Potential to market stevioside in the United States as a food supplement in the near term. This would be driven by the Company?s recent implementation of a comprehensive marketing plan to penetrate this multibilliondollar market, which would in turn open the doors in other western countries.
? Production capacity of stevioside is scheduled to increase sharply. This would be driven by the opening of a new 300-ton production plant in October 2006 at the newly acquired Science Park in Qufu and management?s current negotiation to acquire other stevioside manufacturers this year. Based on our projections, total production capacity would jump from 200 tons in FY2005 to 700 tons by the end of FY2007.
? Significant increase in sales of selected veterinary products. The recent pandemic of avian flu has triggered a sharp increase in demand for the Company?s hypericin and chlorine dioxide (ClO2). The former has been designated as a primary response to combat the avian flu virus, while the latter is an effective disinfectant recommended by the PRC Ministry of Agriculture for bird-flu prevention. Hypericin sales in February 2006
doubled the amount in November last year. new products in the market. An additional nine new medications are under development. The R&D partnership arrangement with major national and regional institutions and universities would ensure more new products could
be introduced to the market to drive revenue. Increasing awareness to cultivate safer and healthier livestock and poultry, as well as the need to prevent avian flu and other viruses worldwide, should drive demand for quality veterinary medicines.
? Organic growth and acquisition to drive the TCM business. Other than launching new TCM products through R&D and capacity expansion, the Company has recently registered 10 TCMs and four to five TCM-based health foods for sale in Canada. In addition, the Company is in negotiations to acquire a TCM company with annual revenue of RMB40?50 million. All of these factors will help drive growth.
? Strong financial position. The Company is in a strong financial position, with over $7 million of working capital and net cash of $3.6 million at January 31, 2006. No long-term debt was outstanding. Driven by its increasing earnings and strong cash flow from operations, we project the net-cash balance to increase from $3.5 million in
FY2006 to $5.4 million in FY2008. Accordingly, we see the need for issuing new common stock to fund capitalexpenditure and acquisition, which had caused significant EPS dilution in the past, diminishing.
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For the first three quarters of FY2006, TCM and animal medicines continued to record steady growth in revenue, whilerevenue from stevioside gradually recovered as the impact of disruption on production due to reconstruction of the newmanufacturing facility was eased, following the commenced production of the facility in September 2005. Total revenueand net profit for the first nine months ending January 31, 2006 amounted to $11.07 million and $2.025 million. In the absence of any accounting adjustments, we expect the Company to record full-year revenue of $15.4 million and a net
profit of $2.63 million, representing a year-on-year increase of 27.2% and 217.5% respectively.
For the first nine months of FY2006 and the full year FY2005, gross margins for TCM were approximately 35%?40%,while those for veterinary medicines were approximately 30%?33%. Gross margin for stevioside was below 30% due to high raw-material costs. However, overall gross margins have been relatively stable at 28%?32%, even on a quarterly
basis. We believe the Company will maintain gross margins in excess of 30% in FY2007 and FY2008, as management has taken steps to ensure a stable supply of raw materials by increasing the prepayment to raw-material suppliers.
Looking ahead, we continue to expect robust growth in both revenue and net profit in FY2007 and FY2008.
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