Dear Shareholders,

2009 was a year of mixed fortunes. As organisations worldwide struggled in the first half to find their footing in the aftermath of the financial crisis that rocked economies globally, the market took a surprising turn for the better in the latter half of the year. While many spectrums of the economy reported statistics pointing to nascent signs of recovery, the upturn was not across the board as some sectors continued to experience uncertainties.

On the back of jittery market sentiments and consumer confidence, the food and catering industry in the PRC saw an overall decline in business as consumer spending slowed. As food manufacturers decreased their orders, leading to overall lower sales volume and average selling prices, China Essence recorded a 6% decrease in revenue to RMB834.3 million, and a 25% decline in net profit to RMB136.4 million for the full year ended 31 March 2010 ("FY2010").

Broad-based demand drives continued growth of the potato starch industry

We are nevertheless heartened to report slow but steady signs of recovery in performance, with revenue and net profit posting sequential quarter-on-quarter increases in 2Q and 3Q FY2010, and year-on-year improvements in 4Q. In particular, we are pleased with the continued strong demand for our key product, potato starch, which saw a strong pick-up in sales and average selling prices towards the later part of the year.

This reinforces our optimism in the long-term prospects of our business, as fundamental demand for potato starch in the PRC remains strong. Potato starch continues to be an important raw material in consumer staples and an additive in a wide variety of non-food sectors such as industrial and pharmaceutical products. In China, particularly, where the potato starch space is highly-fragmented and traditionally dominated by small-scale producers, there has been in recent years an increasing awareness of the many uses and applications of potato starch, paving the way for large-scale commercial potato starch production.

In addition, the per capita usage of potato starch in China is a mere 0.8kg per annum, compared to 10kg in developed countries such as Europe and Japan. As China continues to experience exponential economic and population growth, the increasing industrialisation of the country will spur demand for potato starch in areas beyond the food and catering industry. These trends bode well for China Essence, having established ourselves as a frontrunner and the largest producer in the burgeoning potato starch industry in China. With our augmented product range, highlyexperienced work force, extensive sales network and production capacities, we are well-poised and excited to capitalise on this long-term growth trend.

Building a stronger China Essence

As a forward-looking company, China Essence is continuously looking at ways to boost earnings and strengthen our leadership position.

Firstly, our strategy to strengthen our earnings base via the broadening of our product range has begun to bear fruit. In calendar year 2009, we successfully introduced two new potato by-products - potato protein and potato fibre - which have been well-received by our customers. The two new products contributed positively to FY2010, accounting for RMB49.7 million or approximately 6% of total revenue, a 672% jump from the previous year. We are extremely encouraged, and will continue to develop this product segment into a key growth driver for China Essence moving forward.

In addition, we remain conscientious in our efforts to expand our sales and distribution channels to penetrate new regions in the PRC, as well as capture market share in existing markets. Currently, we have a large distribution network of 106 distributors in 21 provinces across 48 cities, giving us a wide market reach. In addition to selling through distributors, we have also been actively engaging leading food manufacturers, including some of the largest noodle producers in China, to establish direct sales channels. By selling directly to end customers, we aim to secure better margins, further raise China Essence's profile in the industry and boost our negotiating power.

Thirdly, we are committed to strengthening our solid foundations in terms of product quality and production capacities. Equipped with advanced equipment from Holland and Denmark, we are able to produce high quality potato starch that distinguishes China Essence from the competition, enabling us to strengthen distributors' confidence in us and build brand equity. To support our production needs to cater to the growing market, construction of our two new potato starch production plants in Nenjiang, Heilongjiang and Zhalantun, Inner Mongolia, as well as the doubling of existing potato and fibre production capacities, are well under progress. These capacity expansions are slated for completion by the 2010 harvest season (August to November), offering further upside to revenue growth.

Prudent corporate and financial management

In times of difficulties, I am fortunate to have the support of a dedicated management team and staff who share my passion for the potato starch business. As the success of an organisation lies in the quality of its people, we are constantly working hard to broaden and refine the skills of our team, both in management and processes, which has led us to pull through extremely challenging conditions and introduce new products in the market.

As we constantly review and align our corporate governance and risk management processes with the best practices in the industry, we also remain prudent in our capital expenditure and financial management, and take calibrated steps to ensure the steady growth of the Group.

On this note, I would like to take the opportunity to assure all shareholders that China Essence observes strict financial discipline and manages its working capital needs and debt obligations in the best possible ways in the interest of the Group, which we will elaborate upon in the Risk Factors and Management section of this report.

Looking ahead

While the wider economic climate remains tentative, we remain confi dent in the long-term broad-based demand drivers for potato starch. Supported by our expanded product range and production prowess, we are well-positioned to ride out not only current challenges, but also to capitalise on demand opportunities in the eventual market recovery.

I would like to thank all management and staff for their continuous eff ort and dedication over the past year, as well as our business associates for their support of the Group. I would also like to welcome Mr Li Jiquan, an Executive Director to the Board. Mr Li brings with him 5 years of experience in potato starch industry which would be a valuable addition to China Essence.

At the same time, we bid farewell to Mr Tang Xiyi who has been with us since 2005. We are extremely grateful for his contribution to the management of our operations and his unwavering commitment to China Essence.

Last but not least, we are grateful to you, our shareholders, for your belief in the goals and long-term vision of China Essence, and your steadfast support. Together we are confi dent that we will overcome difficulties and work together to build a stronger China Essence.

Yours sincerely

Zhao Libin
Executive Chairman and Chief Executive Officer