The Mainland China's economy is expected to continue its growth momentum supported by a growing domestic consumption power and determined State government policies.

The cement sector in Mainland China is encountering the dilemma of rising demand and rapidly expanding new capacity, which is likely to outpace the growth in demand. However, the cement industry has a strong territorial characteristic, and the market equilibrium varies significantly from region to region. There is also a relatively high proportion of inefficient capacity from obsolete facilities, which are due to be phased out by the government by the year 2012. The government's policy to control cement capacity expansion will also help to maintain a balance in the supply and demand.

In Southern China, in particular the more affluent coastal region, demand for cement is driven by enormous infrastructure development within and between major cities as well as urbanisation in the hinterland of the coastal area. The effect was compounded by a bullish property market in the Guangdong province.

With an established leading position in Southern China, the Group's massive facility build-up in the Guangxi Autonomous Region, Guangdong province and Fujian province has laid an effective platform for its market penetration and further consolidation of its strong presence in the region's worthy industrial and urban areas and their peripheral rural districts.

The stronger cement selling prices recorded in the last quarter of 2009 are expected to be sustained by demand from major infrastructure projects, which have an average construction period of two to three years. New residential developments in the region, on the other hand, will expedite the consumption of cement as developers are trying to replenish their saleable floor area.

With limited additional capacity and a relatively high proportion of obsolete capacity pending replacement, cement price in Guangdong province is expected to remain at a healthy level for the current year.

After years of organic growth in Southern China, the Group began to actively engage in mergers and acquisitions of advanced cement production facilities in recent years. This approach allows the Group to expedite its expansion in scale of operation and market coverage, and to comply with the State's policy of restricting new facility development.

Following the acquisition of TCC (Gui Gang) from its parent company, the Group announced one of the largest takeovers in Mainland China's cement industry at the end of 2009. The Group's HK$3.8 billion bid for Upper Value Investments Limited ("Upper Value"), a holding company with interests in an array of clinker and cement production lines in Guangdong province, Yunnan province, Chongqing municipality and Sichuan province, Liaoning province and Guizhou province, had been approved by its shareholders in February 2010.

Upon completion of the transaction, which is expected in the first half of the current year, the Group will significantly extend its market reach to southwestern, western and northeastern parts of China. The additional capacity from the acquisition will solidify the Group's indisputable dominant position in Guangdong province and enlist it among the top tier cement conglomerates in Mainland China.

The Group has planned to develop a 4 million-metric tonnes grinding mill in Dongguan to provide nearby processing support to the Pearl River Delta. Under the State's recently promulgated policy, the plan is now subject to review and further approval from relevant authorities.

At Yingde, all of its four production lines are in efficient operation. When running at full capacity with optimum utilisation, the Yingde plant can generate a sales volume of around 10 million metric tonnes of clinker and cement per annum. The plant's two residual heat generation units were commissioned in the second half of 2009. Their full year effect is expected to further lower energy costs in the current year.

TCC (Gui Gang) will be able to further improve cost-efficiency in the current year. Phase II of the Gui Gang plant was put into service in the second quarter of 2009. They are expected to further enhance efficiency in the current year. In addition, the plant's two residual heat generation units, inaugurated in the second half of 2009, can amplify their cost saving effect, reducing one-third of the plant's electricity cost.

Transportation costs are likely to reduce, with TCC (Gui Gang)'s terminal and pier facilities at Yujiang river, a main tributary of Xijiang, becoming fully operational and the Xijiang water table resuming its normal level.

TCC (Gui Gang)'s full year results will be consolidated into the Group's accounts in the current year. It is, therefore, expected to significantly enhance the Gui Gang plant's contribution to the Group.

With the inauguration of the second production line in the first quarter of 2010, the Jurong plant will lift its annual capacity to a total of 4.5 million metric tonnes of clinker and cement. A significant portion of the plant's additional capacity will be consumed by the Fuzhou plant. The cooperation will generate mutual benefits, to both facilities in both costs and sales.

The Jurong plant's energy saving residual heat generation units will also become operational in the last quarter of this year. With the expected cost reduction from these facilities, the Jurong plant will be able to improve its cost-efficiency.

The Fuzhou plant is expected to lower its costs, with the supply of clinker from the Group's Jurong plant in the current year. An improved utilisation of the Fuzhou plant will help to strengthen its operation efficiency.

The cement industry is undergoing a phase of transformation. Supported by State policies, the industry is accelerating its pace in consolidation and elimination of inefficient capacity. We believe only those large cement enterprises with a massive scale of operation, extensive market reach and state-of-the-art facilities are able to stay ahead of market competition amidst this process of transformation.

It is for this belief that the Group maintains a rapid pace of expansion both in terms of capacity and geographical coverage. With the completion of the acquisition of Upper Value, the Group will have an attributable annual capacity of over 40 million metric tonnes of cement, clinker and slag powder. This scale of operation will enrol it in forefront of Mainland China's cement industry, and enable it to command a sizable share in regional markets.

Only with these attributes will the Group be able to embrace the upcoming changes in the industry and to continue its healthy ongoing development.