Growth Strategy

Looking ahead, the Company’s goal is to capitalize on China’s modified plastics growth trend, with a specific focus on applications in the auto sector, and to eventually be the leading modified plastics manufacturer in China. Growth strategies include:

• Continuing to increase production capacity. Over the past five years, the Company has consistently increased production capacity to meet the rising demands of the automotive industry in China. As of December 31, 2010, the Company had installed an annual theoretical production capacity of 165,000 MT, or realistic capacity of 135,000 MT assuming historical utilization rates from recent years. The Company intends to continue to strategically increase production capacity to meet customer demands from both expanded geographical location and future downstream sector growth. The goal is to reach an annual capacity of approximately 200,000 MT by 2013 and 300,000 MT by 2015.
• Focus on R&D and develop new product offerings. Currently China XD is utilizing their R&D capabilities to obtain further product certifications, develop new products, applications and technologies. Approximately 20% of the automotive plastic applications are currently undergoing trial manufacturing periods to obtain the necessary certifications. In addition, the Company is developing new products for automotive applications to expand the product portfolio, including initiating R&D on modified plastic for use in electric vehicles. They are also developing specialty engineering plastics and bio-plastics for use in other applications such as high-speed trains, vessel-propulsion systems, mining and oilfield equipment and aerospace equipment.
• Expand customer base domestically and internationally. The automotive plastics market in the PRC is highly fragmented with significant barriers to entry. Although the Company currently has approximately 6% of the market share, customer coverage is concentrated in the northeast regions. Management seeks to increase market share in northeast China, and also expand the Company’s reach to northern and eastern China. In addition, they intend to increase sales in overseas markets and raise exports to 10% of sales over the next three years.
• Pursue selective strategic acquisitions. While the Company has experienced substantial organic growth, plans are to pursue a disciplined and targeted acquisition strategy to accelerate growth. This strategy will focus on strengthening presence in certain geographic locations, improving penetration in attractive markets, enhancing R&D capabilities and acquiring new markets or customers.

On August 15, 2011, the Company entered into a Securities Purchase Agreement with MSPEA Modified Plastics Holding Limited, a company affiliated with Morgan Stanley, for the issuance of 16,000,000 shares of series D junior convertible preferred stock at an aggregate purchase price of $100.0 million, or $6.25 per share. The proceeds from the transaction were allocated to accelerating the Company’s capacity expansion in China and production line upgrade plans as well as investing in development of new products to take advantage of rapidly growing market opportunities and other general corporate purposes.

Significant items in the Agreement included the privilege of MSPEA’s nominating two board members. In addition, the Company was to retain a Big 4 accounting firm as its independent registered public accounting firm. China XD chose KPMG as their accounting firm. A key holder lockup was agreed to by Mr. Han, the Company’s CEO, and net income targets were set for FY 2011 (RMB 360 million, or approximately $53 million), FY 2012 (RMB 468 million, or approximately $69 million) and FY 2013 (RMB 608 million, or approximately $89 million).

October 2010 Common Stock Direct Offering

In October of 2010, the Company offered an aggregate 3,333,334 shares of common stock to certain institutional investors at $6 a share for gross proceeds of $20 million. Net proceeds of $18,821,504 flowed through to the Company. Each share of common stock received a warrant to purchase a number of shares equal to 50% of the common stock purchased. Each warrant carried an exercise price of $6.00.

Competitive Strengths

The Company believes that a combination of unique competitive strengths drive its effectiveness within the automotive modified plastics market in the PRC:

• Established distribution model. With eight distributors throughout China, the Company has established distribution networks that cover northeast, north and east China, with a current focus on the northeastern area. China XD enters into distribution agreements with local distributors in areas where large automobile manufacturers are located. By leveraging the proximity of distributors to the automobile manufacturers, they can enhance relationships with customers, and quickly respond to local market demand.
• Leading market position with high barrier to entry. The Company believes that it is China’s leading specialized manufacturer of modified plastic for automobile parts in terms of sales volume and production capacity, with a market share of approximately 6% in 2010. The industry is growing rapidly and is highly fragmented with the top three domestic producers occupying less than 18% of the market.

• Long-term relationships with reputable customers. Seniors management has been involved in the business of modified plastics since the Company’s former affiliate, Harbin Xinda Nylon Factory, began operations in 1985. The Company benefits from the industry connections and experience of senior management which has enabled China XD to establish long-term customer relations and strong industry recognition.
• High quality products with lower costs. The Company purchases its raw materials from a small number of large suppliers who procure resins locally or internationally. By concentrating purchases from a small group of suppliers, the Company is able to keep the costs of purchasing raw materials relatively low.
• Strong customer-oriented R&D capabilities. The modified plastics industry is characterized by rapid development and increasing demand for high quality products. With strong R&D capabilities, China XD has successfully passed OEM automakers’ certification processes in the past and continually introduces new and high quality products to the market.
  The R&D team is staffed with 90 professionals, of whom 46 have Ph.D. and Master’s degrees. In addition, the Company has developed cooperative research programs with a number of the leading technology centers in China and has 11 patent applications pending with the State Intellectual Property Office.

Mr. Qingwei Ma, COO and Director. Mr. Ma has been General Manager of Harbin Xinda since it was founded. Prior to joining Harbin Xinda, he was employed by Harbin Xinda Nylon Factory as Manager of Quality Assurance, Manager of Research and Development, and finally as Production Manager. Mr. Ma received his bachelor’s degree in chemical engineering of high polymers from the Northern China Technology University.

Mr. Yong Jin, Independent Director. Mr. Jin is currently employed in the Chinese Academy of Engineering. He was previously a professor at the Chemical and Engineering Department of Tsinghua University. Mr. Jin has published and presented more than 350 papers in journals and at conferences domestically and internationally. Mr. Jin also has more than 30 patent applications in his name, and received his engineering degree from Ural Technical University.

Mr. Lawrence W. Leighton, Independent Director. Mr. Leighton has 45 years of experience in international investment banking including Lehman Brothers, Bear Stearns & Co., Chase Manhattan Bank and Credit Agricole. Mr. Leighton received his bachelor’s degree in engineering from Princeton University and a master’s degree from Harvard Business School.

Mr. Robert Brisotti, Independent Director. Mr. Brisotti has over 20 years of experience in the securities industry as an investment banker and securities analyst, as well as 14 years of experience in the plastics industry as a business manager and chemist. Mr. Brisotti has a bachelor’s degree in chemistry from Lehigh University, an MS in chemistry from the University of Rhode Island, and an MBA in finance from Columbia University.

Mr. Linyuan Zhai, Independent Director. Mr. Zhai worked for China FAW Group Corporation for 34 years and brings his experience in technology, production and business management. He currently serves as general manager of FAW Sihuan Products Co., Ltd., an automobile manufacturing company. Mr. Zhai received his degree in business management from Changchun University.

Newly appointed directors, Mr. Eddy Huang and Mr. Jun Xu have been added to the Board pursuant to a recent $100 million securities purchase agreement with a Morgan Stanley affiliate (MSPEA Modified Plastics Holding Limited). Their bios were not immediately available.

• Revenue was a record $88.2 million, an increase of 42.2% from the second quarter of fiscal 2010
• Gross profit was $22.0 million, an increase of 48.9% from the second quarter of fiscal 2010
• Gross profit margin was 25.0%, compared to 23.9% in the second quarter of fiscal 2010
• Net income attributable to common shareholders was $14.4 million, compared to a loss of $3.1 million in the second quarter of fiscal 2010
• Total volume shipped was 36,513 metric tons, up 23.5% from 29,567 metric tons in the second quarter of fiscal 2010

Mr. Jie Han, Chairman and CEO commented, “I am very pleased to report another strong quarter, including record revenue and profit growth. Our continued expansion, increased investment in R&D and concentration on higher-margin and higher value-added products increased our overall gross margin from 23.9% to 25.0% and our average selling price (ASP) from $2,097 to $2,415. We continue to experience strong demand for our products which helped drive our total volume shipped in the second quarter of 2011 to 36,513 metric tons, up from 29,567 metric tons in the second quarter of 2010.”

Mr. Han continued, “China is the largest automobile market in the world and continues to experience significant and growing demand for high-quality modified plastics. Our recently announced purchase of 20 additional production lines and 77 sets of specialized R&D equipment, expected to be fully utilized in the first quarter of 2012, will increase capacity by 90,000 metric tons in 2012 and help us meet the expanding demand for our products.

“We believe this strategy will strengthen our leading position in the automotive modified plastics sector and enable us to continue to deliver strong financial performance.”

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August 15 – China XD Plastics Announces US$100 Million Equity Investment by Morgan Stanley Private Equity Asia

China XD Plastics Company Limited (NASDAQ:CXDC), one of China’s leading players engaged in the development, manufacture, and sales of modified plastics primarily for automotive applications, today announced that Morgan Stanley Private Equity Asia (“MSPEA”), one of the leading private equity investors in Asia, has agreed to make a US$100 million equity investment for a significant minority ownership stake in the Company, subject to certain customary closing conditions. The investment by MSPEA will help China XD Plastics to expand and further upgrade its production capabilities.

About Morgan Stanley Private Equity Asia

Morgan Stanley Private Equity Asia (“MSPEA”) is one of the leading private equity investors in Asia Pacific, having invested in the region for over 18 years. The team has invested approximately US$1.8 billion in Asia, primarily in structured minority investments and control buyouts in profitable, growth-oriented companies. MSPEA has an experienced investment team led by senior professionals with extensive networks, in-depth market knowledge and the ability to apply international investment principles within each local context. MSPEA has offices located in Hong Kong, Shanghai, Mumbai, Seoul, Tokyo and New York.

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