Ann: PET Board Changes, page-8

Hi Inchiquin. On reflection, I wonder if this is related to introducing another Board member with wider experience of Chinese water solutions and services. PET is moving from specialising in the application of Phoslock to a wider range of offerings. The Australian Directors have a finance and management backgound, with a detailed knowledge of Phoslock as well in Robert Schuitema's case of course, but not of wider water engineering and services (particularly in China). So it is not just about getting offices more geographically spread in China to help get work as was mentioned at the AGM as desired by our Chinese partners.

It was flagged at the AGM we are looking not only at buying a zeolite mine, but taking over small private Chinese companies that can add to our wider water offering. It therefore makes sense to not only strengthen our relationship with BEWG, which provides our contract leads, but also to get wider experience of the Chinese water industry including engineering on the Board. We will need it not only in running and expanding our offering in China, but also in analysing the right targets and developing our strategy in broadening the range of things we do. The role of the Australian Directors will be important in ensuring we do not expand the cost base too quickly before we can guarantee a regular flow of work. The dependence on big brother BEWG for work (while great in the short run) still makes me a bit nervous unless we can diversify our sources of work both within and outside China.

There is still the question of why this appointment happened 2 weeks after the AGM, rather than being arranged, announced and explained beforehand. Was this always planned, or is there some reason it suddenly became important? However, the rationale makes more sense to me if it is part of the planning to broaden the Board expertise in Chinese water management as the business evolves.

The risk to us becomes too much focus on China , particularly if we rely on BEWG for clients. It is not clear to me whether we are marketing ourselves to other Chinese companies, or if all the business in China comes via BEWG, which would make us very dependent on big brother. The AGM did flag we are increasing our Phoslock marketing efforts outside China, which seems highly desirable in the interests of not becoming too dependent on one source of contract leads. In the longer run I suppose the other question is whether we do more than sell Phoslock outside China and start selling our wider offering elsewhere as well. Better to learn to walk before we start running of course.

As an aside I asked at the AGM about whether we can get gross margins of 50% on our engineering work as we do on Phoslock. Phoslock is unique so it seems unlikely to me that we can get the same margin on general water engineering. I took Robert's answer to be that they were trying to find ways to improve the margin on engineering (by for example adding cheap zeolite sources upstream) and I assume adding other products apart from Phoslock to what we offer. I suspect the barriers to entry on our engineering business are lower than when Phoslock is involved, so it seems unlikely to me that we can get the same margin. Why would BEWG give us work if others can do the same work cheaper? Finding ways to differentiate our offering (where Phoslock is not involved) is therefore important.

The issues for the Board are becoming much more complicated than when we were just trying to sell one product.