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.

  However, since Thailand is one of the world’s leading sugar exporters
  and is the leading sugar supplier to the Asian region, the lower
  crushing quantities in Thailand results in lower quantities available
  for export with consequent increase in export prices. Such increase in
  the export price of sugar decreases the impact of lower crushing
  quantities and the resulting increase in costs. In addition, the
  company has also taken other steps to assure the sustained supply of
  sugarcane. 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 sale purchase deals. The
  company’s objective in granting such assistance is to establish better
  well being of the farmers. The company has always adopted a slogan
  “Farmer Prosperous, Factory Successful” which promotes good
  relationship with the farmers and considers them as integral part of
  process of reducing raw material risks for the company.

2.  Risk from Fluctuating Sugar Prices in the World Market

  While considering sugar trade in 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 consuming and producing
  countries, exporters and importers, traders and speculators, soil
  fertility and climatic conditions in the respective countries,
  promotional policies and export and import incentives for the sugar
  industry by governments, including those of developed countries. At
  present, the sugar price is also interrelated to the oil price, since
  both sugarcane and molasses can be used to produce alcohol, also
  called ethanol, which is blended with gasoline for use in cars as
  fuel. All the above factors cause high fluctuations in world sugar
  prices. In the past year, the market was quite volatile between 9 – 15
  cents per pound.

  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.

  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 promotes 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 has considered the importance of government policies in
  charting its business strategy. The company’s cane and sugar factories
  have cooperated with three sugar mill associations and associations of
  suga rcane farmers to enable the government to better understand the
  important issues concerning the cane and sugar industry. The industry
  is a precursor to the food and processed food industries and is now
  becoming involved directly with the energy and fuel industry
  (ethanol). Additionally, ethanol is a pure alcohol that can be used as
  a basic starting point to produce other chemicals such as acetic acid,
  ethyl acetate etc. Exports of sugar are different from other
  industries in that they bring in foreign exchange into the country
  almost fully since there is no outflow of foreign exchange due to any
  imports. Sugarcane is an agricultural product, every part of which can
  be put to effective use. Hence, sugarcane can be considered as an
  important agricultural crop in Thailand. Communication, explanation
  and understanding with the government will reduce the risk of
  government policy on the sugarcane and sugar business.

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, 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

  The major risk of the projects are the political risks in Laos and
  Cambodia. In Laos, the difficulties the venture is facing include
  locals’ undefined parcels of lands, and unclearly defined boundary of
  the land under the concession. Negotiations between the company and
  locals are needed. Furthermore, the company needs to promote the
  locals to grow sugarcane for sugar production. In Cambodia, the
  political risk is relatively high, especially the conflict in border
  between Thailand and Cambodia. However, the project is the joint
  venture company which KSL holds 50% of the shares, while another 30%
  of the shares are held by a Taiwanese firm, and the other 20% are held
  by local Cambodian. Advantage that those ventures have is EBA
  (Everything but Arms) quota that both Laos and Cambodia have on
  exporting to the EU at good prices.

  Apart from the political risk factors, there is also risk of the cane
  volume for crushing. Sugarcane plantation is a new thing in both
  countries. There has been a shortage of labor and plantation skills.
  Climate change may also affect the timing for plantation.

  Renewable Energy in Bo Ploy, Kanchanaburi Province

  The venture includes relocation and expansion of the sugar mill,
  currently in Tamaka District to Boploi District, Kanchanaburi
  Province, and business downstream investment--ethanol, fertilizer and
  power plant businesses. The project is still in progress, so it is
  difficult to determine whether it will be successful or not. The
  primary risk factor is applying for licenses, such as an
  environmentally related license, a factory license and BOI investment
  promotion license, before the construction of the factories. There are
  also some risks of being unable to complete the construction in time.
  Moreover, contractors and machinery suppliers may be risk factors.
  There may be risk of difficulty in providing the capital for
  investment. Once the construction is completed, there may be risks
  involving operations, raw material procurement, sugar price
  fluctuation in world markets, and 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

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 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.