its relationship with farmers who will see the benefit of Capital Awards services as a way to create a new revenue source since the RAS technology enables fisheries to operate all year round on facilities that occupy very little space.) SIAF will also provide necessary equipment and marketing services.

SIAF has emphasized that the RAS creates a competitive advantage due not only to its exclusivity, but also because the product will be considered organic.

Similar to it cattle JV operation, SIAF intends to reduce capital outlay by “partnering” with individuals/entities who will desire to invest in fisheries. However, at this time the company is still evaluating funding sources.

In P.R.C. the rapid progress of industrialization of the last decade has unbalanced the demand on its agricultural developments and activities that threaten the environment. Therefore, the P.R.C. Government has in recent years directed many incentives and policies with the aim to revitalize and to modernize its agriculture industry.

With a seasoned management team holding years of practical and professional agrarian experience, the Company can address these challenges while meeting the increasing demand of China’s rising middle class for gourmet and high-quality food items. Our focus is to develop, produce and distribute high margin agricultural products in the P.R.C. We will accomplish this by continually redefining our operations, and through exploring external relationships that will enhance our product reach and bottom-line. This could include vertical acquisitions of raw material suppliers, land or product lines, and undertaking additional joint ventures and partnerships.

Our ultimate goal is to maximize shareholder value by delivering consistent earnings per share growth. Management is also working diligently by taking steps to graduate to a higher exchange.