Sino Techfibre Business Update

SINO TECHFIBRE LIMITED

BUSINESS UPDATE

The Directors refer to the Group’s press release dated 14 November 2007, and would like to provide an update on the progress of the installation of our new Pattern Moulding Paper (PMP) production lines.

In the said press release, it was stated that the US-made machinery would be installed “toward the end of November”, and that the Group was “definitely on track to commence trial production with two PMP production lines by end December 2007”.

Whilst the renovation of the factory has been completed, and part of the ancillary equipment have been installed, we have been informed by the US manufacturer that the critical machinery would take longer than expected to fine-tune. We are pleased to inform that our PMP engineer, who is in the US, has inspected the said machinery and has confirmed that the machinery has been completed and meets all of our performance specifications.

He has advised that the machinery is already on its way to China and is now expected to arrive in China by mid February 2008 and that trial production could only commence in 2Q2008. We hope that our investors and shareholders appreciate the complexity of the PMP technology and that it is absolutely critical that we ensure that the machinery runs according to our stringent specifications before leaving the United States. As a gesture of goodwill, the manufacturer of the machinery has agreed to compensate by offering us free spares for one year.

We are confident that the PMP production will roll-out successfully. However because of the complexity of the technology, a longer gestation period is required for fine tuning and trial production. We envisage that we will be able to achieve a utilization rate of between 40% to 50% in the second half of FY2008, and as such, the annualized utilization rate for full year 2008 is expected to be between 20% to 25%.

Potential of the PMP Business

PMP is primarily used for transferring patterns and textures on to synthetics leathers such as PU and microfibre as well as PVC and even genuine leather. Currently, China is totally reliant on foreign imports of PMP, importing approximately 100,000 tonnes of PMP from six producers in the United States, United Kingdom, Italy and Japan. Sino Techfibre will be the first and only in China, and the fifth country in the world, to have this capability of producing this paper which is essential in transferring patterns on to synthetic leathers, PVC and even genuine leather. From our industry knowledge, China has been importing about 100,000 tonnes (or 400 million metres) of PMP, and our initial total production capacity of 40 million metres is only about 10% of total demand.

Currently, all Chinese manufacturers source PMP from overseas, our strategy is to sell around 10% - 20% discount to the imported price, which we project, will allow us to derive a good gross margin. Already, many distributors have contacted us about the possibility of distributing our PMP products, however, we want to focus on successfully installing our production lines first. We are confident that being users of PMP ourselves, we will be able to achieve the best possible quality standards, particularly since our PMP machinery is predominantly based on the US technology, which is deemed to be the best in the world. Currently the demand for certain patterns have been phenomenal, and the whole of China has run out of stock of some of these patterns. Because of the long lead time required to import these PMP products, we expect the tight supply situation to continue for some time.

Additional PMP production lines ordered

The Group had placed a deposit of RMB125 million for its third and fourth PMP production lines which is expected to be installed by the end of 2008. These additional lines will double our PMP production capacity to 80 million metres which will be used not only for our capacity expansion, but for the development of new products as well.

Furthermore, using our current PMP prototype machine, our R&D team has discovered that by using acrylic as raw material, the PMP prototype machine is able to produce a type of reflective material, which could possibly be used for on roads and expressways.

However, further research and development on this potential product would need the use of the full-scale PMP machine. From what we understand, China currently imports reflective products used on its roads and expressways which we believe to be from 3M. Should we be successful with the R&D of this product, we may have another new product with big potential.

New Production Capability - TPU

In line with the Group’s continual efforts in developing new, cutting-edge products, Sino Techfibre has successfully installed new equipment for the launch of a new product – TPU – a new-generation PU variant with enhanced breathability, wind-proof and waterproof properties because of its ultra-thinness -- that is ideal for the lining of outerwear and raincoats, sports shoes, gloves, medical equipment, and packaging materials.

TPU is expected to replace the current generation of protective lining materials, which is PU-based, and used by the uniformed groups such as PLA and Ministry of Public Security. Currently, Sino Techfibre imports a thicker type of TPU from Taiwan which is used as a lining for rainwear and wintercoats.

This new, ultra-thin TPU is jointly developed with the PLA’s Technology Research and Development Centre for Military Product Supplies of Synthetic Leather and it is an environmentally- friendly product. With the increasing demand from the market, the market potential of this product is huge.

Having in-house capability to produce TPU film will enable the Group to derive higher margins and command higher average selling prices as we have a wide range of valueadding production processes that can churn out various properties and effects according to customer preferences. We envisage that our new TPU film, when fused with cloth materials, will be able to fetch a higher selling price than those using imported TPU from Taiwan.

Our main TPU machine, which has the capability to produce multi-layer TPU (up to seven layers) with various properties such as anti-bacterial, microbial, is currently the one of its kind in Asia.

As the machines are currently at testing stage, it is difficult for us to determine the exact production capacity. However, assuming that the machines only use for TPU, we expect the production capacity to be approximately 10 million metres. We expect TPU to contribute to our revenue from 3Q2008.

Outlook

Whilst the PMP and TPU businesses are exciting for the Group, we wish to reiterate that our existing PU and microfibre business continues to enjoy strong demand and solid growth, not only from the Government sector, but from domestic and overseas customers as well. Coupled with its continual effort to enhance its product mix, the Group expects average selling prices and gross profit margins for the two product segments to remain strong.

Barring unforeseen circumstances, Sino Techfibre’s directors are optimistic of the Group’s growth prospects particularly with strong demand for PU and microfibre synthetic leathers in China and overseas, and the Group’s continual effort to expand production capacity and introduce new sources of revenue such as PMP and TPU.

BY ORDER OF THE BOARD
Li Wenheng
Chief Executive Officer
Date: 3 January 2008