Item 1. Business
ITEM 1. BUSINESS
Overview
China
Infrastructure Construction Corporation (the “Company”) was organized in
Colorado on February 28, 2003. The Company, through its subsidiaries in Hong
Kong and the People’s Republic of China (“PRC” or “China”), engages in
production of ready-mixed concrete for developers and the construction industry
in the PRC. The Company primarily operates through its indirect majority-owned
subsidiary, Beijing Chengzhi Qianmao Concrete Co., Ltd. (“Beijing Concrete”), a
company organized under the laws of the PRC.
Corporate
History
The
Company was organized in Colorado on February 28, 2003 as a limited liability
company under the name “Fidelity Aircraft Partners LLC,” and on December 16,
2004 converted itself into Fidelity Aviation Corporation by filing a Statement
of Conversion and Articles of Incorporation with the Colorado Secretary of
State. At that time we were engaged in the business of salvaging rotable parts
and systems from airframes and selling them to the aviation industry. In 2008,
we began to pursue an acquisition strategy, whereby we sought to acquire an
undervalued business with a history of operating revenues in markets that
provide room for growth.
On
October 8, 2008, the Company consummated a share exchange transaction pursuant
to that certain Share Exchange Agreement, as a result of which Northern
Construction Holdings, Ltd., a Hong Kong limited company (“NCH”) became our
wholly-owned subsidiary. Beijing Fortune Capital Management, Ltd., a PRC limited
liability company (“BFCM”), a 95% owned subsidiary of NCH, became our indirect
majority-owned subsidiary. The remaining 5% equity interest in BFCM is held by
Beijing Xingyuqing Tech Co., Ltd., controlled by Mr. Bingchuan Xiao, a former
director of the Company. BFCM owned 99.5% of the equity interest in Beijing
Chengzhi Qianmao Concrete Co., Ltd. (“Beijing Concrete”), which enabled us to
acquire the business and substantially all of the assets of Beijing Concrete.
The remaining 0.5% in Beijing Concrete is owned by Mr. Rong Yang, one of the
original founders of Beijing Concrete and our current chief executive officer
and director. For accounting purposes, the share exchange transaction was
treated as a reverse acquisition with NCH as the acquirer and the Company as the
acquired party. Following the share exchange, we evaluated the future market for
our aircraft parts business and resolved not to pursue this line of business any
further.
On
January 15, 2010, Beijing Concrete increased its registered capital from RMB 15
million (approximately $2.2 million) to RMB 30 million (approximately $4.4
million) and BFCM increased its investment in Beijing Concrete accordingly. Its
share capital increased from RMB 10 million (approximately $1.47 million) to RMB
15 million (approximately $2.2 million). As a result, BFCM owns 99.67% of
Beijing Concrete from January 15, 2010.
4
On
February 1, 2010, Beijing Concrete formed a subsidiary, Shaanxi Hongruida
Concrete Ltd. (“Hongruida”) and contributed RMB 10 million (approximately $1.47
million) to its capital. Beijing Concrete is the sole shareholder of Hongruida.
Hongruida was organized to implement the 10-year strategic cooperative agreement
with one of the Company’s major clients, China Railway Construction Group Co.,
Ltd (“CRCG”). Under the Agreement, the Company and CRCG will jointly manage the
concrete mixing stations to be operated by Hongruida. CRCG will provide the
cement for manufacturing the concrete mix in such concrete mixing stations, and
will be able to purchase the concrete mix at discounted prices. Also, in
accordance with the Agreement, each party will lease certain equipment to the
concrete mixing stations. The Company and CRCG will share 75% and 25%
of the annual profits of such concrete mixing stations in Xi’an. Hongruida
commenced its operations at the end of March 2010.
Effective
August 24, 2009, the Company changed its name from Fidelity Aviation Corporation
to China Infrastructure Construction Corporation.
Our
current corporate structure is set forth in the following diagram:
5
Recent
Developments
On
September 28, 2009, the Company effectuated a 1-for-10 reverse stock split of
the Company’s common stock, with no par value (the “Reverse Stock Split”). Upon
the Reverse Stock Split, ten (10) shares of the outstanding common stock were
automatically converted into one (1) share of common stock. The Reverse Stock
Split, however, did not alter the number of shares the Company is authorized to
issue, but only reduced the number of shares of its common stock issued and
outstanding. Any fractional share issued as a result of the reverse split was
rounded up.
On
October 14, 2009, to provide incentives to the Company’s management and to
adjust the Company’s capital structure, the Company issued to Rui Shen, the
majority shareholder of the Company, an aggregate of 7,031,344 shares of common
stock (after taking into account the 1-for-10 reverse stock split which took
effect on September 28, 2009).
On
October 16, 2009, the Company entered into and consummated the sale of
securities pursuant to a Subscription Agreement with a number of investors,
providing for the sale to the investors of an aggregate of approximately
2,564,103 shares of common stock for an aggregate purchase price of
approximately $10,000,000 (or $3.90 per Share). In connection with the private
placement, the Company issued to the placement agent warrants to purchase
153,846 shares of Common Stock exercisable for a period of five years at an
exercise price of $3.90 per share. Additionally, the Company issued to a
financial advisor in the PRC 288,963 shares of common stock. Under the
Subscription Agreement, the Company agreed to deliver additional shares of
common stock to the investors on a pro rata basis for no additional
consideration in the event that the Company’s after tax net income for each of
the fiscal years ending May 31, 2010 and 2011 is less than $14,000,000 and
$18,000,000, respectively, subject to certain adjustments (such as exclusion of
non-cash charges and expenses required to be recognized by the Company under the
United States generally accepted accounting principles), which number of shares
would be calculated using the percentage of variation between the actual net
income and the target net income.
On March
5, 2010, the Company and the investors in the October 2009 private placement
(the “2009 Investors”) entered into an Amendment to the Subscription Agreement
dated October 16, 2009. The Amendment modified certain covenants to which the
Company had previously agreed pursuant to the Subscription Agreement, including
exemption of the private placement described below from certain restrictions on
subsequent offerings.
Under the
Amendment, the Company agreed to file a registration statement covering the
securities issued in the October 2009 private placement (the “Registrable
Shares”), if at anytime after December 31, 2010 not all of the Registrable
Shares may be sold without registration pursuant to Rule 144 under the 1933 Act.
Such registration statement shall be filed within 45 days after receipt of a
written demand from the 2009 Investors representing not less than 50% of the
then outstanding Registrable Shares. The 2009 Investors also have piggy-back
registration rights exercisable after December 31, 2010 with respect to the
Registrable Shares that may not be sold without registration pursuant to Rule
144.
6
In
consideration of the Amendment, the Company agreed to issue to the 2009
Investors warrants to purchase in the aggregate approximately 1,281,083 shares
of Common Stock at an exercise price of $6.00 per share. The Company also agreed
for the after tax net income target for fiscal year 2011 to be increased to
$19.8 million from $18.0 million if the Company does not complete a public
offering on or before the date on which it releases its 2011 net income data in
a Form 10-K filed with the SEC. Under the Amendment, the Company agreed to
deliver additional shares of common stock to the 2010 Investors who invest in
the private placement described below ("2010 Private Placement") on a pro rata
basis for no additional consideration in the event that the Company’s after tax
net income for each of the fiscal years ending May 31, 2010 and 2011 is less
than $14,000,000 and $18,000,000 (or $19,800,000 as applicable) respectively
subject to certain adjustments (such as exclusion of non-cash charges and
expenses required to be recognized by the Company under the United States
generally accepted accounting principles), which number of shares should be
equal to the percentage of variation between the actual net income and the
target net income (the “Adjustment Percentage”). The number of such additional
shares shall equal the Adjustment Percentage, times the number of shares of
Common Stock acquired by the 2009 Investor in the 2010 Private Placement, minus
the Adjustment Percentage times the number of shares acquired by such
investor in the October 2009 private placement which have been sold by the
investor as of the date on which the Company releases its respective net income
data in a Form 10-K filed with the SEC.
On March
11, 2010, the Company consummated a private placement pursuant to a Subscription
Agreement dated March 5, 2010 with a number of investors, providing for the sale
to the investors of an aggregate of approximately 1,282,091 shares of common
stock for an aggregate purchase price of approximately $5,000,000 (or $3.90 per
Share). In connection with the private placement, the Company issued to the
placement agent a warrant to purchase 46,154 shares of common stock exercisable
for a period of five years at an exercise price of $3.90 per share and paid a
transaction fee of $240,000. Additionally, the Company issued to a finder
a warrant to purchase 23,077 shares of common stock exercisable for a
period of five years at an exercise price of $3.90 per share and paid a
transaction fee of $120,000.
Our
Business
Through
our indirect subsidiary Beijing Concrete, which has been engaged in the concrete
business since January 2002, we are operating as a producer of advanced
ready-mix concrete materials headquartered in Beijing, China. The Company
specializes in the production of ready-mix concrete and other types of concrete
for developers in the construction industry. The Company currently is
certified by the Chinese Ministry of Construction to produce certain types of
concrete (model C20 to model C60) for residential and commercial developers as
well as for industrial companies. The Company currently is applying for
certification to produce all types of concrete.
The
Company currently owns two stationary factories and two mobile concrete mix
stations, which in total have eight ready-mix concrete batching plants. In
addition, it owns 5 concrete transport pumps, 46 truck transit mixers and 3 bulk
cement transport vehicles. All pump vehicles and trucks are installed
with GPS tracking systems, which ensure the quality control and safe delivery of
the concrete mix.
The
Company currently has an annual output capacity of approximately 3.6
million cubic meters of concrete. In fiscal years 2010 and 2009, the Company’s
revenues amounted to $73.3 million and $66.8 million,
respectively. All of the Company’s products have been certified by
the ISO9001-2000 Certification Quality System and by the Chinese Ministry of
Construction Beijing Branch Certification Center with respect to Integrated
Certification System which includes Quality Management System, Environmental
Management System and Occupational Health and Safety Management
System.
7
Over the
past six years, we have successfully expanded our operations from a single
ready-mix concrete factory in Beijing to additional production in the cities of
Tangshan and Xi’an. Currently, the Company has four main concrete factories. Of
these, one factory has two sets of ready-mix HZS120 series concrete mixing
towers and one set of Betomix 3.0A-R/DW series mixing towers, one factory has
one set of HZS120 series mixing towers, one factory has two sets of HZS120
series mixing towers, and one factory has two sets of HZS180 series mixing
towers. One facility is located in Beijing’s Nanhaizi area, on the west side of
the Yizhuang Economic Development Zone in southern Beijing. Another facility is
located in Shidu, on the outskirts of Beijing. We also had two facilities, both
of which are mobile stations, in the Tangshan Development Zone, about two
hundred kilometers east of Beijing. We combined these two facilities into one to
better utilize our resources. Our newest facility is located in Xi’an, central
China. The Company also completed the construction of a stationary concrete
factory in Tangshan in May 2009. However, this factory has not commenced
operation and it has not passed the first review by the Tangshan Commission of
Construction due to a particular feature of the subsoil that the foundation of
the facility is built upon. The Company has recently entered into an agreement
for the sale of the Tangshan plant to a third party for RMB25,974,631
(approximately $3,819,799). The purchase price shall be paid in installments
over four years starting from September 1, 2010. If there is a delay in
payments for more than 10 days, we will be entitled to liquidated damages equal
to 4% of the purchase price. If the delay lasts for more than 10 days, we will
have the right to terminate the agreement and will be entitled to liquidated
damages equal to 20% of the purchase price.
The
following summarizes the details of the two factories and two mobile stations as
of May 31, 2010:
Location
Batching Plants
Model
Number
of Sets
of
Mixing
Towers
Production
capacity (m 3 )
Estimated
Production Capacity
(based on
estimated
utilization
rate)
Status
Beijing (Yizhuang)
2
HZS 120
1
Betomix 3.0A-R /DW (Stationary)
3
3,679,200
1,287,720
Operating
since 2002
Beijing
(Shidu)
HZS
120 (Mobile)
1
1,051,200
367,920
Operating
since February 2010
Tangshan Caifeidian
HZS
120 (Mobile)
2
2,102,400
735,840
Operating
since November 2009
Xi’an
HZS
180 (Stationary)
2
3,153,600
1,103,760
Operating
since March
2010
8
The
Company is planning to build two additional stationary concrete factories with
two batching plants of 3.5 million cubic meters production capacity and one
mobile station with one batching plant of 2 million cubic meters production
capacity during the fiscal year ended May 31, 2011. We are currently considering
acquiring potential target companies as well.
The
Company is committed to conducting its operations with an emphasis on the
efficient production, management and innovation of our concrete products. In
particular, we produce “Green Concrete” by extensively using recycled industrial
waste and minimizing the energy consumption and the dust and air pollution. We
believe that we are able to meet the stringent environmental and technical needs
of a rapidly growing market in China. The types of projects for
which we provide concrete include large express railways, bridges, tunnels,
skyscrapers, and dams. Many competitors are not able to participate in such
projects due to technical requirements and the limitations of funding and
information.
Our
Industry
We
believe that as its economy has opened and become more developed and vibrant
since the 1990s, China plays a more and more important role in the concrete
industry as both a producer and user of concrete and concrete
products. China is the world’s largest producer of cement and its
output of cement reached up to 1.38 billion tons in 2008 and 1.63 billion tons
in 2009. Cement production has grown about 10 percent per year over the past two
decades and is now growing even faster to keep up with massive urbanization.
Today, China produces roughly half of the total cement in the world, whereas the
next three largest producers, India, Japan, and the United States altogether
produce less than 20 percent. (Source: Chengdu Xinbotelan Technology Inc.; see
www.snsqw.com
)
Cement
consumption in China is forecast to rise by 6% annually through 2012, reaching
1.8 billion tons, according to a new study, "Cement in China", issued by the
Freedonia Group. The study also mentioned that construction contractors will
remain the largest market for cement in China, accounting for approximately 36%
of all cement consumption in 2012. According to the same study, the ready-mix
concrete market will see the strongest growth, rising 9.8% per annum through
2012 to 383 million tons. Some of the forecasted growth is projected to result
from government regulations banning on-site concrete and mortar mixing as
described in more detail under the heading “Business”-“Products and Services” of
this report. Demand for cement used in concrete products is expected to grow
5.4% annually through 2012 to 513 million tons, driven by the growing popularity
of precast concrete with many construction contractors. The government’s
continued efforts to modernize the country’s infrastructure is exemplified by
such massive projects as the South-North Water Diversion - designed to redirect
water to the northern plains from Central and South China. This project,
scheduled for completion in 2050, will result in annual cement consumption of
over one million metric tons alone.
China
accounts for half of all new building activity in the world and rapid expansion
is expected to continue. According to the Report of China Cities Competence,
( http://www.ce.cn/cysc/cysczh/200803/31/t20080331_15010675.shtml )
up to 1 billion people in China are expected to move into Chinese urban areas by
2030.
9
Residential
and non-residential buildings in China are increasingly requiring much more
concrete due to, among other reasons, the short supply of wood. China is
currently the largest consumption market of cement worldwide at over $200
billion annually. China’s cement consumption will amount to approximately 44% of
global demand in 2010 and will be greater than current combined consumption of
India and the U.S. by 2010, according to the Freedonia Group. At the present
rate, it is presumed that China will continue to be an important player in the
global construction materials marketplace for at least the next two
decades.
China’s
concrete market is considered highly competitive, with over 10,000 providers, of
which we estimate that approximately 3,000 are ready mix concrete producers,
Global Information Inc. reports that ready-mix concrete companies will benefit
from an extremely favorable outlook in China, where large-scale construction
projects will require significant amounts of ready-mix concrete. In the Beijing
concrete market, for example, we estimate that no competitor has greater than a
10% market share according to the Beijing Concrete Association.
According
to a recent article in the Economic Observer Newspaper China, the Chinese
government has reviewed its investment priorities under the 4-trillion-yuan (USD
$586 billion) stimulus package introduced in 2008, with more emphasis given to
social welfare projects, rural development, and technology
advancement.
China's
top economic planner, the National Development and Reform Commission (NDRC),
unveiled a breakdown (see chart below) of the revised stimulus package spending
during a news conference on March 6, 2009.
Public
infrastructure development constitutes the biggest portion – USD $222.7 billion,
or nearly 38% of the total Stimulus Package. The projects to be undertaken by
the Chinese government include railway, road, irrigation, and airport
construction, for which we can provide concrete.
10
Other
than the Chinese Central Government’s USD $586 billion stimulus funds,
provincial governments are anticipated to invest another USD $1.5 trillion over
the next five years. More than half of the total investment is for
infrastructure development.
As part
of the Eleventh Fifth Year Plan, the PRC Government had earmarked $730 billion
prior to the stimulus plan for the expansion of the rapid railway
system. Some of the details include:
·
The
national rail network is set to grow by 41,000 km (50%) by
2020.
·
RMB
5 trillion (USD $730 billion) government spending
plan.
·
Expected
to consume 120 million tons of
cement.
As a
result of the Chinese Government Stimulus Package, the demand for cement and
concrete in China is expected to significantly increase in the next several
years.
Products
and Services
We
specialize in “ready-mix concrete”, a concrete mixture made at our production
facilities. Ready-mix concrete is mixed on demand and is shipped to worksites by
concrete mixer trucks. Currently 20% of the total concrete produced in China is
ready-mixed concrete, and 80% is mixed on the construction sites. In
developed countries, 80% of the total concrete produced is ready mix concrete.
This sector in the concrete market is growing at a fast rate, largely due to the
Chinese government’s implementation of Decree #341 in 2004, which bans on-site
concrete production in over 200 cities across China, with the goal of reducing
environmental damages from on-site cement mixing and improving the quality of
cement used in construction. The use of ready-mix concrete minimizes worksite
noise, dirt and congestion. Additionally, most additives used in ready-mix
concrete are environmentally safe. We use at least 34% recyclable components in
our green concrete products.
11
Green
Concrete is the concrete that utilizes industrial waste, or other recycled
materials as part of its raw materials, such as the ash reclaimed from the
power-plant, the grounded waste steel slag powder, and the waste ore from steel
mills. Green Concrete has better performance and properties than
regular concrete in terms of endurance and strength, among other
things.
Since the
Green Concrete uses large amounts of industrial waste, the Company’s products
are cost effective and environmentally friendly.
Features
of “Green Concrete” include:
·
Reduced
cement consumption
·
Reduced
costs of concrete
·
Reduced
costs of construction
·
Reduced
energy consumption
·
Improved
attributes (i.e. strength, endurance, and
bonding)
We have a
product portfolio that serves the diverse needs of our expanding customer base
and its unique construction and infrastructure projects. While we mainly
specialize in ready-mix concrete formulations from controlled low-strength
material to high-strength concrete, specifically formulated to cater into the
respective requirement of each project, we provide both industry standard and
highly innovative products, including: Green Concrete, Self-densifying Concrete,
Lightweight Aggregate Pumpable Concrete, Heavy Concrete, Macro-void Pervious
Concrete, C60 Mass Concrete, Color Concrete, etc.
Manufacturing
Process
Introduction
Concrete
is a mixture of paste and aggregates (sand & rock). The paste is usually
composed of cement and water, coating the surface of the fine sand and coarse
aggregates such as rocks and binding them together into a rock-like mass known
as concrete.
Aggregates
comprise approximately 61 percent of the total volume of concrete. The type and
size of the aggregate mixture depends on the thickness and purpose of the final
concrete product. A continuous gradation of particle sizes is desirable for
efficient use of the paste. In addition, aggregates should be clean and free
from any matter that might affect the quality of the concrete.
12
The key
to achieving a strong, durable concrete rests on the careful proportioning and
mixing of the ingredients. Concrete mixture that does not have enough paste to
fill all the voids between the aggregates will be difficult to place and will
produce rough, honeycombed surfaces and porous concrete. A mixture with an
excess of cement paste will be easy to place and will produce a smooth surface;
however, the resulting concrete will be more likely to crack and be
uneconomical.
A
properly proportioned concrete mixture will possess the desired workability for
the fresh concrete and the required durability and strength for the hardened
concrete. Typically, a mixture is by volume approximately 16 percent cement, 61
percent aggregates and 18 percent water. Entrained air bubbles in many concrete
mixtures may also take up another 3 percent.
The
character of concrete is determined by the quality of the paste. The strength of
the paste, in turn, depends on the ratio of water to cement. The water-cement
ratio is the weight of the mixing water divided by the weight of the cement.
High-quality concrete is produced by lowering the water-cement ratio as much as
possible without sacrificing the workability of fresh concrete. Generally, using
less water produces a higher quality concrete provided the concrete is properly
placed, consolidated and cured.
Besides
portland cement, the most widely used type of cement around the world, concrete
may contain other cementitious materials including (i) fly ash, a waste
byproduct from coal burning electric power plants; (ii) ground slag, a byproduct
of iron and steel manufacturing; and (iii) silica fume, a waste byproduct from
the manufacture of silicon or ferro-silicon metal. The concrete industry uses
these materials, which would normally have to be disposed in land-fill sites, to
the advantage of concrete. The materials participate in the hydration reaction
and significantly improve the strength, permeability and durability of
concrete.
Admixtures
are generally products used in relatively small quantities to improve the
properties of fresh and hardened concrete. They are used to modify the rate of
setting and strength development of concrete, especially during hot and cold
weather. The most common is an air-entraining agent that develops millions of
tiny air bubbles in concrete, which imparts durability to concrete in freezing
and thawing exposure. Water reducing admixtures enable concrete to be placed at
the required consistency while minimizing the water used in the mixture, thereby
increasing strength and improving durability. A variety of fibers are
incorporated in concrete to control cracking or improve abrasion and impact
resistance. Most common admixtures we use include pumping agent,
superplasticizer, and expansive admixtures.
13
Hydration
After the
aggregates, water, and the cement are combined, the mixture remains in a fluid
condition for about four to six hours during which we use the agitator trucks to
transport, place and finish the concrete in its final location. We have around
94 truck drivers to operate and deliver the concrete to customers mainly in the
Beijing area, Tangshan, Hebei Province, and Xi’an area. We intend to hire more
drivers to accommodate our growing business.
Quality Control
Laboratories
The
proportioning of a concrete mix design should result in an economical and
practical combination of materials to produce concrete with the properties
desired for its intended use, such as workability, strength, durability and
appearance. We have laboratories on the site of each plant, performing quality
control tests throughout our manufacturing process to ensure that our products
are accustomed to the needs of the customers. During various stages of the
ready-mix concrete manufacturing, the labs inspect the raw materials, such as
the sand, rocks and water, and determine the proportion of the ingredients of
the concrete in accordance with the specifications received from the customers,
before the mixing of aggregates and paste. Right after the mixing process, the
labs will also perform tests on the fluid concrete with respect to its minimum
cement content, air content, slump, maximum size of aggregate, strength, etc.
The Company, over the years, has developed some expertise in selecting the
proportions based on previously developed guidelines and experience. We have
established methods for selecting the proportions for concrete for each batch
and producing environmental friendly concrete with best
performance:
·
We
utilize fly ash, waste ore, slag or other cementitious materials, which
enhance concrete properties, to supplement our cement. We aim to have the
least amount of water that can result in a mixture that can be easily
placed, consolidated and finished.
·
Our
labs also make sure the concrete aggregates are required to meet
appropriate specifications and in general should be clean, strong and
durable.
·
We
apply some air-entraining and water reducing admixtures into the ready-mix
concrete to adjust the rate of setting and strength development of our
concrete.
The
Company tests the absolute volume of the concrete to determine the safety
factor, through which the Company reduces the costs of cement while still
meeting the criteria of the product specifications. In addition, the Company
applies advanced statistical and orthogonal (two perpendicular right angles)
design techniques in test and data processing, which is a system design property
that facilitates the feasibility and compactness of complex designs. These
processes allow the Company to produce a more cost efficient “Green Concrete”
while maintaining the product’s quality.
14
Sales
and Marketing
Our
marketing efforts are geared towards advancing the Company as the supplier of
choice for helping to build China’s most modern and challenging projects. We are
constantly seeking ways to raise our profile and leverage additional publicity.
To this end, we plan to expand the Company’s presence at leading construction
industry events and in periodicals to build on its successful reputation. The
primary goal when expanding into new markets is to reinforce the sales effort by
promoting positive testimonials and success stories from the Company’s strong
base of high profile clients.
The
marketing strategy of the Company relies primarily on direct sales and we
usually develop our market through the following three means: (i) by our sales
department, which consists of 5-6 employees in each station, conducts the market
promotion and development and also collects the feedback from the customers on
the Company’s products; (ii) by the salesmen, currently around 10 people, with
whom we contract to expand our client base; and (iii) by references from our
current customers and our raw material suppliers. Due to positive prior
experience with the government projects and extensive work with the PRC
government on such projects in the past, we believe that we will continue to
receive access to such projects in the future.
Raw
Materials and Suppliers
We rely
on third-party suppliers of the raw materials to manufacture our products. The
main components of our products include cement, fly ash, slag, admixture, sand
and gravel. Our primary suppliers of each are:
Raw Material
Suppliers
Cement
Tianjin
Zhenxing Cement Factory, Hebei Wushan Cement Factory, Hebei Luan Xian
Maopai Cement Factory
Fly
ash
Beijing
Xingda Fly Ash Co., Baolu Tongda Co., Zhongxin Shenyuan Fly Ash
Co.
Slag
Beijing
Shenshou Slag Co., Tangshan Slag Co., Beijing Liuhuan Construction
Trade Center Co.
Sand
Zhuozhou
Hongyuan Sand & Gravel Factory, Zhuozhou Shuishang Leyuan Sand &
Gravel Factory
Gravel
Changqing
Sand & Gravel Factory, Zhuozhou Shuishang Leyuan Sand & Gravel
Factory
We
believe we are not dependent on any of these suppliers and will be able to
replace them, if necessary, without material difficulties. In particular, we do
not expect to experience a shortage of cement, the main material for
manufacturing our product, since it is usually readily available and we have
long-term contracts with three large cement manufacturers to ensure the constant
supply.
15
Our major
supplier of truck transit mixers and concrete transport pumps is Sanyi Zhonggong
Ltd. (“Sanyi Zhonggong”), which is the largest concrete production equipment
manufacturer in the world. We have purchased over US$5.2 million of equipment
from Sanyi Zhonggong. Pursuant to a Strategic Agreement with Sanyi Zhonggong
dated December 3, 2009, we agreed to use Sanyi Zhonggong Ltd. as our
preferred equipment supplier, and Sanyi Zhonggong in turn will provide discounts
on the purchase prices of the equipment, 24/7 customer service, as well as
training services to our employees. For potential construction projects
undertaken by Sanyi Zhonggong in China, we will be recommended as their
preferred ready-mix concrete provider. In addition, Xiamen XGMA
Machinery Co., Ltd., the major supplier of our forklifts, intends to form a
similar strategic cooperation relationship with us.
Principal
Customers
Our
clients are mostly property developers and industrial companies, as well as PRC
state-owned companies. Some of them are publicly listed, such as Beijing Capital
Steel Group, Tangshan Jiahua Chemical Corporation and Guangzhou Fuli Real Estate
Group, a public company listed on the Hong Kong Stock
Exchange. Fuli Group’s annual sales are over 1.5 billion US
dollars. The PRC state-owned companies, which are our customers,
include China Railway Construction Group (“CRCG”), China Construction Group
(“China Construction”), Beijing Construction Corporation and Beijing Chemical
and Coking.
We had
one major customer, China Railway Construction Group, which represented 14% of
the Company’s total sales for the fiscal year ended May 31, 2010. We had sales
to two major customers, China Railway Construction Group and Guangzhou Tianli
Construction Group, which represented 25% and 12% of the Company’s total sales
for the fiscal year ended May 31, 2009.
Two
customers, China Railway Construction Group, and Guangzhou Tianli Construction
Group, accounted for 26% and 10% of the Company’s accounts receivable balance at
May 31, 2010. China Railway Construction Corp. comprised 33% of the
Company’s accounts receivable balance at May 31, 2009.
The
following table summarizes some of the high-end residential and commercial real
estate development projects, which are currently under construction or we
completed as noted including those completed in fiscal years 2010 and
2009.
Project Names
Start/Duration
(Year)
Concrete Supplied
Beijing
Zhongxin Semiconductor Company (Completed)
2002
Supplied
total 140,000 cubic meters
400,000
square meters construction space
16
Beijing
Rainbow City Project (Completed)
2003
Supplied
100,000 cubic meters
560,000
square meters construction space
Beijing
5 th
Generation semiconductor Company (Completed)
2004
Supplied
70,000 cubic meters
120,000
square meter construction space
Beijing
World Trade CBD project (Completed)
2005
Supplied
90,000 cubic meters
180,000
square meter construction space
Beijing
Wanjing International Mansion (Completed)
2005-2006
Supplied
180,000 cubic meters
240,000
square meters construction space
Tangshan
Jiahua Project (project still in progress)
2007- 2010
434,000
cubic meters in total from September 2007 to November
2009
Douge
Zhuang (project still in progress)
2007-2010
314,000
cubic meters in total from June 2007 to November 2009
Futai
Xiangbo Yuan (project still in progress)
2007-2010
244,000
cubic meters in total from June 2007 to November 2009
Beijing
Fuli Real Estate Company
1.1 million
square meters of construction space (project still in
progress)
2009
755,000
cubic meters in total from June 2006 to February
2009
Competition
Competitive
Environment
Our
principal market, Beijing, is considered highly competitive. It has enjoyed
stronger economic growth and a higher demand for construction than other regions
of China. There are approximately 130 concrete mixture stations in the Beijing
area. According to our estimates, no single supplier has greater than a 10%
market share, which results in this industry being highly segmented. We
currently have an estimated market share of 3% in the ready-mix concrete market
in Beijing.
17
In the
Beijing market, we compete with national, regional and local construction
companies. Some of our competitors have greater financial and other
resources than us. Our main competitors include Beijing Heng Kun Concrete
Center, Beijing Jian Gong Group Concrete Center, and Beijing Gaoqing Concrete
Company. In 2009, the Beijing government issued a series of policies to
encourage concrete manufacturers to upgrade their transportation vehicles to
those models that are environmentally friendly. Vehicles that cannot meet the
environmentally friendly criteria will be restricted in going into the 5 th ring of
Beijing. Therefore, concrete manufacturers that cannot afford
replacing their truck transit mixers with the environmentally friendly models
will be banned from delivering the concrete mix and eventually be eliminated
from the concrete industry.
We
compete primarily on the basis of quality, technological innovation, customer
service, and pricing of our products. We win projects which are awarded through
a competitive bidding process based on our competitive pricing. Projects are
usually awarded to the lowest bidder, if other conditions are the same, although
other factors such as shorter delivery schedules are also taken into
consideration.
Our Competitive
Advantages
Comparing
us with other companies in the concrete industry in Beijing and in the Tianjin
area, we believe that the Company has the following competitive
advantages:
(1) Environmentally friendly
products.
We
produce all types of concrete products including specialty concrete for varied
industry uses. Capitalizing on our research and development, we extensively use
recycled materials such as fly ash (from coal fired power plants) and mining
waste in our production with the share of these materials of approximately 34%
of other raw materials used by us. In doing so, we not only help reduce
environmental wastes but we also increase our product quality. Because we
successfully apply this technology to our products, we have obtained tax
exemptions and other incentives from government organizations. In
accordance with a policy by China’s State Development and Reform Commission (the
“SDRC”), if the percentage of the industrial wastes components in a company’s
concrete mixture exceeds 30%, such company may enjoy the exemptions from income
tax and franchise tax in China.
(2) Strict and effective quality
management system.
We have
developed an effective quality management system that covers all aspects of our
operations, including planning, budgeting, purchasing and production. In every
step, not only do we have fully trained, experienced and skilled employees that
are working in concert to ensure our product’s quality and timely delivery, we
also implemented the computer-controlled Concrete Enter Price Management System
(CEM 2008 System) to coordinate and oversee the manufacturing, bookkeeping and
shipping process. From signing contracts to finishing a project, we
have a quality follow up supervising team to make sure that our concrete matches
our clients’ engineering designs exactly. All pump vehicles and truck transit
mixers are installed with GPS tracking systems, which ensure the quality control
and safe delivery of the concrete mix.
Our
quality supervisory staff on each construction site is responsible for
finished product quality. For every previous project completed, we have earned a
100% pass rate. We believe that this effective management puts us at the top of
the industry standard and has allowed the Company to achieve 5% more in profit
for every cubic meter of concrete we produce and deliver.
18
(3) We also have lower production costs
by smart outsourcing and quality engineering.
More than
80% of concrete costs come from raw materials, such as cement, sands, fly ash,
and gravel. The costs of materials have a direct impact on our production costs.
We compare several suppliers’ quotes before we make final purchases. This
ensures that we have the lowest prices for all of our raw
materials.
In
addition, the percentage of each of the raw materials needed to produce concrete
is also a big factor that affects our production costs. Our research laboratory
led by top professional engineers conducts extensive experiments to ensure that
we have excellent mixing formulas while achieving the required quality. We
believe the scientific formula of each type of concrete reduces our costs to
levels 3% to 5% lower than our competitors.
We
believe our tremendous track record in the industry, effective management, solid
clientele base, lower production costs and higher than the industry average
profit margin puts us at the top in the industry.
(4) Maintenance of key
relationships
We have
successfully built long-term cooperative relationships with China’s top
construction companies through our services. Our reputation and good record will
help us gain new business from existing customers and new
customers.
For
instance, on December 3, 2009, the Company entered into a Strategic Agreement
with Sanyi Zhonggong Ltd. (“Sanyi Zhonggong”), our major equipment supplier,
whereby the Company agreed to choose Sanyi Zhonggong Ltd. as its preferred
equipment supplier, and Sanyi Zhonggong in return will provide discounts on the
purchase prices of the equipment as well as training services to the Company’s
employees. For potential construction projects undertaken by Sanyi Zhonggong in
China, we will be recommended by Sanyi Zhonggong as their preferred ready-mix
concrete provider.
Growth
Strategy
(1) Focus on The Infrastructure
Industries and Develop New Relationships . Our
sales people will focus on developing relationships with the government, general
contractors, architects, engineers, and other potential sources of new business
in our target markets. We will actively monitor and analyze China’s
infrastructure construction plan to ensure that we direct our resources at the
center of the developing area and have the opportunities to bid on the potential
business at the earliest time.
(2) Capacity Expansion via Building New
Plants . We will add three to five batching plants during the fiscal year
2011 in order to meet the requirements of existing contracts and anticipated
demand. We plan to add more stationary and mobile stations in 2011 as part of
our long-term expansion plans due to very attractive margins and high return on
investment.
19
(3) Cooperation with other concrete
companies. We
will consider cooperating with other concrete companies in certain area or for
certain projects. The cooperation will include but not be limited to lease,
co-construct a new plant and profit sharing, or an M&A transaction. We
believe that by cooperating with local concrete companies, we will save capital
and time compared with building a new plant by ourselves. And it will also help
us to develop our relationship with local customers and suppliers.
Research
and Development
Companies
engaged in production of construction materials are under extreme pressure to
respond quickly to industry demands with new designs and product innovations
that support rapidly changing technical demand and regulatory requirements. We
devote a substantial amount of attention to the research and development of
advanced construction materials that meet the demands of project specific needs
while striving to lead the industry in value, materials and processes. We have
sophisticated in-house R&D and testing facilities, a highly technical onsite
team, the access to highly specialized market research, the cooperation with a
leading research institution, an experienced management and advisory board, and
close relationships with leading concrete materials experts. A total of 20
employees are currently working for our R&D department. Our research and
development expenses amounted to approximately $55,723 and $43,200 for the years
ended May 31, 2010 and 2009, respectively.
Our
research laboratory led by a team of 20 engineers and technicians conducts
extensive experiments to ensure that we have excellent mixing formulas while
achieving the required quality. This includes production of innovative concrete
admixtures to supply the company. Admixtures are chemical raw materials used for
production of concrete. Admixture is also one of the key materials that affect
the quality of concrete. Through technology innovation, our admixture products
help the company produce environmentally friendly and energy-saving
concrete.
We intend
to conduct research in developing new raw materials. Adoption of new techniques
and materials will help us reduce our cost of production and will help improve
our product quality.
We have
dedicated ourselves to testing and research of ready-mix concrete. We
have been developing and researching the raw material mixture ratios, which are
crucial to the quality of our products, by our advanced testing facilities and
the 17 years of testing experience of our technical and engineering
staff.
On
December 31, 2009, the Company entered into a three-year agreement with the
Institute of Building Materials, a subsidiary of the China Academy of Building
Research ("CABR") (the “Agreement”). Under the Agreement, the Institute of
Building Materials will provide its technical research, development and support
exclusively to us for an annual payment of RMB 350,000 (or US$51,000). The
Institute of Building Materials will also provide training courses to our
employees. We are allowed to list the Institute of Building Materials as our
technological partner in its marketing materials, and the Institute of Building
Materials has agreed to use its relationships and brand influence in the
construction industry to assist us in its business development.
20
Intellectual
Property
We do not
have any patents or other registered intellectual property. Currently, we are in
the process of applying to register two of our trademarks. To protect our
unregistered intellectual property, we enter into confidentiality agreements
with our officers and employees in our R&D Department. A confidentiality
agreement will cover three years after such officer or employee leaves the
Company, and any breach of the agreement will subject such person to liquidated
damages of RMB 10,000 and any other losses incurred by the breach.
Environmental
Matters
We are
required to comply with environmental protection laws and regulations
promulgated by the Ministry of Construction and the State Environmental
Protection Administration in China. Some specific environmental regulations
apply to sealed transportation of dust materials and final products, non-open
storage of sand and gravel, as well as reduction of noise and dust pollution on
production site and encouraged use of waste materials. In 2009, the Beijing
government issued a series of policies to encourage concrete manufacturers to
upgrade their transportation vehicles to those models that are environmentally
friendly. Vehicles that cannot meet the environment friendly criteria will be
restricted in going into the 5 th ring of
Beijing.
In
addition, the governmental regulatory authorities conduct periodic inspections
on us. We have met all the requirements in the past inspections. The Company has
set up and documented its environment management system according to
GB/T24001-2004 Guidance. The Company has also invested: 1) $29,411 for powder
silo dust equipment, which reduces the release of dust when delivering the
concrete mix; 2) $14,705 for sand and gravel separators, which recycle and reuse
the discharged concrete; 3) $14,705 for 3 sedimentation tanks to recycle the
water in the manufacturing process; and 4) $294,117 for a warehouse to store
sand and gravel to reduce the air pollution. Because of our
dedication to be environmentally friendly, we are one of the companies in the
industry that have been awarded the honor of “Green Concrete Producer” by the
PRC government.
Seasonality
Our
manufacturing operations are primarily located in northeastern China, which is
cold during the winter months. During such time, we are able to manufacture our
advanced ready-mix concrete material; however, many construction projects
operate on an abbreviated work schedule, if at all.
Regulations
Our
products and services are subject to regulation by governmental agencies in the
PRC, Beijing City and Hebei Province. Business and company registrations,
along with the products, are certified on a regular basis and must be in
compliance with the laws and regulations of the PRC and provincial and local
governments and industry agencies, which are controlled and monitored through
the issuance of licenses. All of the Company’s products have passed the
ISO9001-2000 Certification Quality System and Integrated Certification System
including Quality Management System Certification, Environmental Management
System Certification and Occupational Health and Safety Management System
Certification issued by the Beijing Zhong Jian Xie Certification
Centre.
21
We have
been in compliance with all registrations and requirements for the issuance and
maintenance of all licenses and certificates required by the applicable
governing authorities, including the Ministry of Construction and the Beijing
Administration of Industry & Commerce. The Ministry of Construction awards
Level II and Level III qualifications to concrete producers in the PRC
construction industry, based on criteria such as production capacity, technical
qualification, registered capital and capital equipment, as well as performance
on past projects. Level II companies are licensed to produce concrete of all
strength levels as well as special concrete, and Level III producers are
licensed to produce concrete with strength level C60 and below. We are a Level
III concrete producer.
Our
Employees
As of
August 27, 2010, we had 308 employees. The following table sets forth the number
of our full-time employees by department as of August 27, 2010:
Department
Number of
Employees
Accounting
20
Supply,
Purchase & Inventory
44
Technical
& Engineering Staff
35
Production
Staff
165
Administrative
Staff
44
Total
3 08
As
required by applicable PRC law, we have entered into employment contracts with
most of our officers, managers and employees. We are working towards entering
into employment contracts with those employees who do not currently have
employment contracts with us. We believe that we maintain a satisfactory working
relationship with our employees, and we have not experienced any significant
labor disputes or any difficulty in recruiting staff for our
operations.
Our
employees in China participate in a state pension plan organized by PRC
municipal and provincial governments. We are currently required to contribute to
the plan at the rate of 20% of the average monthly salary.
In
addition, we are required by PRC law to cover employees in China with various
types of social insurance, and we believe that we are in material compliance
with the relevant PRC laws.
Insurance
We
maintain worker's employee insurance for our employees. We provide social
welfare insurance for our employees. We also provide life insurance for our
officers. Other than the above mentioned, we do not maintain any other business,
liability or key employee insurance.
22
Company
Information
Our
principal executive offices are located at Room 1906, Shidai Caifu Tiandi
Building, 1 Hangfeng Road, Fengtai District, Beijing, China 100070, and our
telephone number is 011-86-10-5809-0110.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.