Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take
no responsibility for the contents of this announcement, make no representation as to its accuracy or
completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from
or in reliance upon the whole or any part of the contents of this announcement.
Lanzhou Zhuangyuan Pasture Co., Ltd.*
(a joint stock limited liability company incorporated in the People’s Republic of China)
(Stock Code: 1533)
SUPPLEMENTAL ANNOUNCEMENT IN RELATION TO
THE ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2019
Reference is made to the annual report of Lanzhou Zhuangyuan
Pasture Co., Ltd.* (the “Company”, together with its subsidiaries, the “Group”) for the year ended
31 December 2019 (the “Annual Report”). Unless otherwise defined, capitalized terms used herein
shall bear the same meanings as defined in the Annual Report.
The Company would like to provide the following updates and supplementary information in
relation to the Annual Report.
–1–
I. SUPPLEMENTARY INFORMATION IN RELATION TO DONGFANG DAIRY
On 31 October 2018, the Company acquired Dongfang Dairy Co., Ltd. (“Dongfang Dairy”) (the
“ Acquisition” ). Upon the Acquisition, the Company recognised, among others, a goodwill of
HK$58.7 million in its financial statements for the year ended 31 December 2018.
As disclosed in the Annual Report, Dongfang Dairy has realised a net profit after deducting non-
recurring profit or loss of RMB12.5 million, which failed to fulfil the performance undertaking
of RMB22 million for the year ended 31 December 2019 given by the vendor at the time of the
Acquisition. The Company expects that the performance undertaking in 2020 would still be unable
to be fulfilled.
The recoverable amount of Dongfang Dairy was assessed to be RMB263 million, which is lower
than its carrying value of RMB312 million. An impairment loss of RMB48.7 million on goodwill
was recognized accordingly (the “Impairment”).
Reasons for the significant Impairment made and the significant drop in net profit in 2019
The Company completed the acquisition of Dongfang Dairy on 31 October 2018. Upon completion
of the Acquisition, the Company made corresponding adjustment to the operation strategy, channel
building, management team and other aspects of Dongfang Dairy in light of the overall development
strategy of the Company. As there was a run-in period for the team of the Company and the team
of Dongfang Dairy after the merger and acquisition, the above adjustment had not yet produced
beneficial results in 2019, resulting in a drop in the performance in 2019.
The valuation method, major assumptions or details of the value of inputs used between the
valuation performed at the time of (a) the Acquisition; (b) the impairment assessment, and
the reasons for any changes in the valuation approach, inputs and assumptions from those
previously adopted
Specific Methods and Parameters Adopted in stage (a)
Specific Method:
On 31 March 2018, pursuant to the Indicative Announcement Regarding the Current Preparation
Stage for the Acquisition of Equity Interests in An Affiliated Company by Lanzhou Zhuangyuan
Pasture Co., Ltd. (
), for the Company’s proposed acquisition of the equity interests in Dongfang Dairy, it is
required to determine the value of all interests of shareholders as at the valuation benchmark date.
Therefore, in accordance with certain requirements such as Asset Appraisal Law of the People’s
Republic of China ( ) and the Accounting Standards for Business
Enterprises ( ), a valuation agency was engaged to conduct valuation on the
audited assets and liabilities as reported by Dongfang Dairy. The specific methods are as follows:
–2–
Pursuant to Practicing Standards for Asset Valuation — Enterprise Value (
), the valuation agency adopted the asset-based approach and income approach according
to the purpose of this assets valuation for valuation of the value of all interests of shareholders of
Dongfang Dairy based on the characteristics of the appraised assets and the type of appraised value
of assets adopted. In view of the fact that the purpose of the valuation in the stage of acquisition is
to provide value reference for the Company’s proposed acquisition of equity interests, it is more
important to evaluate the future operating conditions and profitability of the appraised entity instead
of simply evaluating the value of each elemental asset of the enterprise, and the valuation results
of the income approach can objectively and comprehensively reflect the fair value of the appraised
entity in the open market. Therefore, the results of the income approach are more applicable to the
purpose of the valuation in the stage of acquisition. It is more reasonable to use the valuation results
of income approach as compared to the asset-based approach. As a result, for the valuation in the
stage of acquisition, the valuation results of the income approach are used as the final valuation
conclusion.
The Company evaluates the equity value of Dongfang Dairy based on the valuation benchmark
date, namely 31 March 2018, and finally the valuation results of the income approach are used as
the final valuation conclusion. The selection methods and principles of the parameters of the income
approach shall be subject to the relevant requirements of Asset Appraisal Law of the People ’ s
Republic of China ( ) and Practicing Standards for Asset Valuation
( ).
Specific Parameters:
A. Assumptions relevant to the operating income
Considering the macroeconomic conditions and the national policies on the industries
related to the Company in the future, Dongfang Dairy has made a profit forecast for April to
December 2018 and 2019 to 2022 based on the historical financial data in 2016, 2017 and
March 2018. On the basis of understanding and analyzing the recent development trend of
the market and the actual operating achievements of Dongfang Dairy in recent years, making
necessary analysis, judgment on the profit forecasts of Dongfang Dairy for 2018 to 2022
and confirming the reasonability of the forecasts, the valuers believe the relevant data of the
profit forecasts of Dongfang Dairy for 2018 to 2022. In 2018, Dongfang Dairy is in a regional
monopoly position in the field of fresh milk in glass bottles (a form of packaging delivered
to the consumers’ homes daily) and this product with monopoly channel has created high
revenue for Dongfang Dairy and has established a solid brand image in the minds of the
consumers. Therefore, it is expected that the operating revenue for April to September 2018
will increase by 10.47% compared to that of January to March 2018 and the average growth
rate for 2019 to 2022 will be 6.37%.
–3–
B. Forecasts of the operating costs
The operating costs of Dongfang Dairy mainly consisted of raw material cost, labor cost,
depreciation and amortization and other operating cost. Operating cost rates for 2016 to March
2018 are 60.37%, 60.26%, 57.33%, respectively, with an average cost rate of 59.32% and an
average gross margin rate of 38.49%. The management of the Company has made a forecast
on the cost rates of various costs in the future with reference to the conditions for 2016, 2017
and the benchmark date, namely 31 March 2018. The operating cost ratios for each forecast
year are shown in the following table:
April to December
2018 2019 2020 2021 2022 Afterwards
60.02% 60.03% 59.48% 58.86% 57.78% 60.02%
C. Calculation of the discount rate
The weighted average capital cost (WACC) is selected as the discount rate. The calculation
formula is:
WACC [Ke ×E/(D+E)+ Kd ×D/(D+E)×(1-T)]
(a) For equity capital cost Ke, the capital asset pricing model (CAPM) is adopted to
determine the equity capital cost. The calculating formula is as follows: Ke Rf + β
(Rm-Rf)+ Rc. Wherein:
The risk-free return rate (Rf): The risk-free return rate is set at 3.75% based on the
average interest rate of the middle- to long-term government bonds issued by the
Ministry of Finance.
Risk premium, Rm-Rf: the stock exchange index is a composite index used to reflect
the stock trading in the stock market. SSE Composite Index and SZSE Component
Index are selected as the indicator of the return on stock investment of Shanghai Stock
Exchange and Shenzhen Stock Exchange, respectively. The estimated risk premium is
6.05%.
Beta coefficient, β: β value is the indicator that measures the enterprise system risk. By
collecting the β coefficient with financial leverage of the listed companies in the same
industry, the coefficient is restored as the β coefficient without financial leverage based
on the capital structure of the corresponding listed companies. On the basis of the β
coefficient without financial leverage, it is translated into the β coefficient with financial
leverage of the appraised enterprise based on the capital structure of the appraised
enterprise. Based on the above-mentioned calculation, the risk coefficient β of the
enterprise is 0.6144.
–4–
Enterprise risk adjustment coefficient, Rc: The risk adjustment coefficient specific to the
enterprise is set at 3.40% after the comprehensive analysis based on the corporate size,
market competition risk, product quality risk, animal epidemic disease risk and other
potential risks and countermeasures.
Based on the parameters determined based on the above analysis, the cost of equity
capital would be:
Ke Rf +β (Rm-Rf)+Rs 10.87%
(b) Debt capital cost (Kd)
The debt capital cost is determined to be 4.75% based on the actual situation of
Dongfang Dairy.
(c) D and E refer to the market value of interest-bearing debts and the market value of
equity of Dongfang Dairy, respectively
(d) T refers to corporate income tax. In accordance with Article 27, Paragraph 1 of
Corporate Income Tax Law of the People’s Republic of China, Article 86, Paragraph 1
(7) of Implementation Regulations for the Corporate Income Tax Law of the People’s
Republic of China and Notice of the Ministry of Finance and State Administration of
Taxation on Announcing the Scope of Primary Processing of Agricultural Products
Covered by Preferential Policies on Corporate Income Tax (for Trial Implementation)
(Cai Shui [2008] No. 149) issued by the Ministry of Finance, Dongfang Dairy is
exempted from the enterprise income tax for initial processing of dairy products, which
include pasteurised milk and UHT milk, during the year. For dairy products other than
pasteurised milk and UHT milk, the Company falls into the category of enterprises
in encouraged industries in Western China under Article 2 of Notice of the Ministry
of Finance, the State Administration of Taxation and the General Administration of
Customs on Issues Concerning Preferential Tax Policies Related to Implementation of
the Western Region Development Strategy (Cai Shui [2001] No. 202) (
2001 202 )
and is entitled to a reduced corporate income tax rate of 15% in the period from 2017
to 2020. Given the time limits for the preferential policies mentioned above and actual
situation of the enterprise, 2021-perpetual annual income tax rate would be 25%, from
the perspective of prudence. (Pursuant to the Notice of the Ministry of Finance, the State
Administration of Taxation and the National Development and Reform Commission on
Extension of Income Tax Policies for Western Development Enterprises (Notice of the
Ministry of Finance [2020] No. 23) (
2020 23 ), companies fall
into the category of enterprises in encouraged industries in Western China are entitled
to a reduced corporate income tax rate of 15% in the period from 1 January 2021 to 31
December 2030.
–5–
With the assumptions and calculations above, the discounted rate is calculated based
on the weighted average cost of capital before tax, applying the formula with the inputs
as mentioned above: the WACC since April 2018 and up to 2021 is 10.39%, while
2022-perpertual annual WACC is 10.29%.
D. Surplus assets
Surplus assets can be considered as assets which are not necessary for the continuing
operation of the business, such as cash surplus, marketable securities and other assets that are
not directly related to the projection on cash flow of revenue. As checked out and reviewed,
the surplus monetary fund as shown in the financial statements of Dongfang Dairy was nil,
and the carrying amount may be directly reflective of its value, with an appraised value of nil.
E. The value of non-operating assets and non-operating liabilities
Non-operating assets refer to the assets that do not directly relate to the normal operating
income of the enterprise, including unproductive assets as well as the assets not relating to the
forecasted income in this valuation. Non-operating liabilities are liabilities not directly related
to the income of an enterprise’s operating activities and the value of which is not included in
the income approach conclusion. The valuation of non-operational assets and non-operating
liabilities are determined by adopting the assets-based method. As checked out and reviewed,
the carrying amount of the non-operating assets stated in the financial statements of Dongfang
Dairy was RMB 46,210,200, with an appraised value of RMB 46,210,200; and the carrying
amount of non-operating liabilities was nil, with an appraised value of nil, and non-operating
net assets of RMB 46,210,200.
F. Interest-bearing debts
Interest-bearing debts refer to the debts that an enterprise is required to pay interests on
valuation benchmark date, which include short-term borrowings and bonds payables. Interest-
bearing debts are determined according to the carrying amount of each interest-bearing debt
after verification. As checked out and reviewed, the aggregate carrying amount of interest-
bearing debts as stated in the financial statements of Dongfang Dairy was RMB99,305,700,
with an appraised value of RMB99,305,700.
–6–
The projection process at the Acquisition stage:
Unit: RMB0’000
April to Year with
December stable
Item 2018 2019 2020 2021 2022 growth
Revenue from principal
businesses 16678.89 22764.22 23783.72 25396.38 26772.01 26772.01
Cost of principal business 10011.32 13664.93 14147.04 14948.45 15469.29 15469.29
Sales taxes and surcharges 261.30 333.66 343.70 359.57 373.11 373.11
Profit of principal businesses 6406.27 8765.63 9292.98 10088.36 10929.61 10929.61
Profit of other business 0.00 0.00 0.00 0.00 0.00 0.00
Operating expenses 2815.43 3692.31 3807.92 3981.01 4127.60 4127.60
Administrative expenses 1283.31 1776.48 1841.92 1925.12 2003.97 2003.97
Loss on impairment of assets 0.00 0.00 0.00 0.00 0.00 0.00
Operating profit 2307.53 3296.84 3643.14 4182.23 4798.04 4798.04
Investment income 0.00 0.00 0.00 0.00 0.00 0.00
Non-operating income and
expenses, net 0.00 0.00 0.00 0.00 0.00 0.00
Subsidy income 0.00 0.00 0.00 0.00 0.00 0.00
Earnings before interest and tax 2307.53 3296.84 3643.14 4182.23 4798.04 4798.04
Less: Income tax 342.98 448.37 495.47 568.78 652.53 1199.51
Net profit 1964.53 2848.47 3147.68 3613.45 4145.51 3598.54
Depreciation 1974.39 2632.52 2632.52 2632.52 2632.52 2632.52
Amortization 13.23 17.64 17.64 17.64 17.64 17.64
Capital expenditures 1987.62 2650.16 2650.16 2650.16 2650.16 2650.16
Increase in operating capital -637.84 70.01 49.78 77.07 69.34
Cash flow, net 2602.37 2778.46 3097.90 3536.38 4076.17 3598.54
Present value of future cash
flow 35,763.21
Addition: non-operating
assets 4,621.02
Less: non-operating
liabilities
Less: Interest-bearing
liabilities 9,930.57
Value of all interests of
shareholders 30,453.66
–7–
Specific Methods and Parameters Adopted in Stage (b)
Specific Method:
At the end of 2018 and 2019, the Company conducted the impairment test on relevant assets in
accordance with the requirements of the “Accounting Standards for Business Enterprises”, the “Risk
Warning for Accounting Regulation No. 8 — Impairment of Goodwill”, etc. The specific method is
set out below:
The management of the Company classified the relevant assets of Dongfang Dairy that commonly
generate separate cash flows into an asset group. At the end of the period, the Company compared
the carrying amount of the asset group with its recoverable amount to determine whether the
impairment of the asset group (including goodwill) has occurred. In the impairment test of the asset
group, the Company applied the current value of the expected future cash flows of the asset group
as its recoverable amount, while the estimation of the future cash flows of the asset group is based
on the historical performance of the asset group and the expectation of the management of the
Company on market with reference to the financial forecasts approved by the management of the
Company, subject to fulfillment of certain assumption conditions. Meanwhile, the Company adopted
a discount rate that can reasonably reflect the time value of money in the current market and the
risks specific to assets in calculating the current value of the expected future cash flow of the asset
group to determine its recoverable amount. An assessment is made for impairment by comparing
the forecasted recoverable amount with the carrying amount of the asset group containing goodwill.
When the impairment test is conducted on the relevant asset group containing goodwill, the
impairment test will be made first on the asset group not containing goodwill and then on the asset
group containing goodwill if there is an indication that the relevant asset group is impaired. The
corresponding impairment loss is recognized if the recoverable amount of the relevant asset group is
lower than its carrying amount (including goodwill).
The Company conducted impairment test on goodwill at the end of 2018 and 2019 and the method
and principle for selecting parameters are consistent. After the testing, no provision for impairment
was required at the end of 2018 but the provision for impairment was required at the end of 2019.
Below is an example in 2019 where we analyzed the key parameters.
–8–
Specific Parameters:
A. Assumption relevant to the operating income
The management conducted a forecast for 2020 to 2024 taking into account the sales
income and the growth status of the whole industry and market in 2017, 2018 and 2019, and
concluded that the income was growing at an increasingly stable growth rate. Due to the
impact of the COVID-19 outbreak, a public health emergency occurred in early 2020, which
resulted in a drop in the production and sales volume of Dongfang Dairy in the first quarter of
2020, it recorded a lower operating income than that for the same period of the previous year.
However, looking back to the historical data for 2003 when the “SARS” pandemic occurred,
the consumption expenses of residents on dairy products will increase in the future as they, as
daily consumption items, can enhance people’s immunity safely and economically. Therefore,
it is expected that the operating income in 2020 will drop by 7.00% over that in 2019, and that
it will resume back to its growth in 2021 at the rate of 4.57% higher than that in 2020 and the
average growth rate from 2022 to 2024 will be 8.55%.
B. Forecast on the operating costs
The operating costs of Dongfang Dairy mainly consisted of raw material cost, labor cost,
depreciation and amortization and other operating costs. The operating cost ratios for 2017 to
2019 were 60.26%, 60.79% and 64.77%, respectively, with an average cost ratio of 61.94%
and an average gross margin rate of 38.44%. The management of the Company has made a
forecast the cost ratio of various types of costs in the future with reference to that in 2019. The
operating cost ratio for each forecast year is set out in the table below:
2020 2021 2022 2023 2024 Afterwards
64.00% 63.93% 63.91% 63.97% 64.02% 64.02%
C. Calculation of the discount rate
The weighted average cost of capital before tax (WACC) is selected as discount rate. The
calculation formula is as follows:
WACC [Ke ×E/(D+E)+ Kd ×D/(D+E)×(1-T)]/(1-T)
(a) The cost of equity capital (Ke): The cost of equity capital is determined using the
capital asset pricing model (CAPM). The calculation formula: Ke Rf + β (Rm-Rf)+ Rc.
Wherein:
The risk-free return rate (Rf): The risk-free return rate is set at 3.98% based on the
average interest rate of the middle- to long-term government bonds issued by the
Ministry of Finance.
–9–
The risk premium (Rm-Rf): The stock exchange index is a composite index used
to reflect the stock trading in the stock market. SSE Composite Index and SZSE
Component Index are selected as the indicator of the return on stock investment of
Shanghai Stock Exchange and Shenzhen Stock Exchange, respectively. The estimated
risk premium is 4.81%.
The beta coefficient (β): The value of β is an index to measure an enterprise’s systematic
risks. After a β coefficient of the listed companies with financial gearing in the same
industry is obtained, it will be converted into a non-financial gearing β coefficient
based on the capital structure of the corresponding listed companies. Based on this
non-financial gearing β coefficient, a financial gearing β coefficient can be calculated
based on the capital structure of the companies assessed. Based on the above-mentioned
calculation, the enterprise’s risk coefficient is calculated at 0.8817.
The enterprise ’ s risk adjustment coefficient (Rc): The risk adjustment coefficient
specific to the enterprise is set at 3.20% after the comprehensive analysis based on the
corporate size, market competition risk, product quality risk, animal epidemic disease
risk and other potential risks and countermeasures.
Based on the parameters determined based on the above analysis, the cost of equity
capital would be:
Ke Rf +β(Rm Rf)+Rs 11.42%
(b) Debt capital cost (Kd)
The debt capital cost is determined to be 4.75% based on the actual condition of
Dongfang Dairy.
(c) D and E represent market value of interest-bearing debts and market value of equity
respectively.
– 10 –
(d) T represents corporate income tax. In accordance with Article 27, Paragraph 1 of
Corporate Income Tax Law of the People’s Republic of China, Article 86, Paragraph 1
(7) of Implementation Regulations for the Corporate Income Tax Law of the People’s
Republic of China and Notice of the Ministry of Finance and State Administration of
Taxation on Announcing the Scope of Primary Processing of Agricultural Products
Covered by Preferential Policies on Corporate Income Tax (for Trial Implementation)
(Cai Shui [2008] No. 149) (
[2008] 149 ) issued by the
Ministry of Finance, the Company is exempted from the enterprise income tax for initial
processing of dairy products, which include pasteurised milk and UHT milk, during
the year. For dairy products other than pasteurised milk and UHT milk, the Company
falls into the category of enterprises in encouraged industries in Western China under
Article 2 of Notice of the Ministry of Finance, the General Administration of Customs
and the State Administration of Taxation on Issues Concerning Corporate Income Tax
Related to Thorough Implementation of the Western Region Development Strategy (Cai
Shui [2001] No. 202) (
[2011]58 ) and is entitled to a reduced
corporate income tax rate of 15% in the period from 2017 to 2020. Based on the time
limit of above preferential policy and current actual condition of the enterprise, from the
perspective of prudence, the perpetual year income tax in 2021 is determined to be 25%.
(According to the Announcement on the Extension of Corporate Income Tax Policy for
the Western Region Development Strategy (MOF Announcement 2020 No. 23) jointly
issued by Ministry of Finance, State Taxation Administration and National Development
and Reform Commission on 23 April 2020
2020 23 ), companies
located in the western region that fall into the catalogue of encouraged industries are
subject to a reduced Corporate Income Tax rate of 15% from 1 January 2021 to 31
December 2030).
Based on the above assumption and calculation, the weighted average capital cost
(WACC) is selected as the discount rate, and the discount rate is calculated with the
above dates as: the WACC in 2020 is 11.33%, and the perpetual year WACC in 2021 is
13.21%.
– 11 –
Process of goodwill impairment test (2019):
Unit: RMB0’000
Year with
stable
Item 2020 2021 2022 2023 2024 growth
Revenue from principal
businesses 18,499.73 19,344.49 21,365.56 23,653.72 24,715.75 24,715.75
Cost of principal
business 11,839.38 12,367.42 13,655.41 15,131.42 15,822.95 15,822.95
Taxes and surcharges 171.19 175.65 185.92 197.27 202.44 202.44
Operating costs 2,539.88 2,656.05 2,888.67 3,149.40 3,293.06 3,293.06
Administrative
expenses 1,723.58 1,808.47 1,940.79 2,083.78 2,189.28 2,189.28
Asset impairment loss — — — — — —
Changes in fair value — — — — — —
Non-operating income
or expense — — — — — —
Depreciation 1,808.13 1,808.13 1,808.13 1,808.13 1,808.13 1,808.13
Amortization 138.77 138.77 138.77 138.77 138.77 138.77
Capital expenditures 1,303.70 1,303.70 1,303.70 1,303.70 1,303.70 1,946.90
Additional working
capital —402.11 45.19 99.01 110.74 55.49 —
Net cash flow 3,271.00 2,934.90 3,238.95 3,624.31 3,795.71 3,208.01
Discount rate 0.11 0.13 0.13 0.13 0.13 0.13
Discount period 1.00 2.00 3.00 4.00 5.00 —
Mid-value 0.50 1.50 2.50 3.50 4.50 —
Discount coefficient 0.95 0.83 0.73 0.65 0.57 4.33
Discounted value 3,100.06 2,436.50 2,375.16 2,347.62 2,171.76 13,898.78
Present value of the
cash flow 26,329.89
Value of an asset group
containing goodwill 31,201.82
Impairment provisions
for goodwill -4,871.93
– 12 –
The detailed basis and assumptions considered by the Company in arriving at the expectation
that Dongfang Dairy would not be able to fulfil the performance undertaking in 2020 with an
expected net profit of RMB16,359,000
The forecast of the Company on the net profits of Dongfang Dairy in 2020 was based on the
2020 financial budget approved by the management. The management forecasted that the
revenue of Xi’an Dongfang would be RMB184,997,300 in 2020, representing a decrease of 7%
from RMB198,923,100 in the previous year, the total operating cost was RMB165,750,900,
representing a decrease of 9.86% from RMB183,889,100 in the previous year, the income tax
expense was RMB2,886,900 in 2020, representing an increase of 12.84% from RMB2,558,500 in
the previous year, and the net profit was RMB16,359,400, representing an increase of 26.64% from
RMB12,917,600 in the previous year. The relevant details are as follows:
(1) Revenue
It was forecasted at RMB184,997,300. The assumption basis: The management of Dongfang
Dairy conducted a forecast for the revenue in 2020 taking into account the sales income and
the growth status of the whole industry and market in 2017, 2018 and 2019. Due to the impact
of the COVID-19 outbreak, a public health emergency occurred in early 2020, which resulted
in a drop in the production and sales volume of Dongfang Dairy in the first quarter of 2020, it
recorded a significantly lower operating income than that for the same period of the previous
year. However, looking back to the historical data for 2003 when the “ SARS ” pandemic
occurred, the consumption expenses of residents on dairy products may increase in the future
as they, as daily consumption items, can enhance people’s immunity safely and economically.
Key parameters: It was forecasted that the revenue in 2020 would decrease by 7% over that in
2019, taking into account the impact of the COVID-19 and the historical data for 2003 when
the “SARS” pandemic occurred.
(2) Total operating cost
a) Cost of the principal businesses
It was forecasted at RMB118,390,000. The assumption basis: The Company conducted
a forecast on the cost of the principal businesses in the future years based on the amount
and price of raw milk purchased by the Company in the historical years with reference
to the analysis and forecast of labor cost, depreciation and amortization, cost of raw
material and other costs.
Key parameters: The cost ratio of the principal businesses was 64%, which was basically
the same as that in 2019.
– 13 –
b) Sales tax and surcharges
It was forecasted at RMB1,710,000. The assumption basis: The sales tax and surcharges
of Dongfang Dairy included urban maintenance and construction tax, education
surcharge, local education surcharge, tenure tax payable, housing property tax payable,
water conservancy fund and stamp duty. The management determined the taxes and
surcharges in the future years at the tax rate applicable as at the assessment benchmark
date based on the value-added tax payable in 2020.
Key parameters: The value-added tax payable, the urban construction tax rate, the
education surcharge rate, the local education surcharge rate and the housing property tax
rate were forecasted at RMB6,400,000, 7%, 3%, 2% and 1.2%, respectively.
c) Selling expenses
Forecast amount was RMB25,400,000. Basis for the assumption: it was determined by
analysis on the growth in future operating income, the revenue for the forecast period,
business policies, and the historical selling expense of similar business.
Key indicators: the ratio of expenses to sales (selling expense/sale income) was 13.73%,
which was basically at the same level as that in 2019.
d) Administrative expenses
Forecast amount was RMB17,240,000. Basis for the assumption: the administrative
expenses of the Company mainly consist of staff remuneration, research and
development expense, business entertainment expenses, travel expenses, property
rental, depreciation of fixed assets, depreciation charges, etc. The remuneration for
management staff for coming years is forecasted by our management with reference to
the historical level of staff remuneration, the human resources development strategies
of the Company and the historical annual personnel growth. The customary enterprise
accounting policies were adopted consistently regarding the depreciation charges which
were provided for on straight-line method in accordance with the size of the actual fixed
assets for the forecast year.
Key indicators: rate of the administrative expenses (administrative expense/operating
income) remained at 9%, which was at the same level as that in 2019.
e) Loss of credit impairment
Forecast amount was RMB1,000,000. The management predicted that the size and
structure of financial assets and forecast credit risks would at the same level as that in
2019, and so was the impairment loss of credit.
– 14 –
f) Gains or losses from changes in fair value
The Company predicted that the gains or losses from changes in fair value for 2020
were RMB-2,010,000.
Key indicators: the average unit prices for milkable cows, heifers and calves remained
at the same level as that in 2019.
The feeding costs for milkable cows, heifers and calves remained basically at same level
as that in 2019.
The natural reproduction rate and the mortality and elimination rate of productive
biological assets remained basically at same level as that in 2019.
g) The income tax was calculated based on the total profit and at the applicable tax rate of
15%.
Supplementary information in relation to the Agreement on the Profit Estimation
Compensation of Dongfang Dairy
Pursuant to “Article II Profit Estimation Compensation” of the Agreement on the Profit Estimation
Compensation of Dongfang Dairy, Entered into by Lanzhou Zhuangyuan Pasture Co., Ltd. with Hu
Keliang and Ding Jianping (
):
2.1 During the profit undertaking period, if the accumulative actual net profit of the
targeted company as of the end of the current period is lower than the one committed, so
the person who has committed for its performance should make compensation to Party
A. As agreed between both parties, if there are circumstances that a compensation for
performance commitment is required, the performance covenantors shall compensate
Party A in cash.
2.2 Upon the issue of the Audit Report issued by an accounting firm, the performance
covenantors shall determine the amount of profit estimation compensation for the
current period based on the following formula:
The profit estimation compensation for the current period = (the accumulated actual net
profits committed as of the end of the current period — the accumulative net profit realized as
of the end of the current period) ÷ the aggregate net profit committed for the years during the
compensation period× the consideration of the transactions of the disposal, by the performance
covenantors, of the underlying assets of the targeted company-the accumulative compensation
paid
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2.3 The performance covenantors shall pay Party A in cash within one month from the date
of issue of the Audit Report for the current period upon the expiry of every accounting
year during the profit undertaking period.
The Audit Report of Lanzhou Zhuangyuan Pasture Co., Ltd. Concerning the Fulfillment of
Performance Commitment for 2019 by Xi’an Dongfang Dairy Company Limited (Da Xin
Zhuan Shen Zi [2020] No. 35-00016) (
2019 [2020] 35-00016
) was issued by PKF Daxin Certified Public Accountants LLP on 23 April 2020, pursuant
to which Dongfang Dairy was believed to fail to fulfill the profit commitment for 2019 under
the requirements in the Agreement on the Profit Estimation Compensation of Dongfang
Dairy, Entered into by Lanzhou Zhuangyuan Pasture Co., Ltd. with Hu Keliang and Ding
Jianping (
). According to the computation of performance commitment, as of
31 December 2019, Hu Keliang and Ding Jianping, each being a former shareholder of the
Company, shall pay to the Company RMB17,358,124.99 and RMB4,975,124.24, respectively,
as compensation.
As of 22 May 2020, the Company has received the payment for performance compensation of
RMB17,358,124.99 and RMB4,975,124.24 from the performance covenantors, Hu Keliang
and Ding Jianping, respectively.
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II. SUPPLEMENTARY INFORMATION IN RELATION TO REMUNERATION
OF DIRECTORS AND SUPERVISORS
Amount incurred for the year
Wages, housing
subsidies,
Directors and other subsidies Retirement
Supervisors and physical Discretionary scheme
Category of personnel Fees benefits bonus contributions Total
Executive directors
Mr. Ma Hongfu 147,600.00 201,882.24 10,517.76 360,000.00
Mr. Wang Guofu 89,570.00 259,962.24 10,517.76 360,050.00
Mr. Chen Yuhai 100,130.00 261,402.24 10,517.76 372,050.00
Ms. Zhang Qianyu 68,227.00 105,162.24 10,517.76 183,907.00
Independent non-executive directors
Ms. Liu Zhijun 30,000.00 30,000.00
Mr. Zhao Xinming 30,000.00 30,000.00
Mr. Wong Cho Hang Stanley 105,381.10 105,381.10
Supervisors
Mr. Wei Lin 30,000.00 30,000.00
Mr. Sun Chuang
Ms. Du Wei 78,685.55 62,741.69 10,517.76 151,945.00
Total 195,381.10 484,212.55 891,150.65 52,588.80 1,623,333.10
Notes:
1. No emolument was paid or payable by the Group during the year ended 31 December 2019 to any of the
directors and supervisors of the Company as an inducement to join or upon joining the Group.
2. No compensation was paid or payable by the Group during the year ended 31 December 2019 to any of
the directors and past directors and supervisors and past supervisors of the Company for loss of office.
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The above additional information does not affect other information contained in the Annual Report
and the content of the Annual Report remains unchanged.
By order of the Board
Lanzhou Zhuangyuan Pasture Co., Ltd.*
Ma Hongfu
Chairman
Lanzhou, the PRC, 3 June 2020
As at the date of this announcement, the executive directors of the Company are Mr. Ma Hongfu,
Mr. Wang Guofu and Ms. Zhang Qianyu; the non-executive directors of the Company are Mr. Yap
Kean Chong and Mr. Song Xiaopeng; and the independent nonexecutive directors of the Company
are Ms. Liu Zhijun, Mr. Zhao Xinmin and Mr. Wong Cho Hang Stanley.
* For identification purpose only
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