The Board of Directors of Qian Hu Corporation Limited ("Qian Hu") is pleased to announce that Qian Hu has today entered into an agreement (the "S&P Agreement") to acquire control of a Malaysian fish breeding business, Kim Kang Aquaculture Sdn Bhd ("Kim Kang"), which specialises in the breeding of Arowanas (the "Acquisition").
Information on Kim Kang
Kim Kang is presently owned by Mr Goh Siak Ngan (the "Principal Vendor") and his wife, Mdm Koh Guat Lee (collectively, the "Vendors"). The Vendors had been in the partnership business of breeding, trading and exporting Arowanas and other species of ornamental fishes like the "LuoHan" and the "Pink Lady" for more than ten years. The Vendors corporatised their business as Kim Kang in 2002.
Kim Kang specialises in the breeding and exporting of Arowanas. Its operations are situated in two farmland with a total approximate land area of more than 23 hectares in Batu Pahat, Malaysia, with readily available water supply which is crucial for fish breeding.
Principal Terms of the Acquisition
Purchase Price
Under the terms of the S&P Agreement, Qian Hu will acquire 65% equity control of Kim Kang (the "Acquired Equity") at the price of RM16,900,000 or approximately S$7,681,818 (the "Purchase Price").
Basis for Purchase Price
The total value of Kim Kang is RM26,000,000.
The Purchase Price of RM16,900,000 or approximately S$7,681,818 is calculated on the following basis:
As at 31 December 2002 the net tangible assets value (the "NTA") of Kim Kang's assets, real properties, and stocks in trade (including its existing brooder stock for breeding Arowanas) is RM19,000,000, of which its brooder stock for Arowanas comprise approximately RM13,500,000. Kim Kang's brooder stocks are valued on the same principles and basis as Qian Hu's brooder stocks. Qian Hu will pay RM12,350,000 or approximately S$5,613,636 constituting 65% of the NTA of Kim Kang.
Goodwill for Kim Kang is valued at RM7,000,000 in consideration of its business track-record of more than ten years, its reputation and experience in breeding and trading Arowanas under the business management of the Principal Vendor. Qian Hu will pay RM4,550,000 or approximately S$2,068,182 constituting 65% of the goodwill premium for Kim Kang.
Conditional Agreement
The Acquisition is subject to the completion of all legal and financial due diligence investigations on the Company, the results of which must be satisfactory to Qian Hu. In particular, Qian Hu must be satisfied from its due diligence investigations that Kim Kang's NTA as at 31 December 2002 is RM19,000,000.
The Acquisition is also subject to all relevant regulatory approvals and there being no breach of the contractual warranties of the Vendors under the terms of the S&P Agreement.
As the value of the Acquisition does not constitute a major transaction under Chapter 10 of the Listing Manual of the Singapore Exchange, the Acquisition does not require the shareholders' approval of Qian Hu.
Payment of Purchase Price
(a) Payment only for NTA value on completion of Acquisition
Qian Hu has paid the Vendors a refundable deposit of S$500,000 on the date of the S&P Agreement. This deposit must be refunded in full in the event the Acquisition is not completed in accordance with the terms of the S&P Agreement.
Subject to the fulfillment of the agreed conditions precedent, on completion of the Acquisition, Qian Hu will pay the Vendors a sum of S$2,306,818 and allot and issue to the Vendors 2,923,769 new shares in Qian Hu at an issue price of S$0.96 per share to obtain 65% equity control of Kim Kang.
The total amount paid by Qian Hu to acquire 65% equity control of Kim Kang on completion will be RM12,350,000 (or approximately S$5,613,636) (including the S$500,000 deposit), which amounts to approximately 65% of the aggregate NTA of Kim Kang at RM19,000,000.
(b) Payment for Goodwill for Acquisition
The goodwill premium for the Acquisition of RM4,550,000 or approximately S$2,068,182 (the "Good-will Payment") will only be paid by Qian Hu to the Vendors on an earned-out basis. Under the terms of the S&P Agreement, the Vendors will only receive the Good-will Payment on the following conditions:-
1. the Vendors will receive the sum of S$1,034,091 (approximately RM 2,275,000) (the "2003 Earned-out Payment") in the event the profit before tax of Kim Kang for its financial year ending 31 December 2003 ("FY 2003") is not less than RM3,000,000 (determined with reference to Kim Kang's audited accounts for FY 2003), of which not less RM1,950,000 (the "2003 Minimum Target") shall be recognised by and consolidated into the Purchaser's group accounts for the Purchaser's FY 2003 in accordance with the accounting principles prescribed under the Singapore Accounting Standards.
Half of the 2003 Earned-out Payment will be paid in cash while the balance half will be paid in the form of new shares in Qian Hu to be allotted and issued to the Vendors at the issue price of S$0.96 per new share. Payment of the 2003 Earned-out Payment will be made within 30 business days from the date of the issue of the FY 2003 audited accounts of Kim Kang.
In the event the actual profit before tax contribution of Kim Kang to the Purchaser's consolidated group accounts for FY 2003 is less than the 2003 Minimum Target, the Vendors will only receive a pro-rated payment of the 2003 Earned-out Payment. The Vendors will only be entitled to receive the balance of the 2003 Earned-out Payment in 2004 if the Purchaser is able to recognise and consolidate the shortfall in respect of the 2003 Minimum Target in 2004 over and above the 2004 Minimum Target (as defined below) into the Purchaser's group accounts for the Purchaser's FY 2004 in accordance with the accounting principles prescribed under the Singapore Accounting Standards;
2. the Vendors will receive the sum of S$1,034,091 (approximately RM2,275,000) (the "2004 Earned-out Payment") in the event the net profit before tax of Kim Kang for its financial year ending 31 December 2004 ("FY 2004") is not less than RM4,000,000 million (determined with reference to Kim Kang's audited accounts for FY 2004) of which not less than RM2,600,000 (the "2004 Minimum Target") shall be recognised by and consolidated into the Purchaser's group accounts for the Purchaser's FY 2004 in accordance with the accounting principles prescribed under the Singapore Accounting Standards.
Half of the 2004 Earned-out Payment will be paid in cash while the balance half will be paid in the form of new shares in Qian Hu to be allotted and issued to the Vendors at the issue price of S$0.96 per new share. Payment of the 2004 Earned-out Payment will be made within 30 business days from the date of the issue of the FY 2004 audited accounts of Kim Kang.
In the event the actual profit before tax contribution of Kim Kang to the Purchaser's consolidated group accounts for FY 2004 is less than the 2004 Minimum Target, the Vendors will only receive a pro-rated payment of the 2004 Earned-out Payment;
3. in the event the Purchaser is not able to recognise and consolidate any part of the 2003 Minimum Target and/or the 2004 Minimum Target by FY 2004 into its consolidated group accounts for each of FY 2003 and/or FY 2004 in accordance with the accounting principles prescribed under the Singapore Accounting Standards, the Vendors will only be entitled to receive the remaining balance of the 2003 Earned-Out Payment or the 2004 Earned-out Payment if the Purchaser is able to receive profit before tax contribution of all the shortfall of the 2003 Minimum Target and the 2004 Minimum Target by the financial year ending 31 December 2006, failing which, the Vendors will not be entitled to the remaining balance of the 2003 Earned-Out Payment and/or the 2004 Earned-out Payment, in any respect whatsoever.
Qian Hu will pay for the cash consideration of the Purchase Price with its internal funds.
Service Agreement
The Principal Vendor, who has been instrumental in managing Kim Kang, has signed a service agreement with Kim Kang to manage and operate Kim Kang under the control of Qian Hu. The service agreement for a term of three years will take effect on the completion of the Acquisition. Under the terms of this service agreement, in addition to a monthly remuneration, the Principal Vendor is entitled to an annual performance bonus, depending on the profitability of Kim Kang.
Shareholders' Agreement
To minimise disruption and to ensure continuity in the operations of Kim Kang after the Acquisition, the original owner of Kim Kang, Mr Goh Siak Ngan, and his team of experienced operations personnel will be employed by our Group. Mr Goh and his wife, Mdm Koh Guat Lee, will continue to hold a 35% equity stake in Kim Kang after the Acquisition and both have entered into a shareholders' agreement with Qian Hu to underscore their commitment to further grow Kim Kang as a joint venture with Qian Hu. Our Group has more than ten years business relationship with Mr Goh and we have over the last decade built a good relationship of trust and confidence with each other.
Rationale for the Acquisition
We envisage an increasing demand for Arowanas in our regional markets, particularly in our new markets in Taiwan and the PRC, in the coming years. Customers who buy Arowanas are invariably well to do and belong to a niche market that is not susceptible to economic cycles. The demand for Arowanas has increased substantially over the last few years and we expect such demand to continue in the future.
Breeding sufficient Arowanas to meet the expected increase in demand requires substantial land, water and infrastructure, and readily available supply of the brooder stock. With the constraint in land space and supply of brooder stock, Qian Hu will not be able to fulfill the strong demand for Arowanas on its present operational resources and capacity. Kim Kang has the requisite operational capacity, land and infrastructure and brooder stock to supply a substantial number of Arowanas to the market. The management and operations team from Kim Kang who will join our Group after the Acquisition have many years of experience in the breeding and trading of Arowanas. The Acquisition will enhance our Group's ability to ride the growth in the demand for Arowanas in the coming years.
We have over the last two years significantly expanded our regional distribution network through our subsidiaries in the PRC, Malaysia and Thailand. We will take advantage of our strong regional distribution network to optimise our sales of Arowanas in the regional markets to capitalise on the increasing demand.
The Acquisition will thus be a strategic backward integration for our Group which we are confident will have a meaningful impact on our Group's turnover and profitability.
Net Profits attributable to the Acquired Equity
We envisage the net profit contribution from the Acquired Equity in FY 2003 to our Group to be not less than RM1,950,000 or approximately S$886,364.
Effect of the Acquisition on the net tangible assets per share of Qian Hu
The net tangible assets per share of Qian Hu for the financial year ended 31 December 2002 ("FY 2002") is S$0.274 based on its existing issued share capital. Assuming that the Acquisition was completed at the end of FY 2002, the net tangible assets per share of Qian Hu for FY 2002 would be S$0.358 based on existing share capital, and S$0.345 on a fully diluted basis taking into the new shares that will be issued by Qian Hu as part of the Purchase Price for the Acquisition.
Effect of the Acquisition on the earnings per share of Qian Hu
The earnings per share of Qian Hu for FY 2002 based on its existing issued share capital is 6.64 cents Assuming the Acquisition was completed at the beginning of FY 2002, the earnings per share of Qian Hu for FY 2002 based on its existing issued share capital of would be 7.54 cents, and 7.18 cents on a fully diluted basis taking into account the new shares that will be issued by Qian Hu as part of the Purchase Price for the Acquisition.
Directors' or Controlling Shareholders' Interests
None of the directors or controlling shareholders of Qian Hu has any interest, direct or indirect, in the Acquisition.
Other Information
A copy of the S&P Agreement is available for inspection during normal business hours at Qian Hu's registered office at 71 Jalan Lekar Singapore 698950 for three months from today.
By Order of the Board
Kenny Yap Kim Lee
Executive Chairman and Managing Director
20/01/2003