3.Operation of Each Product Line

3.1 Product Characteristics

The Company is a group of sugar manufacturers whose quality management
system is certified by SQF 2000, ISO 9001: 2000, and Hazardous Analysis
and Critical Control Point (HACCP) accreditations. Sugar produced by the
KSL group can be divided into four categories according to their types
and levels of purity as follows:

Raw sugar – Raw sugar has a color index higher than 1,500 ICUMSA. It is
dark brown, and has a high dirt index and a low purity index. Transfer
is done in bulk without the use of sacks. This type of sugar cannot be
consumed until it is refined or purified, turning into white sugar or
refined sugar.

High pol sugar - High pol sugar has a color index between 1,000 - 1,500
ICUMSA. It can be consumed without any further process needed.
Generally, the sugar is put in sacks before being transported. It is
priced lower than white sugar and refined sugar.

White sugar - White sugar has a color index between 46 – 200 ICUMSA with
a degree of polarization not lower than 99.50. It is widely consumed
among households and used as a raw material in food industries where
moderate purity is required.

Refined sugar – Refined sugar has a color index that does not exceed 45
ICUMSA. It is especially high in purity. The sugar is used in certain
industries where highly pure sugar is needed, such as pharmaceutical
industry, carbonated beverage industry, and energy drink industry.

After sugar manufacturing there is a residue called “molasses” that its
sugar content is so low that any further sugar extracting is
uneconomical. Molasses is a valuable by-product obtained from sugar
production. It contains 20% water, 30% sucrose, 32% invert sugar, 12%
non-sugar organic substance, and 6% ash. From one ton of sugarcane, the
corporate sugar mills have capacity to manufacture between 45-50
kilograms of molasses. An amount of molasses produced in a year depends
on a quantity of sugarcane crushed in the year. Molasses can be widely
used in such biochemistry industries as alcohol and distilling industry,
yeast industry, monosodium glutamate industry, animal food industry
(where molasses is mixed with cassavas and bagasse), vinegar industry,
and soy sauce and seasoning sauce brewing industry.

Other residues from sugar manufacturing process that are also useful
include bagasse and filter mud. Bagasse is the fibrous material
remaining after the last extraction of juice from sugarcane. Now the
Company uses burned bagasse as a source of energy for electricity and
steam generation used in sugar manufacturing process. Part of the
electricity generated is sold to the EGAT. Filter mud is a residue from
vacuum filtration. It can be used as a raw material for general-purpose
fertilizer. The Company gives away filter mud to sugarcane farmers to
promote sugarcane cultivation in nearby areas. After the Company’s
subsidiary has continuously operated alcohol and chemical production,
wastewater from the factory can be mixed with filter mud and
biodecomposed to produce organic fertilizer that is suitable for
sugarcane cultivation. This completes the corporate value-added product
ranges.

3.2 Marketing and Competition

Marketing and Industry Overview in Overseas Markets

The world sugar market: In 2004/05 sugar was produced 144.66 million
tons (raw value) worldwide. The 1.23 million-ton increase represented a
0.86 percent growth rate compared to that in 2003/04. The world total
consumption amounted to 144.97 million tons. The 2.16 million-ton
increase represented a 1.52 percent growth rate compared to that in
2003/04. Due to the fact that 54.11 million tons of sugar was exported
worldwide whereas 50.83 million tons of sugar was imported, the ending
stock decreased from 64.97 million tons in 2003/04 to 61.38 million tons
in 2004/05. The stock represented 42.34 percent of the total demand
likely to last for 5 month consumption only.

Chart 3.1: World Sugar Balance (Millions Tons, centrifugal sugar, raw
value, OCT/SEP)

[]

  Note: * 2005/06 estimated number

  Source : F.O.Licht, updated 28-10-2005.

The Asian sugar market: Asia is the most important market for Thailand’s
sugar exportation, as the total amount of sugar manufactured in the
region does not meet its yearly demand. Not less than 10 million tons of
raw sugar and white sugar has been imported. At the moment, Thailand is
the only Asian largest net exporter of sugar, while Indonesia is the
largest net importer of sugar in the region. India and Pakistan are the
most influential variables that have caused fluctuation in the market
because they are both net exporters and net importers of sugar. Vietnam
who is currently a sugar importer has been trying to be a net exporter
within a couple of years.

In 2004/05 Asia had the total amount of sugar manufactured of 41.14
million tons (raw value), which was 5 million tons less than the
previous year. The decrease represented a 11 percent decrease. In
contrast, the region’s total demand increased from 60.61 million tons in
the previous year to 61.94 million tons, representing a 2.21 percent
increase. The 20.80 million-ton inadequacy was made up by sugar in the
previous year’s stock and imported sugar from other regions.

Chart 3.2: Production / Consumption in Each Region (Millions Tons,
centrifugal sugar, raw value, Oct/Sep)

[]

  Note: * 2005/06 estimated number

Source : F.O.Licht, updated 28-10-2005

Prices in the world sugar market has been risen as shown in Figure 3.3
indicating raw sugar prices in the NYBOT futures market (NYBOT Sugar
#11) and Figure 3.4 indicating refined white sugar prices in the LIFFE
futures market in the past ten years. Thai manufacturers have sold their
sugar at prices which are a combination of the world sugar market prices
and Thai premiums. (Thai sugar manufacturers have received premiums from
sugar exportation. In Asia sugar has been produced less than the total
consumption. Sugar, therefore, has been imported in the region. The
importers are willing to pay Thai manufacturers premiums instead of
paying expenses of importing sugar from other regions.) Thai premiums
vary in accordance with sugar inadequacies in Asia, differences in
transport expenses of importation, other Asian countries’ importing
sugar from Thailand, and other relevant factors.

Chart 3.3: World Raw Sugar Price in NYBOT Future Market, NY#11 Raw Sugar
(Cents/lbs)

[]

Chart 3.4: World Refined Sugar Price in LIFFE Future Market, LD#5
Refined Sugar (US$/ton)

[]

Trends in the production year of 2005/06: From 2005/06 on the world
sugar market will experience major changes in terms of its structure and
pricing as follows:

(1) The European Union will reduce white sugar exportation, as it needs
to try to cease the exportation of C quota sugar in line with the sugar
system reformation plan and a WTO’s judgment allowing no more than an
amount of 1.274 million tons.

(2) Brazil will increase sugar exportation, replacing the decreased
exportation of the European Union and Cuba.

(3) Ethanol is likely to play an important role in the world sugar
market. Increasing oil prices make it necessary for oil importers to
seek their own alternative energy sources, for example, ethanol produced
from sugarcanes and molasses. Undeniably, the world oil market prices
will become a more influential factor determining the world sugar market
prices.

In October 2005, The F.O.Litcht Magazine forecasted that 148.86 million
tons (raw value) of sugar would be produced worldwide. This means an
approximately 4.20 million-ton increase from the previous year which is
a result of increased produce of Brazil and India. However, the
projected demand equaling 147.26 millions tons appears 1.60 million tons
lower than the world’s produce. Factors contributing the fluctuation of
the total amount of sugar manufactured: (1) the weather; (2) the world
oil market prices; and (3) the ratio of the use of sugarcanes and
ethanol production in Brazil, will make the forecast of the world sugar
market prices become more complicated than in 2004/05 in terms of
directions and changes.

Asia will remain one of Thailand’s important export markets in the next
year. It is estimated that the net import will be approximately between
13-13.50 million tons. There will be a decrease in sugar importation of
India and Indonesia, but an increase in sugar importation of China and
Pakistan. A main competitor of Asia’s sugar manufacturing businesses is
the ethanol production with the use of sugarcanes as a development of an
alternative energy source, which results in a reduction or slow growth
in the total amount of sugar manufactured in Asia. It is, hence, likely
that there will be an increase in sugar importation from countries
outside the region, for instance, Brazil, Guatemala, Australia, and
Republic of South Africa.

The most preferred export channel of Thai sugar mills is major traders,
such as Cargill, Tate&Lyle, and Kerry. These traders sell the sugar
products overseas. The use of traders reduces the risk of overseas
customers’ failure to perform payments and complication in export
management. The Thai sugar mills are only responsible for the transport
of the sugar to export ports in Thailand, for example, FOB Bangkok ports
and FOB Laem Chabang port.

Domestic Marketing and Industry Overview

Domestic sugarcane and sugar industries are governed by Thai Sugarcane
and Sugar Industry Act B.E. 2527. Office of the Cane and Sugar Board is
in charge of ensuring adequacy of sugar for the domestic demand. Every
year the board estimates the domestic sugar consumption amount and
determines quotas for sugar mills according to their capacity. Domestic
sugar prices are controlled by Goods and Services Act B.E. 2542, which
mandates that:

(1) Prices of regular white sugar purchased at sugar mills do not exceed
Baht 1,100 per 100-kilogram sack.

(2) Prices of refined white sugar purchased at sugar mills do not exceed
Baht 1,200 per 100-kilogram sack.

(3) Wholesale prices of regular white sugar at all domestic wholesale
businesses do not exceed Baht 1,165 per 100-kilogram sack, and those of
refined white sugar do not exceed Baht 1,265 per 100-kilogram sack.

(4) Retail prices of regular white sugar at retail businesses in
Bangkok, Nonthaburi, Pahumthani, Samutprakarn, and Samutsakorn do not
exceed Baht 13.25 per kilogram; and those of refined white sugar do not
exceed Baht 14.25 per kilogram. (included VAT)

The price control does not apply to sugar cubes in boxes or packets that
do not weigh over 10 grams.

The legislation results in low competition. Distribution channels are
choices of sugar mills. Some sugar manufacturers focus on retail sale.
Some sell their merchandise through middlemen or modern trades. Others
sell to other businesses in different industries. The KSL Group sells
most sugar products to manufacturers in different industries.

Competition

There are currently 46 sugar mills in Thailand with sugarcane crushing
capacity of 60-75 million tons/year and sugar manufacturing capacity of
5.0-8.0 million tons/year (depending on yearly sugarcane amounts in the
crushing process). The crushing process lasts about 4-6 months each year
due to small amounts of sugarcanes entering the process. It begins in
November and ends in April or May. The number of sugar mills is under
government control. Licenses from Office of the Cane and Sugar Board and
Department of Industrial Works, Ministry of Industry, are required for
sugar mills in increasing capacity, moving mills, or operating new sugar
mills. There is no new licensed sugar manufacturer at the moment.

Major sugar manufacturers can be divided into five main groups, and a
group of small sugar manufacturers as follows:

Table 3.6: Groups of sugar manufacturers and market shares in Thailand

+----------+------+-----------+-------+-----------+------+-----------+
| Group    | Nu   | Amount of | M     | Amount of | Ma   | % of      |
|          | mber | sugarcane | arket | sugarcane | rket | change    |
|          | of   | crushed   | share | crushed   | s    |           |
|          |      |           |       |           | hare | increase/ |
|          | s    | 2004/2005 | 20    | 2003/2004 |      | decrease  |
|          | ugar |           | 04/05 |           | 200  |           |
|          | m    | (million  |       | (million  | 3/04 |           |
|          | ills | tons)     |       | tons)     |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Mitr     | 5    | 8.51      | 17.8  | 11.47     | 17.8 | -25.8 %   |
| Phol     | m    |           | %     |           | %    |           |
| Sugar    | ills |           |       |           |      |           |
| Group    |      |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| TRR      | 7    | 7.15      | 14.9  | 10.01     | 15.5 | -28.6 %   |
| Sugar    | m    |           | %     |           | %    |           |
| Group    | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Thai     | 3    | 6.11      | 12.8  | 7.83      | 12.1 | -22.0 %   |
| Identity | m    |           | %     |           | %    |           |
| Sugar    | ills |           |       |           |      |           |
| Group    |      |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| W        | 4    | 4.24      | 8.9 % | 6.88      | 10.7 | - 38.4 %  |
| angkanai | m    |           |       |           | %    |           |
| Group    | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| KSL      | 4    | 4.07      | 8.5 % | 5.05      | 7.8  | -19.4 %   |
| Group    | m    |           |       |           | %    |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Others   | 23   | 17.75     | 37.1  | 23.24     | 36.0 | -23.6 %   |
|          | m    |           | %     |           | %    |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Total    | 46   | 47.82     | 100.0 | 64.48     | 100  | -25.8 %   |
|          | m    |           | %     |           | .00% |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+

Source: Office of the Cane and Sugar Board, Thailand

The KSL Group is one of Thailand’s largest sugar manufacturers. It
operates four mills in three regions: the Northeast (1 mill), Central
Thailand (2 mills), and the East (1 mill): with the maximum total
sugarcane crushing capacity of 66,885 tons a day. In 2004/05 the Group’s
mill processed sugarcane crushing totaling 4,067,330.72 tons, and
manufactured 425,612.16 tons of sugar including refined white sugar
amounting to 101,982.25 tons, regular white sugar amounting to
280,686.10 tons, and raw sugar totaling 42,943.81 tons; and molasses
amounting to 187,395.78 tons. Table 3.8 shows sales of different types
of sugar in 2004/05 and the ratio of sales in export markets to domestic
markets.

Table 3.7: Sales of different types of sugar in 2004/05 and the ratio of
sales in export markets to domestic markets

[]

3.3 Product and Service Provision

Raw material provision policy

There is limited increase in Thailand’s sugarcane cultivating areas due
to the control of deforestation, high prices of lands for sale, and lack
of promotion of sugarcane cultivation. Yearly growth and fluctuation of
sugarcane produce are mainly influenced by soil fertility and weather.
Providing raw materials for manufacturing is a vital process for sugar
producers. As the total capacity of the Thai sugar industry exceeds
domestic sugarcane produce, all the sugar mills need to ensure that the
maximum amount possible is provided for their production in order to
reduce the fixed cost. The main solution employed by most sugar
manufacturers is providing financial support to farmers, which is known
as the “Geaw” system. Agreements of the sugar producers’ advance
purchase of sugarcanes from the supported farmers are made, allowing the
farmers to apply for loans from the sugar manufacturers. The loans are
used for sugarcane cultivation. Harvested sugarcanes, then, are
delivered to the mills and the sugarcane costs are deducted from the
loans.

The KSL Group makes agreements before the cultivation period on advance
purchase of sugarcanes. Financial support for farmers in need takes the
form of loans for sugarcane cultivation. The farmers grow and deliver
their sugarcane produce to the corporate mills. The whole process takes
about 10-12 months. The sugarcane costs are deducted from the loans the
farmers have received. If the total value of sugarcanes delivered by the
farmers is higher than the loans, they will earn the difference.
However, if the total value of sugarcanes delivered by the farmers is
lower than the loans, the difference is collected from their incomes
from sugarcane sale in the next year or collected in cash. The Company
file lawsuits against those fail to perform their payments. Raw material
provision is the corporate priority as they enable the mills to reach
their full capacity, allowing reduced fixed cost. The Company’s strategy
is giving long-term benefits as encouragement to the sugarcane farmers
providing their produce to the corporate mills. This promotes both the
growth of the farmers’ incomes and the Company. The main policy
“Prosperity of farmers, prosperity of the Mill”, employed in the
northeast, emphasizes creating and promoting a sustainable way to make a
living for sugarcane farmers, as well as eliminating middlemen known as
“Quota Heads”. The attempt allows the Company to know about problems
experienced by the farmers and provides them suitable helps. Also, the
Company provides the farmers equipment, knowledge, and production
support, such as proving loans for purchasing trucks; giving them
molasses for making fertilizers free of charge; and providing experts in
sugarcane cultivation, and prevention and elimination of crop pests. The
support enhances a good relationship between the farmers and the
Company, as well as systematic growth.

Production policy

(1) Focusing on the production of white sugar and refined white sugar

The Company focuses on maximizing the volume of white sugar and refined
white sugar manufactured, as the two products have the highest sale
prices with the highest profit. In 2004/05 the Company manufactured
white sugar and refined white sugar amounting to 66.0 and 24.0 percent
respectively, while white sugar and refined white sugar accounted for
49.0 and 20.8 percent of all the country’s sugar products.

Table 3.8: The ratio of the KSL Group white sugar and refined white
sugar manufactured to its sugar products compared to domestic sugar
products in 2004/05

+-------------------+----------+------------+----------+------------+
| Production year   | White    | Refined    | Raw      | All sugar  |
| of 2004/05        | sugar    | white      | sugar    | products   |
|                   |          | sugar      | and      |            |
| (Tons)            |          |            | others   |            |
+-------------------+----------+------------+----------+------------+
| KSL Group         | 28       | 101,982.25 | 4        | 425,612.16 |
|                   | 0,686.10 |            | 2,943.81 |            |
+-------------------+----------+------------+----------+------------+
| Percentage of     | 66.0%    | 24.0%      | 10.1%    | 100.0%     |
| production        |          |            |          |            |
+-------------------+----------+------------+----------+------------+
| The total from 46 | 2,50     | 1,         | 1,54     | 5,         |
| mills             | 5,205.50 | 064,813.24 | 2,053.75 | 112,072.48 |
+-------------------+----------+------------+----------+------------+
| Percentage of     | 49.0%    | 20.8%      | 30.2%    | 100.0%     |
| production        |          |            |          |            |
+-------------------+----------+------------+----------+------------+

Source: Office of the cane and sugar board, Thailand

(2) Improvement and Development of Production Efficiency

The Company is one of the most efficient sugar producers. According to
the Office of the Cane and Sugar Board, in the production year of
2003/04, New Kwang Soon Lee Sugar Factory Co., Ltd. (Affiliate) was the
most efficient sugar manufacturer, while Khon Kaen Sugar Industry Public
Company Limited, Tamaka Sugar Industry Co., Ltd., and New Krung Thai
Sugar Factory Co., Ltd. came the third, fourth, and eighth Thailand’s
most efficient sugar producers. The Company remains focused on being a
leading efficient sugar manufacturer with the use of advanced
technologies for production and improvement of machinery efficiency.

Marketing policy

Due to the fact that sugar prices in domestic consumer markets are
controlled by the Government, the Company emphasizes direct sale to
industries with product quality and on-time delivery promises. Most of
the customers are businesses in beverage and confectionary industries.
Business-to-business sale requires minimum cost because advertising does
not need in creating consumer awareness. Also, transport and packaging
costs are lower when being done in bulk. Thus business-to-business sale
requires lower cost than business-to-consumer sale.

The Company, moreover, emphasizes the sale of its sugar products to food
product re-exporters, as it allows the sale of C quota sugar which
yields better profit than regular exports while requires lower transport
cost.

Environmental effects

The sugar manufacturing process causes wastewater and dust from ash in
the steamer’s burning process. The Company is well aware of such effects
and has employed appropriate measures to prevent environmental problems,
in compliance with standards issued by Ministry of Industry.

3.4 Works Not Submitted

- None -