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Hongri New Energy High-density Wood Particle Project-I

. Project Background

1.1 The present situation and the developing trend of international biomass solid fuel industry

Recently, the use of biomass energy in the proportion of renewable energy accounts more than 50%. According to the prediction of World Energy Council (WEC), biomass energy in the global share of renewable energy will reach nearly 60% by 2020. There are three forms of the final products of biomass energy utilization: gaseous, liquid and solid. Biomass briquetting densification fuel is to process biomass materials (including a variety of crops residues, tree branches and leaves and processing residues, grass, feces, etc.) for processing, which is available for people with its shape, size and density. Compared to other utilization technologies of biomass energy, the products made out of biomass briquetting densification fuel are easy to be used because of simple production process. Biomass solid fuel now accounts for nearly 60% of the biomass energy use. In 2006, the global biomass resources are transferred into 89 million tons of standard oil, among which solid fuels for heating markets, including household and industrial use, reached a total of 52.3 million tons of standard oil, accounting for nearly 58%, into a heat-electricity combined generation up to 27.31 million tons of standard oil, accounting for 30%; into liquid fuels, accounting for only 6%.

The development of biomass briquetting fuel has gone through three stages: from 1930s to 1950s, because of high oil prices and the goal of replacing fossil fuels, the early industrialized countries began relevant research. From 1970s to 1990s, as oil prices fell, although biomass briquetting and application technology have improved, industrialization made slow progress. As the 21st century comes, fossil energy prices continue to rise. The environmental pollutions have become increasingly severe. The global climate changes and other issues receive extensive attention. Great emphasis is placed on a variety of renewable clean energy development. Biomass briquetting fuel entered a stage of rapid development. Particularly countries who are rich in forestry biomass resource took biomass briquetting densification fuel as a development priority. Take Sweden for example, 30% of the country's total energy consumption is renewable energy, 46.7% of which is biomass briquetting densification fuel. At present in Europe, biomass particles briquettes fuel has become a conventional fuel in the family and an ordinary merchandise in the supermarkets. Some countries have began to calculate per capita consumption. Each EU countries have established the corresponding industrial standards, technical specifications, product standards of biomass briquetting densification fuel. The industrial development has entered into a rapid development stage of mature commercialization.

In 2008, the sales volume of biomass briquetting densification fuel accounted to 180 million tons with the market size exceeding 50 billion Euro. As the global economy is slowing down, solid biomass fuel industry have grown fast with average annual rate of 18% since 2000. According to forecasts, with the national government's strong policy support, the growth rate of this industry will exceed 25% in 2012.




Biomass solid fuel develops fast internationally for the following reasons:

Wide adaptability, biomass density molding technology, in particular granular fuel, with high density, homogeneous shape and nature, free flowing, superior combustion properties, high heat value (4400 kcal / kg, equivalent to the coal of medium quality), is easy to be transported and controlled automatically. It can be used extensively in the production of small and medium enterprises, the households heating in urban and rural areas and district heating, and refrigeration, power generation and other fields, achieving the goal of replacing the coal, oil, and gas.

High economy. Its price is equivalent to 50-60% of fuel, 70% of gas and has strong market competitiveness in the market structure of oil and gas accounting for 70% of total energy consumption in Europe and the United States.

Technology is compatible with resource characteristics. the important reason for large-scale use of biomass solid fuel is determined by the resource characteristics. The economic scale of general production of biomass liquid fuel should exceed at least 50,000 tons, while the demand of biomass power generation resources should exceed at least 200,000 tons. In the energy conversion of biomass resources, usually the raw materials and collection costs account the largest share of total costs, so if it is converted into liquid fuel or for power generation, the scattered biomass resources are hard to achieve the economic scale. However, conversion into solid fuel is not confined by the scale, such as solid fuel will reduce the volume of resources 7-10 times, which can achieve medium and long distance transport, and supply urban energy markets flexibly and also take rural energy needs into consideration.

High efficiency on energy transferring. Energy input-output ratio is a key economic indicator measuring the energy product development. In terms of the current technological level, solid biomass fuel input-output ratio of is about 1:20; liquid fuel input-output ratio is about 1:5-10; while biomass power generation energy input-output ratio is only 1:5. Therefore, biomass converted to solid fuel is an optimal path of less input, and more output.

Government support. The primary technological area of solid briquetting fuel industry includes molding technology and gas appliance technology. As the high efficiency on thermal conversion of the biomass solid fuels, and also a clean energy, substitution of fossil fuels can get higher subsidies, such as in Germany, using the particles combustion device instead of oil-fired boiler burners can get 50% of the governments transformation subsidy and 30% subsidy of the fuel costs.

1.2 The total energy shortage in Jilin and structural adjustment provide opportunity for new energy development

The province's total energy consumption in 2005 was 59.57 million tons of standard coal. Compared with 36.55 million tons of standard coal in 2000, it increased 23.02 million tons with an increase of 63%, average annual growth of 10.3%, the average annual growth of national energy consumption 0.2 percentage points higher than the same period. Jilin Province is seriously lack of energy supply. Coal, oil and natural gas resources per capita is only about 13% of the national average, and energy self-sufficiency rate in 2000 was 50.5%, 47.72% in 2005, showing a downward trend year after year. In 2005, purchased energy reached 30 million tons of standard coal. The provincial "Eleventh Five-Year Plan": the three industrial structure is adjusted from 16.8:44.4:38.8 in 2005 to 13:50:37 at the end of "Eleventh Five-Year". The strengthening of the secondary industry will bring further improvement of energy use intensity. Therefore, from the total amount perspective, the continuing tension in energy supply is becoming a bottleneck problem for economic development of Jilin Province. There is a serious problem in Jilin Provincial energy structure. The proportion of coal is 5 percentage points higher than the national average. Sulfur dioxide emissions caused by burning coal accounts for about 90% of the provincial total emissions. Excessive use of low-grade energy determines the low energy efficiency. The average energy utilization rate of Jilin Province is only 29%, 4 percentage points lower than the national average, 10 percentage points lower than that of Shanghai, about 20 to 30 percentage points than that of developed countries. Reflected in products energy consumption per unit, it is about 15% higher than the national average, 20% higher than the advanced provinces.

400 million tons of the energy consumption of 500, 000 medium and small boilers dispersed throughout cities and towns accountd for 20% of the total. However, because of the low energy conversion efficiency of medium and small boilers and lack of environmental protection equipment, sulfur dioxide and other polluting gases produced accounted for nearly 50% of the total. There are 15000 medium and small boilers in Jilin Province, which has become an important factor affecting the ecological security and energy utilization efficiency in Jilin. The energy in Jilin faces the dual pressures of shortage of total amount and structural adjustment, which provides a good development opportunity for the biomass energy.

. Construction Scale and Production Plan

2.1 Construction Scale

There are at least three types of energy market in Jilin which are favorable for the entry of biomass solid fuels: central heating can not meet the requirements of the heating markets in special public buildings, such as hotels, hospitals, schools, banks, etc; the heating market which the central heating can not cover around the urban or urban district; industrial energy utilization market. These three markets are the decentralized heating markets which the central heating can not replace. The national annual market size amounts to 400 billion Yuan. The annual market size in Jilin is about 12 billion Yuan

Heating market is the fastest growing market in international energy market. Non-central heating market in the heating market is one of the energy markets which have the greatest impact on the environment and also the difficult point for government paying much effort to reform. There are 500,000 medium and small boilers national wide with the fuel consumption of 400 million tons of standard coal, accounting for 20% of the total energy consumption. However, because of lack of environmental protection equipment, the polluting gases produced accounted for nearly 50%.

A good prospect and with the total market size reaching 400 billion Yuan, the non-concentrated heating market is the main target market which the biomass solid fuel is aimed at. Although the city depends on the central heating, heating area of the national cities is 6.5 billion square meters according to the data in 2006, of which 4.5 billion square meters are the central heating, 2 billion square meters are non-central heating.

The heating market of cities special public building: the central heating in some of China's cities and towns can still not meet users requirements, such as hotels, hospitals, schools, banks and other buildings, where currently oil, gas and electric boiler are used and the heating costs are expensive, with more than 100 billion Yuan of annual market capacity.

District Heating Market: the heating market which the central heating can not cover around the urban or urban district makes up the district heating market. The general district heating market is 200,000 square meters. National market size is about 120 billion Yuan or so.

The third target market is industrial energy utilization market: among Chinas industrial energy utilization, there are 175 million tons of standard coal is used for industrial heating in 2006, and the market size is about 180 billion Yuan.

Currently, the annual growth rate of the domestic heating market is 16%. The annual new markets of non-central heating reached 64 billion. If the biomass solid fuel industry is developed, only 10% of the new market can be met and the demand would reach 10 million tons per year. There is a huge market space.

2.2 Production Plam

l  Overall goals: domestic Growth Enterprises Market (GEM) will be listed in 2012

   GEM select the "two high", "six new" type of business (high growth, high technology; new economy, new service, new agriculture, new material, new energy and new business model). Hongri new energy has "two high" and four new", that is, high growth, high technology; new economy, new service, new energy and new business model, which can meet the selection conditions of GEM.

The company's business is not necessarily for the purpose of listing, but Hongri chooses the goal of the GEM listing for the following considerations: 1. Hongris current field is in the public service, in which heating service is a major product. Cross-regional management of public companies plays an important role in establishing a brand image, so as to grow into 1st brand of domestic biomass heating. 2. Hongris business model needs to invest heating equipment and is a capital-intensive. GEM is the capital market with the world's highest price-earnings ratio. It will be helpful for the corporate finance ability if GEM is listed. 3. Hongris target market is distributed heating market, whose demand on management is more severe than general business. The demand on standardization management of listed companies is strict, which is helpful for companies self-discipline and takes the road of standardized management. 4. As it is a new industry, most of Hongris target customers are not familiar with this new industry. But for customers, supply continuity and stability of energy products is the primary factor, and then is economy. Therefore, the public company is easier to access to customer confidence than the general company, which is conducive to business development. 5. As a public company in the field of public service, it is easy to cooperate with the government and get the governments support of public resources. Based on the analysis of above 5 reasons, it is necessary that Hongri strive to become a listed company in three years.

If the company wants to achieve the listing goal, it needs to recognize the current stage and future development path. According to the company's development characteristics, the development process in which the company achieves the listing goal can be divided into six stages: research and development, results verification, model building, model verification, model replication and scale operation. Now it is in the fourth phase, that is, from model verification to model replication. It is estimated to take one year, that is, mode setting stage in 2010, model replication in 2011 and scale operation in 2012. According to the companys development plan from 2010 to 2012, by the end of 2012, the company will have 12 self-processing plants and franchisees, 120 thousand tons of annually produced particles, 4,000,000 square meters of heating area, and become the nation's largest producer of biomass particles and the nation's largest biomass heating operation service provider.

Specific goals:

Technical aspect: through the efforts over 3 years, Hongri new energy company will take the national leading position in briquetting production equipment technology (excluding the integrated production cost of raw materials is controlled within 200 Yuan per ton) and special high efficiency appliance device technology (the boiler thermal efficiency is not less than 90%) At the same time, it strives to make these technologies keep pace with that of foreign countries by means of international cooperation and is adapted to China's national situation.

Market aspect: Continue to expand the users types and scale of biomass heating project and strive to reach about 5 million square meters of heating area in 3 years. Improve and continue to innovate the existing business model. Grasp firmly the opportunity of the related projects construction put forward by the local government, such as "100 towns construction", "warm houses" and others to actively seek government support and expand the scale and impact of heating as soon as possible, and establish Hongri new energy as the leading industry's status of new energy heating industry. While developing special architectural heating market, it should actively expand energy for industrial use and heating market in the residents district.

Operating mode aspect: Strive to change places full of waste resources to places of energy utilization in the nearest town; fully integrate the rational allocation of resources and markets, so as to ensure win-win situation of multi-stakeholder. While expanding production scale and production capacity of biomass fuel, it will fully mobilize the enthusiasm of resource owners and investors, expand and establish various cooperation forms of biomass fuel processing enterprises, gradually expand the social production, and secure the demand of biomass heating fuel on the briquetting fuel. Through a variety of production modes in 3 years, it will strive to achieve more than 150,000 tons of production capacity, and expand the input of heating market development and the construction scale of cooperative factories.

Team building aspect: through 3 years effort, an outstanding team with a professional reasonable structure, efficient management, stable team, advanced philosophy and corporate culture will be built. Construct the training platform, and formulate the training systems to the normalize training, so that Hongri will become not only a "good of heating service", but also a cradle of training "housekeeping talent".

Brand building aspect: brand-building requires long-term unremitting efforts. The brand, first of all, is reflected from the companys natural intrinsic characters. Therefore, the brand building, first of all, is the process of practicing skills. Strengthen management, pay attention to quality, worry what customers worry, think what customers think; gradually form corporate culture of practical work, being faithful person. Only with a deep corporate culture practice, can the company set up the foundation of brand facing to the outside. Through three years effort, it will initially complete brand building and establish the leading brand in the field of biomass heating.

III. Market Analysis and Economic Benefit Forecast

Comprehensive benefit of agriculture and forestry biomass resources into solid fuel

Take Changchun area for example, the comparative analysis from the economic point of view is as follows

There are four main heating types in Changchun area:

         large-scale combined heat and power central heating.

         district boiler central heating.

         decentralized boiler local heating.

         independent heating in Special units.

With the premise of35W/m2 average heat index of the building, 4 types of fuel cost of construction area per unit are estimated.

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