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Yuhe Set to Expand Capacity by 43 Per Cent

05 January 2011

CHINA - Yuhe International has acquired 10 breeder farms in Liaoning and Henan provinces, which will increase its production capacity by 43 per cent to 3.15 million sets of parent breeders, positioning the company further ahead of its competitors.

Yuhe International, Inc., a leading supplier of day-old chicken raised for meat production, or broilers, in the People's Republic of China has announced that the company's wholly owned subsidiary, Weifang Yuhe Poultry Co., Ltd., entered into a series of asset purchase agreements to purchase ten breeder farms in Liaoning and Henan Provinces, China, for an aggregate purchase price of RMB108,686,716, or approximately US$16.4 million. The 10 breeder farms are purchased from six individuals engaged in large-scale parent breeder raising businesses in China, where eight breeder farms are in Liaoning province, and two are in Henan province.

Pursuant to the terms of the asset purchase agreements, the acquisition consideration will be paid in combination of cash and Yuhe's stock. Total cash consideration amount to RMB80,098,406, or approximately US$12,099,457. The share consideration is calculated at a price of $10 per share with total share consideration equal to approximately RMB28.6 million, or approximately $4.3 million, for approximately 431,848 restricted shares of Yuhe's common stock. The restricted shares are subject to a six-month lock-up period.

The 10 breeder farms have a total production capacity of 950,000 sets of parent breeders, covering an area of approximately 91 acres (558 Mus) with a building coverage of approximately 1,471,869 square feet (136,740 square metres). The assets purchased include the buildings and breeding equipment for the breeder farms, as well as land lease rights with terms ranging between 20 years and 50 years. Upon closing, Yuhe will have an increased production capacity of 3.15 million sets of parent breeders, accounting for eight per cent of China's broiler market in terms of production capacity. Geographic details for the 10 acquired breeder farms are as following: one farm in Anshan City, Liaoning province; One farm in Wafangdian City, Liaoning province; Two farms in Haicheng City, Liaoning province; One farm in Dandong City, Liaoning province; Three farms in Shenyang City, Liaoning province; and two farms in Zhoukou City, Henan province.

Zhentao Gao, Chairman and CEO of Yuhe International, commented: "We are very pleased to acquire the ten new breeder farms in China as planned. The highlights of this acquisition lie in two aspects, one being that the Company had gained access to a large quantity of breeding land with reasonable terms; and the other being that we were able to retain a large number of experienced and skilled workers. Both factors are current bottlenecks to self-constructing such breeder farms."

The average cost of acquiring a 100,000-set-parent-breeder-farm in this transaction was RMB11,440,700 (approximately $1.85 million), approximately 25 per cent higher than the average acquisition cost of RMB9,176,000 (approximately $1.48 million) in June 2010 for a comparable breeder farm. The cost increase was mainly driven by the increased land lease right fees from RMB1,000 per Mu to RMB1,400 and RMB1,700 per Mu in Liaoning and Henan province, respectively. Cost for acquiring farm buildings increased slightly, as a result of purchasing more steel-structured farms with higher unit cost. The average costs for the Company to acquire these breeder farms remain lower than those to build such farms from scratch.

At the time of signing the contracts, the age of the existing breeding stocks at the acquired farms were between 23 and 52 weeks, and such existing breeding stocks are expected to retire at the 67th week. Due to quality assurance purposes, Yuhe will only take the ownership of the acquired breeder farms when all existing breeding stocks retire. Upon closing, Yuhe plans to spend RMB10 million (approximately US$1.6 million) on a two- to three-month facility restoration and employee training programme.

The Company plans to put the first batch of 550,000 sets of parent breeders into production by the end of the third quarter of 2011, and the remaining 400,000 sets by the end of the fourth quarter of 2011. The production increase will be reflected in the Company's broiler output in 2012, when the breeding stocks enter their egg-laying peaks. This revenue-contribution timeframe is similar to that in Yuhe's previous acquisitions in December 2009 and June 2010, where the production increase from an accumulated 1.05 million sets of parent breeders is expected to be reflected in the Company's broiler output in 2011.

The Company also announced that the constructions of its hatchery facilities were progressing well. The third hatchery facility equipped with 60 hatchers has completed construction and commenced operation with the first batch of 40 hatchers. The fourth hatchery designed to have 100 hatchers will begin construction in the first quarter of 2011.

Vincent Hu, CFO of Yuhe International, commented: "The Company's future profitability is expected to be improved as a result of this acquisition. We expect the consequential increase in sales volume in 2012 will translate into a lower unit administrative cost and higher operating margin."

"This acquisition was completed amid a booming broiler market in China," added Mr Gao. "The successful acquisition demonstrates that Yuhe is capable of leveraging on its industry experience and reputation to capture industry consolidation opportunities in both rising and falling markets.

"This is the third acquisition carried out by Yuhe, and is also the second acquisition that used our stock as partial acquisition consideration. Based on our previous experience in acquisition and post-acquisition integrations, we expect that this acquisition, being the largest in the Company's history, to be successfully completed as the previous ones.

"It is a strategic milestone in our history that our production base expands into Henan Province after our expansion into Liaoning province in 2010.

"We currently focus our hatching and sales network in Shandong province, and we plan to expand the sales network into wider geographic areas after commanding a meaningful market share in Shandong. Having production bases stationed outside of Shandong province lays strategic foundation for the Company's future nation-wide market penetration. We will continue to leverage on our core competencies and in-depth knowledge of China's broiler industry to carry out our long-term strategy," concluded Mr Gao.

ThePoultrySite News Desk



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