Yantai Dahua Holdings, Ltd.

Yantai Dahua Holdings - Question & Answer Page

In a greater effort to communicate with our current shareholders, Yantai Dahua has created this forum for investors to submit their questions to the company, and have them answered back directly in text.

Please Note: We receive a number of questions from time to time, so we may not be able to answer all the questions submitted, because of time constraints and compliant reasons. So we ask that you keep your inquires to a maximum of 1 question for each submission, and please have some patience. Thank you for your cooperation.

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for QU Shuzhi
Yantai Dahua Holdings Company Ltd. - CFO

Last Updated: Oct. 06, 2003

How can the company (YDHCF) claim the profit when Australia China Investment has 850mil shares given away, and thus cannot be majority owned?

YDHCF: On 18 Feb 2003, Australia China Investments Company Limited was acquired by the public shell company through a share exchange arrangement, whereby the public shell company acquired all the 824,283,600 shares of Australia China Investments Limited issued and outstanding, the original controlling shareholders of Australia China Investments Limited became the new controlling shareholders of the public shell company, and the name of the public shell company was changed to Yantai Dahua Holdings Company Limited. Australia China Investments Limited is a financial holding company which owns an 85% equity stake in the China paper business (in the form of Yantai Dahua Paper Industry Company Limited). As a result of the merger, Yantai Dahua Holdings Company Limited, through Australia China Investments Limited, the intermediate holding company, indirectly holds 85% of the equity interests of Yantai Dahua Paper Industry Company Limited, the operating subsidiary. Immediately after the merger, the number of shares of Yantai Dahua Holdings Company Limited issued and outstanding was 11,149,000. On 23 Apr 2003, there was a one-into-three stock split. The stock split increased the total issued and outstanding shares to 33,447,000.

The shareholding structure of the group has not changed since. As at the end of the third quarter of 2003, there were approximately 33.4 million shares of YDHCF issued and outstanding. YDHCF owned 100% of the 824,283,600 issued and outstanding shares of Australia China Investments Limited. Australia China Investments Limited in turn owns 85% of Yantai Dahua Paper Industry Company Limited, the operating paper manufacturing and distribution subsidiary in China that generated an operating revenue of US$12,356 thousand and net income of US$986 thousand in 2002.

Total Current Assets shown in Yahoo.com is only $1000, how do you explain that?

YDHCF: The amount of total assets as at 31 Dec 2002 of Equity Finance Holding
Corporation (latterly Yantai Dahua Holdings Company Limited) was indeed US$1
thousand, as shown in the Yahoo Finance website.

Please bear in mind, however, that as at 31 Dec 2002, the China paper
business was not yet merged with Equity Finance Holding Corporation. The
merger took place on 18 Feb 2003 and Equity Finance Holding Corporation
changed its name to Yantai Dahua Holdings Company Limited on the same date.
The amount of total assets of the China paper business was US$20 million as
at 31 Dec 2002 (which date was before the date of the merger).

The balance sheet as at 31 Dec 2002 of the China paper business (in the form
of Yantai Dahua Paper Industry Company Limited) can be found on Page 54 of
the Form 20F/A of 2002 filed with the SEC.

On page 49 of your 20F/A it states that there is like 850 million shares outstanding in 'the company', can you explain that?

YDHCF: Page 49 of Form 20F/A pertains to the financial statements of Australia China Investments Limited, a subsidiary of Yantai Dahua Holdings Company Limited. The shares of "the Company" referred to in Page 49 therefore are those of Australia China Investments Limited, and not those of Yantai Dahua Holdings Company Limited.

What is the amount of shares currently outstanding in the company?

YDHCF: As of Sept. 15, 2003 there is currently around 33.4 million shares outstanding in the company to date.

Can you tell us how much paper the company produced last year?

YDHCF: Total production at our Shangdong plant for fiscal year 2002 was around 20,000 tons of paper.

How much revenue did the company generate in 2002?

YDHCF: For fiscal 2002 the operating subsidiary of Yantai Dahua reported top line revenues of around US$12.3 million, and a net profit of around US$1 million for the fiscal year 2002.

So the company currently has an EPS (earnings per share) for 2002?

YDHCF: Yes, but we have to be careful though, because we were talking about the operating subsidiary, which the quoted ultimate holding company owns an 85% stake in. When we take 85% of the net income of the operating subsidiary, the EPS for 2002 was US$0.025 for a total of 33.4 million issued shares outstanding.

So, when reviewing the net income numbers in your financials investors should calculate that 85% of those numbers actually reflected the value in YDHCF, because that is the holdings companies ownership stake in the operating subsidiary?

YDHCF: Yes, that is correct.

Now, because your company is a foreign issuer, the company files a 20F, in comparison to a 10K like most American companies. So the company doesn’t have to file any quarterly reports, and do you guys only have to file once a year?

YDHCF: That’s right, because we are a foreign issuer, so we only have to file financials once a year.

I noticed that on your website you have pictures of your plant, and operation. What is the amount of assets you guys currently have?

YDHCF: The total amount of assets the company currently holds is around $20 million USD, of which about $10 million USD is in non-current assets like property and equipment and construction in progress.

Now there are a lot of paper companies located in China, what would you say makes Yantai Dahua different from other paper companies in China?

YDHCF: Well, let me tell you one thing. It’s quite a feat for a Chinese paper company to be profitable these days in a mature industry like this, and luckily we are one of those and for good reasons. On the supply side, there are a number of small paper firms closing down because either they are too small or inefficient, or their production facilities are obsolete, or they can not meet the stringent environmental regulations that are required by the Chinese State. Market demand continues to go up, and we do not see at this time, or in the near future, any excess capacity in the industry. So we are confident that any increased output from new production capacity will be able to sell at a reasonable price and handsome profit.