1. RISK FACTORS

Significant risk factors in the operation of the sugar business of the
company, which may have affect on the return on investment by the
shareholders, can be summarized as follows.

1.  Risk factors in Raw Material Sourcing – Sugarcane

  The company’s business is to run factories to produce sugar which use
  sugarcane as raw material. The company has also invested in other
  related projects, which use by products and wastes generated from the
  sugar manufacturing process, to create added value. Therefore, the
  quantity of sugarcane available for crushing is the most important
  factor affecting the operations of the company.

  There are two main reasons that cause fluctuations in the quantity of
  sugarcane, viz. (1) changes in the acreage under sugarcane plantation
  which may depend on the price agreed for the cane and whether it is
  worthwhile for the farmers to grow sugarcane compared to other
  agricultural crops as well as the promotional policies of the
  Government and (2) changes in the yields of sugarcane which may depend
  on soil fertility and climatic conditions.

  When the quantity of sugarcane crushed reduces, the effect on the
  company is that the quantity of sugar produced goes down, the unit
  cost, especially the fixed cost per unit, goes up, the profit per unit
  reduces and the company’s overall profit is reduced. In addition, in
  those years when the sugarcane crushed is low, there is increased
  competition among sugar mills to purchase the sugar cane locating in
  the neighborhood area. Therefore, in order to protect their crushing
  quantities, sugar mills have to vie by paying more than the price,
  established by revenue sharing system. This increases the overall raw
  material cost for the company.

  Thailand is one of the world’s leading sugar exporters and is the
  leading sugar supplier to the Asian region. Decreased amounts of cane
  crushed in Thailand result in lower sugar quantities available for
  exportation. Export prices, consequently, increase. Such increase
  relieves the impact of decreased quantities of cane crushed and burden
  of increased costs. The Company, furthermore, values stability of
  sugarcane supplies. To ensure the sustained supplies, the Company
  offers assistance to sugarcane farmers, such as loans for planting
  sugarcane crop, support in procuring inputs for farming, providing
  irrigation systems, introducing technology to increase yields and
  efficiency in cultivation, and reducing the influence of middle men in
  sugarcane sales and purchase deals. All the assistance is provided for
  the farmers in an attempt to help them improve their lives.

2.  Risk from Fluctuating Sugar Prices in the World Market

  While considering sugar trade in the world markets, it can be said
  that sugar has high price fluctuations when compared with other
  agricultural products. The world sugar prices depend on several
  factors, such as demand and supply of countries that are producers,
  consumers, exporters and importers. Traders’ speculations are in
  relation to climatic conditions facilitating cultivation in each of
  the respective countries. Government policies on promoting,
  interfering, exporting and importing sugar, particularly in developed
  countries also determine pricing in the industry. At present, sugar
  prices are also interrelated to oil prices. Both sugarcane and
  molasses can be used to produce a type of alcohol called ethanol.
  Ethanol can be blended with gasoline to produce fuel. All the above
  factors cause high fluctuations in the world sugar prices.

  Generally, sugar companies in Thailand are bound to meet the domestic
  demand first. The balance sugar can be exported. Every year, the
  Office of the Cane and Sugar Board estimates the quantity of domestic
  demand for sugar, called Quota A, and allocates this Quota to all the
  sugar mills based on their respective sugar production. The ratio of
  domestic sales to exports of all sugar mills is therefore quite
  similar, usually in the range of 30:70 to 40:60 depending on the
  sugarcane available for crushing all over the country. The sales of
  the sugar industry fluctuate according to world sugar prices in the 60
  – 70 % range. However, regarding on the cost of production, the cane
  price is the major cost, calculated by the formula based on the
  revenue sharing system 70 : 30. This means that when the sugar price
  has decreased 100%, the farmer should get the 70% impact in term of
  lower sugar cane price and the sugar factory should get 30% impact.

  In 2009, the world sugar market prices increased significantly, from
  11-12 cents per pound to 26-28 cents per pound. Later in 2009, in
  order to manage the risk from volatile sugar prices in the world
  market, the Company undertook its futures contract trading through
  banks. This allowed the Company to maintain its profitability and
  reduce the risk of fluctuating sugar prices in the world market.
  However, the risk management method may affect the profit and lost
  account in quarterly profit and loss statements.

  As regards the company, since it is involved only in the sugar and
  molasses business, the fluctuations in the world sugar price has an
  influence in the company’s operations. The company has, however,
  invested in other related industries such as the ethanol production
  project, the bio-fertilizer project and the power plant project which
  in future will reduce the impact of world sugar prices on the business
  and permit operating in businesses where the impact of price is less
  pronounced.

3.  Risk from Government Policy

  The sugarcane and sugar industry in Thailand is under the supervision
  and control of the Office of the Cane and Sugar Board under the Cane
  and Sugar Act 1984. The Board regulates the amount of sugar produced
  by a quota system (Quota A for domestic sales, Quota B and C for sugar
  exports), controls the domestic price, regulates on the ratio of
  distribution of revenue from the sugar business between the farmers
  and sugar mills, with the revenues sharing in the ratio of 70:30,
  controls on the entry of new players in the sugar business etc. It is
  evident that the rules and regulations enacted by the Cane and Sugar
  Board have an impact on the production costs and the operations of the
  company. For Example, the revenues sharing system 70:30 ratio
  determines the sugar cane price which the sugar mills must pay to the
  farmers. In case, changes in the domestic sugar prices or changes in
  regulation of entire sugar industry, it will have a definite impact on
  the operations of the company.

  Other overall Government policies also have an impact on the company’s
  business. For example, the decision to promote the renewable energy,
  such as ethanol, has secured the domestic sale volume. The policy to
  promote the planting of oil palm trees or price guarantees for cassava
  have negative impact on the company since the area under sugar cane
  plantation will reduce and farmers will switch to growing alternative
  crops with better returns.

  The Company realizes the importance of governement policies in shaping
  directions of cane and sugar insdusty. Hence, it has collaborated with
  three sugar mill associations and associations of sugarcane farmers to
  enhance the government’s understanding of the cane and sugar industry
  and its significance. The industry is a precursor of the food and
  processed food industries. Ethanol derived from sugar production can
  be used as fuel energy. Ethanol is a pure alcohol that can also be
  used as a starting point for production of other chemicals. Exporting
  sugar brings in foreign income and almost does not require import
  costs and expenses. This differentiates the sugar industry from other
  industries.

  Sugarcane is Thailand’s important economic crop in which every part of
  it can be utilized. Communication, explanation and understanding
  between the government and the sugar industry can reduce the risk
  potentially posed by government policies affecting directions of
  sugarcane and sugar insdustries.

4.  Risk of Bad Debts Arising from Credit Given to Farmers (Advance
    Credit)

  In the running of a sugar mill, the factories extend loans or other
  kinds of financial support to sugarcane farmers as working capital to
  plant sugarcane crop, or what is called “sugarcane credit”, thereby
  reserving the sugarcane for crushing. After the sugarcane crop is
  ready for harvesting and the sugar mills are ready to start crushing
  the cane, the farmers harvest the cane and send it to the sugar mills
  and receive payment for the value of the cane supplied after the loans
  advanced and other financial support given is deducted. The risks that
  are generated from such sugarcane credit can come from reduced
  production in any year due to drought conditions, losses from crop
  disease and pestilence, farmers refusing to send the cane to the sugar
  mills etc. Such liabilities, arising from sugarcane credit, can
  adversely affect the company’s operations requiring higher amounts of
  provisioning for bad debts.

  The company would like to mention that regarding the above risk
  factors, it has made positive developments in the sugarcane system.
  The company has bought a satellite monitoring system (Global
  Positioning System – GPS) to survey the sugarcane plantation areas,
  which helps in reducing the problems of ownership of sugarcane fields.
  The system is also used to plan for sourcing more sugarcane. The
  company also encourages farmers to deposit assets as collateral for
  the loans advanced. All this has resulted in the company having a low
  bad debt situation at present and the major debts are adequately
  covered with pledged assets.

1.5) Risks of Investing in Corporate Ventures

  The Company undertook the new ventures which will commence
  commercially operating in 2010, as follows: sugarcane plantation and
  sugar mill project in Laos, sugarcane plantation and sugar mill
  project in Cambodia, and the renewable energy project in Bo Ploy.
  Those 3 projects are from the corporate policy to generate incomes and
  value-added products from sugar and sugar production-related
  businesses.

  There are risks involving in the projects, as they have just started.
  At this point, it is still difficult to determine whether the projects
  will be successful or not. The risks are explained as follows:

  Sugarcane Plantation and Sugar Mill Projects in Laos and Cambodia

  Major risks of the projects may be primarily posed by political risks
  and government policies in Laos and Cambodia. In Laos, the
  difficulties the enterprise is facing include locals’ undefined
  parcels of lands, and unclearly defined boundary of the land under the
  concession. Negotiations between the Company and locals take some
  time. Furthermore, the government policy regarding the sugar mill
  promoting locals to grow sugarcane for sugar production and tax may
  also be risk factors. In Cambodia, the political risk is relatively
  high, especially border and political disputes between Thailand and
  Cambodia. However, the project is a joint venture between Thailand,
  Taiwan and Cambodia. The Cambodian government fully supports the
  project as it benefits community development, generates income for
  locals, and creates employment opportunities for local workers and
  farmers. The operations of the project bring in developments to local
  communities in Cambodia.

  Apart from the political risk factors, the project may run the risk of
  shortage of skilled labors. Sugarcane cultivation is a relatively new
  thing in both countries. There have been shortages of cultivation
  skills and local labors. Resources in transporting sugarcane to the
  mill for crushing are still limited. Climate change may also affect
  the timing for planting sugarcane. The Company has adopted a new
  system that allows those matters to be managed more effectively.
  Specialists from Thailand have been brought in to improve sugarcane
  cultivars and cultivation methods to suit local conditions. The
  Company has also brought in machinery and more contractors from
  Thailand to alleviate the labor shortage.

  Renewable Energy in Bo Ploy, Kanchanaburi Province

  The project includes relocation and expansion of the sugar mill,
  currently in Tamakar District to Boploy District, along with
  development of sugar-byproduct businesses --ethanol, fertilizer and
  power plant businesses. The project is still in progress and requires
  ongoing investment. A primary risk was caused by adequate supply of
  raw materials for crushing. To reduce the risk, the investment of this
  project is divided into 2 phases. This ensures that the production
  capacity closely corresponds with the local promotional plan for cane
  cultivation. Another important risk factor in 2009 was the result of
  the power plant licensing. The Company had been granted the license to
  operate the power plant after the 2007 Constitution enacted. It then
  was required to new regulations being formed by the government.
  Operational risks are related to other types of licensing,
  construction and machinery installation time frame, and capital
  procurement for investing. After completion of the construction, there
  will be other operational risks such as risks involving raw material
  procurement, fluctuating sugar prices in global markets, and the
  government policies on sugar and renewable energy.

6.  Exchange Rate Risk

  The company exports about 60-70% of the sugar produced and hence, is
  exposed to the risk of fluctuating foreign exchange rates. However,
  the company operates under the 70:30 revenue sharing scheme, which
  hedges the risk from exchange rate variations since, lower revenues
  due to lower exchange rates cause the sugarcane price to be lower
  under this scheme. This means that sales revenues and major raw
  material cost of the company are directly linked to the exchange rate
  (Natural Hedge).

7.  Risk of having major shareholders controlling the votes of at the
    Shareholders’ meeting

  The Chinthammit and his company hold more than 60% of total paid up
  share capital of the company. Therefore, the Chinthammit Group and his
  company can control all the proceedings of the shareholders meetings
  whether it is the appointment of Directors or whether it is to seek
  approvals on other matters that require majority votes, except for
  special agendas which, by law or by the articles of association of the
  company, require 75% vote in shareholders’ meetings. Therefore, it is
  difficult for other shareholders to collect enough votes to
  investigate or counterbalance the issues raised by the majority
  shareholders.

  However, for the company's transparency and power balancing, the
  company has appointed three independent audit committee members for
  checking the operations of the company and also, out of the eighteen
  directors of the company, eleven are not Chinthammit; thus, power
  balancing for operation in the company is reasonable. In addition, the
  company also has also set up an independent internal control team
  which reports directly to the audit committee.

1.8) Risk from the World's Economic and Financial Situations

At the end of 2008, The US financial crisis caused by the sub-prime
mortgage crisis has widely affected Europe and other regions. There has
been a lack of liquidity in the world's economy. It is possible that
this worldwide crisis and similar circumstances in the future may affect
a demand for sugar or the world's sugar prices. The lack of liquidity
among foreign financial institutions may also affect Thai financial
institutions. The Group's sources of loans and financing may, then, be
adversely affected.

The Company has implemented its financial policies well. Its D/E has
been low. The Company has maintained good relationships with all the
banks that are long-term corporate business partners. All the corporate
businesses will be handled carefully in order to minimize the probable
effect of the world's financial crisis on the Company.