gansu modern forage, alfalfa production in gansu, china 2014

Capturing the alfalfa opportunity in Gansu

Lanzhou, China July 2014

Table of Contents

C Gansu Modern Forage – Current Status

D Strategy & Business Model

E Stakeholder Analysis & Partnerships

F Organisation Structure & Governance

B Market and Industry Background

G Finance & Investments

H Implementation Timeline & Conclusion

1

A Introduction

Executive Summary

5

9

20

2

65

30

54

78

85

EXECUTIVE SUMMARY

2

Executive Summary (1/2)

Executive Summary

3

Capitlising on growing demand for high quality feed to support China’s increasing meat and dairy consumption, Gansu Modern Forage Development Co., Ltd. (GMF) aims to be China’s top commercial producer of alfalfa and alfalfa products. GMF’s business model is aligned with government policy and supports rural development by improving farmers’ livelihoods and reviving unused or underutilized arid land in Gansu Province.

GMF’s current operational hub is in Dingxi Prefecture, one of China’s least developed areas situated less than 100km from Gansu’s provincial capital Lanzhou. The provincial and local government strongly supports alfalfa cultivation through favorable policies such as landscaping, transfer of land use rights and other incentives.

GMF must overcome a number of challenges to achieve its goal including insufficient supply and inconsistent quality of alfalfa, weak and fragmented supply chains and a lack of mechanization suited to mountainous terrain to support more efficient harvesting. GMF must also secure the talent and funding, engage in the partnerships and institute the governance mechanisms required to support the rapid growth of the business.

GMF has an opportunity to grow 50% p.a through 2019, see a tenfold increase sales volume and achieve sales and net profit of RMB1.3B and RMB144M respectively.

External capital is required to fund expansion and can be secured in the form of investment from socially-oriented investors interested in rural development and financing from local banks.

The estimated total investment needed is RMB 30M over the next 5 years before breakeven.

Executive Summary (2/2)

Executive Summary

4

Key recommendations to GMF are:

– Focus on the production of alfalfa pellets to take advantage of rising demand from the animal husbandry sector, using as raw material medium quality alfalfa which can be cultivated on large tracts of rain fed mountainous land in Gansu

– Differentiate through an inclusive business model by establishing cooperatives of alfalfa collectors and farmers and offering these key stakeholders shareholding in the parent company to strengthen the value chain and secure consistent supply

– Enter into a strategic partnership with an agricultural machinery provider to develop and distribute appropriate technology such as alfalfa harvesters customised for use on mountainous terrain and pulley systems for more efficient transport of alfalfa

– Acquire and retain a strong management team and offer shareholding to instil a sense of ownership and shared success

– Work alongside the government and farming communities to promote the utilisation of unused mountainous land for alfalfa cultivation by demonstrating through its business model the potential benefits of the alfalfa market for rural development.

Note: Financial models and assumptions available upon request

Table of Contents





Executive Summary




5

A Introduction

GIFT Global Leaders Programme

The Global Institute For Tomorrow (GIFT) is an independent pan-Asian think tank focused on advancing a deeper understanding of global issues including the shift of economic and political influence from the West to Asia, the dynamic relationship between business and society, and the reshaping of the rules of global capitalism.

The Global Leaders Programme is the flagship executive education programme offered by GIFT for leading global organisations.

6

Introduction

Global team works on real-world field project

24 participants from 8 countries and 14 organisations traveled to Gansu to develop strategic recommendations to support GMF expansion.

The group engaged in site visits, field research and stakeholder meetings and focus groups with GMF Chairman and employees, government officials, farmers, collectors and cooperatives and strategic partners including financial institutions and machinery providers.

7

Introduction

Project objectives and scope

Development of five-year expansion strategy for GMF

Analysis of current status

Business Plan

Implementation

Forage market and industry based on own research and interviews with stakeholders

GMF current status and operational model Opportunities and challenges

Business model for different growth scenarios Recommended actions for

– Operations and supply chain – Stakeholder management – Organizational structure and governance – Finance and investment

Time line and implementation

8

Introduction

Table of Contents

C Gansu Modern Forage - Current Status




Executive Summary



9

A Introduction


This section will cover 3 areas

10

Rural development

Section

Alfalfa industry as an opportunity

Alfalfa market outlook

Description/Objectives

Importance of agriculture in bringing prosperity to underdeveloped areas of China such as Gansu

Opportunities and challenges of the growing market for alfalfa in rural Gansu

Growth in demand for alfalfa in China

Market and Industry Background

Rural development policies make investment attractive

11

Central Government: President Xi Jingping: “Building a harmonious society is crucial for realizing

China Dream,” Xi further emphasized in 18th National Congress “Three-Rural Issues”（agriculture,

rural development and farmers）to be addressed by reforming rural economies, developing

modern technology and better “social management” in rural areas.

Agriculture

-- Annual grain production capacity to be no less than 540 million tons

-- Farmland reserves to be no less than 1.818 billion mu； *one mu = 666.7 square metres

Livelihoods

-- Pension schemes to cover all rural residents

-- Construction and Renovation of 36 million apartments for low-income families

Social management

-- Improved public service for rural residents

-- Better social management system for greater social harmony

Reform

-- In-depth reform in monopoly industries for easier market entry and more competition

-- Improved government efficiency and credibility.

Market and Industry Background – Rural Development

National and provincial government policies support agricultural sector growth

12

National Policies:

– Improve productivity of food crops

– Enhance agri-tech and equipment access

– Optimize agribusiness and agri-economic structure

– Develop rural public services and infrastructure

– Innovate rural developmental schemes

– Intensify environmental protection

Gansu Provincial Policies:

– Subsidy for grassland ecology conservation

– Support dairy-alfalfa sector growth

– Loess Plateau rehabilitation scheme

– Enhance agricultural sector, improve farmers’ income through restructuring, technological support, and procedural innovation

– Become a leader in the forage industry

Market and Industry Background – Rural Development

Gansu well suited for alfalfa cultivation with significant amounts of arid but potentially arable land

13

Large but Low Quality Farmland Available

Arable land: 80M Mu

80% of farmland is medium to low quality

Elevation 1000m+

Low annual rainfall - Avg 300mm

Large Rural Population

26 million Population

61% Rural population - Low annual Income RMB 5,000

39% Urban population - Annual income RMB 20,000

Underdeveloped

GDP: RMB 627bn (Rank 27th)

GDP per capita: Rank 30th of 31 provinces in China

Gansu can benefit from a new growth sector

Market and Industry Background – Alfalfa Industry

Emerging middle class driving growth in demand for forage crops

14

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Milk Cattle Rabbit Sheep Goat Chicken

Source: United Nations, FAOSTAT own calculations

Chinese production of animal products (million tons)


Perennial flowering legume cultivated globally. Highly palatable and primarily used as feed for high producing dairy cows because of its high protein content and highly digestible fiber compared to grass

Can be harvested three to four times a year (twice a year in most parts of Gansu due to environmental conditions and cultivation techniques)

Requires minimal crop management and does not need to be replanted for approx ten years – quality peaks seven to eight years after planting

High vitamin and mineral content make alfalfa the best forage for maximizing productivity in dairy cattle. Alfalfa has been scientifically proven to positively impact milk production yields, protein content and overall cattle health

Alfalfa quality is primarily defined by crude protein content and fiber content. Its yield and quality are significantly impacted by the stage of maturity at cut and number of previous cuts.

The Relative Feed Value (RFV), Crude Protein Content (CP) and Total Digestible Nutrients (TDN) are highest in pre- to mid-bloom with lower Acid Detergent Fibre (ADF) and Neutral Detergent Fibre (NDF) fibre content.

Alfalfa – The Queen of forages

15

Source: University of Kentucky Dept. of Agronomy


Alfalfa uniquely positioned as an economic growth pillar for Gansu with strong government support

16

Alfalfa

Strong central government support

Strong provincial support to make forage a pillar of economic growth

Chinese domestic milk production back on growth track after melamine scandal

Economic growth and emerging middle class resulting in higher meat and dairy consumption

Regulatory Environment

Huge Market Potential


The early stage

1999-2003

Informal market began in 2001

Companies with Competitive advantages in production, quality, geography or logistics flourished

Market Situation: Supply surplus and low quality crop

Small area of land dedicated to cultivation (500K mu)

Alfalfa has gone through 3 major development stages in China and is now on a positive path with great potential

17

The challenging stage

2003-2006

Great Horizon Stage

2006 - now

Regulatory change in government subsidy impacted attractiveness of growing alfalfa compared to other crops (i.e. corn and potato)

Poor quality: Chinese alfalfa was often “mouldy” and alfalfa products often “impure” due to mixing other ingredients

Increased demand due to standardization/consolidation of large scale animal husbandry driven by growth in dairy consumption

Increase in alfalfa prices attracted more farmers

Domestic companies realised need to provide good quality and sustainable supply to compete with imported alfalfa

Enhanced government support linked to poverty alleviation, reversing desertification and and rural development


Market and Industry Background – Market Outlook

18

China’s 34 million ton Alfalfa market potential: Dairy, Sheep and Goat production biggest consumers

Sources: http://en.cnki.com.cn/Article_en/CJFDTOTAL-GWXK201011004.htm http://www.chinadailyasia.com/business/2014-02/07/content_15116592.html United Nations FAOSTAT Estimations from calculations using available data

3% 4%

8%

15%

19% 23%

28%

Rabbits Chicken Pigs Beef Milk cows Goats Sheep

Market split If Alfalfa is industry’s forage of choice

Sectors

Estimated alfalfa input needed for animal feed

(in million tons) Sheep 9.3

Goats 7.6

Milk cows 6.5

Beef 5.2

Pigs 2.8

Chicken 1.4

Rabbits 1.0

Total 33.8

http://en.cnki.com.cn/Article_en/CJFDTOTAL-GWXK201011004.htm





http://www.chinadailyasia.com/business/2014-02/07/content_15116592.html





Alfalfa industry: Positive growth outlook

19

Alfalfa market in China (million tons)

5

10

15

20

25

30

35

40

45

50

2013-2019: Forecast

Market and Industry Background – Market Outlook

Table of Contents




Executive Summary




20

A Introduction


This section will cover 3 areas

Gansu Modern Forage – current position

Section

Current business analysis

Business model


Gansu Modern Forage’s (GMF) unique position in the Chinese alfalfa market

Strong financial position of the company

Established business value chain

Gansu Modern Forage’s current business model and competitors

21

Gansu Modern Forage – Current Status

Gansu Modern Forage: Well positioned to take advantage of the growing market for alfalfa

22

Early rapid

growth

Description

Founded in 2009, grew rapidly in first three years from

4,300 tons to 65,000 tons

Chairman’s

experience

Founder and Chairman, Zhang Yuping is a 25 year

veteran of the domestic dairy industry and initial

shareholder at leading dairy company Mengniu

Mr. Zhang is a member of the “Corporation Decision

Commission” at Mengniu and one of their major

distributors in northwest China

Scientific Approach

Utilizes modern scientific forage research and crop

management techniques to standardize and

maximize production and quality of domestically

grown alfalfa


GMF at an inflection point after successful start-up

23

GMF: at an inflection point

GMF has successfully ramped up sales

Stable profits with good outlook

Established value chain

The company is now at an inflection point where it would significantly grow and benefit from further investments and improvements to its business, financing model and mgmt structure


Current Alfalfa products include domestic and imported hay and high-grade alfalfa pellets

24


Well established, concentrated customer base leaves room for expansion with existing and new customers

25

40%

Other

13%

15%

23%

40%

New customers: focus areas

Moving into high-grade pellet feed is key:

Rabbit feed

Specialized poultry feed

Specialized lamb feed

Additional dairy firms can help to diversify risk of having sales portfolio tied up into few big customers

Opportunity to explore niche products i.e. alfalfa tea and supplements


Currently a small percentage of total supply

Harvesting services

FINANCIERS Banks, Credit unions, micro-finance institutions

MACHINERY PROVIDERS

GMF FARMS “Company-

leased land”

COLLECTORS & COOPERATIVES

Considered “land under cultivation”

Own / acquire / consolidate land

Employees

CUSTOMERS Dairy farms, Meat producers, Feed companies, etc

GMF Flow of Cash

Flow of Goods & Services

DOMESTIC ALFALFA SUPPLY

Landowners

SMALLHOLDER FARMERS

US-BASED ALFALFA

IMPORTERS (higher quality

+ price)

Existing Business model


Producing Area N.A. Production ~50,000 metric ton per annum Locations Beijing Key products Alfalfa hay products (bales, pellets)

Producing Area 42,000 mu (6,919 acre) Production N.A. Locations Beijing, Gansu Key products

Alfalfa hay products (bales, cubes) and other animal feed products

Producing Area N.A. Planned production capacity

<200,000 metric ton per annum (historical forecast, current capacity expected to be significantly lower)

Locations Sichuan, Gansu Key products

Alfalfa hay products (bales, pellets) and grass products

Planned producing Area

60,000 mu (9,884 acre)

Production capacity N.A. Locations Inner Mongolia Key products Alfalfa hay products (bales, cubes)

27

Competitive Analysis: main competitors Gansu Modern Forage – Current Status

Gansu Modern Forage is uniquely positioned for growth in the alfalfa market

Progressive Management

Business Performance

Geographical Location

Experienced Chairman with 25 years industry experience

Committed to growing the company in a socially responsible way

Strong financial standing with stable business performance

Existing capacity to ramp up production of pellets to meet demand

Company assets located in heart of alfalfa cultivation areas with good

infrastructure links (e.g. railways and roads)

Strategically located in areas with ample supply of cheap and unused land

ideal for growing alfalfa suitable for pellet production

Aligned with government policy to alleviate poverty in rural Gansu

through development of the agricultural sector

28

Regulatory


Key opportunities for Gansu Modern Forage’s future

29

Product mix

Area

Supply Chain

Opportunities

Significantly scale up and increase

proportion of alfalfa pellet

production in order to capture

rising demand in Chinese market

Increase amount of land covered

in supply chain and expand

supplier network thus increase

supply of raw materials

Partnerships

Differentiate through innovations to

current business model to enable

growth

Secure financing and/or capital for

five year expansion plan

Proposed Solution

Acquire cheap underutilised

mountainous land

Form new cooperatives

Appropriate technology i.e.

harvester and pulley system

Offer key cooperatives

shareholding in GMF

Seek external investors

and/or partnerships with

local banks

Utilise lower quality alfalfa

which can be grown on

mountainous terrain


Table of Contents




Executive Summary




30

A Introduction


This section will cover three areas

Business model

Section

Market strategy

Supply chain


Key elements of the proposed business model for GMF

Suggested GMF market strategy and business growth scenarios

Recommendations on expansion of GMF’s alfalfa supply chain

31

Strategy & Business Model

Proposed business model must significantly grow GMF’s alfalfa business

Going forward, GMF should therefore focus increasingly on the production of alfalfa pellets and significantly scale-up its operations through enhanced access to raw materials

Pellets to contribute 75% of alfalfa business, capturing demand growth in Chinese meat production industry

Through pellet production GMF can differentiate and diversify its business model from pure collector-distributor competitors models, and realize higher margins

GMF can utilize lower quality alfalfa to produce Alfalfa pellets. The supply of lower quality alfalfa can be scaled up significantly by expanding alfalfa cultivation into currently underutilised land in Gansu province

Strategy & Business Model – Business Model

32

Strategic partnerships must play a key role in proposed business model

GMF must therefore engage in strategic partnerships to increase access to alfalfa supply.

Collectors: to form cooperatives and offer “sweat equity” to support increased alfalfa cultivation and supply. Coops can organise farmers and provide value-added services

Machinery providers: to co-develop customized harvesters and potentially a pulley system for efficient transport

Banks: to finance GMF and key suppliers working capital to support scaling up

Government: to continue to develop local alfalfa industry via:

– Landscaping of arable land

– Subsidies for new machinery deployment

– Financial support for collectors

33


Future business model

GMF

GMF leased farmland Cooperatives

Domestic suppliers

Farmers & collectors

Dairy farms, Meat producers, Feed companies

Customers

Government

Banks

Machinery COs.

Strategic Partners

Flow of Alfalfa

Flow of cash

34

Changes to existing model Focus on alfalfa pellets production Establish collectors cooperative Strategic partnerships with government,

machinery providers and banks

Sweat equity

Customised harvesters


Business model

Section

Market strategy

Supply chain



Suggested GMF market positioning and business growth scenarios


35


Three main scenarios evaluated: significant growth within reach if recommendations implemented

36

Proposed

Base case

Vision (Best case)

Reach one million ton production /year by 2019

Realising GMF mgmt team long term vision by successful implementation all key recommendations

Achieve 0.6 million ton production/ year by 2019

Implementing majority of key recommendations within proposed timeline

Continued organic growth without significant changes to current business model

Negligible growth in production

S cenario

0

200

400

600

800

1,000

1,200

00

0’s

to

ns

vision proposed base

Strategy & Business Model – Market Strategy

Three five-year business scenarios for GMF expansion based on key parameters

Base case Proposed Case

120,000

62,000

134,084,000

4%

2,000,000

1,000,000

2,298,684,000

70%

Government landscaping support

Current levels of

landscaping maintained

Attractiveness to and loyalty of collectors

Current level

Vision (Best Case)

1,200,000

602,000

1,379,084,000

50%

Profit sharing scheme with collectors in place

Medium-scale outreach

Minimal, current level 70% mechanization

(highest feasible case)

Technical support & education for farmers

No outreach program

Up to 50% mechanization

Medium-scale outreach program in collaboration with government extension office

Land base (mu) Sales vol (mt) Revenue RMB Growth rate


37

Mechanization

Profit sharing scheme

with collectors in place

Maximum outreach

At least 50% of Gansu’s counties under active landscaping program

100% of Gansu’s

counties under active

landscaping program

Massive, large scale

outreach program in

collaboration with

government extension

office

GMF strategy to focus on alfalfa pellets to capture value

Product

Price

Customer

Shift Focus to Alfalfa pellet production

– Lower protein content requirement

– Suitable for rain fed crops grown in lower protein content crops of Gansu soil

Forecasted prices by 2019

– Alfalfa pellet 2.300RMB/ton

– Alfalfa hay 2.500RMB/ton

Lower margin but high volume makes up for profit

They should focus on two main types of customer

– Feed manufacturers

– Directly to farms

▪ Cattle, Rabbit, Sheep, Goat, and Dairy

1

2

3

7% 1%

5%

1%

86%

Domestic alfafa hay

Imported alfafa hay

Domestic oat hay

Corn Silage

alfafa pellets Competitor 4

Expect more competition in alfalfa hays due to

– High margin

– Easy access to imports

Competitive advantage for GMF when Gansu supply base is formalised

38

Proposed product mix


Business model

Section

Market strategy

Supply chain



Suggested GMF market positioning and business growth scenarios


39


If land base in supply chain is to be increased ten-fold the current model is not viable to manage increase in amount of company-leased land or number of farmers and collectors

Farmers and collectors not adequately organised, equipped, financed or trained to increase quantity and quality of supply

Current levels and modes of mechanisation insufficient for projected volume and required quality of alfalfa

Current supply chain model

40

Key challenges

Current model and constraints

Supportive policies i.e. landscaping

(Government)

Farming families Current > 6k

Future > 20k-60k

Alfalfa collectors Current > 50

Future > 300-1k GMF

Lack of labor to work land due largely to urbanisation and

stigma attached to farming as “primitive”

Large and segmented base of producers with limited access to mechanisation, knowledge of best practice and market

information

Lack of working capital at harvest time makes purchasing large quantities difficult. Low

levels of loyalty to buyers among most collectors

Majority of current harvesters not well-

suited to mountainous terrain

Flow of alfalfa

Model of purchasing machinery for use on company

land and then leasing to collectors is constrained

Strategy & Business Model – Supply Chain

Challenges and Recommendations

Capability & availability of appropriate technology for harvesting

Description Recommendation

Availability of harvesting machinery

affecting productivity and quality of

harvest due to short window of time to

ensure optimum protein content and avoid

spoilage of crop

Current harvesting equipment not suitable

for the terrain in Gansu

GMF to lead initiative for introduction of

appropriate equipment - JV with

manufacturer, establish distribution

network and leasing mechanism

Explore potential for pulley system to

transport large quantities of alfalfa

around mountains more efficiently

Low level of loyalty from cooperatives,

collectors and farmers

Capacity and capability of cooperatives and

collectors to manage farmers to achieve

targeted increase in land area utilized for

alfalfa cultivation

Implementation of a scalable a

supply chain model leveraging

cooperatives to drive increase in

quantity/quality of alfalfa supply and

loyalty to GMF

– Shareholding scheme

– Structured communication model

– Access to mechanisation, market

information and financial

resources

Informal relationships with key suppliers

Challenges

41


Proposed supply chain model

42

Key Elements of Model

GMF to act as a development partner to support government in new landscaping

Technology: Partnership with machinery manufacturers to produce and distribute mountainous harvester and baling machine and explore viability of pulley system

Forming / strengthening cooperatives is critical

Set up standard Information sharing, quality promotion, and deal process via cooperatives with collectors and farmers.

Proposed Model Supportive

policies i.e. landscaping

(Government)

Farming families Current

> 6k Future > 20k-60k

Alfalfa collectors

Current > 50 Future > 300-1k

Collector & farmer

cooperatives GMF

Machinery suppliers

Flow of alfalfa

“GMF Machinery” leases harvesters to

key co-ops


Supply chain challenges: three key focus areas

Suggested increase in GMF leased farmland and leverage cooperative model to expand land base in supply chain

Appropriate technology

Cooperative model

Land expansion

Deployment of cooperative model to incentivise collectors and farmers and provide value-added services to key suppliers

Development of appropriate technology to improve quality and efficiency in supply chain whist keeping capital costs down

Focus area Description/Objectives

43


Land expansion is supported by favorable government policies

Landscaping

Description Importance for GMF

Landscaping mountainous land and

enhancing previously landscaped land to

increase area available for farming

– Example: 50k to 80k mu/year in Dingxi

covering newly landscaped land as

well as enhanced land

Additional arable land necessary for

alfalfa cultivation

Land where alfalfa suitable for pellets can

be grown is a strategic advantage for GMF

Promotion of social and environmental

benefits enhances company profile

Ability of GMF and farmers to secure

newly available as well as discarded land

use rights (30yr lease from government)

Government incentives to promote alfalfa

cultivation as alternative or complement

to other crops such as corn and potato

Corn and potato cultivated on approx 25

to 100% of actively farmed lands

As above, increased alfalfa supply

essential to drive GMF business

growth and to promote rural

economic development

Acquisition

Utilization

Transfer of land use rights are central to

GMF’s goal of increasing both company-

leased farmland and the amount of land

being used to cultivate alfalfa

Issues

44

Strategy & Business Model – Supply Chain: Land expansion

Government support can drastically increase land used for alfalfa cultivation in next 15 years

Landscaping

Recommendation

GMF to coordinate with local government on approach and prioritization of landscaped

area aligned with requirements

– Identification of areas more accessible logistically, within existing collector’s coverage,

soil/climate considerations

– GMF to seek favorable landscaping specifications including integration of pulley

system as part of land improvements

Acquisition

Utilization

Gain government support on proclamation of policies allowing for supplementary land

acquisition for Alfalfa farming

– GMF to increase land ownership

By 220% YoY from 5 thousand to 250 thousand mu in five years to achieve sales

volume of one million tons

By 1649% YoY to two million mu in 13 – 15 years (10% of total land in supply

chain)

– Influence farming community to acquire at least 1.3M mu in the next five years

Issues

GMF to encourage government for more incentive to support Alfalfa cultivation in newly

landscaped and discarded land

– Subsidies for seeds and other inputs

– Improved infrastructure

45

Strategy & Business Model – Supply Chain: Land expansion

Cooperative model addresses multiple supply chain challenges

Cooperative (shareholders of GMF)

Collector

Farmer Farmer Farmer

Collector Collector

GMF


Township Level

Village Level

Individual Level

46

Current

Supply Chain

GMF

Shortage & low quality of Alfalfa

Limited resources to cover fragmented

suppliers

Difficulty in accessing finance

Lack of access and finance for machinery

Insufficient incentive to sell to GMF

Collectors/Farmers

Cooperative

Model

Consolidation ensures stable supply and pooled resources improves quality

Simplify supplier management

Offer co-ops shareholding in GMF

Cash advances and credit guarantees from GMF

Mechanization and storage

Purchase price incentive

Farmers Cooperatives exist as independent commercial entities, they not only function as collectors to provide alfalfa to GMF, but also channel GMF’s incentives to individual collectors and farmers such as harvesting services, financial services, market information, and technical support

How Cooperatives Work

Strategy & Business Model – Supply Chain: Cooperative model

GMF must strengthen supply chain relationships

Mobile based info network

Annual

event and ranking

Hardship fund

Provide covers and basic storage

SMS service to relay information on pricing, weather, industry news, etc to cooperatives, collectors and farmers directly and frequently

“Alfalfa Awards” brings together suppliers for festival where ranking of cooperatives based on quality & quantity is announced and new industry developments are shared

One per cent of profit from GMF earmarked for cooperative hardship fund to be used for disaster relief, offset poor harvests, etc

To protect harvest from rain and reduce spoilage

• Build trust and loyalty

• Increased productivity and quality

• Tighter communication

• Create social cohesion and community of alfalfa growers

47

Options Purpose

Strategy & Business Model – Supply Chain: Cooperative model

Appropriate technology is crucial to achieve scale

Challenges Specialized mechanization advantage

Low efficiency of hand harvesting, 5mu/person/day

Low quality of hand harvested alfalfa

Large amounts of land and shortage of labour

Current machines not suitable for mountainous land

High efficiency of mechanisation, target to achieve 100mu/day

Alfalfa quality will be improved due to timely and precise harvesting

Mechanization is not labor intensive

Specialized machine can access and work effectively on mountainous terrain

48

Strategy & Business Model – Supply Chain: Appropriate technology

Head mounted side- mounted Rear mounted Hand held

2m wide 4m wide 2m wide -----

250hp 500hp 250hp 1hp

Low harvesting capacity (small cutter)

High harvesting capacity

Low harvesting capacity

Extremely low harvesting capacity

70-80K RMB 200K RMB 70-80K RMB 1K RMB

--- Pressing function --- ---

49

Harvesters in use are either too big, have inadequate harvesting capacity or lack key features such as hay pressing in order too shorten drying time

Existing harvesters unsuitable for mountainous terrain


GMF can develop and distribute a customised harvester

Suitable size for mountain land

Powerful engine

Pressing / Baling function is necessary

Head mounted, max 2m wide with cutter

500HP Power, with high harvesting capacity

Shorten the drying time of the hay and prevent spoilage

Machinery requirements for GMF

Recommendations

GMF to form a joint-venture with leading Japanese or German machine manufacturer in Gansu to produce specialized machine for alfalfa harvesting.

Government support in order to allow for production in China as competitive costs will be critical.

Possibility of selling nationwide with government support and potentially public sector contracts will be very attractive to potential JV partner

50


51

Challenges of conventional transportation:

Collection and transpiration of alfalfa in steep step fields requires significant:

– Manpower

– Fuel

– Time

Solution:

Implementation of pulley systems will lead to:

– Less labour-intensive harvesting and transport of alfalfa

– More efficient transportation of harvested alfalfa improving quality and reducing spoilage

Implementation:

– Pulley system may be established by cooperatives, collectors, government or through joint efforts

– Government support for this initiative will be vital and they should be engaged as early as possible

Why pulley system is recommended

Pulley Systems GMF can also promote simple pulley systems such as those used in Japan to improve efficiency of alfalfa collection and transport in mountainous areas


Key milestones for mechanisation & supply chain

52

Set up

(~1 year）

Phase1

(1~3 years）

Phase2

(3 years~)

Set up JV with leading machinery company

R&D Harvester units >20

Manufacturing equipment Set up Leasing Co. Harvester units >125

Network expansion Equipment supply increase Harvester units >200

Mechanisation

Supply chain Networking with cooperative

Farming families >6,000 Collectors > 100 Cooperatives >40

Farming families >20,000 Collectors > 300 Cooperatives >140

Farmer families >60,000 Collectors > 1,000 Cooperatives >400

The action plan for mechanization & supply chain restructuring will enhance the overall alfalfa sourcing capacity thereby allow for rapid and sustainable business development.

Strategy & Business Model – Supply Chain: Key milestones

Landscaping, supplier loyalty, appropriate technology and financing critical for expansion

Landscaping to make new arable land available and enhance previously landscaped land is vital to increase amount of alfalfa cultivation

Introduction of scalable supply chain model which leverages cooperatives with shareholding in GMF and provides valuable services to key suppliers will build trust and loyalty and increase quality

JV with leading machinery company to develop and distribute harvesters suitable for mountainous terrain through a leasing model is crucial for expansion

Formalising relationship with key suppliers makes access to financing in the supply chain easier

53

Strategy & Business Model – Supply Chain: Conclusion

Table of Contents

C Gansu Modern Forage Current Status



Executive Summary




54

A Introduction


Stakeholder analysis & partnerships covers two areas

Stakeholder Analysis & Partnerships

Section

Partnerships

Communication plan

Description/ Objectives

Suggestion for partnerships that can support GMF in achieving its strategic objectives

Summary of key points for GMF Management for communication with key stakeholders

55

GMF’s interests need to be aligned with its stakeholders, leading to partnership opportunities

GMF

Collectors

Stakeholders’ Objectives Suggested Partnerships

Increase supply of Alfalfa for business growth

Improve alfalfa quality

2.Technology: Help collectors to gain access to appropriate technology by partnering with machinery providers

Government

Machine Providers

Banks

Stak

eh

old

ers

3. Financial support: Partner with banks and government to provide collectors finance for business expansion

1. Supply Side: Increase Alfalfa production by establishing collectors cooperative and partnering with government

Promote Alfalfa production

Enhance rural livelihoods

Foster economic growth

Improve income

Grow business

Develop new appropriate technology

Gain access to new market with significant

growth potential

Capture growth in agriculture sector

Grow loan book within risk appetite

56


Supply side: GMF must partner with local government and collectors to expand alfalfa cultivation

Increase alfalfa raw material input accessible to GMF

– Increase area of arable land accessible for alfalfa farming

– Organize labor to cultivate land

Objective of partnership

Establish preferred partnership between GMF and government bodies on alfalfa development

Become thought leader to define and drive government’s long-term agenda

GMF to share preferred approach/ priorities for landscaping with government

– Which areas should be landscaped first (e.g., more accessible logistically, within existing collector’s coverage, soil/ climate considerations)

– Approach and specification of landscaped land aligned with GMF’s requirements

Action areas

Local government bodies

Collectors

Partners

Land-scaping

Land cultivation

Partner with collectors and government to cultivate currently unutilised/ newly accessible land

Establish collectors cooperative

– Facilitate scaling of business model

– Create organizational structure to deploy machinery

– Facilitate access to financing

57

Stakeholder Analysis & Partnerships – Government & collectors

GMF must partner with technology partner to develop customized harvesting machinery

Develop customized alfalfa harvesting equipment

– Support expansion of production base

– Reduce dependency on manual labour

– Enhance efficiency and quality

Equipment to automate cutting, pressing and baling of alfalfa in terraced land

Objective or partnership

Identify suitable project partner for R&D (new development or modification of existing design) and manufacturing

Partners could include manufacturers or research institutes

Action areas

Manufacturers/ research institutes

Government

Partners

Identifi-cation of partner(s)

Develop equipment

Roll-out/ scaling of model

Phased roll-out of harvesting equipment across GMF footprint

Time frame

3-6 months

Agree on detailed technical specifications and timeline

Negotiate long-term partnership contract building on scale of market opportunity

Obtain government subsidies for R&D / procurement

Launch prototype tests

6-12 months

>12 months

58

Stakeholder Analysis & Partnerships – Appropriate technology

Potential appropriate technology partners

Established in 1926 as a manufacturer specializing in agriculture machinery

Third largest agriculture machinery providers in Japan

Advantage of R&D on the practical application of specific technology

Description

Established in 1890 as a manufacturer of casting

No.1 agriculture machinery providers in Japan

Exploring a strategic partnerships in China for further business expansion

Key potential provider for GMF

Established in 1897 as a manufacturer of agriculture machinery

One of the largest of agriculture machinery providers in Germany

Providing a wide range of farming equipments including harvesting

A Sino-Italy JV in Shanghai between FIAT & SAIC since 2002

Specialized in small sized tractors machines

Capable of developing harvesting machine

Recommendation: GMF to invite bids from all four companies as part of a tender for the necessary equipment, with backing from government.


59

GMF must partner with banks to provide financial support to collectors cooperative

60

Increase raw material supply to GMF via

– Supporting collector cooperative to scale up their operations

– Facilitate start of new collector businesses to expand coverage

Provide value-add to collectors to tie them closer to GMF

Objective of partnership

Agree with banks on scalable financial support model for collector cooperative

– Working capital solutions to finance harvest

– Leasing/ financing of harvesting equipment

– Product bundles for new business launch

Negotiate advantageous conditions for GMF business partners

– Preferential rates (‘cooperative rate’)

– Flexible approach towards collateral (e.g., harvest)

– Potentially supported by GMF guarantees

Action areas

Collectors

Banks

Government

Partners

Agree on model with banks

Government assistance

Detail collector needs

Quantify financial support collectors would require to significantly scale up their operations

Detail out key constraints faced by collectors today (e.g., bank’s collateral / guarantee requirements)

Negotiate government support to cooperative’s financing (e.g., partial loss coverage, insurance)


Government communication plan

Landscaping

– Shared plan

– Agree on development priorities

– Establish preferred partnership

Subsidies

– Support development and procurement of technology

– Financing of collectors

GMF supports the government agenda for rural development in Gansu province

Improving livelihood of rural population

– Raise farmers and collectors’ income

– Creating new work opportunities

▪ Farming / Collecting

▪ Production / Management

Enhancing productivity of local economy

– Drive technological innovation

– Utilizing landscaped areas

– Free up manual labour resources for higher productive economic activities

Fostering economic growth

– Attracting investment into region

– Support growth in down-stream industries (e.g., meat production, dairy)

Benefits to stakeholder Areas of support to GMF

Talking points for GMF chairman

61


Collectors communication plan

Commitment to preferred partnership with GMF

Organize farmers to increase land coverage

Support/ coordinate roll-out technology / education of farmers

Support alfalfa quality control

Collaboration with GMF in cooperative model allows collectors to expand business and increase incomes

– Support through machinery deployment and technology (e.g., SMS)

– Easier access to financing

– Information platform (mobile SMS based)



62

Cooperative

Collector


Collector Collector

GMF



Technology provider communication plan

R&D cooperation on customized harvesting and pressing equipment in line with GMF’s requirements

Support in testing and deployment of prototypes

Dedicated resources to implement with 18 month time frame

Ability to scale up production to meet GMF’s expansion plans

Commitment to long term partnership


Significant new market opportunity providing stable source of long term revenue growth

– Significant amount of land with potential for alfalfa cultivation in Gansu

– Opportunity to establish / expand footprint in Chinese machinery market

– Development of new technology that could be distributed in other markets

Government commitment to support through subsidies, e.g., supporting R&D or procurement


63


Banks communication plan

Agree on scalable financial support model for collector cooperative

– Working capital solutions to finance harvest

– Leasing/ financing of harvesting equipment

– Product bundles for new business launch

Negotiate advantageous conditions for GMF business partners

– Preferential rates (‘cooperative rate’)

– Flexible approach towards collateral (e.g., harvest)

– Potentially supported by GMF guarantees

Provide long term business growth opportunity of significant scale

Better management of credit risk exposure to collectors through cooperative model

Allow to contribute to government’s agenda to develop rural community

Benefits to Banks Areas of support to GMF


64


Table of Contents

C Gansu Modern Forage - Current Status



Executive Summary




65

A Introduction


Organisation structure & Governance section overview

Organisation Structure & Governance

Current status and challenges

Section

Proposed organisation

Objectives

Understanding the challenges, constraints and opportunities

New structure with additional functions to address current challenges and capture growth opportunities

66

Shareholding Participation criteria and structure

Board of Directors Effective governance and risk management

Talent Development

Building effective management team Retain core employees Develop competencies

Current organization is constrained in overcoming the challenges of rapid expansion

67

Lack of experienced middle management

Business development capabilities stretched

Ad hoc approach to acquiring land and dealing with new farmers and collectors

Lack of agriculture and technical experts to improve quality of Alfalfa

No mechanical engineering and technology competency

Building the capabilities in house to capture opportunities presented by growing demand

Establishing and maintaining good relationships with key suppliers and government stakeholders

Proper mechanization to ensure improved quality and increased volume of alfalfa production

Creating the right organizational structure and governance to manage sustainable growth

Status Challenges

Note: Too reliant on Chairman


Setup new functions and strategic positions to support expansion

Development of key competencies with structured Human Resources Management

Introduce a shareholding structure to attract investors and intensify partnerships with key stakeholders

Set up of a board with executive and non executive directors

Create an organisation with a strong management team that is less reliant on the Chairman and founder for key decision-making and business development

68

Proposed key measures

Participants discuss GMF with Chairman Zhang


New roles required to support expansion

Strong management team

Strong relationship & collaboration with key stakeholders:

– Collectors

– Bank / Investors

– Machinery providers

– Government

Land acquisition & management

Strong capabilities in sales & marketing, production & supply chain management

Expansion of GMF requires Additional responsibilities for key roles

Managing Director: – Strategic planning & business management

– Relationship with key stakeholders

Business Development Director: – Land acquisition – Co-operative management

Production & Logistics Director – Alfalfa products supply chain – Mechanisation – Pellet production

Marketing and Sales Director – New customer and market development

Finance & Admin Director – Developing financial reporting systems that are reliable

and auditable – Managing investor relations – Independent function to ensure investor interests are

secure

69


Proposed Organizational Structure

70

Existing function

New function

Board of Directors

Managing Director

Production & Logistics Director

Mechanisation

Plant 1 Manager

Plant 2 Manager

Plant .. Manager

Finance & Admin Director

Marketing & Sales Director

Business Development Director

Cooperatives Manager

Government Relationship Legal

Company Farm Management

R&D Management

Dairy Farm

Feed Producer

Primary Meat Producer

Accounting Office

HR Dept


Three Reasons to Introduce Shareholding

71

Business expansion requires funding for:

– Land acquisition

– Machinery, production, logistics assets

– Hiring

1. Attracting new investors

Provide incentives for key suppliers (collectors/cooperatives) to supply alfalfa to GMF. This can be achieved by providing shareholding

2. Increasing and stabilizing alfalfa supply

Provide incentives for the management team members by offering equity

3. Acquiring and retaining talent

In broadening the shareholder base, the following key areas need to be considered:


Shareholding Participation Criteria

72

Socially oriented investors willing to accept long-term return

Shared vision to develop the agricultural sector and improve rural economies

Investors

“Sweat equity” for cooperatives under certain conditions such as volume commitments over time in order to secure shareholding

Basis for community engagement and social responsibility

Key Suppliers (Collectors/Cooperatives)

Attract management team member who are aligned with company’s vision

Dividend plan that provides incentive for management team member to make long-term commitment

If he/she leaves GMF they needs to sell back shares to company

Management Team Members

In broadening the shareholder base, the following criteria can be applied


Shareholding Structure

73

Current majority shareholder (up to 60%) Investors

(up to 30%)

Cooperatives (up to 20%)

Management Team Members (up to 10%)

Suggested shareholder distribution for growth, strong governance and incentives

As founder, Chairman may wish to retain majority stake

Sufficient investment needed to support expansion

Providing shares to each of the key cooperatives secures supply of alfalfa

Providing sufficient shares to management team members instils sense of ownership and shared success

Rationale


Note: Could be more depending on investment level and negotiations with major shareholder

Inclusion of non-executive members who can provide strategic insights on board of directors will benefit GMF

74

Chairman Zhang

Managing Director

Executive Members

Investors

Expert in the area of rural government policies

Agricultural machinery providers

Feed industry expert

Non-Executive Members


Board of Directors - Roles and Responsibilities

75

Business expansion requires strong corporate governance and external expertise and relationships

Monitor company’s performance and growth

Balance the interests between Investors and company’s long-term vision

Legal compliance, land acquisition in particular

Preventing malfeasance and poor governance practices

Governance

External expertise and relationships

Land Acquisition

Local Government Policies

Machinery technology and industry

Agricultural technology and industry

Feed industry


Talent Development

Hiring Management Talent

76

Hiring and retaining technical experts

Identify executives and initiate a search across various Chinese agricultural industry platforms and bodies

Offer attractive package with shareholding incentive

Focus on personal development and career perspectives

Some key personnel can be based in Lanzhou headquarters if needed to make it more attractive

Hire young engineers and business administration professionals by using the internet and targeting the top agricultural schools in China.

Hiring and retaining employees in Dingxi will pose various challenges. A comprehensive talent development strategy is necessary. For all of these, the search should include leading universities across China since the talent pool is large.

Hiring and retaining experts for new functions

Challenges Measures

Lack of candidates in-house and time for development

Dingxi is not a preferred base

Technical experts get higher salaries in other industries


Experts such as lawyer or HR professional have better opportunities in other industries



Key Competencies

Clear communication on strategic directions to all levels and among all functions

Building strong relationship with all stakeholders

Create open culture to enable new suggestions and improvement

Identify new markets and key clients

Sales and Marketing

77

Ability to connect the dots and deal with the complexity from land acquisition to alignment with all stakeholders interests

Identify and solve key issues along the value chain

Identify new markets and key clients

Business management skills

Technical know how on alfalfa

Improvement of production processes for pellets

Stay updated about new machinery

Know how on seeds and formulations

Agricultural engineering

Equip employees with continuous development to meet the needs of a rapidly growing business


Table of Contents




F Organization Structure & Governance

Executive Summary



78

A Introduction


Finance and investment requirements cover four areas

Financial highlight and projection

Section

Cash flow projection

Capital structure and investment requirements

Description/ Objectives

Risks & mitigations

Risks assessment and mitigations

Debt and equity structure analysis, funding needs and solution

Cash flow position in line with expansion plan

Revenue and Profit projection

Finance & Investments

79

Revenue and profit projection under three scenarios

2,134

1,267

Base 2013

+8%

+72%

113

2,247

23 60

1,327

51

19 32

82

Proposed

60

+88%

Vision

Hay

Pellets

5 9 144 241

2019 growth scenarios

Net profit1

1 Incl. estimated revenue and cost growth for non-alfalfa products

Revenue from alfalfa products

RMB’m

… 2013-2019 annual growth rate

Scenario used in following pages


80

Cash flow Projection – Investment will be required to avoid high gearing.


RMB (million)

2014 2015 2016 2017 2018 2019 2014-19

Net profit 6.4 14.7 27.1 48.5 88.0 144.0 329

Adjustment for Depreciation 1.0 3.1 4.4 6.7 9.1 13.6 38

Cashflow from changes in AR (3.1) (5.9) (11.5) (18.6) (29.4) (36.6) (105)

Cashflow from changes in AP 0.9 1.5 2.9 4.7 7.3 9.0 26

Cashflow from changes in inventory (8.2) (5.9) (11.5) (18.4) (28.6) (35.0) (108)

Capital expenditure - Harvest machine (2.6) (2.6) (2.6) (2.6) (10)

Capital expenditure - Pellet machine (22.0) (22.0) (22.0) (22.0) (33.0) (121)

Capital expenditure - Land (6.8) (3.8) (5.6) (8.4) (12.7) (37)

Advances to collectors/co-ops (19.0) (28.6) (47.2) (77.0) (123.4) (180.2) (475)

Net Cashflow (22.1) (49.9) (64.1) (84.3) (109.9) (133.4) (464)

Beginning cash balance 1.8 (20.3) (70.1) (134.2) (218.5) (328.4)

Ending cash balance (20.3) (70.1) (134.2) (218.5) (328.4) (461.9)

Total Liabilities (from Balance shset) 15.6 16.5 18.0 20.9 25.6 32.9

Cash deficit as bank loan 22.1 49.9 64.1 84.3 109.9 133.4

Equity 29.1 35.5 50.2 77.3 125.8 213.8

Debt/equity ratio 1.292 1.868 1.635 1.361 1.078 0.778

Total investment needed over the next 5 years before breakeven is RMB 30M.

81

Key assumptions for scenarios


82

2014 2019 2014 2019 2014 2019

Price (RMB/ton)

Alfalfa Pellets 2,150 2,300 2,150 2,300 2,150 2,300

Alfalfa Hay 2,350 2,500 2,350 2,500 2,350 2,500

Volume (Thousand ton)

Alfalfa Pellets 16 26 30 551 29 928

Alfalfa Hay 9 9 10 24 11 45

COG (RMB/ton)

Alfalfa Pellets 1984 2000 1984 2000 1984 2000

Alfalfa Hay 2067 2199.5 2067 2199.5 2067 2199.5

(RMB million)

Staff expense 0.49 0.54 1.39 9.08 1.35 13.16

Pellet machines 0.99 4.95 11.88 2.97 18.81

Harvest machines 0.02 0.18 0.94 0.02 3.55

Land leasing 0.01 0.05 0.74 2.87

Cost

Revenue

Base Proposed Vision

Expense

Risk analysis and mitigations (1/2)


83

Risks Functional area

Likelihood Impact Mitigations

Market competition with local and overseas players

Marketing High High Leadership position in Northern China Well established clientele base, Scaling, landscaping and mechanisation

Capital constraint to support growth

Finance High High Introduction of new investment partners Government’s stimulus policy Establish relationship with banks

RMB appreciation against USD impacts its market share

Finance Medium Medium RMB appreciation reduces import raw

material cost Import tariff

Default risks on collectors

Finance Medium Medium

Collateral arrangement equipment leasing, eg. asset collateralization, personal guarantee etc.

Internal credit monitoring system set up for collectors

Progress payment to collectors

Risk analysis and mitigations (2/2)


84

Risks Functional area

Likelihood Impact Mitigations

Market price volatility Marketing High High Product mix improvement Diversification of sourcing channel

Customer concentration Marketing High High Diversify customer base via new in-house

sales and marketing capabilities

Limited labor force constrains alfalfa plantation

Organization Medium High Consolidate land Mechanisation

Technical knowledge insufficiency

Supply chain Medium Medium Introduction of joint venture partner

Climate impact on production Supply chain Medium High Insurance scheme Hardship fund

Table of Contents





Executive Summary



85

A Introduction


Indicative implementation plan

2014 2015 2016 2017 2018 2019

Bank partnership

- Initiate discussions

- Agree and formalize framework

- Develop equipment

- Launch financing model

- Set up Management Team and Board of directors

- Add new key roles to support business expansion

Organization & HR

Collector cooperative

Activity

- Initiative discussions

- Launch Cooperative

Government partnership

Mechanization

- Identification of partner(s)

- Phased roll-out

Implementation Timeline & Conclusion

86

Conclusions Implementation Timeline & Conclusion

87

The forage industry and alfalfa in particular presents a massive opportunity not only for commercial success but also to support rural development and bring prosperity to some of China’s most underdeveloped areas.

Industry and consumer trends and government policy have created an environment suited for investments in alfalfa cultivation

GMF is well positioned to take advantage of this opportunity and drastically scale up its business in the coming five years

Expansion of the business will require fundamental changes to the business model and key partnerships along the value chain. By entering into a JV with a machinery provider and offering cooperatives shareholding in the business GMF can secure the quality and quantity of alfalfa required to take advantage of rising domestic demand and achieve long-term profitability

Capital will be required to fill the gap in funding and therefore external investors and financial institutions should be cultivated

Business and operation risks should be mitigated and anticipated with proper governance and risk management standard procedures.

88

Thank You!