Sino Agro's (SIAF) CEO Solomon Lee on Q4 2015 Results - Earnings Call Transcript

| About: Sino Agro (SIAF)

Sino Agro Food, Inc. (OTCQX:SIAF) Q4 2015 Results Earnings Conference Call April 18, 2016 10:00 AM ET

Executives

Solomon Lee - Chairman and Chief Executive Officer

Daniel Ritchey - Acting Chief Financial Officer

Anthony Ostrowski - Chief Scientific Officer

Analysts

Operator

Welcome to Sino Agro Food's 2015 Annual Financial Results Conference Call. During this call, CEO, Solomon Lee, will provide an overview of results from operations and highlights for the year ended December 31, 2015. He will turn the call over to Acting Chief Financial Officer for Sino Agro Food, Mr. Daniel Ritchey, then we will open the lines for question-and-answer session.

All forward-looking disclaimers included in the company's 2015 annual financial and operating results press release dated March 30, 2016, which is available on the company’s website at www.sinoagrofood.com, are in effect and incorporated throughout the duration of this call as an extension of the material discussed and provided in the press release, and in the 2015 10-K filing available via the U.S. Securities and Exchange Commission's EDGAR system.

On this call will be Mr. Solomon Lee, the Chairman and CEO of Sino Agro Foods Incorporated; and Mr. Daniel Ritchey, the Acting Chief Financial Officer; Dr. Anthony Ostrowski, the Chief Scientific Officer and members of the Board of Directors; Mr. George Yap; Mr. Nils-Erik Sandberg and Mr. Anthony Soh as well as Mr. Bertil Tiusanen, Senior Vice President of Business Development, New Ventures, Europe.

Questions will come from the phone lines and from those submitted from the web facility. We have an hour for the call, so in the interest of fairness, please ask only one or two questions anytime selected from the queue.

I would now like to introduce Mr. Solomon Lee. Solomon, please go ahead.

Solomon Lee

Thank you, moderator, and thanks to everyone for attending today's conference call. Slide four please. I start today's remarks with a positive development. We have an offer from our construction subcontractor, one of the largest in China on new terms to build the second phase of the Zhongshan MegaFarm Project to construct it at a much faster pace and much cheaper construction cost in Prawn Farm 3 which will add 60,000 metric tons of production capacity per year.

We are now calling the first phase of the MegaFarm Prawn Farm 3 and the second phase Prawn Farm 4. Prawn Farm 4 we will build in six modules, each module with approximate capacity of Prawn Farm 3 which itself has the capacity of approximately 10 Fish Farm 1s.

Payment for each module to the builder and contractor will commence six months after completion of that module. Hence cash flow from sales of goods will already be well underway to serve the full construction costs. Effectively this amounts to a financing arrangement for the Prawn Farm 4 securing the way forward for continued capital capacity goals.

This demonstrates strong third-party confidence in the project and is a major positive step towards all aspects of Zhongshan MegaFarm and for Sino Agro Food including long term cash flow and attractiveness of a carve out exercise.

Slide five please. During 2015 a number of operational achievements and milestones took place, highlighting Sino Agro's focus on profitable growth opportunities in China's protein food sector. They also showcase the group's versatility in accepting to a changing industry landscape.

The aquaculture sector, during 2015 we harvested 6,762 metric tons of seafood, 21% growth over 2014. Since starting major operations in 2012, aquaculture production has grown at a compound annual growth rate of 56%. We are proud of the strong volume growth which is unprecedented compared to peer seafood producers.

Behind this growth is our historical range of 30% to 60% return on invested capital allowing strong cash flow for reinvestments. Key operations at SJAP increased gross profits from value-added processing in 2015 more than offset decreases from sales of live cattle due to deteriorating prices.

To continue this trend in 2016 why we transitioned our herd to premium Wagyuand and 550-day grain feed Angus cattle we are expanding the deboning capacity to 12,500 MT/year and freezing capacity to 10,000 MT/year. In accordance with this plan value-added capacity production in SJAP will double.

At HSA we completed construction of a cattle farm with a capacity for 2000 head of cattle. [Indiscernible] cattle is one of the top quality breed brands in Asia on a path with Japanese Wagyu beef we plan to process cattle waste as raw material for manufacturing fertilizer, expecting to reduce costs by 2.5 million per year when fully implemented.

Import and export and trading because of decreasing trade barriers to import beef in China, we've begun to establish a sizeable footprint as supplier of imported beef into China increasing volume of imported beef seven fold in 2015. The new level ocean trade facility allows us to capitalize in 2016 the capacity at Shanghai distribution center we finished building during 2015. The facility has helped us to secure as exclusive agency for supply of CAAB brand of grain fed Angus cattle by Thomas Foods into China. Thomas Foods is a leading export producer of beef in Australia.

Slide six please. Turning to the group's audit annual financial results, 2015 revenue increased by 6% to $429 million. Revenue from project development increased 13% to $90.4 million. Construction and development work at Zhongshan MegaFarm totaled $65.4 million and earnings per share was $3.60. Stockholders' equity totaled $483.5 million based on 2015 weighted average number of fully diluted outstanding shares. The 21% yearly increase of $83.9 million equals to $4.50 per share.

Slide seven please. We have laid the groundwork to increase variation, visibility of the group's assets through separate carve out of its business sectors. We expect to capitalize on these efforts in 2016 onward becoming a true holding company. We have begun the process of work on transforming Prawn Farm 1 and 2 to be used as supporting facility for Prawn Farm 3 and 4 providing operational R&D facility, food stock and nursery facility until comparable facilities are built onsite.

Tri-way will also serve as an excellent platform for raising debt capital. Restructuring the aqua [indiscernible] business segment into a standalone entity we undertake to incorporate a separate audit firm and Board of Director listing exercise et cetera.

According to plan we projected Tri-way to generate healthy and growing revenue and profit in 2016 and 2017. By year end 2017 Tri-way is projected to generate sufficient profit to self finance further remaining development needs for capital expenditure and working capital at the Zhongshan MegaFarm project and other facilities.

Steps are also being taken to create suitable, attractive candidates for other of our subsidiary in preparation for separate listings, again on the best effort basis to align those operations and assets into proper market variations.

Having held numerous meetings with domestic Chinese other Asian and Nordic financial advisors in relation to separate listing of our assets we are pleased that two of our carve out candidate currently being worked on might well each achieved separate variation far greater than SIAF Group's variation.

One benefit of which we saw in a series of benefit for the exercise to our shareholders. We have completed the first two buildings or three comprising Prawn Farm 3 of the Zhongshan MegaFarm. The first completed building fully encloses 48 standard units of APM filters for the first three grow out stages and occupy 8,560 square meters of floor space.

The second building houses the tanks for the final growth out stage and we will shift the third building as well. The third building is identical to the first and is currently under construction. After testing and optimization we estimate that Prawn Farm 3 will have the production capacity of 6000 metric tons of seafood per year from the first two buildings and reach 10,000 with all three buildings combined.

Initial Tri-way stock commenced in late February 2016 with 1.2 million [indiscernible]. Currently they are 2.4 million in two stages grow out. The transfer to second stage grow out tank is March 18. Due to water temperature issues and consequent uneven small sizes, we place that transfer with suitable animal [ph] on March 28 and are now witnessing improved results.

Concluding within 2016 and beyond we expect to grow seafood harvest volumes in line with capacity build in 2015. While continuing expansion of facility we remodeled Prawn Farm 3 and laid Prawn Farm 4. Likewise we expect to more fully utilize capacity within the import and export trade segment and to continue growth in value-added beef processing.

In all cases we will allocate capital based on the return potential of each project and upon advancing the evaluating structure of SIAF into a true holding company carving out segments according to optimized preserved values.

How I will had the call over to our new Acting CFO, Mr. Daniel Ritchey who will provide some summary detail on financial performance and strategy. Dan, please go ahead.

Daniel Ritchey

Thank you, Solomon. Before I get started, I want to say happy New Year to our Thai shareholders. We do have a couple that call in each conference call and I know you guys had the celebration yesterday.

Let me just make some summary comments on the financials which are well represented in the accompanying slides, then I'll amplify on Solomon's comment regarding becoming a true holding company.

Slide 10 please. Gross profit for 2015 decreased by 14% to $111.2 million with a decline in margin from 32% to 26%. The following segment factors impacted the group gross profit and margin:

Number one, reduced gross profit and a 5.3% reduction in margin in the Aquaculture segment were mainly due to a drop in eel production, followed by a smaller suppler of lower quality eel elvers forcing sales of smaller grow out eels.

Number two, gross profit from project development decreased by 14% to $33.3 million due to a margin decline from 45% to 37%. The Zhongshan MegaFarm derives lower margins than earlier Aquaculture farms due to larger scale and economies of scale.

Number three, while the Integrated Cattle Farm business segment showed an 8% increase in overall gross profit, deteriorating prices for standard domestic beef caused the gross profit for sale of live cattle to decrease by 44% to $9.1 million equivalent to a margin of 14% versus 26% that we realized in 2014.

Number four, seafood and meat trading gross profit decreased by 66% to $4.7 million equivalent to a margin of 12.5% versus 27.5% in 2014. The margin contraction is due to different sales mix and a higher share of Australian beef imports sold with lower margins.

G&A expenses increased by 19% to $18.6 million in 2015 representing a 5.5% revenue versus 4.8% in 2014. The increase reflects ongoing heightened expenses related to various corporate exercises including cost for group listings and preparations for subsidiary listings, et cetera.

Slide 11 please. Looking at the balance sheet current assets increased 24% to $351 million in 2015 mainly due to increased accounts receivables and inventories. Higher volumes of value-added processing at SJAP and higher production with an aquaculture resulted in more goods being sold to Shanghai and Guangzhou distribution centers, whereby they have increased their sales to more supermarket chains secondary and third tier distributors et cetera and in conjunction with that we have provided extended credit terms affording them additional time to be able to repay their balances due as necessary.

Year-over-year current liabilities decreased sharply with lower accounts payable and other current liabilities reflecting a return to the levels the company has experienced in previous years. These lower levels of accounts payable are expected to continue into 2016.

Stockholders' equity per share increased by 9% to $26.40 per share. In the fourth quarter The Agricultural Development Bank of China extended SJAP's bank facility a total of RMB90 million including a project loan of up to RMB35 million, which can be applied for purposes of new development, mergers or acquisitions, and which may be converted to long-term debt under certain conditions.

Slide 12 please. Cash flow from operations increased by 105% to $45 million in 2015 compared to $22 million in 2014. The higher operating cash flow is due to less capital being tied up in working capital, lending more room for investment and capacity expansion. Capital expenditure during 2015 was mainly allocated to SJAP and HSA, the organic fertilizer segment.

Investment at SJAP in 2015 created new deboning and deep freezing facilities to increase capacity to handle more processed beef. Investment at HSA completed its cattle station. Anticipated new 2016 projects include building a canning factory and a potential add-on merger and acquisition with a target company located in Qinghai province both to further expand value-added processing capabilities at SJAP.

2016 working capital deployments will mainly enable herd transitioning to premium beef cattle biological assets at SJAP and imported seafood and beef for trading.

Slide 13 please. The company anticipates growing earnings in 2016 by continuing to build scale in its three main operations, one continue the strong aquaculture harvest volume growth trend by driving incremental commission sales through current and new capacity at the Zhongshan MegaFarm.

Number two, increase beef imports supplying available and new processing capacity at SJAP. Continue to upgrade the herd of live cattle to 550-day grain fed and Wagyu Simmental and Charolais cattle ultimately expanding profit margin. And number three, utilize the credit facility and existing capacity of the Shanghai Distribution Center to increase volumes of imported beef.

Solomon mentioned in his remark it is becoming a true holding company. From its inception Sino Agro Food set the first primary goal of building a set of vertically integrated protein food subsidiaries achieving SIAF group net asset value of at least $500 million. That aspect of our mission is now accomplished. Now we're positioned to restructure several sets of subsidiaries each with sufficient critical business standing and size as standalone companies.

The parent assists each operation to find his own most appropriate venue and value and as with every expectation that each is accorded a multiple to individual net assets not a fraction. So in addition to efforts underway preparing the Aquaculture carve out parallel efforts for other subsidiaries have begun as well. Each set of assets present different challenges with the goals of optimizing standalone management, gaining recognition within the appropriate market audience and timing while maintaining interoperation within the SIAF family for the time being.

For instance the company currently has two options on the table, one consisting the merging of the HU Plantation with the health and the herbal company with change of health food change food shops. This option promotes positioning the [indiscernible] of the producer and retailer with selenium rich and calcium rich health products using the HU flowers and immortal plans at its core produce.

The company views the strategic approach as one that can generate attractive returns for shareholders upon spinoff as an independent company listed on a suitable stock exchange. Work has progressed for the better part of two months on procedures preparing SJAP for listing on the NEEQ which is the National Equities Exchange & Quotation market in China i.e. the third board where it seems well-qualified for an invitation.

As with all spin-out alternative venues, peer group valuation metrics far exceed those applied to SIAF over the years. We are encouraged by efforts to date and if all requisites are timely met, the separate listing of SJAP is projected within Q4 of this year. We look forward to reporting milestone achievements in these endeavors as they occur and/or are warranted.

Moderator, now if we can please take some questions?

Question-and-Answer Session

Operator

Yes, thank you. [Operator Instructions] And our first question on the phone is Jonathan Wu [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst

Hi guys, how are you doing? Thanks for taking my call. Probably Dan maybe you will have this, he just mentioned this about SJAP being spun-off away sometime in the fourth quarter. If he could provide timeline for any other spin-offs as well as likely discuss the cash flow for the future, how that's going to impact dividends or see - as well as share buybacks? I appreciate it guys.

Daniel Ritchey

Solomon, why don’t you go ahead and respond and then I'll add to that after you have finished?

Solomon Lee

I think like any genera IPO there will be much work to be done. However, we have identified most of the work and related time schedule and grouped them into every stage for accomplishment. So in order for this, we are now seeking our lawyer's permission whether we can put this schedule in our website and then if he allows then we will put the progress report accordingly as we accomplish each step of the stages. And I think at this moment, that's all I can add to that for now Dan. Might be you can add some more.

Daniel Ritchey

Well, I want to go back to the comment you had made at the opening of your remarks and that is along the way as we are piecing together these carve outs that we do have different milestones that are being met. One as an example, the one that Solomon had mentioned which is that we have the contractor for Prawn Farm 3, who now is open to carrying the cost of building out Prawn Farm 4 which is estimated in total at $240 million.

Now the way that will work that buildout will take a period of approximately 3.5 years and then what will end up happening, you have six modules, each module equivalent to Prawn Farm 3, so you have especially six Prawn Farm 3s being built. And as soon as each module is built they will get online for production. The contractor is willing to provide a six-month grace period.

Once production starts and sales start then repayment toward that first module, then can begin to be made to the contractor and we expect to be able to have everything completed, locked in and in place through over the next three and a half years.

So, these are the kind of agreements and arrangements that are happening along the way. Again, as I mentioned earlier, we will update when those milestones have been met, but all this is making it possible for these carve outs to happen sooner rather than sometime later down the line.

Unidentified Analyst

And just quickly a comment, you said the SJAP evaluation is expected to be higher than the entire current market capital of [indiscernible] of SIAF?

Daniel Ritchey

In respect to it what we expected to, yes in terms of its valuation, in terms of what SIAF currently is garnering in the market today, yes, no question.

Unidentified Analyst

Okay and timeline wise is the Aquaculture spin-off expected before SJAP or can you guys shed some light on that?

Daniel Ritchey

We can, well the SIAF, I'm sorry, the Zhongshan project is, was always anticipated to be later because of the number of steps will have to be taken to wrap it up. SJAP is mostly, again there are issues that have to be wrapped up, but not to the extent of the Zhongshan project. Whereas the issue is with SJAP is having that initial amount of funding needed to get these steps completed to work on the M&A with the other processing facility to make it worthwhile than to be listed as a separate entity. Because that is really going to be where the focus is going to be with SJAP is going to be on its processing deboning value-added processing, canning, et cetera, operations.

So once we are able to complete the M&A which by the way, with the company that is being merged into SJAP, very favorable terms, very much willing to work through this as a partner for the long term. So it's not costing nearly what it would cost if we would have to acquire this outright. That being said, we still have to raise the necessary funding first before making that happen.

Solomon Lee

And I can add more to that, because on the Aqua business we have to do quite a substantial amount of work in China. And China, as we all know, we are facing a long holiday in May the first for the Labor Day. And the second thing we face another long holiday in Norway in the July holiday another month. That’s really made that situation a little bit, what I can say is, on best effort basis we will try our best. I mean they are progressing very well with all the preparation work. But due to this kind of holiday we are trying to be more conservative and let's not overstating that, that’s what I am trying to say.

Now, the other thing is, we would do all the preparation work to make the listing possible and again during that particular moment or that period or time whether it is the favorable market condition because after all our aim is to get the right variation for this new spin-off. Now, whether that would be the case or not that’s subject to the market condition. So there are a number of variables here. We should be a little bit more conservative, that’s all.

Unidentified Analyst

Okay, I appreciate the clarity guys, I'll jump on the queue.

Operator

Thank you. The next question comes from Robert [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst

Thank you. I have a few questions. First of all given the news on the contractor being wanting to being able to finance, how much, how is that deal set up, how much is financing cost and how much is construction cost for those $240 million and is it an offer or is it a done deal?

Solomon Lee

No, the contract has not been signed. We just reached an understanding with the contractor pending on the execution of the contract. And that contract will make the building completed a lot faster and a lot cheaper in comparison to Prawn Farm 3. So the reality is like Dan said, we just have to within the next few months or next month to complete the execution of the contract when the cash flow is capable.

Unidentified Analyst

But you said you didn’t need any cash flow to sign that contract you said that they would take care of that and I guess that contract you will not start working on the Prawn Farm 4 until the Prawn Farm 3 is done and when do you expect to start and when do you expect to sign for it, because as I understand it right now, it’s only an offer. What’s holding you back from signing this offer?

Solomon Lee

Because the whole thing is we want to do the carve-off exercise. Now, the recommendation is including the Prawn Farm 4’s future. So, the whole thing is we want to do a job properly. That contract has to be signed in order to secure the Prawn Farm 4. Now, if we take it just anything rush it through and don’t worry about it that’s a different scenario. But I think if we do that, that will not complete the whole projection of the potential of the project for that private company for now.

Unidentified Analyst

Okay, so how much was financing interest in that $240 million and how much is construction cost?

Solomon Lee

No, the financing of that $240 million as we said eventually it would be funded by the end of 2017 by the project itself. The initial…

Unidentified Analyst

Yes, but when they offer you, yes, but you said they offered you a total cost of $240 million, so I wonder how much is construction costing and how much you pay them to financial it for you?

Solomon Lee

Well, they tell me six months terms, so you can work it out what's your financing cost. They are already financing part of it, but I'm sure they cannot finance all of it.

Unidentified Analyst

Maybe Dan can elaborate on that, because I don’t understand how the financial set up is on the deal. I understand it is a total cost of $240 million, but I don’t understand how it is – I guess they are not giving you a financial solution for free, some part of that solution must be interest and then for them to be quiet a those first three and a half year.

Daniel Ritchey

Yes, let me back up one step first. When we talk about getting on to Prawn Farm 4 the same contractor is who is working on Prawn Farm 3. The Prawn Farm 3 project needs to be completed. To tie up Prawn Farm 3 we are needing between $5.5 million to $7 million to complete the remaining building on Prawn Farm 3. Prawn Farm 4, for the contractor to take the contract and hand over the financing of that contract throughout those three and a half years requires a $10 million dollar deposit from us. The interest though there is far as, interest on that it is a nominal fee, mainly because the government in Zhongshan is helping to offset interest cost related to that three and a half year period.

So, we are essentially not getting it interest free, but for a nominal amount and for a $10 million down payment for that build out. Again, Prawn Farm 3 has to be completed first and therefore we need to be able to generate that $5.5 million to $7.5 million to get Prawn Farm 3 finished.

Unidentified Analyst

Are you giving priority to those $5 million to $7 million and that $10 million down payment within the cash flow that you are generating right now within the company or you are giving priority to the other areas within the company.

Daniel Ritchey

Well, of course, there is, the issue has to be, we have to be able to maintain operations as they exist and with respect to buildout of other parts of operation as well, even though we have scaled back, I mean there has been scale back with respect to importing beef as an example and we are looking at other facilities to be able to draw in loans that we could then help to support those sectors.

In the meantime they still have to operate on a day-to-day basis. We still have to be able to have what's necessary to continue the needed supply to handle customer demand that is out there right now. And yes, at the same time have curbed the outflow of funds for those purposes and are focusing more on the MegaFarm project than we have in the past.

Unidentified Analyst

Yes, but simply you are generating some positive cash flow within the segments of the company. Are you using, will you use that positive cash flow to give priority to the MegaFarm project with the money that you need there?

Daniel Ritchey

Yes, except I will not say that all of it is going to be used on the MegaFarm.

Unidentified Analyst

I'm not saying that all of it, but will you take what you need to not get held back on the MegaFarm?

Daniel Ritchey

Yes. That process has already been put into play.

Unidentified Analyst

Okay and then a second question about the spin-off. You are talking about - you are saying that you have started the process, the process has begun, et cetera, and in the whole presentation you are talking about what you're aiming and what you are expecting but and at the same time you are talking about plans in the coming years. We heard about the five-year plans in the past, but you are not giving any concrete, what is the concrete progress? When can we expect, have you done any concrete progress with the spin-off, has some actual concrete actions been taken so far?

Daniel Ritchey

Yes, I'll let Solomon expand on my response, but basically with respect to the MegaFarm project, yes there has already been work underway, the work which can at least be completed in-house is already in process. With regard to some of the outside legal work, that has yet to be finished. And Solomon?

Unidentified Analyst

Yes, but has it started, how far have you gone, I mean 20%, 30%, 50% how much of the work has actually been done because you are talking about a plan and you are talking about a timetable, but how far have you, how far, what have you accomplished, concrete progress?

Daniel Ritchey

Yes, and you are also talking money to be able to do so and we're not going to be looking to…

Unidentified Analyst

Yes, but I am not asking about, I'm asking about if you have done any concrete progress any actual actions that's been done?

Daniel Ritchey

I'll let Solomon respond to that part of it, but I do want to make sure that we all understand that we are not going to be diluting shares to cover that cost.

Unidentified Analyst

No that’s good, no dilution.

Solomon Lee

My below budget in here the same things I said earlier. I said there is a schedule, the schedule covers various stages of work into our stages, to positive of cost we have. Do you wish us to or you don’t wish us to? [Indiscernible].

Unidentified Analyst

I would like to know what you've done some actual progress, that's what I am asking and what progress it is, if you can tell us about what progress you've done so far in concrete actions with…?

Solomon Lee

Well, we will post that on our website and you can read it carefully.

Unidentified Analyst

Yes, but we saw that in a press release in November that you will update us on the progress, but should I understand that there has been no progress actual progress since November?

Solomon Lee

Well, if that's what you wish then we have another time…

Unidentified Analyst

No, it is a question, I want to know if you feel there has been progress?

Solomon Lee

Well, I am telling you the question is we have, but you want the detail. I am telling you the detail, you have to read it from the website carefully because it is four pages of schedule and work. That's what it is and if we haven’t done anything we cannot come here and say to you. We are working and we have done a fair deal of work. So if you want to hear negative thoughts, issue I cannot help you, but that’s what we do. And in so many years we have done so many hard works and this is one of them. It is no exception.

Unidentified Analyst

It is just that there are a lot of plans and it is more like a visionary document to me sometimes, so it was nice to see…

Solomon Lee

Well [indiscernible] we will carry out with our actions. You will be kidding yourself to say the company has not done anything, then you go ahead.

Unidentified Analyst

No, I'm not saying, I'm just asking what you have done, it would be nice to have concrete action?

Solomon Lee

We are seeking the opinion of my lawyer, whether we can post it on the website and the work schedule.

Unidentified Analyst

Okay, all right, okay I need that and then there is a third question, when do you expect us to be back on EPS growth because we are always talking about top line growth, but when will we expect to be back on EPS growth, will it be this quarter, will it be the next quarter? what are your expectations on that?

Solomon Lee

Well, I think at this moment we will be quite on line with Q4. It will be no exception this quarter or the next quarter because later on I will explain. The beef industry in China is still very rocky and the new position we do not know 100% yet. Now these are the two major profit items in the past that we are relying on.

Now although we are changing various steps to overcome that problem, but other like where we had the processing, like import, they are on the low margin. You got to do a lot of trace in order to capitalize on it. As well as the prawns, the prawns take time to grow. But I can be pretty confident as the Prawn Farm 3 increases and the Prawn Farm 4 to go on we have a higher number of good growth to follow.

Unidentified Analyst

Do you still feel that the first stage, the first 6000 ton will be up and running at full speed in June?

Solomon Lee

No, at the moment I cannot give you 100% answer to that, or fast basis we are trying. It has been already torn out, there is so much money in the pool and we have to do so much [indiscernible]. Now as you already mentioned what is the priority? So we are carefully evaluating it. We try to balance it as much as we can.

Unidentified Analyst

All right, I'll let somebody…

Daniel Ritchey

I think this may be a good moment if Tony are you on the line?

Unidentified Analyst

Yes, sure.

Daniel Ritchey

Yes, Tony Dr. Ostrowski is on the line, I would like for him to give a brief overview on the mechanics that we are at the stage we're at right now and what is anticipated and the timeframe and so forth, so yes, Tony if you could do that?

Anthony Ostrowski

Yes in Sweden as you know, I indicated that we are kind of targeting full-scale stocking in May, but on the video I also said you know don't really hold me. I mean these construction timelines change, especially really since this is a big construction project and I pointed out all the reasons why. Actually when I left China in March to go on a conference in Vegas and Bergen it was raining and actually I returned about a week and a half ago it was still raining and in fact it was thundering outside in Guangzhou tonight.

So rain has really been a problem for us. It has hampered the excavation and primarily of the settling ponds, those very large settling ponds which are really required to handle all the water and waste for a large scale type of that we want to get into. And these ponds are about 30,000 square meters. But from my experience in the industry and having built aquaculture facilities myself in the U.S. and China, but I think the project construction is progressing quite well given the timeframe of the entire project.

You got to remember that most into our last forms in the world there are less 1000 metric tons and I have not seen or really heard of any more than 2000 metric tons. So given that perspective, in a very short time in my opinion we will have by far the largest RAS project in the world and that's really only the beginning. You know we have phase 2 and phase 3 to add on it will be huge and also for China too, there is, some recent information came out about certification.

Our goal is really to have a certified sustainable project using these international standards. And only information came out that only 3% of all Chinese aquaculture production is labeled as certified sustainable under the international standard. So with this, once we get up to speed, once we get our construction done and with the sustainability standard where we're to be very' very unique and enviable position.

So regarding the recent stockings and the progress that we've done there, I also think kind of from my experience that we're progressing well as this is the training of our new staff. We have a lot of new staff onboard and most of these people have not worked in RAS systems. Okay? And aquaculture is not just science, but it is also a lot of art involved.

So we're taking out and trying to train our new staff appropriately on the art of aquaculture in these systems like observing the behavior of the animals and especially how to observe and adjust the feeding. And we're also learning ourselves too in these new larger systems, we learn something new almost every day. So our batch two right now, so I'm not going to talk about batch one, but batch two is in stage I. It is progressing well as Solomon mentioned earlier.

And we will continue to monitor both of those batches and the training of staff and then decide on the pace of stocking further stocking subsequent stocking of the subsequent batches.

Unidentified Analyst

But you are ready for the next I think, you have the tools?

Anthony Ostrowski

Yes, well the animals we have the hatcheries up, the brute stock, are they are producing animals or producing animals for sale off the farm to the local farmers as well as being ready to go to come onto our farm when we'll be sorry that we need to stop that next batch. And I really think that these preliminary tests been very good exercise because we need to really train our staff, refine our techniques and better understand our systems before they really begin their large scale production. So one day it's kind of like all comes together, the construction, the training, the stocking harvest and sales will ramp up very rapidly.

Unidentified Analyst

I have one final question for you and maybe Solomon. When you are saying that the Prawn Farm 4 and Prawn Farm 3 you are saying 10,000 and then you say 50,000 or 60,000 tons from Prawn Farm 4 and what capacity of these numbers take it on, we are talking not before was it 600,000 every time or is it 1.2 million. You were talking before there was 40% of capacity we were running on 40% of maximum capacity, what is the potential within that number?

Anthony Ostrowski

As I explained in Sweden that we're running at 40% capacity and that is based upon the calculated capacity of our bio filters that we have there it is 40% and that's what we tip especially been running at previously and I said we're going to do that and we're not going to move forward quickly especially with the new system. Now, the numbers that were talking about, stocking 1.2 million in there that is 600,000 on each side. Okay? We can double that you know easily.

Unidentified Analyst

So those production numbers are, you know looking at the stocking rates of 1.2 million animals and…

Anthony Ostrowski

So it does not mean when the filters are running and everything is working great then you are on top of things. Does that mean that actually 60,000 tons can be 120,000 tons? I mean 60,000 tons can be 60,000 but then we will look at pushing those systems further and it's not just based upon bio filter capacity. There is also behavior the animals, there's also nutritional effects that limit that as well too. I'm just basing that 40% capacity based on just bio filter, the mechanical system operation of that okay?

Unidentified Analyst

And what would you think is we have optimal environment anywhere between 100,000 and 300,000, but not for those Prawn Farm 4 for the 60,000…

Anthony Ostrowski

Okay, well the 60,000 is based on so the 60,000 can be higher than that. So 60,000 is based upon our minimum operation of our three units operating system that is 10,000 three building operating production unit or 10,000 metric tons. Okay?

Unidentified Analyst

Yes.

Anthony Ostrowski

And so that 60,000 could be more than that, certainly. Now what we want to do is target our minimum.

Unidentified Analyst

So you would say it is a very conservative number?

Anthony Ostrowski

I would say that would be a conservative number based upon our previous experience.

Unidentified Analyst

Okay. All right, thank you Tony, nice talking to you again.

Anthony Ostrowski

Good talking to you too.

Operator

Thank you. The next question comes from…

Solomon Lee

Can we take a couple of questions from the web?

Operator

You can do that.

Unidentified Analyst

Okay. First is in the Q4 report you write that you are working on new supply channels for sourcing seafood and eel can you please tell us the progress on that?

Solomon Lee

Yes, as far as that is concerned, we would, yes, I can answer that question for you, it is we are working at the moment with Norway on the salmon, crabs and fish. And we are also working with Russia on crabs, prawns and shellfish. But at the moment we are organizing various import permits in arrangement with agents and suppliers with the aim to start [indiscernible] of import from these two countries within Q2 2016.

Now at the same time we have already started trials with import from Canada and USA on lobsters and crabs and also lobsters from Pakistan. So having said that there are other countries that we are now currently exploring, but soon and so far the last two to three months since the Chinese New Year or before the Chinese New Year I think we have made a pretty good progress on this side.

Unidentified Analyst

Okay, another web question, you mentioned a spin-out of the HU Plantation. Can you elaborate on what that might look like?

Solomon Lee

You can answer that question.

Anthony Ostrowski

Okay, yes, I mean I want to say that in each of these instances even though there are different complexities involved with each carve out they for the most part follow the same boilerplate and in essence what we're doing, let's just use, let's use the Zhongshan project as an example.

We currently have Tri-way, which is a Hong Kong company that is the right vehicle and probably the most expedient vehicle for us to utilize that we will be looking at assuming the assets of the fish farm and the aquaculture entities into that one, under that one umbrella which is Tri-way, HK. You still have business partners as you well know that have to be factored into this and they still have a giant share especially in Prawn Farm 2, Prawn Farm 3 projects. So their ownership, right now their ownership will be retained as part of Tri-way, HK.

And in addition to that, over a period of time, even after if there is a decision made to buy off a portion of their share, what have you, they will always maintain and this is going with any Chinese business partner any joint venture partnership we're talking about, there will always be a maintenance of at least 25% ownership by the Chinese business partners. So from that now we are talking about then extracting, I'm not going to go into details on this, but we're talking that at that point taking shares of Tri-way, HK and having some of those distributed to our current Sino Agro Food shareholders.

In addition to that Sino Agro Food will retain a minority position as again going back to what we said it will become, it is going to become a true and I put quotation marks around the word true holding company. So it will hold a minority interest in the aquaculture in the HU Plantation and SJAP, et cetera.

Now this whole thing, this transition is a lengthy process, but depending again on funding can be expedited in some areas and hopefully we can have possibly two these carve outs taking hold yet this year. But I'd put that out there only because I say if we have the funding in place to make it work today it can be made to work within that timeframe.

Okay Rick, you want to go back to call-ins?

Operator

Will do, so the next question comes from Mark [indiscernible] from [indiscernible]. Please go ahead.

Unidentified Analyst

Yes, hello everybody. My question is more of a general question for you Dan or Solomon. As you know most of us on the call have been existing shareholders for many, many years. We are now sitting very close to a 52 week low. From what I am hearing on the call now, most of the valuation and enhancements will take place at the Q4 at the earliest and the valuation in terms that we've made in the past haven’t really added to the value of the company.

So my question to you is we have been trying buybacks in the past it seems like that would be a logical attempt even if we had to get a loan for it. What words of confidence do you have for the existing shareholders for us to hang on to the stock this year? If we have to wait for another six to seven months to see for these pending spin-outs that may or may not happen, we haven’t had much hope there lately can you answer that for us?

Daniel Ritchey

Well let me start then Solomon you can chime in after me if you would. Again, I want to go back to what was mentioned earlier and that is we are dedicated to making certain that these milestones are going to be reported as they occur hoping then as a result of that that can at least give some sense of satisfaction to the extent that things are moving in the direction that they need to be. I will tell you and again, I am acting CFO and I underline the word acting, but in this interim period of time my intent is to make sure that we are conservative in our approach.

I would much prefer to under promise and over perform that habit where we have been coming up with what we felt or what had been felt at the time anyway to be very doable. But again because of cash crunch issues and so forth have not been made to happen and I think we have just found ourselves in a precarious position as a result of that.

So to remove that onus from the company our approach right now is to take this from the approach that I had just mentioned in terms of announcing those milestones when they occur and then be able to possibly even fill in some of the blanks that are still outstanding at that time once we get to those points. But you will be hearing more about what is happening as we go along only because we have a lot of things going on right now and there are sure to be things which are going to be materializing at any one of these ventures, HU, SJAP the MegaFarm et cetera.

Unidentified Analyst

And with all due respect and when Frederick [ph] was announced as a board member way back when or perspective we were supposed to be one of his big announcements was that we were supposed to be showing a lot more transparency way back when and we in fact we haven't seen transparency.

We were promised in the past that we would see earnings projections many times. We've never seen earnings projections as far as I know. We were in the past speculating or promised dividend payments. We haven't seen dividend payments. As an acting CFO I think one of the - any conventional CFO I think one of the conventional practices that I would see would be looking at enhancement as a buyback even if you had to get a loan.

I mean the internal rate of return would be very compelling at that. I just don't understand why the company is not considering these things, especially as the stock price considers the market is telling you that they don't have much faith in the management at this point.

Daniel Ritchey

Well, let me mention we have undertaken some efforts towards seeking the funding that you are talking about with respect to buyback and there could be something materializing. Again, I cannot give anything and I won't. I will not go into any detail until such time as we have things solidified.

So it is not as if the company isn't taking action, it does. It is working through whatever conventional issues we have to when it comes to financing whether through a financial institution, through private investors, et cetera. It is getting obviously harder because we are going after more funding for more things and we're trying to as we were talking earlier we're prioritizing how those monies were being spent.

But there is and I will assure you, I am on the phone with Solomon practically five to six days a week, there are a number of issues going on at the same time on different fronts. We are trying to coordinate this as best as we can with the limited funding that we have hoping to have some additional funding from some of these sources we are talking to and we keep moving it forward.

So yes, I understand the frustration from how things have been and again there were certain items which were at that time when they were down to the best of intentions, but at the same time, again that's why I say I cannot see us putting any information out until we have things tightened up to the point where we can put that information out and then not have to worry about how we tell everybody afterward that we weren’t able to do this. And I just as well will not have to deal on a continuous basis with that.

Granted it is more boring obviously that way taking that approach and at the same time it is one which we have a lot going on with the companies you have heard throughout these discussions here and it means there are things which are going to be made to happen. It is just a matter of those things having to be taken care of first before we can get those announcements out there.

Unidentified Analyst

Okay, I understand. Thank you very much.

Operator

Thank you and the next question comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you. First a question to Solomon regarding SJAP, in the 10-K you report that was it said that 14% of the slaughter business was sold for $770,000. The buyer would not have the right to profits from the first three years, but is there a 6% interest, can you explain the logic behind that transaction please? Solomon do you read me?

Solomon Lee

Yes, yes, I'm with you, but I just want you to repeat that question. I couldn’t hear.

Unidentified Analyst

Yes, in the 10-K report it says that 14% of the slaughter business was sold for $770,000. The buyer would not get the right to the profits for a three-year period, instead he would get 6% interest. Could you explain a bit the reason or the logic behind that transaction?

Solomon Lee

Actually that one was some kind of arrangement with the local operators in that particular setup. So we will give them because it is pretty hard to get and retain very good steelworkers. And so we make an arrangement with the general staff of that particular sector only. So therefore this gives them the incentive, so they will stay on and work along as we expand the other sector.

Unidentified Analyst

Okay, another question regard SJAP, it has been said before that the CF's [ph] true ownership in SJAP is higher than the 45% that is reported in 10-K and so on and that will be announced or revealed in connection with the restructuring of the business like listing and so on. Could you give us some more flavor upon that comment?

Solomon Lee

Yes, I'm sorry I have to stick to what Dan just said. Unless we do the complete the restructuring we cannot say anything at this stage for that just in case something goes with it and the restructuring of that company. But the restructuring program has been carried out and our lawyers…

Unidentified Analyst

So we will have to wait until the [indiscernible] to see the true ownership of SJAP?

Solomon Lee

Having said that is you see when the new structure comes we will not go on that way, because it is already intention of the company's segment the last year. When we do the spin-off we want get a substantial if we are allowed to back to our shareholder. And hopefully, we will realize the right value at that time for all my shareholders. That is the promise we made many, many years. So that will come out and just be patient a little bit and I don’t want to jam in between. We couldn’t complete the restructuring on time, but the restructuring will definitely will take place. I just cannot promise you the time just now that's all.

Unidentified Analyst

Okay thank you. And then one question to Dan as well, if I understood you correctly when you talked about the Aqua business the future structure there, it sounded to me as though I - Chinese businessmen that are now holding all or you have the option to buy up to 75% of the different prawn farms and but it could be that the Chinese are owners is that will own 25% off the Tri-way and Tri-way will own 100% of the prawn farms. Did I understand you correctly?

Daniel Ritchey

That's yes, you did, you understood that correctly, and again the Chinese businessmen we've had discuss with them. They have said that they would take a strong interest in having discussions on the buyout of their ownership up to that 75% figure and at the same time he is not going to preclude us moving forward because remember for us to be able to get Tri-way HK to assume these assets.

We have to get them in agreement and they have agreed to this and then be able to have Tri-way listed on its own merit on an exchange and be able to perform thus also based on that performance it may mean a better return in the form of an IPO when it comes the dollars generated to be able to buy out that portion of those partners. So there is, again there is no, let's put it this way, there is no impediment from the Chinese business partners keeping the carve out under the separate listing going forward.

As to the arrangements to be made with respect to taking over their percentage of ownership, those details are still being worked on as we speak, but as the same time they are very open to only holding it up, holding a 25% minimum in the final carve out once it is completed.

Unidentified Analyst

Could you have mentioned something, but what money are we talking about here to buyout these Prawn Farms from those Chinese businessmen how much money?

Daniel Ritchey

Well, we can't talk, I can't talk about those numbers specifically because we have to have a fair market valuation done on the assets themselves. Now there is a book value, but I don’t want to, you know book value in and of itself isn’t the true value of those assets, especially since there are now being bought online and starting to produce and what have you. But also the thing is that these business partners also may becoming involved with expansion in the future on some additional prawn farms being built.

If we were ever to need them they already said that they were they would take an interest in helping to partner with those as well. So I would suspect that whatever is going to be resolved whatever the amount is that is that is agreed to is going to be something that will likely be in our favor just as much as it is going to be in their favor only because they see themselves as long-term partners with this venture in one form or another.

Unidentified Analyst

[Indiscernible] options to acquire 75% was based on book value of the entity?

Daniel Ritchey

Well, the book value is going to be increasing as production starts underway and we see that the value of those assets now started to improve, at the same time the current book value is one which they are, which they appear to be okay with at this time. So if we were able to find the funding source to be able to take over at this point it would or should not be an issue, although without anything having yet been settled and in writing we can say that for sure, but through our discussions that is where things are today.

Unidentified Analyst

Okay, thank you.

Operator

Thank you. And the last question comes from Roland Toscana [ph]. Please go ahead. As there is no response from the questioner, I hand the conference back to you, Solomon.

Solomon Lee

Anymore further questions?

Operator

There are not questions received on the phone.

Solomon Lee

Oh no more questions, so Dan I say thank you to Dan to everybody's presence and I think we should finish the meeting and thank you for everybody for coming.

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