Shanghai Asia Holdings

Prospects

As our main products are packaging for cigarettes, the prospects of our Group are underpinned by the general demand of tobacco products in the PRC as well as the growing trend of cigarette companies marketing and differentiating their cigarette brands by using good quality and visually appealing packaging for their products.

Our Directors are of the view that there are strong factors underpinning the growth of our Group.

The tobacco industry in the PRC has been growing over the past few years and the PRC is now the top consumer of cigarettes with a total aggregate annual consumption of 1,643 billion sticks representing an annual per capital consumption of 1,790 sticks as compared to only 792 sticks in 1970.

In addition, the PRC tobacco industry is highly dominated by domestic manufacturers with the CNTC accounting for 99.9% of the market share of cigarettes and only 0.1 % is imported. While the PRC's ascension to the WTO may lead to foreign cigarette manufacturers posing greater competition to domestic manufacturers, our Directors believe that there would still be a captive demand for local Chinese cigarettes with a unique local flavour distinct from imported cigarettes. Furthermore, we are well-positioned to capitalise on the entrance of foreign cigarette manufacturers through our strong links with our Controlling Shareholder, NTIH. NTIH has an established track record and strong working relationships with foreign cigarette manufacturers such as BAT and our Directors believe that we would benefit from these relationships.

Furthermore, as the STMA considered the tobacco industry too fragmented to remain competitive amidst potential foreign competition, recent reforms have been introduced to consolidate the industry into a smaller number of large-sized cigarette manufacturers. This has led to the creation of a highly competitive environment where individual PRC cigarette manufacturers strive to enhance their competitiveness. Our Directors have observed that one of the strategies adopted by these manufacturers to sharpen their competitive edge and achieve a differentiated advantage for their cigarette brands is to use good quality and visually appealing packaging for their products. The increasing affluence of the PRC cigarette consumer has also led to consumers being more discerning and demand better packaging for the cigarettes that they purchase. Our Directors have also noted that cigarettes are increasingly given as gifts and hence consumers demand packaging which are more appealing and presentable. Trends in cigarette packaging have also been moving towards hard-pack packaging rather than soft-pack packaging.

Cigarette packaging has also become increasingly important to counter the treat posed by counterfeit cigaretters in the PRC. In the lights of the problem, cigarettes manufacturers are investing more into cigarette packaging to counter this treat posed by counterfeiters.

Forms of packaging used for this purpose include the use of holographic images and embossed logos on cigarette packs and cartons so as to facilitate consumers in identifying the genuine brands. Our Directors believe that this need to reduce the spread of counterfeit cigarettes will directly improve the demand for our gravure printing capabilities which allow the production of packages which have anti-counterfeiting measures such as embossed images, intricately designed brand logos and sharp images.