Overview 

Industry Overview & Prospects

Increasing per capita income and strong consumer spending in the PRC is expected to drive growth for the food and beverage sector, which is favourable for the packaging industry. The annual GDP per capita of the PRC increased from approximately RMB7,858 in 2000 to approximately RMB25,575 in 2009, representing a Compound Annual Growth Rate (CAGR) of approximately 14.0%. The annual urban household disposable income per capita increased from approximately RMB6,280 in 2000 to approximately RMB17,175 in 2009, representing a CAGR of approximately 11.8%. This figure is expected to increase going ahead. As China‘s food and beverage industry continues to thrive steadily, the use value of packaging products will be further enhanced and thus, creating enormous room for growth in the food packaging market, especially for liquid dairy product market.

According to statistics from Frost & Sullivan, the liquid dairy product market in the PRC grew in terms of annual sales revenue from RMB71.8 billion in 2005 to RMB140.3 billion in 2009. Despite the melamine contamination that affected part of China’s dairy industry from late 2008 to early 2009, consumer sales and confidence recovered and annual sales revenue is expected to increase to RMB270.0 billion in 2015, representing a CAGR of 11.5% from 2009 to 2015.

Compared with other countries, the liquid dairy product market in the PRC remains relatively under-developed, with the lowest per capita consumption among the 12 surveyed countries. Per capita liquid dairy products consumption in the PRC was only 22.5 litres in 2009, approximately half that of India, and is expected to increase to 24.9 litres by 2012.

The PRC government has also promulgated policies to set standards for future development in the dairy industry and to ensure health and safety in the New metallised CPP targeted to be launched in 2010 to drive growth. Operations Review industry. For example, pursuant to NDRC’s Dairy Industry Policy issued on 26 June 2009, dairy packaging suppliers should focus on developing composite sterile packaging, multi-layer co-extruded high barrier materials, and sustainable green packaging materials.

Packaging suppliers that meet this standard are better positioned compared to other suppliers in the PRC. These policies will help to drive growth in the packaging industry, particularly for businesses like the Group’s, which focuses on producing quality packaging for the food and beverage industry.

The PRC BOPP film market is also expected to experience strong growth ahead. BOPP film in China is expected to enjoy an average growth of 13%-15% for the next five years, from 2006 until 2011 with most of the growth taking place in the general purpose packaging industry, according to independent research.

While the packaging industry is highly concentrated on regional levels, barriers to entry in the industry include:
 

•	extensive technical and operational know-how to achieve high precision and quality standards and to quickly trace product performance issues to their root cause;
•	customers’ reluctance to adopt new suppliers of packaging given their stringent quality requirements and aversion to potential food safety risks, and,
•	given the particularly stringent requirements of the dairy industry, the time necessary to build a strong reputation and earn the trust of dairy customers; difficulty of establishing relationships with raw material suppliers that meet high quality food standards; and substantial capital investment required for building production facilities and achieving the requisite scale of production.

These barriers to entry as well as the Group’s continued innovation and investment in research and development will enable the Group to retain as well as to grow its market share, and with the food and beverage industry in the PRC set for strong growth ahead, we are looking forward to steady growth and healthy profits in FY2011.

Finally, with the Group’s prudent management team keeping a close eye on the Group’s financials without impeding the Group’s expansion plans, the Group is confident that China Flexible Packaging will grow steadily into FY2011.

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