As filed with the Securities and Exchange Commission on October 18, 2007

Registration No. 333-          

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

 

 

 

 

Room 706, 7/F, Huantai Building, No. 12A

South Street Zhongguancun

Haidian District, Beijing 100081, People’s Republic of China

(86-10) 6210 9288

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

 

 

Law Debenture Corporate Services Inc.

400 Madison Avenue, 4th Floor

New York, New York 10017

(212) 750-6474

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:   as soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o   ­ ­

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o   ­ ­

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o   ­ ­

 

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

Dealer Prospectus Delivery Obligation

 

Until      , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

	•	rapid growth as a provider of upstream agricultural products in China;
	•	a diversified portfolio of commercially successful products;
	•	operations in strategic locations where we have an extensive local knowledge and experience;
	•	strong marketing and customer support and extensive distribution network;
	•	effective operations management and quality control system;

	•	strong research and development capabilities; and
	•	an experienced management team and skilled staff.

	•	increase our product sales in existing and new geographic markets;
	•	increase the variety of our products within each of our business segments;
	•	expand our research and development capabilities; and
	•	selectively pursue strategic acquisitions and alliances and expand into new agricultural sectors.

	•	natural or man-made disasters could damage our seed production, which would cause us to suffer production losses and a material reduction of our revenues;
	•	outbreaks of disease in livestock and/or food scares in China would materially and adversely affect our sheep breeding business;
	•	we primarily rely on arrangements with village collectives to produce our corn seed products, and if we are unable to continue these arrangements or enter into new arrangements with other village collectives to increase our production, our total land acreage devoted to corn seed production may decrease and our growth may be inhibited;
	•	our growth prospects may be materially and adversely affected if we are unable to continue to develop or acquire products to meet the demands of Chinese farmers or to produce our existing products in sufficient quantities;
	•	one or more of our distributors may engage in activities that are harmful to our brand and to our business; and
	•	our limited operating history makes it difficult to evaluate our future prospects and results of operations.

	•	exercise effective control over P3A;
	•	receive substantially all of the earnings and other economic benefits from P3A to the extent permissible under PRC law in consideration for the services provided by Agria China; and
	•	have an exclusive option to purchase all or part of the equity interests in P3A in each case when and to the extent permitted by PRC law.

	•	no exercise by the underwriters of their option to purchase up to       additional ADSs representing       ordinary shares;
	•	conversion of all outstanding preferred shares into ordinary shares immediately prior to the closing of this offering; and
	•	all share and per share data have been adjusted to reflect a 10,000-for-1 share split of our ordinary shares and our preferred shares that became effective on August 15, 2007.

	•	“we,” “us,” “our company,” “our” and “Agria” refer to Agria Corporation, a Cayman Islands company, and its predecessor entities, subsidiaries and consolidated affiliated entity;
	•	“P3A” refers to our consolidated affiliated entity, Primalights III Agriculture Development Co., Ltd., which is a limited liability company established in China;
	•	“China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this prospectus, Taiwan, Hong Kong and Macau;
	•	“shares” or “ordinary shares” refers to our ordinary shares, and “preferred shares” refers to our series A redeemable convertible preferred shares;
	•	“ADSs” refers to our American depositary shares, each of which represents       ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs;
	•	all references to “RMB” or “Renminbi” are to the legal currency of China; all references to “$,” “dollars” and “U.S. dollars” are to the legal currency of the United States;
	•	“breeder sheep” refers to pure breed sheep that are used primarily in rapid reproduction or artificial reproduction methods to spread desired genes widely in a flock and have received official variety recognition in China or another country; and
	•	“upstream” refers to the production and sale of agricultural products (e.g., seeds, sheep semen and sheep embryos) to be used by other participants in the agricultural industry to produce other agricultural products, such as corn and sheep, which in turn are used to manufacture products, such as animal feed, mutton and wool.

THE OFFERING

 

The following information assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

 

Offering price		We currently estimate that the initial public offering price will be between $       and $       per ADS.
ADSs offered by us		ADSs
ADSs offered by the selling shareholders		ADSs
ADSs outstanding immediately after this offering		ADSs
Ordinary shares outstanding immediately after this offering		shares
The ADSs		Each ADS represents       ordinary shares, par value $0.0000001 per share.
		• The depositary will hold the shares underlying your ADSs. You will have rights as provided in the deposit agreement.
		• If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.
		• You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange.
		• We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.
		To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
Over-allotment option		We and the selling shareholders have granted to the underwriters options, which are exercisable within 30 days from the date of this prospectus, to purchase up to an additional       ADSs.
Use of proceeds		Our net proceeds from this offering are expected to be approximately $       million, assuming an initial public offering price per ADS of $      , which is the midpoint of the estimated public offering price range. We plan to use the net proceeds we receive from this offering to fund capital expenditures and expansion of our business, expand our research and development capability and for other general corporate purposes, including funding potential strategic acquisitions. See “Use of Proceeds” for additional information.
		We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

Lock-up		We have agreed with the underwriters to a lock-up of shares for a period of 180 days after the date of this prospectus. In addition, our executive officers, directors and existing shareholders have also agreed with the underwriters to a lock-up of shares for a period of 180 days after the date of this prospectus. See “Shares Eligible For Future Sale” and “Underwriting.”
Listing		We have applied to have the ADSs listed on the New York Stock Exchange under the symbol “GRO.” Our ADSs and shares will not be listed on any other exchange or traded on any other automated quotation system.
Reserved ADSs		At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of       ADSs to our directors, officers, employees, business associates and related persons through a directed share program.
Risk factors		See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our ADSs.
Depositary		The Bank of New York

	•	assumes the conversion of all outstanding preferred shares into 2,400,000 ordinary shares immediately prior to the completion of this offering;
	•	assumes the underwriter’s over-allotment option is not exercised;
	•	excludes 7,500,000 ordinary shares issuable upon exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$2.912 per share; and
	•	excludes ordinary shares reserved for future issuances under our 2007 share incentive plan.

		For the Year Ended December 31,																For the Six Months Ended June 30,
		2004				2005				2006								2006				2007
		RMB				RMB				RMB				$				RMB				RMB				$
		(In thousands, except share, per share and per ADS data)
Consolidated Statement of Operations Data:
Revenues
Corn seeds			48,560				245,601				245,634				32,269				142,126				133,853				17,584
Sheep breeding			92,904				119,468				193,054				25,362				97,518				110,599				14,530
Seedlings			10,820				19,020				51,015				6,702				29,594				34,955				4,592
Total revenues			152,284				384,089				489,703				64,333				269,238				279,407				36,706
Cost of revenues
Corn seeds			(33,311	)			(147,723	)			(144,730	)			(19,013	)			(81,378	)			(80,395	)			(10,562	)
Sheep breeding			(31,196	)			(37,716	)			(52,287	)			(6,869	)			(26,629	)			(30,543	)			(4,012	)
Seedlings			(9,053	)			(5,932	)			(10,357	)			(1,361	)			(4,212	)			(10,679	)			(1,403	)
Total cost of revenues			(73,560	)			(191,371	)			(207,374	)			(27,243	)			(112,219	)			(121,617	)			(15,977	)
Gross profit			78,724				192,718				282,329				37,090				157,019				157,790				20,729
Operating expenses			(16,635	)			(18,372	)			(25,169	)			(3,306	)			(13,610	)			(12,524	)			(1,646	)
Operating profit			62,089				174,346				257,160				33,784				143,409				145,266				19,083
Income before income tax			57,772				169,080				253,903				33,356				142,110				143,351				18,832
Net income			57,772				169,080				253,903				33,356				142,110				143,351				18,832
Earnings per ordinary share
Basic			0.58				1.69				2.54				0.33				1.42				1.43				0.19
Diluted			0.58				1.69				2.54				0.33				1.42				1.43				0.19
Earnings per ADS(1)
Basic
Diluted
Weighted average number of ordinary shares used in per share calculations:
Basic			100,000,000				100,000,000				100,000,000				100,000,000				100,000,000				100,000,000				100,000,000
Diluted			100,000,000				100,000,000				100,000,000				100,000,000				100,000,000				100,119,337				100,119,337
Pro forma earnings per share: (2)
—Basic and diluted on an as converted basis			—				—				RMB2.48				US$0.33				—				RMB1.40				US$0.18

		For the Year Ended December 31,																For the Six Months Ended June 30,
		2004				2005				2006								2006				2007
		RMB				RMB				RMB				$				RMB				RMB				$
		(In thousands, except share, per share and per ADS data)
Weighted average number of ordinary shares outstanding used in computation of pro forma basic and diluted earnings per share			—				—				102,400,000				102,400,000				—				102,400,000				102,400,000

(1)		Each ADS represents       ordinary shares.
(2)		The pro forma earnings per share are calculated based on an assumption that the conversion of 2,400,000 Series A convertible redeemable preferred shares outstanding as of June 30, 2007 into the same number of ordinary shares had occurred on January 1, 2006 and 2007.

		As of December 31,								As of June 30,
		2006								2007
		RMB				$				RMB				$
		(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents			42,782				5,620				325,562				42,770
Accounts receivable			156,440				20,552				166,954				21,933
Total assets			490,476				64,434				871,500				114,490
Total current liabilities			127,344				16,729				344,636				45,275
Series A Redeemable convertible preferred shares			—				—				65,111				8,555
Redeemable ordinary shares			—				—				155,928				20,484
Total shareholders’ equity			354,136				46,523				296,829				38,994

 

RISK FACTORS

 

Investing in our ordinary shares and ADSs involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus before making an investment decision. The trading prices of our ADSs could decline due to any of these risks or other factors and you may lose all or a part of your investment.

 

Risks Relating to Our Business

 

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

 

We have a limited operating history. Our consolidated affiliated entity, P3A, commenced operations in 2000 and first achieved profitability in 2002. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in the highly fragmented agricultural industry in China. Some of these risks and uncertainties relate to our ability to:

 

 

If we are unsuccessful in addressing any of these risks and uncertainties, our business, financial condition and results of operations may be materially and adversely affected.

 

Natural or man-made disasters could damage our seed production, which would cause us to suffer losses of production and a material reduction of revenues.

 

We produce corn seeds through a network of approximately 54 village collectives and seed production companies that plant crops and harvest seeds for us on a contract basis. The sources of supply for our seeds are highly diverse but invariably subject to the risks associated with growing crops, including natural disasters such as drought, pestilence, plant diseases and insect infestations, and man-made disasters such as environmental contamination. Other man-made incidents may damage our products, such as arson or other acts that may adversely affect our corn seed inventory in the winter storage season. Furthermore, natural or man-made disasters may cause farmers to migrate from the farmland, which would decrease the number of end users of our products. We are particularly susceptible to disasters or other incidents in Shanxi province, where we have the greatest concentration of our operations. In the event of a widespread failure of a seed crop, we would likely sustain substantial loss of revenues and suffer substantial operating losses. We do not have insurance to protect against such a risk and we are not aware of the availability of any such insurance in China.

 

An outbreak of disease in livestock and/or food scares in China would materially and adversely affect our sheep breeding business.

 

Any major outbreak of disease in livestock in China, such as foot and mouth disease, is likely to result in significant disruptions to our business operations. A major epidemic within our farms, the onset of diseases and the preventive culling of our livestock could result in considerable losses to our flocks, which would materially and adversely affect our business and our profitability. Adverse publicity and concerns resulting

from an outbreak of diseases in livestock may discourage consumers from purchasing mutton or related products. Such a reduction in demand would adversely impact our financial performance, regardless of whether our livestock has been directly affected by any disease.

 

We primarily rely on arrangements with village collectives to produce our corn seed products. If we were unable to continue these arrangements or enter into new arrangements with other village collectives, our total land acreage devoted to corn seed production would decrease and our growth would be inhibited.

 

As of June 30, 2007, we had access to approximately 27,000 acres of farmland in seven provinces mainly through contractual arrangements with village collectives. As we are legally prohibited from owning farmland, we typically lease the land owned by a village collective and enter into a seed production agreement with that village collective. These leases typically are twelve years in length, while the contracts to produce corn are typically one year in length, covering one growing season. In the event that prices for other crops increase, these village collectives may decide to farm other crops in breach of our leases and seed production agreements with them, or following expiration of our leases, lease the land to our competitors or others. If the land policy changes so that we are unable to continue to lease the land, if a significant number of village collectives refuse to lease the land to us at the expiration of their current leases, or if we are unable to find new villages collectives willing to lease their land to us and produce corn seeds for us, our business and results of operations would be materially and adversely affected. Any of these disruptions could materially and adversely affect our supply of corn seeds and our revenues. Such disruptions could also damage distributor relationships and farmer loyalty if we cannot supply them with the quantities and varieties of seeds that they expect. Moreover, due to competition for land suitable for leasing, we may be unable to lease the same land or other land at commercially reasonable prices. In the event that we have to pay more for leased land or are unable to lease sufficient land, our results of operations may be materially and adversely affected.

 

If our rights to lease land from village collectives were subject to a dispute, or if their legality or validity were challenged, our operations could be disrupted.

 

PRC law provides for the registration of land ownership and land-use rights and for the issuance of certificates evidencing land ownership or the right to use land. See “Regulation — Land Use Rights.” However, the administrative system for registration of land ownership and land-use rights is not well-developed in rural areas where most of our corn seed production bases are located. As a result, we are generally not able to verify through the land registry system the ownership or land-use rights of the parties from whom we have leased land. Despite our efforts to obtain representations from the village collectives that they own the land, possess land-use rights or have the right to sub-contract the land-use right on behalf of the holder of such rights, there is nevertheless a risk that they have not legally and validly granted the right to use the land to us. Moreover, there is a risk that the village collectives will, in breach of the terms of the applicable leases, enter into leases with other third parties in respect of land-use rights which they have previously granted to us, or that they have not entered into leases with third parties before entering into leases with us.

 

In addition, under PRC law, if a village collective plans to enter into a lease with a party that does not belong to the collective, the contract must first be approved by at least two thirds of the members of the village assembly or representatives of the villagers. The lease must then be submitted to the township government for approval before it becomes effective. There is a risk that the village collectives with which we have entered into leases, and which have generally advised us that the required village assembly meetings were convened and the leases were approved by the township government, have in fact not undertaken all required actions prior to entering into leases with us.

 

There is a risk that the legality or validity of our leases will be subject to dispute or challenge in the future. If our leases become subject to a dispute or challenge, our operations on such land could be suspended and we could lose our rights to use such land which would in turn reduce the amount of corn we are able to sell, which could have a material and adverse effect on our business, financial condition and results of operations.

Our growth prospects may be materially and adversely affected if we are unable to develop or acquire new products or to produce our existing products in sufficient quantities.

 

The majority of our products are upstream products ultimately used by farmers in China. The profitability of our business depends on sustained and recurring orders from our direct customers, which include distributors, BIRS and other intermediaries. Reorder rates are uncertain due to several factors, many of which are beyond our control. These include changing customer preferences, competitive price pressures, our failure to develop new products to meet the evolving demands of farmers in China, the development of higher-quality products by our competitors, and general economic conditions. If we are unable to develop or acquire additional products that meet the demands of farmers in China, if our competitors develop products that are favored by farmers in China, or if we are unable to produce our existing products in sufficient quantities, our growth prospects may be materially and adversely affected and our revenues and profitability may decline.

 

One or more of our distributors could engage in activities that are harmful to our brand and to our business.

 

In provinces outside Shanxi, our corn seed products are sold primarily through distributors, and those distributors are responsible for ensuring that our products have the appropriate licenses to be sold to farmers in those provinces. If those distributors do not apply for and receive the appropriate licenses, their sales of our products in those provinces may be illegal, and we may be subject to government sanctions, including confiscation of illegal revenues and a fine of between two and three times the amount of such illegal revenues. Unlicensed sales in a province may also cause a delay for our other distributors in receiving a license from the authorities for that province, which could further adversely impact our sales in that province. In addition, distributors may sell our products under another brand that is licensed in a particular province if our product is not licensed there. If our products are sold under another brand, the purchasers will not be aware of our brand name, and we will be unable to cross-market other corn seed varieties or other products as effectively to these purchasers. Moreover, our ability to provide appropriate customer service to these purchasers will be negatively affected, and we may be unable to develop our local knowledge of the needs of these purchasers and their environment. Furthermore, if any of our distributors sell inferior corn seeds produced by other companies under our brand name, our brand and reputation could be harmed, which could make marketing of our branded corn seeds more difficult.

 

Our plans to increase our production capacity and expand into new markets may not be successful, which could adversely affect our operating results.

 

We plan to further our expansion efforts with increased production of existing products and new corn seed, sheep breeding and seedling products. This expansion has placed and will continue to place, substantial demands on our managerial, operational, technological and other resources. If we fail to manage the growth of our product offerings, operations and distribution channels effectively and efficiently, we could suffer a material and adverse effect on our operations and our ability to capitalize on new business opportunities, either of which could materially and adversely affect our operating results.

 

As part of our growth, we intend to expand the geographic areas in which our products are sold. Expansion into new markets may present operating and marketing challenges that are different from those that we currently encounter in our existing markets. If we are unable to anticipate the changing demands that expanding operations will impose on our production systems and distribution channels, or if we fail to adapt our production systems and distribution channels to changing demands in a timely manner, we could experience a decrease in revenues and an increase in expenses and our results of operations could be adversely affected.

 

It is difficult to predict our future performance because our revenues and operating results fluctuate significantly from period to period due in part to the nature of our business.

 

Our operating results may fluctuate due to a number of factors, many of which are beyond our control. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues may be

significantly different from our historical rates. Our operating results in future quarters may fall below expectations. The industry in which we operate is seasonal in nature. For example, the vast majority of our corn seed sales take place between October and May. The sales of most of our sheep breeding products occurs in the spring season from March to June and the fall season from August to November and the majority of our seedling products are sold mainly in the spring season from March to June and in the fall season from September to October. As a result, if we are unable to generate sufficient working capital from our cash flow from operations and working capital facilities, we may encounter liquidity difficulties during the period of July and August, which may have a material and adverse effect on our operations. The seasonal nature of our business causes our operating results to fluctuate from quarter to quarter. Any unexpected seasonal or other fluctuations could cause the price of our ADSs to fall. As a result, you may not be able to rely on comparisons of our quarterly operating results as an indication of our future performance.

 

In addition, the future sustainability and growth of our profits depend on our ability to secure sufficient orders from customers. An adverse change in market conditions may have material and adverse effects on our operating results if we cannot adjust our operating and marketing strategy to respond to such changes. Our results of operations may be materially and adversely affected by reduced orders and profit margins in the event of a slowdown in market demand, an increase in business competition, a decrease in government subsidies to farmers, increased costs, or for other reasons. As such, there is a risk that we will not be able to continue to maintain a similar level of profits.

 

Our financial results are sensitive to fluctuations in market prices of the products that we offer; in recent years, prices of our corn seed and breeder sheep in China have been declining.

 

The profitability of our operations is affected by the selling prices of our products. We benchmark the prices of our proprietary corn seed against the prevailing domestic market prices of corn seed of similar quality and attributes, and set the prices of the breeder sheep that we sell at prices comparable to similar breeder sheep in China. Historically, prices of corn seed, breeder sheep and other agricultural products in China have been volatile, primarily due to fluctuations in supply and demand. In the past three years, prices of our corn seed and breeder sheep in China have been declining. If the prices for such products continue to decline in the future, and we are unable sell more products and/or reduce our cost of sales, our revenues will decrease and our profitability will be adversely affected.

 

The Chinese agricultural market is highly competitive and our growth and results of operations may be adversely affected if we are unable to compete effectively.

 

The agricultural market in China is highly fragmented, largely regional and competitive and we expect competition to increase and intensify within the sector. We face significant competition in our corn seed and sheep breeding lines of business. Many of our competitors have greater financial, research and development and other resources than we have. Competition may also develop from consolidation or other market forces within the corn seed industry in China, and the privatization of corn seed producers that are currently operated by the local governments in China. According to the Opinion on Enhancement of Market Supervision regarding Seed Administration Reform issued by the General Office of the PRC State Council in May 2006, the agricultural administrative offices of local government were required to separate their governmental administrative functions from seed production activities by the end of June 2007 and, therefore, there may be more privately-owned seed companies in the future. Our competitors may be better able to take advantage of industry consolidation and acquisition opportunities than us. The reform and restructuring of state-owned equity in seed enterprises will likely lead to the reallocation of market share in the seed industry, and our competitors may increase their market share by participating in the restructuring of the state-owned seed companies. Such privatization would likely mean that these producers will need to develop more efficient and commercially viable business models in order to survive. In addition, the PRC government currently restricts foreign ownership of any domestic seed development and production business to no more than 50%. When and if such restrictions are lifted, multinational corporations engaged in the seed business may expand into the agricultural market in China. These companies have significantly greater financial, technological and other resources than us and may become our major competitors in China. As competition intensifies, our margins

may be compressed by more competitive pricing in the short term and may continue to be compressed in the long term and we may lose our market share and experience a reduction in our revenues and profit.

 

If we are unable to estimate farmers’ future needs accurately, and to match our production to the demand of our direct customers, our business, financial condition and results of operations may be materially and adversely affected.

 

Due to the nature of the corn seed industry, we normally produce seeds according to our production plan before we sell and deliver corn seeds to distributors, which are our direct customers. Chinese farmers, the end users of our corn seed, generally make purchasing decisions for our products based on market prices, economic and weather conditions and other factors that we and our distributors may not be able to anticipate accurately in advance. If we fail to accurately estimate the volume and types of products sought by farmers, we may produce more seeds that are not in demand by our distributors resulting in aged seeds. In the event we decide not to sell the aged seeds due to our concerns about the quality of these seeds, the aged inventory could eventually be sold as corn for end uses at greatly reduced prices than seeds. Aged inventory could result in asset impairment, in which case we would suffer a loss and incur an increase in our operating expenses. On the other hand, if we underestimate demand, we may not able to satisfy our distributors’ demand for corn seeds, and thus damage our customer relations and end-user loyalty. Our failure to estimate farmers’ future needs and to match our production to the demand of our direct customers may materially and adversely affect our business, financial condition and results of operations.

 

If we are not able to recover all of the advances paid to contracted village collectives or if a substantial number of our customers fail to pay for our products, our liquidity and financial condition may be materially and adversely affected.

 

We provide advances to the contracted village collectives which grow corn seeds for us in return for their purchase of fertilizer and other production materials. At the end of the growing season, after we take delivery of corn seeds, we credit the advances against the purchase prices payable to the village collectives. If the village collectives fail to produce or deliver the contracted amounts of corn seeds by the end of each growing season, we may not be able to recover all of the advances paid to the village collectives and our financial condition may be materially and adversely affected.

 

Our sales contracts provide for upfront payments, which may be up to 100% of the purchase price, depending upon the payment history and creditworthiness of each customer, with the balance due within 180 days of delivery. As a result, some of our customers have 180 days’ credit to pay after we deliver our corn seeds. These customers may not have ready access to further sources of credit and therefore may have limited ability to withstand economic downturns. The lack of credit could prevent them from fulfilling their purchasing commitments with us, which in turn may cause liquidity issues for us and materially and adversely affect our financial condition.

 

The resources we devote to research and development may not result in commercially viable or competitive products.

 

Our success depends in part on our ability to develop new products. Research and development in the corn seed, sheep breeding and seedling industries is generally expensive and prolonged. For example, seed development takes at least five years, as measured from selection of the variety of seed for product development to launch of a new corn seed product on the market. Due to the uncertainties and complexities associated with seed and biotechnological research, corn seed products under development may not survive the development process, may not ultimately be commercially viable, and/or may not pass government testing in the relevant provinces. As a further example, a new breed of sheep takes at least several generations to stabilize. Our proprietary locally-bred sheep breed, the Primalights III hybrid sheep, is close to stabilization which will qualify it for application eligibility as a new breed in China, and we expect to apply for official variety recognition when our Primalights III hybrid sheep becomes eligible for application. We have not yet begun the application process to apply for the title of official breeder sheep, and it may take several years to complete and/or may not be successful. In addition, we have significantly less financial resources than many

of our international competitors. If the resources we devote to research and development do not result in products that survive the development stage, do not result in products that we can sell to our customers, or do not pass government testing, our results of operations may be materially and adversely affected.

 

We may be subject to intellectual property rights claims or other claims in the future which could result in substantial costs and diversion of our financial and management resources away from our business.

 

We are subject to the risk that the products, technology and processes that we have developed in collaboration with institutes and universities infringe or will infringe upon patents, copyrights, trademarks or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims relating to the intellectual property of others. If any such claim arises in the future, litigation or other dispute resolution proceedings may be necessary to retain our ability to offer our current and future products, which could result in substantial costs and diversion of our management resources and attention even if we prevail in contesting such claims. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property rights, incur additional costs to license or develop alternative products and be forced to pay fines and damages, any of which could materially and adversely affect our business and results of operations.

 

Our failure to protect our intellectual property rights may undermine our competitive position, and legal action to protect our intellectual property rights may be costly and divert our management resources.

 

We rely primarily on trademark, trade secret, copyright law and other contractual restrictions to protect our intellectual property. These afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. Preventing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. There is a risk that the outcome of such potential litigation will not be in our favor. Such litigation may be costly and may divert management attention as well as expend other resources which could otherwise have been devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing may have a material adverse effect on our business, results of operations and financial condition.

 

Historically, implementation of PRC intellectual property-related laws has been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property.

 

Our rights to some of the technologies used in our sheep breeding business and developed through collaborations with Shanxi Agriculture University are limited in scope. If we are unable to continue commercialization of our intellectual property, our sheep breeding business could suffer, which could materially and adversely affect our results of operations.

 

We cooperate with Shanxi Agriculture University in research and development for our sheep breeding business. Under a number of our agreements with Shanxi Agriculture University, the university holds the rights to claim authorship on the technological achievements and the rights “to apply for awards” for the technologies developed. We have the exclusive right to use, further develop and commercialize these technologies developed by Shanxi Agriculture University under these agreements. If Shanxi Agriculture University were to dispute our exclusive rights to use, further develop and commercialize these technologies, we may lose our ability to continue to employ such technologies in our sheep breeding business. If this were to occur, our sheep breeding operations could suffer and our results of operations could be adversely affected.

Our senior management team has worked together for a short period of time, which may make it difficult for you to evaluate their effectiveness and ability to address challenges.

 

Due to our recent restructuring and additions to our corporate management team, certain of our senior management have worked together at our company for only a short period of time. For example, our chief financial officer joined us in February 2007, our chief technology officer joined us in May 2007, and our co-chief executive officer Kenneth Hua Huang joined us in July 2007. As a result, it may be difficult for you to evaluate the effectiveness of our senior management and their ability to address future challenges to our business. In addition, we plan to recruit qualified candidates with substantial experience in the global agricultural industry to further strengthen our senior management team. We may not be able to identify or recruit appropriate new senior management personnel with such experience and even if we can, such new senior management personnel may not be able to work with our existing management to effectively execute our growth strategy and address future challenges to our business.

 

Our business depends substantially on the continuing efforts of our management, and our business may be severely disrupted if we lose their services.

 

Our future success depends significantly upon the continued services of our management, especially in the case of our primary operating entity, P3A. We rely on our management’s experience in product development, business operations, and sales and marketing, and on their relationships with distributors and relevant government authorities. If one or more of our key management personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all. The loss of the services of our key management personnel, in the absence of suitable replacements, could have a material adverse effect on our operations and financial condition, and we may incur additional expenses to recruit and train personnel. Each member of our management team has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. If disputes arise between our management and us in light of the uncertainties within the PRC legal system, there is a risk that some of the provisions of these agreements may not be enforced or enforceable in China, where our managers reside and hold most of their assets.

 

We may not possess all the licenses required to operate our business, or may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could have a material adverse effect on our results of operations.

 

We are required to hold a variety of permits and licenses to conduct our corn seed business, sheep breeding and seedling businesses in China. We may not possess all the permits and licenses required for each of our business segments. In addition, there may be circumstances under which the approvals, permits or licenses granted by the governmental agencies are subject to change without substantial advance notice, and it is possible that we could fail to obtain the approvals, permits or licenses that are required to expand our business as we intend. Two permits held by P3A for production and business operations of breeding livestock and poultry, or Husbandry Permits, have expired and we are currently in the process of obtaining the renewals from the department authorized by the State Council. If we fail to obtain or to maintain such permits or licenses or renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we would be able to offer. As a result, our business, result of operations and financial condition could be materially and adversely affected.

 

If the sale of our self-developed Primalights III hybrid sheep is considered by relevant government authorities to constitute the sale of breeder sheep, we may be ordered to stop selling Primalights III hybrid sheep and be subject to other penalties.

 

We sell breeder sheep as well as our self-developed Primalights III hybrid sheep to our customers. We expect that we will be eligible to apply for new breed status for our Primalights III hybrid sheep in the near future. According to the PRC Animal Husbandry Law, which became effective on July 1, 2006, any new variety of livestock is subject to examination and approval by the National Commission for Livestock and Poultry Genetic Resources and can be marketed and sold as a new variety only after the variety is approved

and announced by the Ministry of Agriculture. Before obtaining such approval, we are not allowed to market or sell Primalights III hybrid sheep as breeder sheep, but only as ordinary hybrid sheep. According to informal inquiries with relevant PRC authorities, we do not need to acquire additional licenses if we only sell ordinary hybrid sheep. In the past, we sold our Primalights III hybrid sheep together with our breeder sheep under our form contract for breeder sheep, and farmers may use our Primalights III hybrid sheep to breed sheep. Under applicable PRC law, if any person sells any kind of livestock as a new variety before obtaining necessary approval, such person may be ordered to stop selling the livestock and pay a fine up to three times the proceeds received from prior illegal sales, and all the proceeds received from prior illegal sales may be confiscated. In 2006, sales of our Primalights III hybrid sheep accounted for 9.0% of our total revenues. If our sale of Primalights III hybrid sheep is considered by the relevant government authority to be a sale of breeder sheep, we may be ordered to stop selling them, be subject to confiscation of the livestock and the illegal gains or have additional fines imposed, all of which may have a material and adverse effect on our business.

 

We may be subject to product quality or liability claims, which may cause us to incur litigation expenses and to devote significant management time to defending such claims and, if determined adversely to us, could require us to pay significant damage awards.

 

In addition to the genetic traits and the quality of our products, the performance of our corn seeds depends on climate, geographical areas, cultivation method, farmers’ degree of knowledge and other factors. At the same time, the viability of some farmland in China has deteriorated due to toxic and hazardous materials from farmers’ overuse of herbicides. Moreover, different production methods of corn seeds might result in inconsistent quality of corn seeds. These factors are beyond our control and can result in sub-optimal production yields. However, farmers generally attribute sub-optimal production yields to poor seed quality.

 

We may be subject to legal proceedings and claims from time to time relating to our seed quality. The defense of these proceedings and claims could be both costly and time-consuming and significantly divert the efforts and resources of our management personnel. An adverse determination in any such proceedings could subject us to significant liability. In addition, any such proceeding, even if ultimately determined in our favor, could damage our market reputation and prevent us from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase of our products.

 

Corn seed prices and sales volumes may decrease in any given year with a corresponding reduction in sales, margins and profitability.

 

During most of our limited operating history, the corn seed market has been stable in China. In the future, there may be periods of instability during which commodity prices and sales volumes may fluctuate greatly. Commodities can be affected by general economic conditions, weather, disease outbreaks and factors affecting demand, such as availability of financing, competition and trade restrictions. Our attempts to differentiate our products from those of other corn seed producers have not prevented the corn seed market from having the characteristics of a commodity market. As a result, the price that we are able to demand for our corn seed is dependent on the size of the supply of our corn seed and the corn seed of other producers. Therefore, the potential exists for fluctuation in supply, and consequently in price, in our own markets, even in the absence of significant external events that might cause volatility. As a result, the amount of revenue that we receive in any given year is subject to change. As production levels are determined prior to the time that the volume and the market price for orders is known, we may have too much or too little product available, which may materially and adversely affect our revenues, margins and profitability.

 

The advent of the genetic modification of corn seeds in China could adversely affect our business, causing us to lose business opportunities, market share and revenues.

 

We currently rely upon traditional methods of creating corn seed hybrids to develop new products. There has been a worldwide increase in the development and application of genetically modified agricultural

products to increase the quality and quantity of crop yields. Advances in technology are increasingly allowing the use of gene modification to produce seeds that are more superior than those that are produced by traditional methods. Currently, the production and commercial sale of genetically modified corn seed is not allowed in China. However, if government policies change to allow genetically modified corn seeds, demand may develop for these products, and we expect that we will need to produce genetically modified products to meet customer demands.

 

Should the Chinese government change its policy with respect to genetically modified corn seeds, there is a risk that our current steps to respond to the potential competitive threat posed by genetically modified agricultural products, including our research and development activities with respect to genetically modified corn seeds, may not allow us to compete successfully. In particular, our competitors may have more advanced technology or may market genetically modified seed more successfully than us.

 

Any diversion of management attention to matters related to acquisitions or any delays or difficulties encountered in connection with integrating acquired operations may have a material and adverse effect on our business, results of operations, and/or financial condition.

 

We intend to acquire companies whose products, operations or resources are complementary to our existing business. These transactions are designed to contribute to our long-term growth. We intend to align such acquisitions into our growth strategies to generate sufficient value to justify their cost. We may not be successful in identifying, consummating and integrating future acquisitions, which could significantly impair our growth potential. Acquisitions also present other challenges, including issues relating to geographical coordination, personnel integration and retention of key management personnel, systems integration and the reconciliation of corporate cultures. Those activities and operations could divert management’s attention from our business or cause a temporary interruption of, or loss of momentum in, our business and the loss of key personnel from the acquired companies. Any diversion of management’s attention to matters related to acquisitions or any delays or difficulties encountered in connection with integrating acquired operations may have an adverse effect on our business, results of operations and/or financial condition.

 

Our future growth prospects may be affected if we are unable to obtain additional capital to finance future acquisitions.

 

We may require additional cash resources in order to make acquisitions. We plan to expand through acquisitions, but have not yet identified or investigated potential acquisition targets in detail. In general, the cost of an acquisition is unknown until the opportunity is analyzed, due diligence has been completed and negotiations are underway. If the cost of any such acquisition that our management deems appropriate is higher than our cash resources, we will need to seek additional cash resources, and may seek to sell additional equity or debt securities or borrow under credit facilities. The sale or issuance of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We may not be able to obtain financing in amounts or on terms acceptable to us, if at all. We may also not be able to secure or repay debt incurred to fund acquisitions, especially if the acquisition does not result in the benefits we anticipated. As a result, our operating results and financial condition may be materially and adversely affected.

 

Failure to properly manage our storage system may result in damage to products in storage, thereby resulting in operating losses.

 

Corn seed and seedling storage entails significant risks associated with the storage environment, including moisture, temperature and humidity levels, deviations of which may result in damage of corn seeds and seedlings in stock. Our semen and embryo products for our sheep breeding business are generally stored in a frozen state and any problems affecting the temperatures or conditions under which they are stored could damage these products. Any significant damage to the products we have in storage could materially and adversely affect our results of operations.

Failure to achieve and maintain effective internal controls could have a material and adverse effect on the trading price of our ADSs.

 

We will become subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, as required under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, has adopted rules requiring public companies to include a report of management on the effectiveness of such companies’ internal control over financial reporting in their annual reports. In addition, an independent registered public accounting firm for a public company must report the effectiveness of our company’s internal control over financial reporting. These requirements will first apply to our annual report on Form 20-F for the fiscal year ending December 31, 2008. Management may not conclude that our internal control over financial reporting is effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if such firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated or reviewed, or if such firm interprets the relevant requirements differently from us. In addition, during the course of such evaluation, documentation and testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404.

 

We have been a private company with limited accounting personnel and other resources to address our internal controls and procedures. As a result, during the audit of our financial statements for the three years ended December 31, 2006, we and our independent registered public accounting firm identified a number of control deficiencies, including two material weaknesses, as defined in the Public Company Accounting Oversight Board’s Audit Standard No. 2. The material weaknesses identified by us and our independent auditors are our inadequate personnel resources, processes and documentation to address reporting requirement under U.S. GAAP, and our inadequate independent oversight over financial reporting due to the lack of an independent audit committee. If we fail to implement measures to remediate these material weaknesses and other control deficiencies in time to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act, including establishing an audit committee in the near future, we may not be able to conclude, on an ongoing basis, that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, any failure to achieve and maintain effective internal control over financial reporting could result in our inability to conclude we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, causing the loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs. Furthermore, we may need to incur significant costs and use significant management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements.

 

We have limited insurance coverage in China.

 

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance on certain vehicles and property and casualty insurance on some of our assets, we do not have insurance coverage on our other assets or inventories and we do not have insurance to cover our business or interruption of our business, litigation or product liability. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence of loss or damage to property, litigation or business disruption may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our operating results and financial condition.

 

Deficient railway transportation capacity in northern and northwestern China may result in an increase in our transportation-related costs and thus adversely affect our business.

 

The majority of our major production bases are located in the Shanxi, Gansu, Inner Mongolia and Xinjiang provinces of China. Railway transportation is currently the most cost-effective means to transport

seeds throughout China. With China’s fast economic development and increasing demand for commercial transportation, the railway system in China is often overburdened, and deficient in terms of transportation capability. As our volume of freight increases year by year, our seeds may have to be transported by other means if the rail system cannot efficiently and cost-effectively manage the increasing volume of freight. We may not be able to pass the resulting increase in transportation costs to our customers through price increases of our products. The deficiencies of the railways may also result in delays, inefficient distribution of our products and a loss of goodwill among our customers or end users, all of which may materially and adversely affect our business and results of operations.

 

If we grant additional employee share options, restricted shares or other share incentives in the future, our net income could be adversely affected.

 

We have adopted a 2007 share incentive plan and granted 7,500,000 share options under the plan in July 2007. We are required to account for share-based compensation in accordance with Financial Accounting Standards Board Statement No. 123(R), Share-Based Payment, which requires a company to recognize, as an expense, the fair value of share options and other share-based compensation to employees based on the fair value of equity awards on the date of the grant (taking into account the prices payable by the award recipients), with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. If we grant additional options, restricted shares or other equity incentives in the future, we could incur significant compensation charges equal to the fair value of the additional options, restricted shares and other equity incentives (taking into account the prices payable by the award recipients) and our net income could be adversely affected.

 

Risks Related to Doing Business in China

 

If the Chinese government finds that the agreements that establish the structure for operating our Chinese businesses do not comply with Chinese governmental restrictions on foreign investment in the seed industry, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Most of our operations are conducted through our contractual arrangements with our affiliated entity and its shareholders in China. PRC regulations currently restrict foreign ownership of corn seed companies. For a description of these regulations, see “Regulation — Seed Law, Animal Husbandry Law and Other Relevant Regulations — Seed Law and Other Relevant Regulations.” We have entered into contractual arrangements with the affiliated entity and its shareholders, all PRC citizens, which enable us to, among other things, exercise effective control over the affiliated entity, P3A. See “Corporate History and Structure — Our Corporate History and Structure — Our Contractual Arrangements with P3A and Its Shareholders.”

 

If we or either of our PRC subsidiary or affiliated entity or our corporate structure is found to be in violation of any existing or future PRC laws or regulations (for example, if we are deemed to be holding equity interests in an entity in which direct foreign ownership is restricted) the relevant PRC regulatory authorities, including the administration of industry and commerce, the administration of foreign exchange and relevant agencies of the Ministry of Commerce, would have broad discretion in dealing with such violations, including:

 

 

The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business.

 

The shareholders of P3A may breach our agreements with them or may have potential conflicts of interest with us, and we may not be able to enter further agreements to derive economic benefits from P3A, which may materially and adversely affect our business and financial condition.

 

The shareholders of P3A , our consolidated affiliated entity in the PRC, may breach or refuse to renew the existing contractual arrangements with us that allow us to effectively control P3A, and receive economic benefits from its operations. There is a risk that they will not always act in the best interests of our company. We do not have existing arrangements to address potential conflicts of interest between these individuals and our company. We rely on these individuals to abide by the contract laws of China and honor their contracts with us in order for us to effectively control P3A and to receive the economic benefits deriving from our contracts with them. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of P3A or if the shareholders breach our agreements with them, we would have to rely on legal proceedings, which may result in disruption to our business. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

Any limitation of PRC law and regulations on the ability of our subsidiary and affiliated entity to make dividend or payments to us could have a material adverse effect on our ability to conduct our business.

 

Current PRC regulations permit our subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiary and our affiliated entity in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital, and to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the shareholders’ meeting or the board. These reserves are not distributable as cash dividends. Furthermore, if our subsidiary and our affiliated entity in China incur debt on their own behalf in the future, the loan agreements governing that debt may restrict their ability to pay dividends or make payments to us according to the contractual agreements. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiary’s ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiary and our affiliated entity to distribute dividends or other payments to us could materially limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, or otherwise fund and conduct our business.

 

Under the current PRC tax law, dividend payments to foreign investors made by foreign-invested enterprises, or FIEs, are exempted from PRC withholding tax. Pursuant to the new PRC enterprise income tax law to be effective on January 1, 2008, however, dividends payable by a FIE to its foreign investors will be subject to a 20% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Our wholly-owned subsidiary in China, Agria China, is considered as an FIE and is directly owned by our intermediary holding company incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between the Mainland and Hong Kong Special Administrative Region in August 2006, dividends paid by an FIE to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%. The new tax law contemplates the possibility of exemptions from withholding taxes for China-sourced income of FIEs. Since the PRC tax authorities have not promulgated any related implementation rules, it remains unclear whether we would be able to obtain exemptions from PRC withholding taxes for dividends distributed to us by Agria China.

We benefit from certain PRC government incentives. Expiration of, changes to, disputes over or challenges against these incentives or protectionism arising from the incentives could adversely affect our operating results.

 

The Chinese government has provided various incentives to high-technology companies and agricultural companies in order to encourage development of the high-technology and agricultural industries. Such incentives include reduced tax rates, subsidies, and other measures. For example, P3A, our consolidated affiliated entity, is qualified as a “key technology enterprise” pursuant to the Shanxi Province 1311 Agricultural High Technology Project implemented by Shanxi Province since 2002. As a result, P3A has been exempted from the PRC enterprise income tax since 2002 based on the approval of the local tax authority in Shanxi. In addition, Agria China, our wholly-owned subsidiary established in March 2007 in China, has been approved as a new technology enterprise and enjoys the reduced enterprise income tax rate of 15%. Agria China also received the local tax authority’s approval on September 30, 2007 to be exempted from the EIT from 2007 to 2009 and to be subject to the reduced EIT rate of 7.5% from 2010 to 2012. When these tax benefits are changed adversely, or if the central government challenges the tax exemption enjoyed by P3A as a result of the Shanxi Province 1311 Agricultural High Technology Project, our effective tax rate will likely increase up to a maximum of 25% on our worldwide income, which could have a material adverse effect on our financial condition and results of operations.

 

The PRC government has in recent years reduced taxes and increased subsidies and other support across the agricultural industry. For instance, the government subsidizes farmers for their seed purchases, and has increased spending on rural infrastructure. Sales of agricultural products from producers to intermediaries or to farmers is exempt from PRC value-added tax. The discontinuance of preferential treatments granted by the Chinese government to the seed industry, could adversely affect our earnings.

 

In addition, subsidy policies may have an adverse effect on our ability to market our products, especially in provinces other than Shanxi where we are planning to increase our sales. Farmers can buy corn seeds designated as “high-quality” at subsidized prices, but the designation of seeds as “high-quality” is at the discretion of the local government, companies owned by the local government and local private seed companies. It is possible that this policy could result in preferential treatment for local seed producers, with locally produced seeds being designated as “high-quality” while ours are not designated as such. If such preferential treatment were to occur, the price for our seeds to farmers in those provinces would be higher than the subsidized local seeds, and our sales in that province could suffer, which could have a material and adverse effect on our results of operations.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct our business primarily through our subsidiary and affiliated entity in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China, and in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.

 

Recent SAFE regulations relating to offshore investment activities by PRC residents may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders and

beneficial owners who are PRC residents fail to make any required applications and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

 

The PRC State Administration of Foreign Exchange, or SAFE, has promulgated several regulations, including Circular No. 75 issued in November 2005 and implementation rules issued in May 2007, requiring registrations with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents. These regulations apply to our shareholders and beneficial owners who are PRC residents.

 

The SAFE regulations require registration of direct or indirect investments made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of that offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.

 

We have requested our current beneficial owners who are PRC residents to make the necessary applications and filings as required under these regulations and under any implementing rules or approval practices that may be established under these regulations. However, as a result of the recent enactment of the regulations, lack of implementing rules and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. There is a risk that not all of our shareholders and beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registration or approvals required by these regulations or other related legislation. The failure or inability of our PRC resident shareholders and beneficial owners to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected. See “Regulation — Foreign Exchange.”

 

In addition, under the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rules, issued on January 5, 2007 by the SAFE, PRC citizens who are granted shares or share options by an overseas listed company according to its employee share option or share incentive plan are required, through the PRC subsidiary of such overseas listed company or any other qualified PRC agent, to register with the SAFE and complete certain other procedures related to the share option or other share incentive plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company may be remitted into a foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen employees who have been granted share options, or PRC option holders, will be subject to the Individual Foreign Exchange Rules upon the listing of our ADSs on the New York Stock Exchange. If we or our PRC citizen employees fail to comply with these regulations, we or our PRC option holders may be subject to fines and legal sanctions.

 

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.

 

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current structure, our income is primarily derived from dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB

are to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

Fluctuation in the value of RMB may have a material adverse effect on your investment.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Effective from July 21, 2005, the RMB is no longer pegged solely to the US dollar. Instead, it is pegged to a basket of currencies, determined by the People’s Bank of China, against which it can rise or fall by as much as 0.3% each day. For example, on July 21, 2005, the RMB was revalued against the US dollar to approximately RMB8.11 to the US dollar, representing an upward revaluation of 2.1% of the RMB against the US dollar, as compared to the exchange rate on the previous day. On September 23, 2005, the PRC government widened the daily trading band for RMB against non-US dollar currencies from 1.5% to 3% to improve the flexibility of the new foreign exchange system. The exchange rate may become volatile, the RMB may be revalued further against the US dollar or other currencies or the RMB may be permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the RMB against the US dollar or other currencies. This change in policy resulted in an approximately 8.0% appreciation in RMB against the US dollar between July 21, 2005 and June 30, 2007.

 

Our revenues and costs are mostly denominated in RMB, while a significant portion of our financial assets will be denominated in U.S. dollars after the completion of this offering. We rely entirely on dividends and other fees paid to us by our subsidiaries and our affiliated entity in China. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we would need to convert U.S. dollars into RMB for such purposes.

 

We face risks related to health epidemics and other outbreaks, or acts of terrorism, which could result in reduced demand for our products or disrupt our operations.

 

Our business could be materially and adversely affected by the outbreak of avian flu, severe acute respiratory syndrome or another epidemic, or an act of terrorism. From time to time, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of avian flu, severe acute respiratory syndrome or other adverse public health developments in China or elsewhere in Asia may have a material and adverse effect on our business operations. In addition, terrorist attacks, such as those that took place on September 11, 2001, geopolitical uncertainty and international conflicts, could have an adverse effect on our business operations. Any of these events could adversely affect China’s economy and cause an immediate and prolonged drop in consumer demand. An immediate and prolonged drop in consumer demand could severely disrupt our business operations and adversely affect our results of operations. Furthermore, a significant portion of our revenues are derived from government customers, which may reduce their spending on our products during a crisis, which could adversely affect our results of operations and could probably be difficult to recover once the threat has subsided.

 

The new PRC Property Rights Law may affect the perfection of the pledge in our pledge agreement with P3A and its shareholders.

 

Under the equity pledge agreement among P3A, the shareholders of P3A and Agria China, the shareholders of P3A have pledged all of their equity interests in P3A to Agria China. This pledge has been recorded on P3A’s shareholders registration book pursuant to the PRC Security Law. However, according to the PRC Property Rights Law, which became effective as of October 1, 2007, the pledge will not be effective if it is not registered with the relevant local administration for industry and commerce. P3A has applied for

such registration, but the application has not been processed as no registration procedures are available. P3A will continue to attempt to register such pledge when the local administration for industry and commerce implements registration procedures in the future. However, if P3A is unable to do so, the pledge may be deemed ineffective under the PRC Property Rights Law.

 

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation. Any requirement to obtain prior CSRC approval could delay this offering and a failure to obtain this approval, if required, may create uncertainties for this offering and could have a material adverse effect on our business, operating results, reputation, prospects and trading price of our ADSs. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.

 

On August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. This New M&A Rule purports, among other things, to require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by special purpose vehicles seeking CSRC approval of their overseas listings. While the application of the New M&A Rule remains unclear, we believe, based on the advice of our PRC counsel, Commerce & Finance Law Offices, that CSRC approval is not required in the context of this offering because (1) we are not a special purpose vehicle formed or controlled by PRC companies or PRC individuals, and (2) we established our PRC subsidiary by means of direct investment other than by merger or acquisition of PRC domestic companies. However, there is a risk that the relevant PRC government agencies, including the CSRC, may not reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operations in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus.

 

The New M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance when a foreign investor acquires equity or assets of a PRC domestic enterprise. Complying with the requirements of the New M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

According to the New M&A Rule and other PRC rules regarding foreign exchange, an offshore company’s shares can be used as consideration for acquisition of a domestic PRC company’s equity only under very limited circumstances. Prior approval from the Ministry of Commerce must be obtained before such a share swap can be done.

 

If the CSRC approval is required in connection with this offering, it could delay this offering and a failure to obtain this approval could have a material adverse effect on our business, operating results, reputation, prospects and trading price of our ADSs.

Risks Related to the ADSs and this Offering

 

There has been no public market for our ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

 

Prior to this initial public offering, there has been no public market for our ADSs. Following the offering, our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. We have applied to have our ADSs listed on the New York Stock Exchange. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected. The initial public offering price for our ADSs is determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after this initial public offering. An active trading market for our ADSs may not develop and the market price of our ADSs may decline below the initial public offering price.

 

The market price for our ADSs may be volatile.

 

The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

 

Because the initial public offering price is substantially higher than our net book value per ADS, you will incur immediate and substantial dilution.

 

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ADSs on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $       per ADS (assuming no exercise by the underwriters of options to acquire additional ADSs), representing the difference between our net book value per ADS as of      , after giving effect to this offering, and the initial public offering price of $       per ADS, the midpoint of the estimated price range. In addition, you may experience further dilution to the extent that our ADSs are issued upon the exercise of share options.

 

Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.

 

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have       ADSs outstanding. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining ADSs

outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. In addition, we have granted registration rights to our private equity investor. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriter. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

 

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

 

Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee to vote the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affect the rights of shareholders.

 

Under our deposit agreement, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless we have instructed the depositary that we do not wish a discretionary proxy to be given or any of the other situations specified under the deposit agreement takes place. The effect of this discretionary proxy is that you cannot prevent ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may be more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute that property and you will not receive that distribution.

We are a Cayman Islands company and because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, you may have less protection for your shareholder rights than you would under U.S. law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

 

As a result of all of the above, public shareholders of our company may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders of our company than they would as shareholders of a U.S. public company.

 

Our management will have considerable discretion as to the use of the net proceeds to be received by us from this offering.

 

We have allocated much of the net proceeds of this offering to be received by us for acquisitions and general corporate purposes. Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

 

We are controlled by a small group of existing shareholders, whose interests may differ from other shareholders.

 

Brothers Capital Limited and its subsidiaries collectively hold 84.6% of our total outstanding shares on an as-converted basis, and will hold           of our total outstanding shares immediately following the completion of this offering, assuming no exercise of the underwriters’ over-allotment option. Mr. Guanglin Lai, our chairman and co-chief executive officer is the sole owner of Brothers Capital Limited and Mr. Lai and Mr. Zhaohua Qian, a director of our company, are the only directors of Brothers Capital Limited. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. In addition, because Brothers Capital Limited controls our company, it is able to take actions that may not be in the best interests of other shareholders. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. We do not have any existing arrangements with any of our shareholders to address potential conflicts of interests between these shareholders and our company and none of our shareholders have entered into non-compete agreements. There is a risk that our existing shareholders may not always act in the best interests of our company.

 

Our memorandum and articles of association will contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs.

 

We intend to adopt an amended and restated articles of association that will become effective immediately upon the closing of this offering. We have included certain provisions in our new memorandum and articles of

association that could limit the ability of others to acquire control of our company, and deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

 

We have included the following provisions in our new articles that may have the effect of delaying or preventing a change of control of our company:

 

 

You may have difficulty enforcing judgments obtained against us.

 

We are a Cayman Islands company and most of our assets are located outside of the United States. Most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts. See “Enforceability of Civil Liabilities.”

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

 

We do not expect to be treated as a passive foreign investment company, or PFIC, for our current taxable year ending December 31, 2007. However, we must make a separate determination each year as to whether we are a PFIC, and accordingly, there is a risk that we may be a PFIC for our current taxable year or any future taxable year. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income. If we were treated as a PFIC for any taxable year during which a U.S. person held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to that U.S. person. See “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”

FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include:

 

 

You should thoroughly read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $       million or approximately $       million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and the estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of $       per ADS, the midpoint of the range shown on the front cover page of this prospectus. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. A $1.00 increase (decrease) in the assumed initial public offering price of $       per ADS would increase (decrease) the net proceeds of this offering by $       million, assuming the sale of       ADSs at $       per ADS, the midpoint of the range shown on the front cover page of this prospectus and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

 

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital.

 

We intend to use the net proceeds we will receive from this offering as follows:

 

 

As of the date of this prospectus, we cannot specify with certainty the particular uses for the net proceeds we will receive upon the completion of this offering.

 

The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

 

Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.

 

DIVIDEND POLICY

 

We have no present plan to declare and pay any dividends on our shares or ADSs in the near future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

 

We are a holding company incorporated in the Cayman Islands. We rely on dividends from our subsidiary in China. Current PRC regulations permit our subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiary in China is required to set aside a certain amount of its accumulated after-tax profits each year, if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further, if our subsidiary in China incur debt on its own behalf, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

 

Our board of directors has complete discretion as to whether to distribute dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2007:

 

 

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

DILUTION

 

Our net tangible book value as of June 30, 2007 was approximately $       per share, and $       per ADS. Net tangible book value per share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.

 

Without taking into account any other changes in such net tangible book value after June 30, 2007, other than to give effect to (i) the conversion of all of our preferred shares into 2,400,000 ordinary shares, which will occur automatically upon the closing of this offering, and (ii) our sale of the       ADSs offered in this offering, at an assumed initial public offering price of $       per ADS, the midpoint of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses (assuming the over-allotment option is not exercised), our pro forma net tangible book value at June 30, 2007 would have been $       per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or $       per ADS. This represents an immediate increase in net tangible book value of $       per ordinary share, or $       per ADS, to existing shareholders and an immediate dilution in net tangible book value of $       per ordinary share, or $       per ADS, to purchasers of ADSs in this offering.

 

The following table illustrates the dilution on a per ordinary share basis assuming that the initial public offering price per ordinary share is $       and all ADSs are exchanged for ordinary shares:

 

 

A $1.00 increase (decrease) in the assumed public offering price of $       per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by $       million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by $       per ordinary share and $       per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by $       per ordinary share and $       per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

 

The following table summarizes, on a pro forma basis as of June 30, 2007, the differences between the shareholders as of June 30, 2007 and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of $       per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include       ADSs issuable pursuant to the exercise of the over-allotment option granted to the underwriters. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

 

 

 

The discussion and tables above also assume no exercise of any outstanding stock options. As of September 30, 2007, there were 7,500,000 ordinary shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $2.912 per share, and there were 12,500,000 ordinary shares available for future issuance upon the exercise of future grants under our 2007 share incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

EXCHANGE RATE INFORMATION

 

Our business is conducted in China and substantially all of our revenues are denominated in RMB. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of RMB into U.S. dollars in this prospectus is based on the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB7.6120 to $1.00, the noon buying rate in effect as of June 29, 2007. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On October 17, 2007, the noon buying rate was RMB7.5156 to $1.00.

 

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

 

 

 

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

 

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

 

 

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

 

All of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

We have appointed Law Debenture Corporate Services Inc., 400 Madison Avenue, 4th Floor, New York, New York 10017, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

 

Maples and Calder, our counsel as to Cayman Islands law, and Commerce & Finance Law Offices, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

 

Our Cayman Islands counsel has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.

 

Commerce & Finance Law Offices has advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made, or on reciprocity between jurisdictions. Commerce & Finance Law Offices has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. As China does not have any treaty or other reciprocal arrangements with the United States or Cayman Islands that provide for recognition and enforcement of foreign judgments, it is generally difficult to recognize and enforce in China a judgment rendered by a court in either of these two jurisdictions.

 

CORPORATE HISTORY AND STRUCTURE

 

Our Corporate History and Structure

 

We conduct substantially all of our operations in China through our contractual arrangements with P3A as described below, and through Agria China which is our wholly-owned subsidiary in China. We commenced operations in January 2004 by acquiring the business of P3A, a limited liability company incorporated under the laws of the PRC in 2000. We established a holding company, Aero-Biotech, under the laws of the British Virgin Islands in July 2005 to facilitate our future international fund-raising activities. We formed Agria China as a wholly-owned subsidiary under the laws of the PRC in March 2007 to focus on research and development and other corporate activities. In preparation of this offering, we incorporated Agria Corporation under the laws of the Cayman Islands in May 2007 as our proposed listing vehicle. Agria Corporation became the holding company of Aero-Biotech in June 2007 when all of the shareholders of Aero-Biotech exchanged their shares in Aero-Biotech for shares of Agria Corporation on a pro rata basis.

The following diagram illustrates our corporate structure as of September 30, 2007:

 

 

PRC law currently prohibits a foreign entity or person from owning over 50% of any seed production business in China. We conduct our corn seed, sheep breeding and seedling businesses through contractual arrangements with P3A, which holds the requisite licenses and permits for these businesses, and we may amend these arrangements at any time. Our contractual arrangements with P3A and its shareholders enable us to:

 

 

 

In addition, P3A’s shareholders have executed a letter of undertaking to remit all of the dividends and other distributions received from P3A to Agria China, subject to satisfaction of their personal income tax and other statutory obligations arising from receiving such dividends or other distributions.

 

Our Contractual Arrangements with P3A and Its Shareholders

 

Under PRC laws, each of Agria China and P3A is an independent legal person and neither of them is exposed to liabilities incurred by the other party. Other than pursuant to the contractual arrangements between Agria China and P3A, P3A does not transfer any other funds generated from its operations to Agria China. P3A has four record shareholders, consisting of Ms. Juan Li who is the wife of Mr. Guanglin Lai, our chairman of the board of directors, our co-chief executive officer and a beneficial owner of our ordinary shares, Mr. Zhaohua Qian who is our director and a beneficial owner of our ordinary shares, Mr. Zhixin Xue who is our chief operating officer and director, and Mr. Mingshe Zhang who has been involved in the management of P3A. All four shareholders of P3A are PRC citizens and do not receive any compensation from us for holding shares of P3A. Mr. Zhaohua Qian, a shareholder of P3A, and Mr. Guanglin Lai, who is the husband of another shareholder of P3A, Ms. Juan Li, are the directors of Brothers Capital Limited, which is the largest shareholder of our company. Agria China’s relationship with P3A and its shareholders is governed by the following contractual arrangements entered into on June 8, 2007. The powers of attorney, the equity pledge agreement and the exclusive call option agreement enable Agria China to effectively control P3A. The exclusive technology development, technical support and service agreement, the exclusive consultancy service agreement, the proprietary technology license agreement and the letter of undertaking, the terms of which may be amended from time to time, enable Agria China to receive substantially all of P3A’s earnings and other economic benefits to the extent permissible under PRC law.

 

Power of Attorney.   Each shareholder of P3A has executed a power of attorney to appoint our director, Mr. Zhaohua Qian as his/her attorney-in-fact to exercise all of his/her rights as a shareholder of P3A as provided under the PRC law and the articles of association of P3A, including voting rights, the rights to transfer any or all of its equity interest in P3A and the right to appoint the general manger of P3A. The appointment of Mr. Zhaohua Qian as attorney-in-fact will remain effective during the operation term of P3A until (i) the termination of the exclusive call option agreement (see below), (ii) the resignation of Mr. Zhaohua Qian from Agria China, or (iii) notice from Agria China to replace Mr. Zhaohua Qian with another person.

 

Equity Pledge Agreement.   Under the equity pledge agreement among P3A, the shareholders of P3A and Agria China, the shareholders of P3A pledged all of their equity interests in P3A to Agria China to guarantee P3A’s performance of its obligations under the exclusive technology development, technical support and service agreement, the proprietary technology license agreement, the exclusive consultancy service agreement and the exclusive call option agreement. If P3A or any of its shareholders breaches its respective contractual obligations under any of these principal agreements, Agria China, as pledgee, will be entitled to certain rights, including the right to sell or auction the pledged equity interests. During the term of this agreement, the shareholders of P3A may not transfer their respective equity interests to any third party or create other pledges or rights over the equity interests that may have an adverse effect on the rights of Agria China as pledgee. The equity pledge agreement will terminate when all the principal agreements are terminated or fully performed.

 

Exclusive Call Option Agreement.   Under the exclusive call option agreement among the shareholders of P3A, P3A and Agria China, the shareholders of P3A irrevocably granted Agria China an exclusive option to purchase from P3A’s shareholders, to the extent permitted under PRC law, all of the equity interests in P3A for the higher of (i) RMB100,000 and (ii) the minimum amount of consideration permitted by applicable law. To the extent permitted by the PRC law, Agria China or its designated person has sole discretion to decide when to exercise the option and when to buy all or part of the equity interests in P3A.

 

Exclusive Technology Development, Technical Support and Service Agreement.   Under the exclusive technology development, technical support and service agreement between P3A and Agria China, Agria China is the exclusive provider of technology development, technical support and services to P3A relating to P3A’s

agricultural business. P3A will not accept these services from any third party without the prior consent of Agria China. Agria China owns the rights to any intellectual property developed by Agria China in the performance of this agreement. P3A pays to Agria China service fees of 20% of the annual net profit of P3A after each accounting year. The payments of fees are secured by the equity interests in P3A under the equity pledge agreement. This agreement is effective during the operation term of P3A unless terminated by Agria China or by either party due to the other party’s breach of the agreement according to the early termination provisions of the agreement. This agreement may be amended at any time by P3A and Agria China. Through the power of attorney granted by the shareholders of P3A to an individual designated by Agria China, Agria China has the ability to cause P3A to amend the agreement and intends to do so as needed.

 

Exclusive Consultancy Service Agreement.   Under the exclusive consultancy service agreement between P3A and Agria China, P3A exclusively engages Agria China to provide consultancy services including but not limited to the administration model, operational plans and market research and development. P3A will not accept any of these services from any third party without the prior consent of Agria China. P3A pays Agria China a consultancy service fee of RMB3 million each year upon P3A’s confirmation of the list of services provided by Agria China for that year. The payments of fees are secured by the equity interests in P3A under the equity pledge agreement. This agreement is effective during the operation term of P3A unless terminated by Agria China or by either party due to the other party’s breach of the agreement according to the early termination terms of the agreement. This agreement may be amended at any time by P3A and Agria China. Through the power of attorney granted by the shareholders of P3A to an individual designated by Agria China, Agria China has the ability to cause P3A to amend the agreement and intends to do so as needed.

 

Proprietary Technology License Agreement.   Under the proprietary technology license agreement between P3A and Agria China, Agria China licenses to P3A the exclusive rights to use 20 technologies listed in the appendix of the agreement that are related to the sheep breeding business. Agria China owns the intellectual property rights developed by P3A in the performance of this agreement. P3A pays Agria China license fees of RMB2.72 million before December 31 of each year. The payments of fees are secured by the equity interests in P3A under the equity pledge agreement. This agreement is effective during the operation term of P3A unless terminated by either party according to the early termination terms of the agreement. This agreement may be amended at any time by P3A and Agria China. Through the power of attorney granted by the shareholders of P3A to an individual designated by Agria China, Agria China has the ability to cause P3A to amend the agreement and intends to do so as needed.

 

Letter of Undertaking.   The shareholders of P3A have executed a letter of undertaking to irrevocably undertake that unless otherwise limited by laws, regulations or legal proceedings, they will remit all of the dividends and other distributions received from P3A to Agria China, subject to satisfaction of their personal income tax and other statutory obligations arising from receiving such dividends or other distributions. The spouse of each shareholder has consented to the foregoing undertaking.

 

In the opinion of Commerce and Finance Law Offices, our PRC legal counsel:

 

 

We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. The uncertainties include how the PRC government may interpret the restriction of foreign ownership of corn seed development and production companies and whether foreign companies may conduct the corn seed development and production businesses through contractual arrangements with domestic companies engaging in such businesses. Accordingly, there can be no assurance that the PRC regulatory authorities will not in the future take a view

that is contrary to the above opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC government finds that the agreements that establish the structure for operating our PRC agricultural business do not comply with PRC government restrictions on foreign investment in the agricultural businesses, we could be subject to severe penalties. In addition, under PRC Property Rights Law which will become effective on October 1, 2007, an equity pledge is required to be registered with the relevant administration for industry and commerce in order to become effective.

 

For more information in this regards, see “Risk Factors — Risks Related to Doing Business in China — If the Chinese government finds that the agreements that establish the structure for operating our Chinese businesses do not comply with Chinese governmental restrictions on foreign investment in the seed industry, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations,” and “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the following information in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

The following selected consolidated financial information (except for net income per ADS) has been derived from our consolidated financial statements included elsewhere in this prospectus. Our consolidated statement of operations data for the years ended December 31, 2004, 2005 and 2006 and our balance sheet data as of December 31, 2005 and 2006 have been derived from our consolidated financial statements for the relevant periods which have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm, and are prepared and presented in accordance with U.S. GAAP. Our consolidated statement of operations data for the six months ended June 30, 2006 and 2007 and our consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our consolidated balance sheet data as of December 31, 2004 have been derived from our unaudited consolidated financial statements which are not included in this prospectus. We have prepared the unaudited consolidated financial information on the same basis as our audited consolidated financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Our historical results do not necessarily indicate results expected for any future periods. In addition, our unaudited results for the six months ended June 30, 2007 may not be indicative of our results for the full year ending December 31, 2007.

 

 

 

 

The following table presents a summary of our consolidated balance sheet data as of December 31, 2005 and 2006 and as of June 30, 2007:

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus .

 

Overview

 

We are a fast-growing China-based agri-solutions provider engaged in research and development, production and sale of upstream agricultural products. We currently provide corn seed, sheep breeding products and seedling products. Our goal is to become a leading provider of a variety of agricultural upstream products to meet evolving demands of other participants in the agricultural industry, including producers of corn, sheep and other agricultural products that are used to manufacture products such as animal feed, mutton and wool. We have experienced substantial growth in revenues and profitability in recent years. Our corn seed and sheep breeding products are ultimately sold to and used by farmers in 14 provinces in China. Our total revenues increased from RMB152.3 million in 2004 to RMB489.7 million ($64.3 million) in 2006, representing a CAGR of 79.3%, and our net income increased from RMB57.8 million in 2004 to RMB253.9 million ($33.4 million) in 2006, representing a CAGR of 109.6%. In the six months ended June 30, 2007, we generated total revenues of RMB279.4 million ($36.7 million) and net income of RMB143.4 million ($18.8 million). In 2006, revenues from our corn seed, sheep breeding and seedling segments accounted for 50.2%, 39.4% and 10.4%, respectively, of our total revenues. In the six months ended June 30, 2007, revenues from our corn seeds, sheep breeding and seedling segments accounted for 47.9%, 39.6% and 12.5%, respectively, of our total revenues.

 

We provide four proprietary strains of Primalights III corn seed products, consisting of Primalights III — 591, Primalights III — 391, Primalights III — 891 and Primalights III — 28, which contributed approximately 55.8% of our total corn seed revenues in 2006. We have access to approximately 23,000 acres of farmland in seven provinces for corn seed production. Our corn seed products are grown through contractual arrangements with village collectives and seed production companies under which we provide farming, harvesting and other technical guidance and supervision and the farmers grow and harvest corn seeds. In addition to our proprietary products, we are the exclusive distributor in the Shanxi province of four varieties of corn seed produced by other seed companies outside of the Shanxi province. We also produce and sell four popular generic corn seeds. We sell our corn seed products to local and regional distributors inside and outside of the Shanxi province. Revenues derived from our corn seed segment accounted for 31.9%, 63.9%, 50.2% and 47.9% of our total revenues in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively. We achieved gross margins of 31.4%, 39.9%, 41.1% and 39.9% from our corn seed segment in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively.

 

Our sheep breeding segment consists primarily of the production and sale of frozen sheep semen, sheep embryos, breeder sheep and our self-developed Primalights III hybrid sheep. We currently own approximately 6,100 breeder sheep, approximately 9,700 Primalights III hybrid sheep and approximately 900 breeder goats. We operate five breeding bases which occupy a total of approximately 3,700 acres of land in the Shanxi province where we maintain propagation bases and pasture land for our flocks. We sell our sheep breeding products primarily to BIRS, breeding companies and other sheep reproductive stations. Revenues derived from our sheep breeding segment accounted for 61.0%, 31.1%, 39.4% and 39.6% of our total revenues in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively. We achieved gross margins of 66.4%, 68.4%, 72.9% and 72.4% from our sheep breeding segment in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively.

 

Our seedling segment primarily comprises the sale of four types of seedlings, namely, blackberry and raspberry, date and white bark pine. We sell our seedling products directly to end users, such as municipal

government agencies and plantation nurseries. Revenues derived from our seedling segment accounted for 7.1%, 5.0%, 10.4% and 12.5% of our total revenues in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively. We achieved gross margins of 16.3%, 68.8%, 79.7% and 69.4% from our seedling segment in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively.

 

Factors Affecting Our Results of Operations

 

We believe the following factors have had, and we expect that they will continue to have, a significant effect on our results of operations:

 

Demand for Our Upstream Agricultural Products

 

The growth of our business has benefited, and is expected to continue to benefit, from the increasing demand for our upstream agricultural products. This demand is in turn driven by demand for corn, high quality sheep, raspberries, blackberries, dates and pine trees.

 

China has experienced a rapid increase in demand for corn for animal feed and human consumption, primarily due to population growth and industrial development. According to the China National Grain and Oil Information Center, corn consumption in China has increased from 115.3 million tonnes in 2000 to 137.5 million tonnes in 2006 and is expected to reach 150.0 million tonnes in 2010. Furthermore, demand for hybrid corn seeds producing corn with high-yield, drought or pest resistance, high oil content or other advantageous attributes has increased more significantly than the increase in demand for more generic corn seeds.

 

According to FAOSTAT, China consumes more mutton than any other country and its demand for mutton and sheep wool has increased rapidly. For example, mutton consumption in China increased from 2.5 million tonnes in 2000 to 5.1 million tonnes in 2005. Compared to sheep in more developed countries, sheep in China generally tend to produce lower qualities and quantities of wool and meat. As a result, China has been upgrading the quality of its sheep flock, which creates significant internal demand for breeder sheep, low-cost production of related products and relevant scientific research.

 

Changes in the affluence of Chinese consumers and recognition of the nutritional benefits of berry fruit worldwide is driving demand for fruit berries for human consumption. Demand for dates has been driven by both domestic consumption and by increasing exports to countries such as Singapore, Japan and Korea. As a result of the rapid urbanization, rising affluence of households in China and a deteriorating environmental situation, the need for urban greenery has increased rapidly. White bark pine is suitable for urban plantation in the northern part of China because it is evergreen.

 

Expansion of Our Production Capacity

 

Expansion of production capacity is essential to the growth of our business. We have expanded our production capacity in the corn seed segment by obtaining access to additional farmland in seven provinces in China. As of June 30, 2007, we had access to approximately 23,000 acres of farmland for corn seed production, compared to approximately 16,400 acres, 13,000 acres and 5,000 acres as of December 31, 2006, 2005 and 2004, respectively. We expand our production capacity of the sheep breeding segment by increasing the size of our sheep flocks. We currently own approximately 6,100 breeder sheep, approximately 9,700 Primalights III hybrid sheep and approximately 900 breeder goats. We expect to expand our production capacity of the seedling segment by increasing the number of our seedling-growing staff.

 

The investment in expanding our production capacity requires significant capital expenditure, however, and whether our expansion strategy is successful will depend primarily on whether our sales volumes grow alongside our growing production capacity. If our capacity expansion exceeds the growth in demand for our products, we may not be able to generate sufficient returns from our capacity expansion and our business and financial condition will suffer.

Pricing of Our Products

 

The profitability of our operations is affected by the selling prices of our products. A majority of our products are ultimately sold to farmers in China, who are extremely price sensitive. Farmers may choose among different products with comparable quality primarily based on the differences in prices. In light of this, we have tried to reduce the distribution layers between us and farmers to a minimum, which we believe has enabled us to price our products to maintain our competitive market position.

 

Prices of corn seed, sheep breeding, seedling and other agricultural products in China have historically been volatile, reflecting overall economic conditions which affect the budgeting and buying patterns of end users. In general, changes in the prices of our products are the result of changes in supply and demand in the markets in which we operate. Changes in the domestic demand in China result primarily from population growth, changes in dietary habits and availability of similar and competing agricultural products.

 

We set the prices for our proprietary corn seed products higher than the prices of the generic corn seed and other corn seed that we distribute. We benchmark the prices of our proprietary corn seed against the prevailing PRC domestic market prices of corn seed of similar quality and attributes. The prices of our generic corn seed are based on the prevailing market prices of other comparable generic corn seeds and are subject to more significant competitive price pressure compared to our proprietary products. The prices of the other corn seed that we distribute are determined by our negotiations with the seed companies.

 

We set the prices of Primalights III hybrid sheep substantially lower than those of the purebred foreign sheep. Our Primalights III hybrid sheep, even though not officially recognized as breeder sheep in China, are sold at prices comparable to domestic breeder sheep and the prices depend primarily on market demand for our Primalights III sheep. The selling prices of our Primalights III hybrid sheep have remained relatively stable since 2004. We may be able to increase the price of our Primalights III hybrid sheep if we receive official variety recognition of such sheep as breeder sheep in China. The selling prices of our breeder sheep, frozen semen and embryos are based on prevailing market prices of similar products and have experienced fluctuations in recent years.

 

In pricing our proprietary Primalights #1 and Primalights #2 date seedlings, we use the prevailing market prices of generic date seedlings as benchmarks. The selling prices of our raspberry and blackberry and white bark pine seedlings are based on prevailing market prices.

 

Ability to Market and Sell Corn Seed Products with Higher Margins

 

We believe that our future success in the corn seed segment will depend on our ability to develop, market and sell our proprietary corn seed products. Compared to generic corn seed and other corn seed that we distribute, proprietary corn seed products have higher profit margins. We have produced and sold not only our own proprietary corn seed but generic corn seed and distributed or produced corn seed for other seed companies. We have done so in order to accumulate experience in growing corn seed, developing our distribution network and effectively operating a corn seed business. The sales of our proprietary products accounted for 28.5%, 55.6%, 55.8% and 64.6% of our revenues in the corn seed segment in 2004, 2005, 2006 and the six months ended June 30, 2007, respectively. We plan to increase sales of our existing proprietary corn seed products and develop, market and sell additional proprietary corn seed products in order to seek relatively higher margins than generic products.

 

Seasonality

 

The agricultural industry is seasonal in nature and we experience quarterly fluctuations in our results of operations. The vast majority of our corn seeds are sown by the village collectives between April and May. During this period, we have significant cash flow needs to provide advances to the village collectives for their purchase of fertilizer and other production materials. The majority of our corn seed sales take place between October and May. The sales of the majority of our sheep breeding products takes place in the spring season from March to June and the fall season from August to November and the majority of our seedling products are sold mainly in the spring season from March to June and in the fall season from September to October. As

a result, we need to carefully budget and plan our liquidity requirements for the periods from March to May. See “Risk Factors — Risks Relating to Our Business — It is difficult to predict our future performance because our revenues and operating results fluctuate significantly from period to period due in part to the nature of our business.”