Valuation of the Forest and Land Use Right for Yew Bio-Pharm Group, Inc. As of October 28, 2013

Zhiguo Wang

Yew Bio-Pharm Group, Inc.

294 Powerbilt Avenue,

Las Vegas, NV 89148

 

Dear Mr. Wang:

 

In accordance with your authorization, Marshall & Stevens Incorporated (“Marshall & Stevens”, “M&S” or “we”) provided our opinion of value of a land use contract, including the assets situated on the land that are the subject of the contract relative to the current use of the land, (the “Contract” or the “Forest and Land Use Right”) with respect to an approximately 171 hectare (422.549 acre) property located in China (the “Property”). The purpose of this valuation is to assist Yew Bio-Pharm Group, Inc. (the “Company” or “Client”) in connection with a possible acquisition of such Contract. The Property is commonly known as the Wuchang Erhexiang Pingfangdian Forestry Centre, and is located in Harbin City, Heilongjiang Province, China, 150204. It is our understanding that the Contract grants the holder the right to grow and harvest timber on Property and that the Contract expires on November 7, 2051.The date of our valuation is October 28, 2013 (the “Valuation Date”).

 

It is our understanding that we will not be inspecting the Property or determining the bona fides, enforceability, or transferability of the Contract (or any of the rights thereunder), and that we may rely on the Client’s transaction of the Contract. Our engagement does not include the giving of any legal, accounting, brokerage, engineering, agricultural, or environmental advice. This Summary Appraisal Report may be invalid if used for any other purpose.

In the course of our valuation analysis, we relied upon financial and other information obtained from the Company and from various public, financial, and industry sources. As part of this engagement, we did not independently investigate or otherwise verify the data provided, or those obtained from publicly available sources. Thus, we do not express an opinion or other form of assurance regarding its accuracy or completeness. Although we applied principles and procedures that, in our view, appear appropriate, no assurance can be given that the Fair Market Value of the Contract or any other underlying assumptions will not be subject to review or challenge by regulatory authorities or that the conclusions reached would be achieved in a purchase or sale transaction.

 

Yew Bio-Pharm Group, Inc., through its subsidiaries, engages in growing and selling yew trees in the People’s Republic of China. The Company is involved in the cultivation and sale of yew seedlings and trees to state-owned enterprises and private businesses for reforestation in Heilongjiang and Jilin Provinces; and potted yew trees to retail customers. It also provides yew raw materials, including branches and leaves of yew trees for medicinal application in the pharmaceutical industry; and furniture and handicrafts that are made from yew timber. The Company sells its products through a network of distributors, as well as operates a retail store for the sale of potted yew trees, handicrafts, and furniture in Harbin. Yew Bio-Pharm Group, Inc. is based in Las Vegas, Nevada.

 

The current standing forest on the Property are light hard wood mixed forest composed of leaf wood and hard wood mixed forest with Oak, Ehretia, Poplar, and Elm. The forest is sprinkled with young, mid-aged, and mature trees which cannot be divided individually based on the age group. In the mature stands, there are approximately 130,000 trees with age range of 28 to 63 years old, average diameter at 22 centimeters, and average height of 16 meters. The growing stock of the mature stands is approximately 23,480 cubic meters with canopy cover of 0.8. The inclination of the forest is about 15 degrees, and the main ground cover consists of unevenly distributed Eriophorum and Carex at 30.0 percentage coverage with average height of 2.5 meters. The dominant underwoods, which are mainly composed of 180,000 younger trees, unevenly covering 20.0 percent of the forest. A horizon is about 18 centimeters to 20 centimeters with typical dark brown soil. These standing forests are in their mature stage.

 

The Company plans to replant the trees as scheduled, adjust density and promote the growth of the young trees accordingly. We will mainly plant taxus chinensis of five years old or above based on the condition of the harvest cutting.

No single valuation method is universally applicable. The purpose of the valuation, the property to be valued, the effective valuation date, the availability of and access to information, the relevant ownership characteristics, and the specific attributes of the subject company dictate the appropriate value standards and methodologies to be used. Further, because the market for businesses varies widely, several valuation techniques are often used to find a range of likely values.

 

According to the Forest Resource Valuation Guideline issued in 1996 by the Bureau of Forestry (the “Guideline”), it is a recommended practice when appraising real property to consider the following three main approaches:

The assessment of the forest investments generally suggests the examination of all the approaches and relies on the appraiser’s professional judgment to assess what weighting should be applied to the results from the respective methods.

Since the main use of the forest assets on the Property is to supply the building materials and Chinese herb medicine raw materials and it has not been harvested yet since its original purchase in 2001, we utilized the Market Approach and Cost Approach to conduct the valuation.

In principle, the most satisfactory basis for valuing the forest and land use right is to turn to the evidence provided by comparable sales transactions. In researching financial and other information acquired through published sources, three comparable sales transactions were identified from China Forestry Exchange as of the Valuation Date. Below is the brief description of each transaction:

Each of these factors may have a significant effect on the value of the forest and land use right. Other features may also be influential. These include the standard of road infrastructure in the forest, the risks arising from climatic factors and pathogenic agents, etc. When comparing forest and land use right and the prices paid for them, it is also necessary to consider the time at which an example sale took place. All the three identified transactions occurred in 2013 which is close to the Valuation Date.

 

Given the range of factors affecting the value of the forest and land use right, it is unlikely that forests can be found that are closely similar to the Contract to be valued. Achieving a forest-to-forest match is extremely unlikely, as it would require finding forests alike in all respects. Therefore, we made the adjustment to each key factor to transform their comparable transaction prices to reflect the Property’s characteristics including the additional profit that can be generated from the sales of the Chinese herbal medicines raw materials. Below is the table for the adjustment of all key factors:                                                                                                               

(1) The average sales price of all species for building materials based on the price chart provided by Management.

(2) The mature trees can be merchandized sooner than the younger trees. In order to quantify the time value of interest and mantainance cost saved during the additional growth period, we compute the adjustment factor based on the various ages on each group.

(3) Based on the profit that can be made from the sales of the Chinese Herbal Medicines materials per unit in addition to the profit of building materials.

By averaging the adjusted sales price of the three comparable transactions, the concluded Fair Market Value of the Contract is RMB 48.3 million as of the Valuation Date (Exhibit 3).

 

The inflation-corrected compounding rate also considers the additional premium that the investor will ask for to invest in the Company. Per Guideline, the compounding rate should consider the base risk-free rate for the compensation of inflation risk as well as the specific investment risks associated with the subject property.

 

Base on the five-year and over interest rate published by Bank of China as of the Valuation Date, the based risk-free rate of 6.6 percent was selected. In addition, a 1.0 percent industry risk premium was added to reflect the additional return that the investor would like to ask for to undertake the industry-specific risks such as natural disasters, fire risk, pest risk, etc. At last, a 2.0 percent company-specific risk was incorporated into the expected rate of return to reflect the operation risk associated with the Company.

 

As indicated in Exhibit 2, the 9.6 percent compounding rate was utilized to grow the historical investment to the Valuation Date. The concluded Fair Market Value of the Contract under the Cost Approach is RMB 46.0 million (Exhibit 4).

 

Based on the valuation indications derived from Market Approach and Cost Approach, we weighted them equally to arrive at the concluded value of RMB 47.2 million for the Contract as of the Valuation Date. As the foreign exchange rate between U.S. Dollar and RMB is 6.1 as of the Valuation Date, the concluded value of the Contract is $7.8 million in U.S. Dollars.

 

The opinion of value expressed in this Summary Appraisal Report is contingent upon the assumptions and limiting conditions contained herein.

 

A copy of this report and the data from which it was prepared are retained in our files and are available for your inspection on request.

Statement of General Assumptions and Limiting Conditions

 

No investigation of legal title was made, and we render no opinion as to ownership of the Company or its underlying assets.

 

The date of value to which the conclusions and opinions expressed in this Summary Appraisal Report apply is October 28, 2013. The dollar amount of any value reported is based on the purchasing power of the RMB and U.S. dollar as of the Valuation Date. The appraiser assumes no responsibility for economic or physical factors occurring subsequent to the date of value that may affect the opinions reported.

 

The Company’s corporate office or the subject Property was not visited in the course of this appraisal assignment; however, conversations were held with Management regarding financial results, operations, and the outlook for the business.

 

No opinion is intended to be expressed for matters that require legal or specialized expertise, investigation, or knowledge beyond that customarily employed by appraisers.

 

The fee paid to Marshall & Stevens Incorporated in connection with the rendering of this Summary Appraisal Report has not been contingent upon the conclusions reached or the substance presented.

 

Marshall & Stevens has no financial interest in the Company, or any of its affiliates.

 

Information supplied by others that was considered in this valuation is from sources believed to be reliable, and no further responsibility is assumed for its accuracy. We reserve the right to make such adjustments to the valuation herein reported as may be required by consideration of additional or more reliable data that may become available.

 

 

Statement of General Assumptions and Limiting Conditions

 

This Summary Appraisal Report is confidential. Neither all nor any part of the contents of this appraisal shall be copied or disclosed to any party or conveyed to the public orally or in writing through advertising, public relations, news, sales, or in any other manner without the prior written consent and approval of Marshall & Stevens Incorporated.

 

Depositions, expert testimony, attendance in court, and all preparations/support for same, arising from this appraisal shall not be required unless arrangements for such services have previously been made.

 

Our conclusions assume the continuation of prudent management policies over whatever period of time is reasonable and necessary to maintain the character and integrity of the Company.

 

All opinions of fair market value are presented as Marshall & Stevens Incorporated's considered opinion based on the facts and data appearing in the Summary Appraisal Report. This Summary Appraisal Report has been prepared for the sole purpose stated herein and shall not be used for any other purpose.

 

We assume there are no hidden or unexpected conditions of the Company or the underlying assets that might adversely affect value. Further, we assume no responsibility for changes in market condition, which may require an adjustment in the appraisal.

 

Hazardous substances, if present within a business, can introduce an actual or potential liability that may adversely affect the marketability and value of the Company or the underlying assets. In this appraisal, no consideration has been given to such liability or its impact on value.