THE CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer or other registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Shang Hua Holdings Limited , you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer, registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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SHANG HUA HOLDINGS

SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock code: 371)

SUBSCRIPTION OF NEW SHARES AND BONDS GRANT OF OPTIONS TO SUBSCRIBE FOR BONDS WHITEWASH WAIVER CHANGE OF COMPANY NAME AND INCREASE IN AUTHORISED SHARE CAPITAL

Financial Adviser to Shang Hua Holdings Limited

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Macquarie (Hong Kong) Limited

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

South China Capital Limited

A letter from the Board is set out on pages 5 to 22 of this circular. A letter from the Independent Board Committee containing its advice to the Independent Shareholders is set out on page 23 of this circular. A letter from South China Capital containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 24 to 45 of this circular.

A notice convening a special general meeting of the Company to be held at Room 1601, 16/F., Cosco Tower, No. 183 Queen’s Road Central, Sheung Wan, Hong Kong on Tuesday, 4 March 2008, at 3:00 p.m. is set out on pages 76 to 78 of this circular. Whether or not you are able to attend the special general meeting, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit the same at the office of the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjournment thereof should you so wish.

for identification purpose only

18 February 2008

	Page
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Letter from South China Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Appendix I – Financial Information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	46
Appendix II – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	68
Notice of the SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76

DEFINITIONS

In this circular, the following expressions shall have the meanings set out below unless the context requires otherwise:

“Announcement”	the joint announcement dated 28 January 2008 of the Company
	and BEHL regarding, among other things, the Subscription
	Agreement and the Whitewash Waiver
“associate(s)”	has the meanings ascribed thereto under the Listing Rules
“BEHL”	Beijing Enterprises Holdings Limited, a company incorporated in
	Hong Kong with limited liability, the shares of which are listed on
	the Main Board of the Stock Exchange
“Board”	the board of Directors
“Bonds”	the Firm Bonds, the First Option Bonds and the Second Option
	Bonds
“Bye-Laws”	by-laws of the Company
“Call Options”	the First Call Option and the Second Call Option
“Company”	Shang Hua Holdings Limited, a company incorporated in
	Bermuda with limited liability, the shares of which are listed on
	the Main Board of Stock Exchange
“Completion”	completion of the Subscription Agreement
“Completion Date”	the date on which Completion takes place
“Conversion Shares”	Shares to be issued upon conversion of the Firm Bonds, the First
	Option Bonds or the Second Option Bonds (as the case may be)
“Director(s)”	director(s) of the Company
“Executive”	the Executive Director of the Corporate Finance Division of the
	SFC or any delegate of the Executive Director
“Firm Bonds”	the zero coupon convertible bonds due 2011 in the aggregate
	principal amount of HK$200,000,000 to be issued by the
	Company to the Subscriber pursuant to the Subscription
	Agreement
“First Call Option”	an option to be granted by the Company to the Subscriber to
	require the Company to issue the First Option Bonds at their full
	face value to the Subscriber or its nominee as the Subscriber may
	direct pursuant to the Subscription Agreement

DEFINITIONS

“First Option Bonds” the zero coupon convertible bonds in the aggregate principal amount of HK$300,000,000 to be issued by the Company pursuant to the exercise of the First Call Option “Group” the Company and its subsidiaries

“HK$” Hong Kong dollars, the lawful currency of Hong Kong “Hong Kong” The Hong Kong Special Administrative Region of the PRC “Independent Board Committee” an independent board committee of the Board comprising the independent non-executive Directors, namely, Messrs. Shea Chun Lok Quadrant, Chan Wai Kwong Peter and So Kwok Keung
“Independent Shareholders” Shareholders other than the Subscriber, BEHL and parties acting in concert with any of them and their respective associates and those parties who are involved in, or interested in, the Subscription Agreement and/or the Whitewash Waiver
“Independent Third Party(ies)” a third party independent of the Company and its connected persons (as defined under the Listing Rules)
Independent Financial Adviser” or South China Capital Limited, being a licensed corporation to “South China Capital” carry out type 6 (advising on corporate finance) regulated activity as set out in Schedule 5 to the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders
“Initial Conversion Price” the initial conversion price of each Conversion Share of HK$0.40 “Latest Practicable Date” 15 February 2008, being the latest practicable date prior to the printing of this circular for ascertaining certain information set out in this circular
“Last Trading Date” 9 January 2008, being the last trading day of the Shares on the Stock Exchange prior to the suspension of trading of the Shares with effect from 2:30 p.m. on the same day
“Listing Committee” the Listing Committee of the Stock Exchange “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Long Stop Date” 31 July 2008 or any later date as agreed by the parties to the Subscription Agreement

DEFINITIONS

“Macquarie”	Macquarie (Hong Kong) Limited, being a licensed corporation
	to carry out type 6 (advising or corporate finance) regulated
	activity as set out in Schedule 5 to the SFO and the financial
	adviser to the Company
“MOU”	the memorandum of cooperation dated 9 January 2008 between
	the Company and BEHL
“Monthly Announcement”	announcement to be made by the Company to keep the Shareholders
	informed of the level of dilution and details of conversion after
	the issue of the Firm Bonds, the First Option Bonds and the
	Second Option Bonds
“PRC”	the People’s Republic of China, for the purpose of this circular,
	excludes Hong Kong, the Macau Special Administrative Region of
	the People’s Republic of China and Taiwan
“PWL”	Pioneer Wealth Limited, a company incorporated in the British
	Virgin Islands and ultimately and beneficially owned by Ms. Lucy
	Du as to 50% and Ms. Helen Zhang as to 50%
“Possible Acquisition”	the possible acquisition of an interest in a company which is
	principally engaged in sewage purification and treatment in the
	PRC, brief details of which were disclosed in the announcement
	of the Company dated 14 August 2007
“Second Call Option”	an option to be granted by the Company to the Subscriber to
	require the Company to issue the Second Option Bonds at their
	full face value to the Subscriber or its nominee as the Subscriber
	may direct pursuant to the Subscription Agreement
“Second Option Bonds”	the zero coupon convertible bonds in the aggregate principal
	amount of HK$200,000,000 to be issued by the Company
	pursuant to the exercise of the Second Call Option
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“SGM”	special general meeting of the Company to be held at Room 1601,
	16/F., Cosco Tower, No. 183 Queen’s Road Central, Sheung Wan,
	Hong Kong on Tuesday, 4 March 2008, at 3:00 p.m. to consider
	and, if thought fit, to approve, among other matters, the
	Subscription Agreement, the transactions contemplated thereunder
	and the Whitewash Waiver

DEFINITIONS

“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subscriber”	Lucky Crown Management Limited, a company incorporated in
	the British Virgin Islands with limited liability and is wholly
	owned by BEHL
“Subscription Agreement”	the conditional subscription agreement dated 21 January 2008 as
	amended and supplemented by an addendum dated 28 January
	2008 among the Company, the Subscriber and BEHL in relation
	to the issue of and subscription for the Subscription Shares and
	the Firm Bonds and the grant of the Call Options
“Subscription Price”	the subscription price of each Subscription Share of HK$0.40
“Subscription Shares”	a total of 247,000,000 new Shares to be issued by the Company to
	the Subscriber pursuant to the Subscription Agreement
“Takeovers Code”	Hong Kong Code on Takeovers and Mergers
“Tranche 1 Bond”	the bond in the principal amount of HK$100,000,000 issued by
	the Company to PWL on 27 July 2007
“Tranche 2 Bond”	the bond in the principal amount of HK$100,000,000 to be issued
	by the Company to PWL
“Whitewash Waiver”	a waiver pursuant to Note 1 on dispensations from Rule 26 of the
	Takeovers Code from the obligation of the Subscriber to make a
	mandatory general offer for all the Shares other than those held
	by the Subscriber and parties acting in concert with it as a result
	of the issue of the Subscription Shares
“%”	per cent.

LETTER FROM THE BOARD

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SHANG HUA HOLDINGS

SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock code: 371)

Directors:

Executive Directors

Mr. Huang Flynn Xuxian (Chairman) Ms. Guan Mei Mr. Chase J Wong

Registered office:

Canon’s Court 22 Victoria Street Hamilton HM 12 Bermuda

Independent non-executive Directors

Mr. Shea Chun Lok Quadrant Mr. Chan Wai Kwong Peter Mr. So Kwok Keung

Principal place of business:

Room 1601, 16/F Cosco Tower No.183 Queen’s Road Central Sheung Wan Hong Kong

18 February 2008

To the Shareholders

Dear Sir or Madam,

SUBSCRIPTION OF NEW SHARES AND BONDS GRANT OF OPTIONS TO SUBSCRIBE FOR BONDS WHITEWASH WAIVER CHANGE OF COMPANY NAME AND INCREASE IN AUTHORISED SHARE CAPITAL

INTRODUCTION

On 28 January 2008, the Company and BEHL jointly announced that they had entered into the Subscription Agreement, pursuant to which (i) the Company conditionally agreed to issue and the Subscriber conditionally agreed to subscribe for 247,000,000 new Shares at a price of HK$0.40 per new Share; (ii) the Company conditionally agreed to issue and the Subscriber conditionally agreed to purchase the Firm Bonds; and (iii) the Company conditionally agreed to grant the Call Options to the Subscriber.

for identification purpose only

LETTER FROM THE BOARD

The purposes of this circular are to provide you with, among other things, (i) further information regarding the Subscription Agreement and the transactions contemplated thereunder, the Whitewash Waiver, the proposed change of company name and increase in authorized share capital; (ii) to set out the recommendations of the Independent Board Committee to the Independent Shareholders regarding the Whitewash Waiver; (iii) to set out the letter of advice from South China Capital to the Independent Board Committee and the Independent Shareholders in relation to the Whitewash Waiver; and (iv) to give you the notice of the SGM.

THE SUBSCRIPTION AGREEMENT

Date

21 January 2008

Parties

(a) The Company;
(b) Lucky Crown Management Limited (i.e., the Subscriber), a company which is directly and whollyowned by BEHL; and
(c) BEHL, a company incorporated in Hong Kong with limited liability and the shares of which are listed on the Main Board of the Stock Exchange.

Each of the Subscriber and BEHL represents and warrants to the Company that neither the Subscriber, BEHL and its ultimate beneficial owners nor parties acting in concert with any of them are parties connected with or acting in concert with any substantial shareholder, chief executive and directors of the Company and its subsidiaries and their respective associates.

The Subscription Shares

Pursuant to the Subscription Agreement, the Company has conditionally agreed to allot and issue to the Subscriber, and the Subscriber has conditionally agreed to subscribe for, 247,000,000 new Shares at a subscription price of HK$0.40 per new Share. The Subscription Shares represents approximately 296.57% of the existing issued share capital and approximately 74.78% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares.

The Subscription Shares will be issued under a specific mandate proposed to be sought from the Independent Shareholders at the SGM. The Subscription Shares, when allotment and issued, will rank pari passu in all respects, including the rights attaching to them on or after the date of their allotment and issue, with the other Shares in issue as at the date of issue of the Subscription Shares, i.e., the Subscription Shares will be attaching with the right to receive dividend which may be declared on or after the date of issue.

LETTER FROM THE BOARD

The Subscription Price

The Subscription Price of HK$0.40 per Subscription Share represents:

(a) a discount of approximately 47.37% to the closing price of HK$0.76 per Share as quoted on the Stock Exchange on the Last Trading Date;
(b) a discount of approximately 41.18% to the average closing price of HK$0.68 per Share as quoted on the Stock Exchange for the last five trading days up to and including the Last Trading Date;
(c) a discount of approximately 46.67% to the average closing price of HK$0.75 per Share as quoted on the Stock Exchange for the last ten trading days up to and including the Last Trading Date;
(d) a discount of approximately 68.75% to the closing price of HK$1.28 as quoted on the Stock Exchange as at the Latest Practicable Date; and
(e) a premium of approximately 5.26% to the net asset value of the Company of approximately HK$0.38 per Share as at 30 June 2007, being the date to which the latest audited financial statement of the Company were made up.

The Subscription Price was determined with reference to the prevailing market price of the Shares after taking into account the financial position of the Company including the net asset value per Share and its past record of loss since 1999, and was negotiated on an arm’s length basis between the Company and the Subscriber.

The Firm Bonds

The Firm Bonds will be issued under a specific mandate proposed to be sought from the Independent Shareholders at the SGM.

The Call Options

Pursuant to the Subscription Agreement, the Company has agreed to grant the Subscriber (i) the First Call Option to require the Company to issue the First Option Bonds any time during the 12-month period after the Completion Date (which may be extended by agreement between the Subscriber and the Company); and (ii) the Second Call Option to require the Company to issue the Second Option Bonds any time during the period commencing on the Completion Date and ending on 31 December 2009 (which may be extended by agreement between the Subscriber and the Company).

LETTER FROM THE BOARD

Principal terms of the Bonds

Issuer : The Company Principal amount : Firm Bonds – HK$200,000,000 First Option Bonds – HK$300,000,000 Second Option Bonds – HK$200,000,000

Maturity date

: The date falling on the third anniversary of the date of issue by the Company of the Firm Bonds, the First Option Bonds or the Second Option Bonds (as the case may be).

Initial conversion price

: HK$0.40 per Conversion Share.

The Initial Conversion Price was determined with reference to the prevailing market price of the Shares and the Subscription Price and was negotiated on an arm’s length basis between the Company and the Subscriber. No minimum conversion price was stipulated in the Subscription Agreement.

The Initial Conversion Price is subject to adjustments in the event of consolidation or subdivision of the Shares, the issue of Shares by way of capitalization of profits or reserves, the making of capital distribution by the Company, rights issue or the issue of Shares or convertible securities at a price which is less than 95% of the market price, the issue of Shares for acquisition of assets, and the purchase of the Shares by the Company, which may or may not occur. The Company considers that foregoing events of adjustment are normal and customary of their kind.

The Initial Conversion Price represents:

(a) a discount of approximately 47.37% to the closing price of HK$0.76 per Share as quoted on the Stock Exchange on the Last Trading Date;
(b) a discount of approximately 41.18% to the average closing price of HK$0.68 per Share as quoted on the Stock Exchange for the last five trading days up to and including the Last Trading Date;

LETTER FROM THE BOARD

(c) a discount of approximately 46.67% to the average closing price of HK$0.75 per Share as quoted on the Stock Exchange for the last ten trading days up to and including the Last Trading Date;
(d) a discount of approximately 68.75% to the closing price of HK$1.28 as quoted on the Stock Exchange as at the Latest Practicable Date; and
(e) a premium of approximately 5.26% to the net asset value of the Company of approximately HK$0.38 per Share as at 30 June 2007, being the date to which the latest audited financial statement of the Company were made up.

		The holders of the Bonds shall have the rights at any time
		during the applicable conversion period to convert the
		Bonds in whole, or in any part representing at least
		HK$10,000,000 of the outstanding principal amount of the
		Bonds, into the Conversion Shares at the applicable
		conversion price.
Ranking	:	The Conversion Shares, when allotted and issued, will rank
		pari passu in all respects, including the rights attaching to
		them on or after the date of their allotment and issue, with
		the other Shares in issue as at the date of issue of the
		Conversion Shares.
Interest	:	The Bonds shall not bear any interest.
Transferability	:	The Bonds may be transferable in whole or in part in
		multiples of HK$10,000,000, provided that if necessary, the
		prior approval of the Stock Exchange shall be required for
		any transfer to any transferee which is a connected person
		(as defined in the Listing Rules) of the Company.
Voting rights	:	The Bonds do not confer on the holder(s) of the Bonds the
		right to vote at a general meeting of the Company.
Events of default	:	On the occurrence of certain events of default specified in
		the Bonds (e.g., liquidation), the holder(s) of the Bonds
		shall be entitled to demand repayment of the relevant
		Bonds.

LETTER FROM THE BOARD

Listing : No application will be made for the listing of the Bonds on the Stock Exchange or any other stock exchange

Public float : The Company, at all times, shall use its reasonable endeavours to ensure that the relevant provisions as to the minimum public float requirement of the Listing Rules are complied with. It will be a term of the Bonds that the holder(s) of the Bonds shall not exercise any of the conversion rights attaching to the Bonds, if following such exercise, the Company’s minimum public float cannot be maintained.

Upon exercise in full of the conversion rights attaching to the Firm Bonds, an aggregate of 500,000,000 Conversion Shares would fall to be allotted and issued by the Company at the Initial Conversion Price, which represents (a) approximately 600.34% of the existing issued share capital; (b) approximately 151.38% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares; and (c) approximately 60.22% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds.

Upon exercise in full of the conversion rights attaching to First Option Bonds, an aggregate of 750,000,000 Conversion Shares would fall to be allotted and issued by the Company at the Initial Conversion Price, which represents (a) approximately 900.52% of the existing issued share capital; (b) approximately 227.08% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares; (c) approximately 90.33% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds; and (d) approximately 47.46% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares, the Conversion Shares upon full exercise of the Firm Bonds and the Conversion Shares upon full exercise of the First Option Bonds.

Upon exercise in full of the conversion rights attaching to Second Option Bonds, an aggregate of 500,000,000 Conversion Shares would fall to be allotted and issued by the Company at the Initial Conversion Price, which represents (a) approximately 600.34% of the existing issued share capital; (b) approximately 151.38% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares; (c) approximately 60.22% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds; (d) approximately 31.64% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares, the Conversion Shares upon full exercise of the Firm Bonds and the Conversion Shares upon full exercise of the First Option Bonds; and (e) approximately 24.04% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares, the Conversion Shares upon full exercise of the Firm Bonds, the Conversion Shares upon full exercise of the First Option Bonds and the Conversion Shares upon full exercise of the Second Option Bonds.

LETTER FROM THE BOARD

The Company will disclose by way of an announcement all relevant details of the conversion of the Bonds in the following manner:

(a) the Company will make the Monthly Announcement on the website of the Stock Exchange and the Company. Such Monthly Announcement will be made on or before the fifth business day following the end of each calendar month and will include the following details in the table form:
(i) whether there is any conversion of the Bonds during the relevant month. If there is a conversion, details thereof including the conversion date, number of new Shares issued and conversion price for each conversion. If there is no conversion during the relevant month, a negative statement to that effect;
(ii) the amount of outstanding of the Bonds after the conversion, if any;
(iii) the total number of Shares issued pursuant to other transactions during the relevant month, including Shares issued pursuant to exercise of options under any share option scheme(s) of the Company; and
(iv) the total issued share capital of the Company as at the commencement and the last day of the relevant months;
(b) in addition to the Monthly Announcement, if the cumulative amount of the Conversion Shares issued pursuant to the conversion of the Bonds reaches 5% of the issued share capital of the Company as disclosed in the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Bonds (as the case may be) (and thereafter in a multiple of such 5% threshold), the Company will make an announcement on the website of the Stock Exchange and the Company including details as stated in (a) above for the period commencing from the date of the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Bonds (as the case may be) up to the date on which the total amount of Shares issued pursuant to the conversion amounted to 5% of the issued share capital of the Company as disclosed in the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Bonds (as the case may be); and
(c) if the Company forms the view that any issue of Conversion Shares will trigger the disclosure requirements under Rule 13.09 of the Listing Rules, then the Company is obliged to make such disclosures regardless of the issue of any announcements in relation to the Bonds as mentioned in (a) and (b) above.

LETTER FROM THE BOARD

Conditions Precedent

Completion of the Subscription Agreement is conditional upon:

(a) the passing by the Shareholders (other than those prohibited from voting under the Listing Rules and/or the Takeovers Code, if applicable) of all necessary resolutions at the SGM approving:
(i) the Subscription Agreement and the transactions contemplated thereunder including (but not limited to) the grant of the Call Options, the issue of the Subscription Shares, the Bonds and the Conversion Shares in accordance with the terms of the Subscription Agreement;
(ii) the change of the Company’s name to such name as is provided by the Subscriber to the Company not later than the third business day prior to the despatch of the notice of the SGM to the Shareholders with effect from the Completion Date;
(iii) the grant of a waiver in respect of the obligation of the Subscriber and the parties acting in concert with it (if any) to make a mandatory general offer to the Shareholders in respect of the Shares not already owned or agreed to be acquired or subscribed by the Subscriber or any parties acting in concert with it (if any) as a result of the issue of the Subscription Shares in accordance with Note 1 on dispensations from Rule 26 of the Takeovers Code; and
(iv) the increase in the authorized share capital of the Company from HK$150,000,000 to HK$1,500,000,000;
(b) the Executive granting to the Subscriber a waiver of the obligation to make a mandatory general offer to the Shareholders in respect of the Shares not already owned or agreed to be acquired or subscribed by the Subscriber or any parties acting in concert with it (if any) as a result of the issue of the Subscription Shares;
(c) the Stock Exchange having granted the listing of, and permission to deal in, the Subscription Shares and the Conversion Shares (and such permission and listing not subsequently being revoked prior to the delivery of the definitive certificate(s) with respect to the Subscription Shares and the bond certificates with respect to the Firm Bonds);
(d) the Bermuda Monetary Authority granting permission for the issue of the Subscription Shares, the Bonds and the Conversion Shares (if required);
(e) the Subscriber being reasonably satisfied with the results of the due diligence review on the Group, including in relation to the Group’s assets, liabilities, contracts, commitments, and its business and financial, legal, taxation and compliance aspects, provided that such due diligence review shall be completed within 14 days from the date of the Subscription Agreement;

LETTER FROM THE BOARD

(f) the grant of the approval by the Stock Exchange for the resumption of trading in Shares on the Stock Exchange pending the release of the Announcement;
(g) the current listing of the Shares not having been withdrawn and the Shares continuing to be traded on the Stock Exchange (save for any temporary suspension of not more than seven consecutive trading days (as defined in the Listing Rules) or any suspension pending clearance of any announcement in connection with the execution of the Agreement or the transactions contemplated under the Agreement); no indication having been received on or before the Completion Date from the Stock Exchange or the SFC to the effect that the listing of the Shares may be withdrawn or objected to for any reason having arisen which may adversely affect the listing status of the Company on the Stock Exchange;
(h) the warranties set forth in the Subscription Agreement remaining true and accurate and not misleading in any material respects;
(i) all other requisite consents, authorisations and approvals (or, as the case may be, the relevant waiver) in connection with the entering into and performance of the terms of the Subscription Agreement having been obtained by the Company;
(j) the Subscriber being reasonably satisfied that there has been no material adverse change;
(k) there being no event existing or having occurred and no condition being in existence which would (if after the issue of the Firm Bonds) constitute an event of default and no event or act having occurred which, with the giving of notices, or the lapse of time, or both, would (if after the issue of the Firm Bonds) constitute an event of default; and
(l) the Subscriber being reasonably satisfied that there has been no material breach of obligations and undertakings given by the Company under the Subscription Agreement to be performed not later than one hour before the agreed time for Completion.

The Subscriber may in its absolute discretion waive the conditions precedent referred to in paragraphs (a)(ii) and (iv), (e), (g), (h), (j), (k) and (l) above at any time by notice in writing to the Company. Except the foregoing conditions precedent, the Subscriber does not have the rights to waive the conditions precedent under the Subscription Agreement. In the event that not all of the conditions precedent are fulfilled, or waived by the Subscriber (as the case may be) by the Long Stop Date, then none of the parties shall be bound to proceed with the issue and subscription of the Subscription Shares and the Firm Bonds and the grant of the Call Options, and the Subscription Agreement shall be automatically terminated forthwith and cease to be of any effect whereupon the parties shall have no claim against each other arising out of or in connection with the Subscription Agreement and save in respect of claims arising out of any antecedent breach thereof. As at the Latest Practicable Date, conditions precedent referred to in paragraphs (e) and (f) above have been fulfilled.

Subject to the continuing fulfillment of the conditions precedent or waiver thereof (as the case may be) in accordance with the Subscription Agreement, Completion shall take place on the third Business Day immediately following the fulfillment or satisfaction (or if applicable, waiver) of the conditions precedent. At Completion, the Company shall issue all of the Subscription Shares and the Firm Bonds and grant the Call Options (but not part only unless the Subscriber agrees to do so).

LETTER FROM THE BOARD

Indemnification

The Company has represented and warranted to the Subscriber that the Company has no liabilities, actual, contingent or otherwise, except (i) liabilities expressly provided in the audited consolidated accounts of the Group for the financial year ended June 30, 2007 and the unaudited consolidated management accounts of the Group for the six months ended 31 December 2007; and (ii) actual liabilities incurred in the ordinary course of business of the relevant members of the Group not exceeding HK$500,000 in a single transaction and HK$1,000,000 in aggregate. Subject to and conditional on the Completion, in the event of any breach of the foregoing warranty, the Company shall indemnify the Subscriber and pay to the Subscriber on demand an amount equal to the product of the liabilities to which any member of the Group is liable as confirmed and certified by the auditors of the Company and the percentage of the Shares held by the Subscriber in the then issued share capital of the Company upon Completion.

The maximum aggregate liability of the Company for breach of any warranty contained in the Subscription Agreement shall not exceed the aggregate amount of the consideration of the Subscription Shares and selling price of the Bonds received by the Company. All claims for indemnification shall be brought in writing to the Company no later than the third anniversary of the Completion Date.

CHANGE OF THE SHAREHOLDING STRUCTURE

The following table illustrates the shareholding structure of the Company (i) as at the date of this circular; (ii) upon issue and allotment of the Subscription Shares; (iii) upon full conversion of the Firm Bonds; (iv) upon full conversion of the First Option Bonds and the Second Option Bonds; and (v) upon full conversion of the Tranche 1 Bond and Tranche 2 Bond:

Shareholders The Subscriber and parties acting in concert with it PWL_(Note 1) Aster Well Limited(Note 2) Mr. Chase J Wong(Note 3)_ Public Sub-total (public) Total	As at the date of this circular No. of % Shares shareholding – – 18,797,875 22.57 13,957,000 16.76 394,800 0.47 50,135,774 60.20 50,135,774 60.20 83,285,449 100	Upon issue and allotment of the Subscription Shares No. of % Shares shareholding 247,000,000 74.78 18,797,875 5.69 13,957,000 4.23 394,800 0.12 50,135,774 15.18 82,890,649 25.10 330,285,449 100	Upon full conversion of the Firm Bonds(Note 4) No. of % Shares shareholding 747,000,000 89.97 18,797,875 2.26 13,957,000 1.68 394,800 0.05 50,135,774 6.04 82,890,649 9.98 830,285,449 100	Upon full conversion of the First Option Bonds and the Second Option Bonds(Note 4) No. of % Shares shareholding 1,997,000,000 96 18,797,875 0.90 13,957,000 0.67 394,800 0.02 50,135,774 2.41 82,890,649 3.98 2,080,285,449 100	Upon full conversion of the Tranche 1 Bond and Tranche 2 Bond(Note 5) No. of % Shares shareholding 1,997,000,000 77.39 518,797,875 20.11 13,957,000 0.54 394,800 0.02 50,135,774 1.94 64,092,774 2.48 2,580,285,449 100	Upon full conversion of the Tranche 1 Bond and Tranche 2 Bond(Note 5) No. of % Shares shareholding 1,997,000,000 77.39 518,797,875 20.11 13,957,000 0.54 394,800 0.02 50,135,774 1.94 64,092,774 2.48 2,580,285,449 100
						100

LETTER FROM THE BOARD

Notes:

PWL is ultimately and beneficially owned by Ms. Lucy Du as to 50% and Ms. Helen Zhang as to 50%. Neither PWL, its ultimate beneficial owners and their respective nominees or agents had involved in the introduction or any matter leading or ancillary to the signing of the Subscription Agreement or transactions contemplated thereunder. The Subscriber, BEHL and parties acting in concert with any of them do not have any relationship with PWL, Ms Lucy Du or Ms Helen Zhang. Pursuant to the notices under section 324 of the SFO sent by PWL to the Company, PWL disposed on market of 500,000 Shares at the average price of HK$0.666 per Share on 7 January 2008 and 1,000,000 Shares at the average price of HK$0.6319 on 9 January 2008.
Aster Well Limited is ultimately and beneficially owned by Ms. Guan Mei, an executive Director and Deputy Chairman of the Company. Ms. Guan Mei has agreed with the Company that she will resign as Director after conclusion of the SGM and before the Completion. Upon the resignation of Ms. Guan Mei as Director, the Shares held by Aster Well will form part of the public float under the Listing Rules. Save that Ms. Guan Mei is an executive Director and Deputy Chairman of the Company (i) neither Aster Well Limited, its ultimate beneficial owner and their respective nominees or agents had involved in the introduction or any matter leading or ancillary to the signing of the Subscription Agreement or transactions contemplated thereunder; and (ii) the Subscriber, BEHL and parties acting in concert with any of them do not have any relationship with Aster Well Limited or Ms. Guan Mei.
Mr. Chase J Wong is an executive Director.
It will be a term of the Bonds that the holder(s) of the Bonds shall not exercise any of the conversion rights attaching to the Bonds, if following such exercise, the Company’s minimum public float of the Shares as required under the Listing Rules cannot be maintained.
Pursuant to the subscription agreement dated 12 April 2007 entered into between the Company and PWL, the Company will only issue conversion shares upon exercise of the Tranche 1 Bond and the Tranche 2 Bond to the extent that there is sufficient public float of the Shares of at least 25% (or such other percentage as determined by the Stock Exchange) of the issued share capital of the Company as enlarged by the issue of such conversion shares.

HIGHEST AND LOWEST SHARE PRICE

The highest and lowest closing price of the Shares as quoted on the Stock Exchange during the sixmonth period preceding the date of the Announcement was HK$2.00 recorded on 2 August 2007 and HK$0.53 recorded on 7 January 2008 respectively.

THE SUBSCRIBER’S DEALING AND INTERESTS IN THE COMPANY’S SECURITIES

Save for the entering into of the MOU and the Subscription Agreement, none of the Subscriber, BEHL and parties acting in concert with any of them has dealt in the Shares, outstanding options, derivatives, warrants or other securities convertible or exchangeable into the Shares during the period commencing on the date falling six months prior to the date of the Subscription Agreement and up to the Latest Practicable Date. As at the Latest Practicable Date, the Subscriber, BEHL and the parties acting in concert with any of them did not hold any Shares or securities of the Company.

INFORMATION OF THE SUBSCRIBER

The Subscriber is a company incorporated in the British Virgin Islands with limited liability and is directly and wholly-owned by BEHL. The Subscriber, its beneficial owners and its concert parties are Independent Third Parties. The principal business of the Subscriber is investment holding. It has not undertaken any business activities other than the entering into of the Subscription Agreement.

LETTER FROM THE BOARD

BEHL is a company incorporated in Hong Kong with limited liabilities, the shares of which are listed on the Main Board of the Stock Exchange. BEHL’s group of companies is principally engaged in public utilities, infrastructure projects, investment holding and investment management.

Beijing Enterprise Group (BVI) Company Limited directly owns approximately 36.11% of the issued share capital of BEHL, while its non-wholly owned subsidiary, Beijing Enterprises Investments Limited, a company incorporated in the British Virgin Islands with limited liability, directly and indirectly owns an aggregate of approximately 23.32% of the issued share capital of BEHL. Accordingly, Beijing Enterprise Group (BVI) Company Limited together with Beijing Enterprises Investments Limited own an aggregate of approximately 59.43% of the issued share capital of BEHL.

Beijing Enterprises Group Company Limited (a limited liability company incorporated under the laws of the PRC and a State-owned enterprise) is the ultimate beneficial owner that holds the entire issued share capital of Beijing Enterprises Group (BVI) Company Limited. As at the Latest Practicable Date, the directors of Beijing Enterprises Group (BVI) Limited comprised Yi Xiqun, Bai Jinrong and Lei Zhengang, while the directors of Beijing Enterprises Group Company Limited comprised Yi Xi Qun, Bai Jin Rong, Sun Le Xin, Zhang Hong Hai, Yin Jie, Zhou Si, Gao Peng and Lei Zhen Gang.

Based on the price of the Subscription Shares and the price of the Firm Bonds, the payment term of the Subscription Agreement and the value of the Group, the directors of BEHL are of the view that the Subscription Agreement is on normal commercial terms, fair and reasonable and the entering into of the Subscription Agreement is beneficial to BEHL and its shareholders as a whole.

FUTURE INTENTIONS OF THE SUBSCRIBER REGARDING THE GROUP

Upon Completion, the Company will become a non wholly-owned indirect subsidiary of BEHL and the results of the Group will be consolidated to the financial statements of BEHL. The Subscriber intends to maintain the listing status of the Company on the Stock Exchange following the Completion.

Following Completion, the Subscriber intends that the Group will progressively reduce its reliance on its existing principal business of trading of computers and related products. The Group will focus on water treatment and environmental business. The Company is fully aware of the restrictions in Rule 14.92 of the Listing Rules and does not intend to dispose of the existing computer business. It is expected that with the proposed business diversification, the contribution from the computer business to the Group would become less material. For its expansion into the water treatment and environmental business, the Company will pursue the Possible Acquisition and consider other opportunities in the sector as and when they arise.

BEHL intends that the Group will be the platform for investment in and development of water treatment and environmental business. BEHL will, subject to the interests of the shareholders of BEHL and the Company, continue to pursue the Possible Acquisition and engage the Group in water treatment and environmental projects that BEHL has been reviewing and negotiating on fair and reasonable basis as and when appropriate.

LETTER FROM THE BOARD

Regarding water treatment and environmental business which BEHL has been engaged in and operated, BEHL will, in compliance with the requirements of the Listing Rules and the applicable rules and regulations, consolidate it into the Group as and when appropriate. The Company will comply with the requirements of the Listing Rules and the rules and regulations applicable to such consolidation of water treatment and environmental business. The Company is fully aware of the restrictions in Rule 14.06(6)(b) of the Listing Rules and will closely observe such restrictions with respect to acquisitions during the 24 months after Completion.

Any acquisition or disposal of the assets or business of the Group will be in compliance with the Listing Rules. Save for the water treatment and environmental business, the Subscriber has no intention of injecting any assets or business to the Group. Other than the disposal of a dormant member of the Group which is in the deregistration procedure, the Subscriber has not had any intention to divest of any other member of the Group. The Subscriber has confirmed that there will be no redeployment of the fixed assets of the Company.

It is intended by the Subscriber that the employment of most of the key employees of the Group will be continued and it will reassess the situation from time to time to ensure that the resources of the Group would be best utilized.

PROPOSED CHANGE OF BOARD COMPOSITION OF THE COMPANY

The Subscriber has nominated two new executive Directors to sit on the Board and the Board has approved their appointment on 16 February 2008. Their appointment will take effect on 18 February 2008 and after the despatch of this circular. Please refer to the announcement to be issued by the Company on or about 18 February 2008 for the brief biographic particulars of the newly appointed Directors.

PROPOSED CHANGE OF COMPANY NAME

It was proposed that the name of the Company be changed from “Shang Hua Holdings Limited” to “Beijing Enterprises Water Group Limited” and upon the change of name becoming effective, a new Chinese name “北控水務集團有限公司” will replace “上華控股有限公司” for identification.

The proposed change of name of the Company will not affect any of the rights of the Shareholders. Once the change of name becomes effective, share certificates of the Company will be issued in the new name of the Company. However, all existing share certificates in issue bearing the existing name of the Company, will, after the change of name has become effective, continue to be effective as documents of title to and be valid for trading, settlement and registration purposes. There will not be any arrangement for the exchange of the existing share certificates of the Company for new share certificates bearing the new name of the Company. The proposed change of name will become effective from the date on which the new name of the Company is entered into the register maintained by the Registrar of Companies in Bermuda. The Company will comply with the filing procedures in Hong Kong regarding its change of name and the Company expects to be traded in its new name as soon as the proposed change of name becomes effective and the filing procedures in Hong Kong have been fulfilled. Further announcement will be made by the Company to inform the Shareholders of the effective date of the change of name of the Company and the relevant trading arrangement (if any) as a result of the change of name of the Company.

LETTER FROM THE BOARD

The proposed change of name of the Company is subject to the satisfaction of the following conditions (a) the passing of a special resolution by the Shareholders approving the change of name of the Company at the SGM; and (b) the Registrar of Companies in Bermuda approving the change of the Company’s name. A special resolution will be proposed at the SGM for Shareholders’ approval for the change of the Company’s name.

REASONS FOR ENTERING INTO THE SUBSCRIPTION AGREEMENT

BEHL has expressed its intention to invest in the Group and to use the Group as its platform to invest in and develop water treatment and environmental business. The Company has been reviewing various opportunities with an aim to diversify its business into the water treatment and environmental business. The Directors consider that through the introduction of BEHL as controlling shareholder, the Group will be able to secure further business opportunities in water treatment and environmental business. The Directors also believe that the Group will benefit from BEHL’s financial strength and its extensive experience and expertise in public utility sectors including water supply and treatment.

USE OF PROCEEDS

The net proceeds from the issue of the Subscription Shares and the Firm Bonds (taking no account of the Options) are estimated to be approximately HK$298 million. The Directors at present intend to apply the net proceeds as follows:

(a) as to 20% – 30% for the Possible Acquisition;
(b) as to 60% - 70% for investment and development of water treatment and environmental business; and
(c) as to the remaining balance of 10%-20% as general working capital.

Except the Possible Acquisition, there is no present identifiable target of acquisition or investment.

FUND RAISING ACTIVITIES FOR THE PAST 12 MONTHS

The Company issued the Tranche 1 Bond to PWL, an investment holding company currently holding approximately 22.57% of the issued share capitl of the Company, on 27 July 2007. As at the date of this circular, the proceeds of HK$100,000,000 obtained from the issue of the Tranche I Bonds have not been used. The Company intends to use such proceeds to finance acquisition opportunities for business in water treatment and environmental sector, including the Possible Acquisition. As at the date of this circular, the Company had not received any notice of exercise of the conversion rights attached to the Tranche 1 Bond.

According to the terms of the subscription agreement with PWL, completion of the subscription of the Tranche 2 Bond should be on a business days in the period between 1 December 2007 to 31 December 2007 (both day inclusive) determined by PWL with at least 7 business days prior written notice to the Company, failing such notice shall be deemed to be 31 December 2007. The Company had not received

LETTER FROM THE BOARD

the said notice from PWL. On 16 January 2008, the Company received a letter from PWL informing the Company that (i) PWL confirms the subscription for the Tranche 2 Bond; and (ii) PWL is making the arrangement for the subscription and it is expected that the subscription for the Tranche 2 Bond will be completed by the end of March 2008. After considering the benefits of the Company and the Shareholders as a whole, the Board agreed to issue the Trache 2 Bond by 31 March 2008 or any other date as agreed by the Company and PWL. By a letter dated 20 January 2008, in consideration of the Company’s agreeing to issue the Tranche 2 Bond by 31 March 2008, PWL unconditinally and irrevocably agrees to, and shall procure that any subsequent holder(s) of the Tranche 1 Bond and the Tranche 2 Bond to, waive the rights for any adjustment of conversion price under the relevant subscription agreement, the Tranche 1 Bond and Tranche 2 Bond arising from or in connection with (i) the entering into of the Subscription Agreement; and (ii) the Possible Acquisition and any actions including the issue of any Shares contemplated by or referred to therein.

PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

As at the date of this circular, the authorized share capital of the Company is HK$150,000,000 divided into 1,500,000,000 Shares, of which 83,285,449 Shares have been issued and fully paid or credited as fully paid. In order to fulfill condition precedent (a)(iv) referred to in the paragraph headed “Conditions precedent” above, and to provide the Group with flexibility in future expansion and growth by means of issuing new Shares and fund raising activities as the Directors may consider appropriate from time to time, the Directors propose to increase the authorized share capital of the Company to HK$1,500,000,000 divided into 15,000,000,000 Shares by the creation of an additional 13,500,000,000 unissued Shares. The increase in the authorized share capital of the Company is conditional upon the passing of an ordinary resolution by the Shareholders at the SGM and no Shareholders are required to abstain from voting for such resolution.

APPLICATION FOR LISTING

An application will be made by the Company for the listing of, and permission to deal in, the Subscription Shares and the Conversion Shares.

THE WHITEWASH WAIVER

Immediately following the allotment and issue of the Subscription Shares to the Subscriber on Completion, the Subscriber, BEHL and parties acting in concert with any of them will be interested in 247,000,000 Shares, representing approximately 74.78% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares. In the absence of the Whitewash Waiver, the Subscriber and persons acting in concert with it would incur an obligation pursuant to Rule 26 of the Takeovers Code to make a mandatory general offer for all the Shares not already owned or agreed to be acquired by them. An application has been made to the Executive Director of the Corporate Finance Division of the SFC for the Whitewash Waiver. The Executive has indicated that he has agreed to grant the Whitewash Waiver subject to the approval of the Independent Shareholders taken by way of a poll at the SGM.

LETTER FROM THE BOARD

Immediately following the allotment and issue of the Subscription Shares, the shareholding of the Subscriber and persons acting in concert with it will exceed 50% of the voting rights of the Company, upon which the Subscriber and persons acting in concert with it may increase their shareholding in the Company without incurring any further obligation under Rule 26 of the Takeovers Code to make a general offer.

The SGM will be held to consider and, if thought fit, passing the resolutions to approve, among other things, the Subscription Agreement and the Whitewash Waiver. The resolutions in respect of the Subscription Agreement and the Whitewash Waiver will be taken by way of a poll. If the Whitewash Waiver is not granted by the Executive Director of the Corporate Finance Division of the SFC or approved by the Independent Shareholders, the Subscription Agreement will not become unconditional and will be terminated.

Save for the Shares to be issued pursuant to the exercise of options to be granted under the share option scheme of the Company and pursuant to the conversion of the Tranche 1 Bond, the Company did not have any other outstanding options, warrants, derivatives and other securities convertible or exchangeable into Shares or any other derivatives as at the Latest Practicable Date.

The Directors and the Subscriber confirm that so far as it is aware there are no (a) arrangements (whether by way of option, indemnity or otherwise) in relation to the Shares and which might be material to the Subscription Agreement and/or the Whitewash Waiver; and (b) agreements or arrangements to which the Subscriber is party which relate to the circumstances in which it may or may not invoke or seek to invoke a pre-condition or a condition to the Subscription Agreement and/or the Whitewash Waiver.

THE SGM

A notice of the SGM to be held at Room 1601, 16/F., Cosco Tower, No. 183 Queen’s Road Central, Sheung Wan, Hong Kong on Tuesday, 4 March 2008, at 3:00 p.m. to consider and, if thought fit, to approve, the Subscription Agreement and the transactions contemplated thereunder, the Whitewash Waiver, the proposed increase in authorized share capital and the proposed change of company name.

The Subscriber, BEHL and parties acting in concert with any of them and their respective associates will abstain from voting on the resolutions approving the Subscription Agreement, the transactions contemplated thereunder and the Whitewash Waiver at the SGM.

Whether or not you are able to attend the SGM, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit the same at the office of the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish.

LETTER FROM THE BOARD

PROCEDURES FOR DEMANING A POLL AT GENERAL MEETING

According to Bye-Law 69, all resolution put to the vote of the Shareholders at general meetings of the Company shall be decided on a show of hands, unless a poll is (before or on the declaration of the results of the show of hands) demanded by:

(i) the chairman;
(ii) at least 3 Shareholders present in person or by proxy or representative for the time being entitled to vote at the meeting;
(iii) any Shareholder(s) present in person or by proxy or representative and holding not less than one-tenth of the total voting rights of all the Shareholders having the right to attend and vote at the meeting; or
(iv) any Shareholder(s) present in person or by proxy or representative and holding Shares conferring a right to attend and vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less then one-tenth of the total sum paid up on all Shares conferring that right.

In addition, under the Listing Rules, if the chairman of the meeting and/or Directors individually or collectively hold(s) proxies in respect of Shares holding five per cent or more of the total voting rights of the Company at the general meeting and if the votes cast at the general meeting on a show of hands are in the opposite manner to that instructed in those proxies, then the chairman shall demand a poll. However, if it is apparent from the proxies held that a vote taken on a poll will not reverse the vote taken on a show of hands, then the chairman shall not be required to demand a poll.

RECOMMANDATION

The Independent Board Committee has been established to advise the Independent Shareholders regarding the Subscription Agreement and the Whitewash Waiver. South China Capital has been appointed as Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders regarding the Subscription Agreement and the Whitewash Waiver.

Your attention is drawn to (i) the letter from the Independent Board Committee which contains the recommendation of the Independent Board Committee to the Independent Shareholders regarding the resolutions to approve the Whitewash Waiver; and (ii) the letter from South China Capital which contains its advice to the Independent Board Committee and the Independent Shareholders regarding the Whitewash Waiver.

The Board considers that the proposed increase in authorized share capital and the proposed change of company name are in the interests of the Company and the Shareholders as a whole, and recommends the Shareholders to vote in favour of the resolutions relating to the foregoing matters at the SGM.

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is also drawn to the information set out in the appendices to this circular.

Yours faithfully For and on behalf of the Board of Shang Hua Holdings Limited Flynn Xuxian Huang Chairman

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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SHANG HUA HOLDINGS
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SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock code: 371)

18 February 2008

To the Independent Shareholders

Dear Sir or Madam,

SUBSCRIPTION AGREEMENT AND WHITEWASH WAIVER

We refer to the circular dated 18 February 2008 (the “Circular”) of Shang Hua Holdings Limited, of which this letter forms part. Capitalized terms used in the Circular shall have the same meanings in this letter unless the context otherwise requires.

We have been appointed to form the Independent Board Committee to advise you in connection with the Whitewash Waiver, details of which are set out in the letter from the Board in the Circular.

We wish to draw your attention to the letter from the Board, as set out on pages 5 to 22 of the Circular, and the letter from South China Capital, as set out on pages 24 to 45 of the Circular. Having considered the terms of the Subscription Agreement, the Whitewash Waiver and the advice given by South China Capital and the principal factors and reasons taken into consideration by them in arriving at their advice, we are of the opinion that the terms of the Subscription Agreement are fair and reasonable and the Subscription Agreement and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM to approve the Subscription Agreement and the Whitewash Waiver.

Yours faithfully,

Independent Board Committee of

Shang Hua Holdings Limited Mr. Shea Chun Lok Quadrant Mr. Chan Wai Kwong Peter Independent Non-executive Directors

Mr. So Kwok Keung

LETTER FROM SOUTH CHINA CAPITAL

Set out below is the text of a letter received from South China Capital, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders regarding the Subscription Agreement and the Whitewash Waiver for the purpose of inclusion in this circular.

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South China Capital Limited 28/F., Bank of China Tower No. 1 Garden Road Central Hong Kong 18 February 2008

To: The independent board committee and the independent shareholders

of Shang Hua Holdings Limited

Dear Sirs,

SUBSCRIPTION OF NEW SHARES AND BONDS GRANT OF OPTIONS TO SUBSCRIBE FOR BONDS WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in connection with the Subscription Agreement and the Whitewash Waiver, details of which are set out in the letter from the Board (the “Board Letter”) contained in the circular dated 18 February 2008 issued by the Company to the Shareholders (the “Circular”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as defined in the Circular unless the context requires otherwise.

The Board announced that on 9 January 2008, the Company entered into the MOU with BEHL pursuant to which BEHL conditionally agreed to subscribe for and the Company conditionally agreed to issue convertible bonds with an aggregate principal amount of HK$600 million to HK$800 million at a conversion price of not more than HK$0.40 per Share to BEHL.

Subsequently on 21 January 2008, the Company entered into the Subscription Agreement (which supersedes the MOU) with the Subscriber and BEHL. Pursuant to the Subscription Agreement, the Subscriber conditionally agreed to subscribe for and the Company conditionally agreed to issue to the Subscriber (i) 247 million new Shares at the Subscription Price of HK$0.40 per Subscription Share (the “Share Subscription”); (ii) the Firm Bonds in an aggregate principal amount of HK$200 million at the Initial Conversion Price of HK$0.40 per Conversion Share; and (iii) the grant of the Call Options, which allow the Subscriber to require the Company to issue (a) the First Option Bonds in an aggregate principal amount of HK$300 million at the Initial Conversion Price at any time during the 12-month period after the Completion Date; (b) the Second Option Bonds in an aggregate principal amount of HK$200 million at the Initial Conversion Price at any time during the period commencing from the Completion Date and ending on 31 December 2009.

LETTER FROM SOUTH CHINA CAPITAL

Immediately following the allotment and issue of the Subscription Shares to the Subscriber on Completion, the Subscriber, BEHL and their respective concert parties will be interested in a total of 247 million Shares, representing approximately 74.78% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares. In the absence of the Whitewash Waiver, the Subscriber will be obliged pursuant to Rule 26 of the Takeovers Code to make a mandatory general offer to acquire all the Shares other than those held by the Subscriber and the parties acting in concert with it.

In this regard, the Subscriber has made an application to the Executive for the granting of the Whitewash Waiver pursuant to Note 1 on Dispensations from Rule 26 of the Takeovers Code. The Executive has indicated that the Whitewash Waiver will be granted. The Whitewash Waiver will be subject to approval of the Independent Shareholders by way of poll at the SGM. The Subscriber, BEHL and their respective concert parties and associates shall abstain from voting on the relevant resolution(s) approving the Subscription Agreement and the transactions contemplated thereunder, and the Whitewash Waiver at the SGM.

An Independent Board Committee comprising Messrs. Shea Chun Lok, Quadrant, Chan Wai Kwong, Peter and So Kwok Keung (all being independent non-executive Directors) has been established to advise the Independent Shareholders on (i) whether the terms of the Subscription Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the Subscription Agreement and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole; and (iii) how the Independent Shareholders should vote on the relevant resolution(s) to approve the Subscription Agreement and the transactions contemplated thereunder, and the Whitewash Waiver at the SGM. All the members of the Independent Board Committee have confirmed to the Company that they are independent with respect to the aforementioned transactions. We, South China Capital, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in the above respects.

BASIS OF OUR OPINION

In formulating our advice and recommendation to the Independent Board Committee and the Independent Shareholders, we have relied on the statements, information, opinions and representations contained or referred to in the Circular and the information and representations as provided to us by the Directors. We have assumed that all information and representations that have been provided by the Directors, for which they are solely and wholly responsible, are true, complete and accurate in all material respects at the time when they were made and continue to be so as at the date of the despatch of the Circular. We have also assumed that all statements of belief, opinion, expectation and intention made by the Directors in the Circular were reasonably made after due enquiries and careful considerations. We have no reason to suspect that any material facts or information have been withheld or to doubt the truth, accuracy and completeness of the information and facts contained in the Circular, or the reasonableness of the opinions expressed by the Company, its advisers and/or Directors, which have been provided to us. We consider that we have taken sufficient and necessary steps on which to form a reasonable basis and an informed view for our recommendation in compliance with Rule 13.80 of the Listing Rules.

The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquires, which to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in the Circular misleading.

LETTER FROM SOUTH CHINA CAPITAL

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our recommendation. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company, the Subscriber and BEHL, their respective subsidiaries or associates, nor have we considered the taxation implication on the Group or the Shareholders as a result of the Subscription Agreement and the Whitewash Waiver. Nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

PRINCIPAL FACTORS AND REASONS CONSIDERED

THE SUBSCRIPTION AGREEMENT

In arriving at our opinion in respect of the Subscription Agreement, we have taken into consideration the following principal factors and reasons:

(1) Background of and reasons for the Subscription Agreement

On 21 January 2008, the Company entered into the Subscription Agreement with the Subscriber and BEHL pursuant to which the Subscriber conditionally agreed to subscribe for and the Company conditionally agreed to issue to the Subscriber:

(i) 247 million new Shares at the Subscription Price of HK$0.40 per Subscription Share;
(ii) the Firm Bonds in an aggregate principal amount of HK$200 million at the Initial Conversion Price of HK$0.40 per Conversion Share. The Firm Bonds do not bear any interest and will mature on the third anniversary of the date of its issue; and
(iii) the Call Options, which allow the Subscriber to require the Company to issue:
(a) the First Option Bonds in an aggregate principal amount of HK$300 million at the Initial Conversion Price at any time during the 12-month period after the Completion Date. The First Option Bonds do not bear any interest and will mature on the third anniversary of the date of its issue; and
(b) the Second Option Bonds in an aggregate principal amount of HK$200 million at the Initial Conversion Price at any time during the period commencing from the Completion Date and ending on 31 December 2009. The Second Option Bonds do not bear any interest and will mature on the third anniversary of the date of its issue.

Subject to the continuing fulfilment of the conditions precedent (as detailed under the paragraph headed “Conditions Precedent” in the Board Letter) or waiver thereof (as the case may be) pursuant to the Subscription Agreement, Completion shall take place on the third Business Day immediately following the fulfilment or satisfaction (or if applicable, waiver) of the conditions precedent. On Completion, the Company shall issue all of the Subscription Shares and the Firm Bonds, and grant the Call Options to the Subscriber (but not part only unless the Subscriber agrees to do so).

LETTER FROM SOUTH CHINA CAPITAL

Business and financial information on the Group

The Group is principally engaged in the trading of computers and related products. Tabularised below is a summary of the audited consolidated financial information on the Group as extracted from the annual report of the Company for the year ended 30 June 2007 (the “2007 Annual Report”):

	For the year	For the year
	ended	ended	Year on
Consolidated Income Statement	30 June 2007	30 June 2006	year change
	HK$’000	HK$’000	%
Turnover	19,899	35,786	(44.39)
Gross Profit	204	875	(76.69)
Net loss attributable to equity holders
of the Company	(2,567)	(3,188)	(19.48)
	As at	As at	Year on
Consolidated Balance Sheet	30 June 2007	30 June 2006	year change
	HK$’000	HK$’000	%
Cash and bank balances	29,287	32,088	(8.73)
Net asset value (net of minority interests)
(“NAV”)	31,436	33,352	(5.74)
Gearing ratio (Total bank borrowings plus
convertible bonds/Shareholders’ equity)	Nil	Nil	–

As depicted by the above table, the Group recorded an audited total turnover of approximately HK$19.90 million for the year ended 30 June 2007, representing a significant decline of approximately 44.39% as compared to the prior year. In addition, the Group enjoyed minimal gross profits and was at a persistent loss position for the two years ended 30 June 2007. According to the 2007 Annual Report, the Directors were of the view that the computer consumer products market is highly competitive and they also believed that the market growth has already been saturated. As such, the Group has revamped its business strategy by diversification of its focus and resources to other new businesses such as corporate finance advisory, securities dealing and asset management (the “New Business”) since the year ended 30 June 2006. Nevertheless, we are further advised by the Directors that save as and except for the New Business, the Group has encountered difficulties in identifying other potential investments or acquisitions for business diversification by itself as proven by the Group’s continued losses for the year ended 30 June 2007. The Group has been searching for potential new business opportunities, for example, the Company had established wholly-owned companies for the New Business during the 2007 financial year. However, as confirmed by the Directors, the New Business has only made minimal contribution to the Group so far.

LETTER FROM SOUTH CHINA CAPITAL

As at 30 June 2007, the Group had audited consolidated net assets of approximately HK$31.44 million, representing a decline of approximately 5.74%. Furthermore, the Group’s cash and bank balances in hand also dropped by approximately 8.73% from approximately HK$32.09 million as at 30 June 2006 to approximately HK$29.29 million as at 30 June 2007. Upon our further enquiry, the Directors also confirmed that the Group’s total cash and bank balances in hand have risen to approximately HK$91.05 million as at 31 December 2007 largely by the net proceeds obtained from the issue of the Tranche 1 Bond.

Given the prolonged persistent losses incurred by the Group since 1999 as a result of the sluggish business environment within the computer consumer products market, we recognize the Group’s imminent need for potential investments or acquisition projects to generate reasonable return to the Shareholders in long run. Moreover, in view of the Group’s inability in carrying out new business opportunities identified by itself as proven by its recent business losses, we also concur with the Directors that the Company is in need for investor(s) with extensive business network and experience to identify potential business opportunities for the Group with an aim to revive its business in the foreseeable future.

Information on the Subscriber and BEHL

With reference to the Board Letter, the Subscriber is a company incorporated in the British Virgin Islands with limited liability in January 2008 and is directly and wholly-owned by BEHL. The Subscriber, its beneficial owners and its concert parties are Independent Third Parties. The principal business of the Subscriber is investment holding and the Subscriber has not undertaken any business activities other than the entering into of the Subscription Agreement.

BEHL is a company incorporated in Hong Kong with limited liabilities, the shares of which are listed on the Main Board of the Stock Exchange with market capitalisation of approximately HK$41,223 million as at the Latest Practicable Date. BEHL’s group of companies is principally engaged in public utilities, infrastructure projects, investment holding and investment management. Within the public utilities and infrastructure business, BEHL is actively pursuing investment opportunities in the water treatment sector and had acquired Beijing Municipal Water Company to operate a water purification and treatment plant, No. 9 Phase I, in Beijing, the PRC and to sell purified water since 1998.

Beijing Enterprise Group (BVI) Company Limited and Beijing Enterprises Investments Limited are the substantial shareholders of BEHL. As also confirmed by the Subscriber, the ultimate beneficial owner of both Beijing Enterprise Group (BVI) Company Limited and Beijing Enterprises Investments Limited is the Beijing Municipal Government.

The Subscriber’s future intentions in relation to the Group

As referred to in the Board Letter, following the Completion, the Subscriber will progressively reduce the Group’s reliance on its existing principal business of trading of computers and related products. The Group will then focus on the water treatment and environmental business in the PRC. It is expected that with the proposed business diversification, the contribution from the computer business to the Group would become less material. For the Group’s expansion into the water treatment and environmental business, the Group will pursue the Possible Acquisition and consider other business opportunities in such sector as and when they arise.

LETTER FROM SOUTH CHINA CAPITAL

Since the Company will become an indirect non-wholly owned subsidiary of BEHL upon Completion, BEHL intends to allow the Group to act as its platform for investment in and development of the water treatment and environmental business in the PRC. BEHL will, subject to the interests of the shareholders of BEHL and the Company, continue to pursue the Possible Acquisition and engage the Group in water treatment and environmental projects which it has been reviewing and negotiating on fair and reasonable basis as and when appropriate. As confirmed by the Subscriber, save and except for the water treatment and environmental business, the Subscriber has no intention of injecting any other assets or businesses into the Group at present.

Use of proceeds

As referred to in the Board Letter, the net proceeds from the issue of the Subscription Shares and the Firm Bonds (excluding the Call Options) are estimated to be of approximately HK$298 million and the Directors at present intend to apply such net proceeds in the following ways:

(i) as to 20%–30% for the Possible Acquisition;
(ii) as to 60%–70% for investment and development of water treatment and environmental business; and
(iii) as to the remaining balance of 10%–20% as general working capital.

Upon our further enquiry, the Directors confirmed that the gross proceeds of HK$100 million obtained from the issue of the Tranche 1 Bond have not been used; while the issue of the Tranche 2 Bond to PWL with an aggregate amount of HK$100 million is expected to be completed by the end of March 2008. The Company intends to apply those available proceeds to finance acquisition opportunities for business in the water treatment and environmental sector in the PRC, including the Possible Acquisition.

Although the additional funds which the Group has obtained so far/ will obtain are relatively sufficient to satisfy its current plan for future development in the water treatment and environmental business, the Directors also considered that the net proceeds of approximately HK$500 million from the First Option Bonds and the Second Option Bonds (assuming that the Call Options will be exercised by the Subscriber) would provide financing flexibility to the Group for further acquisitions as when opportunities arise.

Based on the above, the Directors (excluding the members of the Independent Board Committee) are of the view that the Subscription Agreement will provide adequate financial resources to the Group to diversify its existing unsatisfactory business and therefore is in the interests of the Company and the Shareholders as a whole.

LETTER FROM SOUTH CHINA CAPITAL

Reasons for entering into of the Subscription Agreement

As aforementioned, it is the intention of BEHL to invest in the Group and to use the Group as its platform to invest in and develop the water treatment and environmental business in the PRC. The Directors consider that through the introduction of BEHL as the controlling Shareholder, the Group will be able to secure certain business opportunities in the water treatment and environmental business in the PRC. The Directors also believe that the Group will be benefited by BEHL’s financial strength and its extensive network and experience in the public utility sectors including water supply and water treatment.

With respect of the above, we have researched over the internet and we noted from the news released by the PRC government regarding the 10th five year plan (2001 to 2005) and the 11th five year plan (2006 to 2010) of the PRC that the local and central governments in the PRC recognize that water shortages present a serious problem affecting the economic and social development of the PRC. The PRC central government is determined to put in place policies and control measures in order to reduce the risk of pollution of fresh water resources by implementing stringent policies to promote the rate of waste water treatment, such as (i) to increase the operational efficiency of the water supply sector through the process of privatization; (ii) to reflect the scarcity value of water; (iii) to instill the concept of water conservation through proper pricing of water; and (iii) to accelerate and encourage investments in waste water recycling. Since the PRC central government has aimed to achieve these goals in the shortest time possible, a huge amount of investment in the water treatment and environmental sector will be required. Accordingly, it is expected that there would be a rapid development of the water industry in the PRC in the coming future.

Having taken into consideration (i) the Group’s imminent need to rely upon new investor(s) with extensive network and experience to turnaround its persistent loss making position; (ii) the future intentions of the Subscriber in relation to the Group and the rationale for the entering into of the Subscription Agreement; and (iii) the future prospect of the water industry in the PRC as just mentioned, we consider that the entering into of the Subscription Agreement which would enable the Group to penetrate into the water treatment and environmental business in the PRC in the future, is in the interests of the Company and the Shareholders as a whole.

(2) Principal terms of the Subscription Agreement

The following summarises the principal terms of the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options (the details of which are set out in the Board Letter):

The Share Subscription

Pursuant to the Subscription Agreement, the Company will allot and issue to the Subscriber a total of 247 million new Shares at the Subscription Price of HK$0.40 per Subscription Share. The Share Subscription will generate gross proceeds of HK$98.8 million in cash for the Group.

The Subscription Shares represents (i) approximately 296.57% of the existing issued share capital of the Company; and (ii) approximately 74.78% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares. The Subscription Shares will rank pari passu in all aspects with the Shares in issue as at the date of allotment and issue of the Subscription Shares.

LETTER FROM SOUTH CHINA CAPITAL

The Firm Bonds

Pursuant to the Subscription Agreement, the Company will issue to the Subscriber the Firm Bonds in an aggregate principal amount of HK$200 million at the Initial Conversion Price of HK$0.40 per Conversion Share. The Firm Bonds do not bear any interest and will mature on the third anniversary of the date of its issue.

The number of the Conversion Shares to be issued upon full conversion of the Firm Bonds will be 500 million new Shares, representing (i) approximately 600.34% of the existing issued share capital of the Company, (ii) approximately 151.38% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares; and (iii) approximately 60.22% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds.

The Firm Bonds will generate gross proceeds of HK$200 million in cash for the Group, and the Conversion Shares to be issued upon conversion of the Firm Bonds will rank pari passu in all aspects with the Shares in issue on the date of conversion.

The First Option Bonds

Pursuant to the Subscription Agreement, subject to the full exercise of the First Call Option (which is exercisable by the Subscriber at any time during the 12-month period after the Completion Date and may also be extended by agreement between the Subscriber and the Company), the First Option Bonds in an aggregate principal amount of HK$300 million at the Initial Conversion Price will be issued. The First Option Bonds do not bear any interest and will mature on the third anniversary of the date of its issue.

The number of the Conversion Shares to be issued upon full conversion of the First Option Bonds will be 750 million Conversion Shares, representing (i) approximately 900.52% of the existing issued share capital of the Company; (ii) approximately 227.08% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares; (iii) approximately 90.33% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds; and (iv) approximately 47.46% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares, and the Conversion Shares upon full exercise of the Firm Bonds and the First Option Bonds.

The First Option Bonds will generate gross proceeds of HK$300 million in cash for the Group, and the Conversion Shares to be issued upon conversion of the First Option Bonds will rank pari passu in all aspects with the Shares in issue on the date of conversion.

LETTER FROM SOUTH CHINA CAPITAL

The Second Option Bonds

Pursuant to the Subscription Agreement, subject to the full exercise of the Second Call Option (which is exercisable by the Subscriber at any time during the period commencing from the Completion Date and ending on 31 December 2009 and may also be extended by agreement between the Subscriber and the Company), the Second Option Bonds in an aggregate principal amount of HK$200 million at the Initial Conversion Price will be issued. The Second Option Bonds do not bear any interest and will mature on the third anniversary of the date of its issue.

The number of the Conversion Shares to be issued upon full conversion of the Second Option Bonds will be 500 million Conversion Shares, representing (i) approximately 600.34% of the existing issued share capital of the Company; (ii) approximately 151.38% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares; (iii) approximately 60.22% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds; (iv) approximately 31.64% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares, and the Conversion Shares upon full exercise of the Firm Bonds and the First Option Bonds; (v) approximately 24.04% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares, and the Conversion Shares upon full exercise of the Firm Bonds, the First Option Bonds and the Second Option Bonds.

The Second Option Bonds will generate gross proceeds of HK$200 million in cash for the Group, and the Conversion Shares to be issued upon conversion of the Second Option Bonds will rank pari passu in all aspects with the Shares in issue on the date of conversion.

Regarding the terms of the Subscription Agreement, we have enquired into the Directors of not issuing the First Option Bonds and the Second Option Bonds together with the Firm Bonds upon Completion but instead granting the Call Options to the Subscriber. In this respect, the Directors advised us that the aggregate principal amounts of the First Option Bonds and the Second Option Bonds, being HK$500 million in total, are substantially huge as compared to the market capitalisation of the Company as at the Latest Practicable Date (i.e. approximately HK$107 million). Therefore, the issue of the Firm Bonds, the First Option Bonds and the Second Option Bonds altogether upon Completion may lead to a considerable jump in the gearing level of the Group, and the Directors considered it to be detrimental to the Company and the Shareholders as a whole. Moreover, as outlined under the paragraph headed “Use of proceeds” in this letter, whilst the Group will actively identify potential investments or acquisition projects to turnaround its persistent loss making position and will concentrate on the water treatment and environmental business, the additional funds which the Group has obtained so far/ will obtain are relatively sufficient to satisfy its current plan for future development in the water treatment and environmental business. In view of the above, the Directors were of the view that the Call Options’ arrangement would provide certain financing flexibility to both the Company and the Subscriber without worsening the gearing position of the Group. Given also that the grant of the Call Options is a vital part of the Subscription Agreement in terms of the principal amounts involved and that all terms of the Subscription Agreement were concluded by the Company and the Subscriber after arm’s length negotiation, we concur with the Directors that the Subscription Agreement is in the interests of the Company and the shareholders as a whole.

LETTER FROM SOUTH CHINA CAPITAL

The Subscription Price and the Initial Conversion Price (the “Issue Price”)

The Issue Price of HK$0.40 per Subscription Share and Conversion Share represents:

(a) a discount of approximately 47.37% to the closing price of HK$0.76 per Share as quoted on the Stock Exchange on the Last Trading Date;
(b) a discount of approximately 41.18% to the average closing price of HK$0.68 per Share as quoted on the Stock Exchange for the last five trading days up to and including the Last Trading Date;
(c) a discount of approximately 46.67% to the average closing price of HK$0.75 per Share as quoted on the Stock Exchange for the last ten trading days up to and including the Last Trading Date;
(d) a premium of approximately 5.26% to the NAV of the Company of approximately HK$0.38 per Share as at 30 June 2007 based on 83,285,449 Shares in issue on the Last Trading Date (the “Latest NAV per Share”); and
(e) a discount of approximately 68.75% to the closing price of HK$1.28 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

The Directors also confirmed that the Issue Price was determined after arm’s length negotiation between the Company and the Subscriber with reference to the latest NAV per Share and the historical persistent losses of the Group.

LETTER FROM SOUTH CHINA CAPITAL

In order to assess the fairness and reasonableness of the Issue Price, we set out below various informative analyses for illustrative purpose:

Review on historical price of the Shares

The following table sets out the highest and lowest closing prices and the average daily closing prices of the Shares as quoted on the Stock Exchange in each month during the period commencing from 1 January 2007 up to and including the Latest Practicable Date (the “Review Period”):

	Highest	Lowest	Average daily
Month	closing price	closing price	closing price
	(HK$)	(HK$)	(HK$)
2007
January	0.43	0.33	0.37
February	0.48	0.32	0.39
March	0.50	0.35	0.41
April_(Note 1)_	0.99	0.46	0.79
May	1.03	0.77	0.87
June	1.57	1.03	1.28
July	1.45	1.20	1.31
August_(Note 2)_	2.00	1.35	1.51
September	1.62	1.30	1.38
October_(Note 3)_	1.40	1.20	1.30
November_(Note 3)_	1.28	1.04	1.16
December	1.19	0.80	0.91
2008
January (up to and including
the Last Trading Date)(Note 4)	0.80	0.52	0.70
Post-Announcement Period
January (from 29 January to 31 January 2008)	1.93	1.55	1.75
February 2008 (up to and including
the Latest Practicable Date)	1.50	1.28	1.36

Source: the Stock Exchange web-site (www.hkex.com.hk)

Notes:

Trading in the Shares was suspended from 4 April 2007 (half-day suspension) to 12 April 2007 (both days inclusive).
Trading in the Shares was suspended from 6 August 2007 to 17 August 2007 (both days inclusive).
Trading in the Shares was suspended from 26 October 2007 to 5 November 2007 (both days inclusive).
Trading in the Shares was suspended from 9 January 2008 (half-day suspension) to 28 January 2008 (both days inclusive).

LETTER FROM SOUTH CHINA CAPITAL

Set out below is the graph showing the historical closing prices of the Shares as quoted on the Stock Exchange versus the Issue Price during the Review Period:

==> picture [434 x 274] intentionally omitted <==

----- Start of picture text -----

Historical closing price
HK$
The Issue Price
2.1
Suspension of trading
(Note 2) (Note 3) (Note 4)
1.75
1.4 Suspension of trading
(Note 1)
1.05
0.7 The Issue Price
0.35
0 Month
January 2007February 2007March 2007April 2007 (Note 1)May 2007 June 2007 July 2007August 2007 (Note 2)September 2007 October 2007 (Note 3)Novomber 2007 (Note 3)December 2007January 2008 (Note 4)February 2008
----- End of picture text -----

Source: the Stock Exchange web-site (www.hkex.com.hk)

Notes:

Reasons for suspension of trading in the Shares:

Pending for the release of the announcement regarding the issue of the Tranche I Bond and the Tranche II Bond.
Pending for the release of the announcements regarding the Possible Acquisition and a possible share disposal by the substantial shareholders of the Company.
Pending for the release of the announcement regarding a subscription agreement for units in an investment fund.
Pending for the release of the announcement regarding the MOU and the Subscription Agreement.

During the Review Period, the average daily closing price of the Shares ranged from HK$0.37 to HK$1.75 per Share and the Shares had been traded above the Issue Price for the entire Review Period except for January 2007 and February 2007. The highest and lowest closing prices of the Shares as quoted on the Stock Exchange were HK$2 per Share recorded on 2 August 2007 and HK$0.32 per Share recorded on 2 February 2007, 5 February 2007 and 6 February 2007 respectively during the Review Period. We noted that the highest closing price of the Shares of HK$2 represented a premium of approximately 525% over the lowest closing price of the Shares of HK$0.32. In addition, the movement of the average daily closing prices of the Shares fluctuated and did not demonstrate any continual significant rising or sliding trend during the Review Period. In view of the above, we consider that the market price of the Shares is volatile and may be unable to serve as an indicator for the Company’s business performance and the market perception on the Company.

LETTER FROM SOUTH CHINA CAPITAL

Review on historical trading liquidity of the Shares

The number of trading days, average daily number of the Shares traded per month, and the respective percentages of the Shares’ monthly trading volume as compared to (i) the total number of issued Shares held by the public as at the Latest Practicable Date; and (ii) the total number of issued Shares as at the Latest Practicable Date during the Review Period are tabulated as below:

			% of the Average	% of the Average
			Volume to total	Volume to total
			number of issued	number of issued
			Shares held by	Shares as at
		Average daily	the public as at the	the Latest
	No. of	trading volume (the	Latest Practicable	Practicable
	trading days	“Average Volume”)	Date (Note 4)	Date (Note 5)
		Shares	%	%
2007
January	22	16,800	0.03	0.02
February	18	97,863	0.19	0.12
March	22	80,883	0.16	0.10
April_(Note 1)_	14.5	450,569	0.89	0.54
May	21	186,477	0.37	0.22
June	20	276,703	0.55	0.33
July	21	99,324	0.20	0.12
August_(Note 2)_	13	131,774	0.26	0.16
September	19	108,650	0.22	0.13
October_(Note 3)_	17	58,250	0.12	0.07
November_(Note 3)_	19	26,505	0.05	0.03
December	19	11,553	0.02	0.01
2008
January (up to and including
the Last Trading Date)(Note 4)	5.5	3,151,833	6.24	3.78
Post-Announcement Period
January (from 29 January to
31 January 2008)	3	6,435,252	12.74	7.73
February 2008 (up to and including
the Latest Practicable Date)	9	620,761	1.23	0.75

Source: the Stock Exchange web-site (www.hkex.com.hk)

Notes:

Trading in the Shares was suspended from 4 April 2007 (half-day suspension) to 12 April 2007 (both days inclusive).
Trading in the Shares was suspended from 6 August 2007 to 17 August 2007 (both days inclusive).
Trading in the Shares was suspended from 26 October 2007 to 5 November 2007 (both days inclusive).
Trading in the Shares was suspended from 9 January 2008 (half-day suspension) to 28 January 2008 (both days inclusive).
Based on 50,530,574 Shares held in public hands on the Latest Practicable Date.
Based on 83,285,449 Shares in issue on the Latest Practicable Date.

LETTER FROM SOUTH CHINA CAPITAL

The above table illustrated that the average daily trading volume of the Shares per month was thin during the Review Period, with ranges of approximately 0.02% to 12.74% and approximately 0.01% to 7.73% of the total number of issued Shares held by the public as at the Latest Practicable Date and the total number of issued Shares as at the Latest Practicable Date respectively. We noted that the trading in the Shares had been inactive historically prior to the Post-Announcement Period except for January 2008 after the date of the MOU. As a result, we consider that the historical price of the Shares may not serve as a good benchmark to determine the fairness and reasonableness of the Issue Price given also that trading in the Shares was inactive historically.

During the Post-Announcement Period, we noted that the closing price of the Shares had increased by approximately 68.42% from HK$0.76 per Share as at the Last Trading Date to HK$1.28 per Share as at the Latest Practicable Date. Besides that, trading in the Shares had also become more active following the release of the Announcement. The price movement in the Shares, together with the rise in trading volume of the Shares after the release of the Announcement and up to the Latest Practicable Date represent, in our opinion, a positive response from the market to the Subscription Agreement and reflect the market perception of the potential benefits of the Subscription Agreement to the Company upon Completion.

LETTER FROM SOUTH CHINA CAPITAL

Comparison with other transactions involving the share subscription

To further evaluate the fairness and reasonableness of the Subscription Price, we have identified, to the best of our knowledge and as far as we are aware of, nine share subscription transactions involving a change in control and an application for whitewash waiver by companies listed on the Stock Exchange from 1 January 2006 up to the Latest Practicable Date (the “Subscription Price Comparables”). The Subscription Price Comparables are exhaustive and are fair and representative samples even though Shareholders should also note that the businesses, operations and prospects of the Company are not the same as the Subscription Price Comparables as set out in the table below. The Subscription Price Comparables are hence only being used to provide a general reference for the common market practice of companies listed on the Stock Exchange in transactions which involved the subscription of shares. The table below summarises our relevant findings:

					Premium/(Discount) of
					the subscription
					price over/to
					the closing price of the
				Market	Shares as at the last
				capitalisation	trading date prior
			Date of	as at the date of	to the release of
Company	Stock	Code	announcement	the Announcement	the announcement
				HK$‘000	%
Prime Investments Holdings Limited		721	17 February 2006	341,410	(72.40)
Pearl Oriental Innovation Limited
(formerly known as
China Merchants Dichain
(Asia) Limited)		632	23 March 2006	387,282	(67.74)
Great Wall Cybertech Limited		689	21 April 2006	1,240,509	(96.59)
The Sun’s Group Limited		988	29 May 2006	722,231	(90.00)
Panva Gas Holdings Limited		1083	4 December 2006	7,316,750	5.56
Forfront International Holdings Limited		885	16 February 2007	616,105	(62.63)
Vision Tech International Holdings Limited		922	28 June 2007	17,865	(79.59)
China Elegance (Holdings) Limited		476	29 August 2007	1,132,467	(2.17)
China Vanguard Group Limited		8156	17 January 2008	717,728	(15.85)
Maximum					5.56
Minimum					(96.59)
The Company		371	28 January 2008	63,297	(47.37)

Source: the Stock Exchange web-site (www.hkex.com.hk)

We noted from the above table that the subscription prices of the shares of the nine Subscription Price Comparables ranged from a discount of approximately 96.56% to a premium of approximately 5.56% to/over the respective closing prices of their shares as at the last trading dates prior to the release of the relevant announcements. Out of the nine Subscription Price Comparables, the issue prices of eight of them represented discounts to the closing prices of their shares as at the last trading dates prior to the release of the announcements. The Subscription Price, which represents a discount of approximately 47.37% to the closing price of the Shares on the Last Trading Date, thus falls within the said market range of the Subscription Price Comparables and we consider such discount to be acceptable.

LETTER FROM SOUTH CHINA CAPITAL

Comparison with other issues of convertible bond/note

To further evaluate the fairness and reasonableness of the terms of the Firm Bonds, the First Option Bonds and the Second Option Bonds, we have identified to the best of our knowledge and as far as we are aware of, 24 transactions by companies listed on the Stock Exchange which involved the issue of convertible bond/note from 1 December 2007 up to the Latest Practicable Date (the “CB Comparables”). The CB Comparables are exhaustive and are fair and representative samples even though Shareholders should also note that the businesses, operations and prospects of the Company are not the same as the CB Comparables as set out in the table below. The CB Comparables are hence only being used to provide a general reference for the common market practice of companies listed on the Stock Exchange in transactions which involved the issue of convertible bond/note. The table below summarises our relevant findings:

						Premium/(Discount)
						of the conversion
						price over/to
						the closing price
						of the Shares
						as at the last trading
						date prior to
			Date of			the release of
Company	Stock	Code	announcement	Term	Interest	the announcement
					%	%
Pacific Basin Shipping Limited		2343	3 December 2007	2	3.30	27.01
Imagi International Holdings Limited		585	4 December 2007	3	0	25.39
New Smart Energy Group Limited		91	4 December 2007	5	0	40.35
Kai Yuan Holdings Limited		1215	4 December 2007	2	3.50	0
Dynamic Energy Holdings Limited		578	6 December 2007	2	2.00	19.21
Cosmopolitan International Holdings Limited		120	7 December 2007	2.6	0	3.45
B.A.L. Holdings Limited		8079	7 December 2007	2	0	0
China Rise International Holdings Limited		723	7 December 2007	5	1.50	(7.14)
Espco Technology Holdings Limited		8299	18 December 2007	5	0	(54.55)
The Sun’s Group Limited		988	19 December 2007	3	2.00	12.61
Rising Development Holdings Limited		1004	10 January 2008	3	1.00	(9.68)
Asian Capital Resources (Holdings) Limited		8025	11 January 2008	2	0	(16.15)
Artel Solutions Group Holdings Limited		931	15 January 2008	5	0	4.32
Intelli-Media Group (Holdings) Limited		8173	15 January 2008	2	0	(44.44)
Glory Future Group Limited		8071	23 January 2008	5	0	2.56
Frankie Dominion International Limited		704	24 January 2008	5	0	(91.92)
Artfield Group Limited		1229	28 January 2008	3	0	(86.75)
Mongolia Energy Corporation Limited		276	1 February 2008	3	0	5.04
Sungreen International Holdings Limited		8306	4 February 2008	7	3.00	5.77
Sunny Global Holdings Limited		1094	5 February 2008	3	0	(86.72)
Mandarin Entertainment (Holdings) Limited		9	6 February 2008	3	0	(27.27)
Sun Man Tai Holdings Company Limited		433	6 February 2008	3	0	0
Dickson Group Holdings Limited		313	12 February 2008	2	0	(52.38)
Wah Nam International Holdings Limited		159	12 February 2008	5	0	(45.45)
Maximum					3.5	40.35
Minimum					0	(91.92)
The Company		371	28 January 2008	3	0	(47.37)

Source: the Stock Exchange web-site (www.hkex.com.hk)

LETTER FROM SOUTH CHINA CAPITAL

(i) The Initial Conversion Price

The conversion prices of the CB Comparables ranged from a discount of approximately 91.92% to a premium of approximately 40.35% to/over the respective closing prices of their shares as at the last trading dates prior to the release of the relevant issue of convertible bond/note announcements. Accordingly, the Initial Conversion Price, which represents a discount of 47.37% to the closing price of the Shares on the Last Trading Date, falls within the said market range of the CB Comparables and we consider such discount to be acceptable.

In addition, as presented under the paragraph headed “The Subscription Price and the Initial Conversion Price” in this letter, since the Initial Conversion Price represents a premium over the Latest NAV per Share, we consider the Initial Conversion Price to be in the interests of the Company and the Shareholders as a whole.

(ii) Annual interest rate

As presented by the above table, the CB Comparables carried an annual interest rate of 0% to 3.5%. The Firm Bonds, the First Option Bonds and the Second Option Bonds, which do not bear any interest, hence fall within and is at the minimum of the said market range of the CB Comparables. Due to this reason, we are of the view that the interest rate of the Firm Bonds, the First Option Bonds and the Second Option Bonds is in the interests of the Company and the Shareholders as a whole.

In addition, we have also reviewed the other terms of the Subscription Agreement (including the terms of the Share Subscription, the Firm Bonds, the First Option Bonds and the Second Option Bonds) and are not aware of any terms which are uncommon to normal market practice. Accordingly, we are of the view that the terms of the Subscription Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

LETTER FROM SOUTH CHINA CAPITAL

(3) Dilution effect on the shareholding interests of the public Shareholders

The table below demonstrates the Company’s shareholding structure (i) as at the Latest Practicable Date; (ii) as enlarged by the issue of the Subscription Shares; (iii) as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds; (iv) as enlarged by the issue of the Subscription Shares and the Conversion Shares upon full exercise of the Firm Bonds, the First Option Bonds and the Second Option Bonds; and (v) as enlarged by the issue of the Subscription Shares, the Conversion Shares upon full exercise of the Firm Bonds, the First Option Bonds and the Second Option Bonds and the conversion Shares upon full exercise of the Tranche 1 Bond and the Tranche 2 Bond:

As at the Practicab No. of Shares – 394,800 18,797,875 13,957,000 50,135,774 50,135,774 83,285,449	Latest le Date % of total issued Shares - 0.47	After issue of the Subscription Shares % of total No. of issued Shares Shares 247,000,000 74.78 394,800 0.12	After issue of the Subscription Shares % of total No. of issued Shares Shares 247,000,000 74.78 394,800 0.12	After issue of the Subscription Shares and exercise in full of the Firm *Bonds(Note 4)*** % of total No. of issued Shares Shares 747,000,000 89.97 394,800 0.05	After issue of the Subscription Shares and exercise in full of the Firm *Bonds(Note 4)*** % of total No. of issued Shares Shares 747,000,000 89.97 394,800 0.05	After issue of the Subscription Shares and exercise in full of the Firm Bonds, the First Option Bonds and the Second Option *Bonds(Note 4)*** % of total No. of issued Shares Shares 1,997,000,000 96.00 394,800 0.02	After issue of the Subscription Shares and exercise in full of the Firm Bonds, the First Option Bonds and the Second Option *Bonds(Note 4)*** % of total No. of issued Shares Shares 1,997,000,000 96.00 394,800 0.02	After issue of the Subscription Shares and exercise in full of the Firm Bonds, the First Option Bonds, the Second Option Bonds, the Tranche 1 Bond and the Tranche *2 Bond(Note 5)*** % of total No. of issued Shares Shares 1,997,000,000 77.39 394,800 0.02	After issue of the Subscription Shares and exercise in full of the Firm Bonds, the First Option Bonds, the Second Option Bonds, the Tranche 1 Bond and the Tranche *2 Bond(Note 5)*** % of total No. of issued Shares Shares 1,997,000,000 77.39 394,800 0.02
18,797,875 13,957,000	22.57 16.76	18,797,875 13,957,000 50,135,774	5.69 4.23 15.18	18,797,875 13,957,000 50,135,774	2.26 1.68 6.04	18,797,875 13,957,000 50,135,774	0.90 0.67 2.41	518,797,875	20.11
								13,957,000 50,135,774	0.54 1.94
50,135,774	60.20
	60.20 100.00	82,890,649 330,285,449	25.10 100.00	82,890,649 830,285,449	9.98 100.00	82,890,649 2,080,285,449	3.98	64,092,774 2,580,285,449	2.48
							100.00		100.00

Notes:

Mr. Chase J Wong is an executive Director.
PWL is ultimately and beneficially owned by Ms. Lucy Du as to 50% and Ms. Helen Zhang as to 50%.
Aster Well Limited is ultimately and beneficially owned by Ms. Guan Mei, an executive Director and Deputy Chairman of the Company. Ms. Guan Mei has agreed with the Company that she will resign as Director after conclusion of the SGM and before the Completion.
It will be a term of the respective bonds that the holder(s) of the Bonds shall not exercise any of the conversion rights attaching to the respective bonds, if following such exercise, the Company’s minimum public float of the Shares as required under the Listing Rules cannot be maintained.
Pursuant to the subscription agreement dated 12 April 2007 entered into between the Company and PWL, the Company will only issue conversion shares upon exercise of the Tranche 1 Bond and the Tranche 2 Bond to the extent that there is sufficient public float of the Shares of at least 25% (or such other percentage as determined by the Stock Exchange) of the issued share capital of the Company as enlarged by the issue of such conversion shares.

LETTER FROM SOUTH CHINA CAPITAL

As demonstrated by the above table, the shareholding interests of the public Shareholders will be reduced from approximately 60.20% to:

(i) approximately 25.10% immediately after the issue of the Subscription Shares;
(ii) approximately 9.98% immediately after the issue of the Subscription Shares and the exercise in full of the Firm Bonds;
(iii) approximately 3.98% immediately after the issue of the Subscription Shares and the exercise in full of the Firm Bonds, the First Option Bonds and the Second Option Bonds; and
(iv) approximately 2.48% immediately after the issue of the Subscription Shares and the exercise in full of the Firm Bonds, the First Option Bonds, the Second Option Bonds, the Tranche 1 Bond and the Tranche 2 Bond.

We noted that the shareholding interests of the existing Independent Shareholders is subject to dilution of the aforementioned extents as a result of the Share Subscription, the possible exercise in full of the Firm Bonds, the First Option Bonds and the Second Option Bonds. However, as balanced by (i) the Group has been suffering from prolonged persistent losses since 1999; (ii) the Group is in need for new investor(s) with extensive business network and experience which would enable the Group to identify future investment opportunities to diversify its existing business; and (iii) the terms of the Subscription Agreement, including the terms of the Share Subscription, the Firm Bonds, the First Option Bonds and the Second Option Bonds, are in the interests of the Company and the Shareholders as a whole and are fair and reasonable so far as the Independent Shareholders are concerned, we consider the possible dilution effect on the public Shareholders to be justifiable, and also that the Subscription Agreement is in the interests of the Company and the Shareholders as a whole.

After completion of the Share Subscription and exercise in full of the Firm Bonds, the First Option Bonds and the Second Option Bonds (assuming that the Call Options will be exercised by the Subscriber), the public float of the Company will fail to meet the minimum requirement of the Listing Rules of 25%, the Subscriber has given an undertaking to the Stock Exchange in order to meet the minimum public float requirement under Rule 8.08 of the Listing Rules. In light of such undertaking, we are of the view that the shareholding interests of the public Shareholders would be safeguarded.

LETTER FROM SOUTH CHINA CAPITAL

(4) Financial effects of the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options to the Group

Effect on net asset value

As referred to in the 2007 Annual Report, the audited consolidated NAV of the Group was approximately HK$31.44 million as at 30 June 2007. As confirmed by the Directors, the NAV and the NAV per Share would rise due to the issue of the Subscription Shares. Regarding the issue of the Firm Bonds, we are advised by the Directors that the Firm Bonds would be divided into a liability component and an equity component in the consolidated balance sheet of the Group, the extent of which has not yet been determined at this early stage and would only be determined when the Group prepares its annual report for the year ended 30 June 2008. As for the Call Options, the Directors further confirmed that they are unable to assess the impact of the Call Options on the Group until the Call Options are exercised by the Subscriber.

Effect on earnings

The Directors expected that the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options would not have any immediately impact on the earnings position of the Group. However, in view of the future prospect of the water industry in the PRC, the Directors are optimistic about the future earnings of the Group following the Group’s penetration into such industry.

Effect on gearing

As extracted from the 2007 Annual Report, the gearing level of the Group, which is calculated as total borrowings divided by total assets, was nil as at 30 June 2007. As aforementioned, the consolidated NAV and the total assets of the Group would rise due to the Share Subscription whereas the Group’s total borrowings would remain unchanged. Furthermore, as just mentioned, the relevant accounting entries for the Firm Bonds and the grant of the Call Options have not yet been determined and as a result, the impact of the issue of the Firm Bonds and the grant of the Call Options on the gearing level of the Group could not be estimated at this early stage.

Effect on working capital

We noted from the Board Letter that the gross proceeds from the Share Subscription and the issue of the Firm Bonds are HK$98.8 million and HK$200 million respectively. Thus, the Share Subscription and the issue of the Firm Bonds would increase the working capital of the Group. In the event that the both the First Call Option and the Second Call Option are exercised by the Subscriber in the future, the Group would receive a further of HK$300 million and HK$200 million through the issue of the First Option Bonds and the Second Option Bonds. Besides that, since the Firm Bonds, the First Option Bonds and the Second Option Bonds would not incur any interest payment, the Directors confirmed that the issue of the Firm Bonds, the First Option Bonds and the Second Option Bonds would not lead to any negative effect on the working capital position of the Group.

It should be noted that the aforementioned analyses are for illustrative purpose only and does not purport to represent how the financial position of the Company will be upon completion of the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options.

LETTER FROM SOUTH CHINA CAPITAL

THE WHITEWASH WAIVER

In this regard, the Subscriber has made an application to the Executive for the granting of the Whitewash Waiver pursuant to Note 1 on Dispensations from Rule 26 of the Takeovers Code. The Executive has indicated that the Whitewash Waiver would be granted. The Whitewash Waiver will be subject to approval of the Independent Shareholders by way of poll at the SGM. The Subscriber, BEHL and their respective concert parties and associates shall abstain from voting on the relevant resolution(s) approving the Subscription Agreement and the transactions contemplated thereunder, and the Whitewash Waiver at the SGM.

It is a condition precedent to the Subscription Agreement that the Whitewash Waiver is granted by the Executive. If the Whitewash Waiver is not granted by the Executive or if any of the conditions of the Subscription Agreement is not fulfilled, the Subscription Agreement will not proceed to Completion.

Given the aforementioned potential benefits of the Subscription Agreement and the transactions contemplated thereunder to the Company and the terms of the Subscription Agreement being fair and reasonable so far as the Independent Shareholders are concerned, we are of the opinion that the approval of the Whitewash Waiver, which is a prerequisite for the completion of the Subscription Agreement, is in the interests of the Company and the Shareholders as a whole and is fair and reasonable for the purpose of proceeding with the Subscription Agreement.

Shareholders should note that upon completion of the Share Subscription, the Subscriber and parties acting in concert with it will hold more than 50% of the enlarged issued share capital of the Company. In the event that the Subscriber and its concert parties’ shareholding interests in the Company exceed 50% upon completion of the Share Subscription, and the Whitewash Waiver is approved of the Independent Shareholders and granted by the Executive, the Subscriber and parties acting in concert with it may increase their shareholdings in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer.

LETTER FROM SOUTH CHINA CAPITAL

RECOMMENDATION

Having taken into account the above principal factors and reasons, we consider that the terms of the Subscription Agreement are on normal and commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned. Furthermore, the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options are in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee to advise the Independent Shareholders to vote in favour of the relevant resolution(s) at the SGM to approve the Subscription Agreement and the transactions contemplated thereunder. We also recommend the Independent Shareholders to vote in favour of the relevant resolution(s) to approve the Subscription Agreement and the transactions contemplated thereunder at the SGM.

Taking into consideration the reasons and benefits of the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options and that the Share Subscription, the issue of the Firm Bonds and the grant of the Call Options are conditional upon the grant of the Whitewash Waiver, we consider that the Whitewash Waiver is in the interests of the Company and the Shareholders as whole. Accordingly, we advise the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution in relation to the Whitewash Waiver at the SGM. We also recommend the Independent Shareholders to vote in favour of the resolution to approve the Whitewash Waiver at the SGM.

Yours faithfully, For and on behalf of South China Capital Limited Graham Lam Director

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL SUMMARY

The auditors of the Company for the year ended 30 June 2005 and 2006 are Deloitte Touche Tohmatsu and for the year ended 30 June 2007 are HLM & Co. The respective audit opinions of Deloitte Touche Tohmatsu and HLM & Co. are not qualified. The following is a summary of the audited consolidated income statement of the Group for the three years ended 30 June 2007:

Turnover Cost of sales Gross profit Interest income Other income Distribution costs Amortisation of goodwill Administrative expenses Loss before taxation Income tax (charge) credit Loss for the year attribute to equity holders of the Company Loss per share-basic_(Note 1)_	2005 HK$’000 (restated) 66,036 (64,096) 1,940 236 678 (155) (12,400) (6,214) (15,915) (48) (15,963) (23.44 HK cents)	2006 HK$’000 35,786 (34,911) 875 815 48 (73) – (4,867) (3,202) 14 (3,188) (3.93 HK cents)	2007 HK$’000 19,899 (19,695) 204 1,067 295 - – (4,186) (2,620) 53 (2,567) (3.08 HK cents)

Note:

The calculation of the loss per share for the year ended 30 June 2007 is based on the loss for the year of approximately HK$2,567,000 (2006: HK$3,188,000) and on weighted average of 83,285,449 (2006: 81,108,618) shares in issue throughout the year. The calculation of the loss per share for the year ended 30 June 2005 is based on the loss for the year of approximately HK$15,963,000 and on weighted average of 68,087,373 which was adjusted for an open offer shares in issue in 2005.
On 22 August 2005, the Company raised net proceeds of approximately HK$2.6 million by an open offer of 27,761,816 offer shares at HK$0.10 per share on the basis of one offer share for every two shares held (the “Open Offer”) to provide additional working capital for the Company. Upon the completion of the Open Offer, the number of ordinary shares issued and fully paid of the Company was increased from 55,523,633 to 83,285,449. Except for the aforesaid, no extraordinary items, exceptional items or minority interests were noted.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. AUDITED FINANCIAL STATEMENTS

The following is an extract of the audited financial statements of the Group together with the notes thereto from the annual report of the Company for the year ended 30 June 2007:

CONSOLIDATED INCOME STATEMENT

For the year ended 30 June 2007

NOTES Turnover 5 Cost of sales Gross profit Interest income Other income Distribution costs Administrative expenses Loss before taxation 6 Income tax credit 9 Loss for the year attributable to equity holders of the Company Loss per share-basic 10	2007 HK$’000 19,899 (19,695 ) 204 1,067 295 – (4,186 ) (2,620 ) 53 (2,567 ) (3.08 HK cents )	2006 HK$’000 35,786 (34,911 ) 875 815 48 (73 ) (4,867 ) (3,202 ) 14 (3,188 ) (3.93 HK cents )

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

At 30 June 2007

NOTES NON-CURRENT ASSETS Property, plant and equipment 11 Goodwill 12 CURRENT ASSETS Trade receivables, deposits and prepayment 13 Investments held-for-trading 14 Pledged bank deposits 15 Bank balances and cash 16 CURRENT LIABILITY Trade and other payables 17 NET CURRENT ASSETS CAPITAL AND RESERVES Share capital 18 Reserves	2007 HK$’000 71 – 71 2,251 431 75 29,287 32,044 679 31,365 31,436 8,328 23,108 31,436	2006 HK$’000 97 –
		97 154 1,682 75 32,088
		33,999 744
		33,255
		33,352

		8,328 25,024
		33,352

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2007

At 1 July 2005 Exchange differences arising on translation of foreign operations directly recognized in equity Loss for the year Total recognized income (expenses) for the year Issue of shares At 30 June 2006 and 1 July 2006 Exchange differences arising on translation of foreign operations directly recognized in equity Loss for the year Total recognized income (expenses) for the year At 30 June 2007	Share capital HK$’000 5,552 – – – 2,776 8,328 – – – 8,328	Capital reserve HK$’000 (note) (400 ) – – – – (400 ) – – – (400 )	Translation reserve HK$’000 – 323 – 323 – 323 651 – 651 974	Accumulated (losses)/ retained profits HK$’000 28,289 – (3,188 ) (3,188 ) – 25,101 – (2,567 ) (2,567 ) 22,534	Total HK$’000 33,441 323 (3,188 ) (2,865 ) 2,776 33,352 651 (2,567 ) (1,916 ) 31,436

Note: The capital reserve represents the difference between the nominal value of the share capital issued by the Company in exchange for the nominal value of the share capital of the subsidiaries pursuant to the group reorganization in March 1993.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2007

OPERATING ACTIVITIES Loss before taxation Adjustments for: Loss/(gain) on disposal of property, plant and equipment Depreciation of property, plant and equipment (Gain)/loss on change in fair value of investments held-for-trading Write-back of bad debts Interest income Operating cash flows before movements in working capital (Increase) decrease in trade receivables, deposits and prepayments Increase in investments held-for-trading Decrease in trade and other payables Cash (used in) generated from operations PRC enterprise income tax refunded NET CASH (USED IN) GENERATED FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Purchases of property, plant and equipment Proceeds on disposal of investment securities Proceeds from disposal of property, plant and equipment Interest received NET CASH GENERATED FROM INVESTING ACTIVITIES	2007 HK$’000 (2,620 ) 13 40 (25 ) – (1,067 ) (3,659 ) (2,044 ) – (65 ) (5,768 ) – (5,768 ) (27 ) 1,276 – 1,067 2,316	2006 HK$’000 (3,202 ) (26 ) 61 25 (6 ) (815 ) (3,963 ) 6,922 454 (2,466 ) 947 14 961 (2 ) – 26 815 839

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCING ACTIVITIES Issue of shares CASH GENERATED FROM FINANCING ACTIVITIES NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT END OF THE YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances and cash	2007 HK$’000 – – (3,452 ) 651 32,088 29,287 29,287	2006 HK$’000 2,776
		2,776
		4,576 224 27,288
		32,088
		32,088

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 June 2007

1. GENERAL

The Company is incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited. The address of the registered office and principal place of business of the Company are disclosed in the “Corporate Information” section to the annual report.

The principal activities of the Group are the trading of computers and related products.

The Company is an investment holding company. The principal activities and other particulars of its subsidiaries are set out in note 22 to the consolidated financial statements.

The consolidated financial statements are presented in Hong Kong dollars, which is the functional currency of the Company.

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has applied, for the first time, a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”), Hong Kong Accounting Standards (“HKASs”) and Interpretations (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are effective for accounting periods beginning on or after 1 January 2006, 1 May 2006 or 1 June 2006. The adoption of the new HKFRSs has no material effect on the results and the financial position for the current or prior accounting years. Accordingly, no prior year adjustment has been required.

The Group has not early applied the following new standards, amendments in and interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these new standards, amendments or interpretations will have no material impact on the result and financial position of the Group.

HKAS 1 (Amendment) Capital disclosures1 HKAS 23 (Revised) Borrowing Costs2 HKFRS 7 Financial Instruments: Disclosure1 HKFRS 8 Operating Segments2 HK(IFRIC) – INT 10 Interim Financial Reporting and Impairment3 HK(IFRIC) – INT 11 HKFRS 2 – Group and Treasury Share Transactions4 HK(IFRIC) – INT 12 Service Concession Arrangements5

1 Effective for annual periods beginning on or after 1 January 2007 2
Effective for annual periods beginning on or after 1 January 2009
3
Effective for annual periods beginning on or after 1 November 2006
4
Effective for annual periods beginning on or after 1 March 2007
5
Effective for annual periods beginning on or after 1 January 2008

3. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and the Hong Kong Companies Ordinance.

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments which are measured at fair values, as explained in the accounting policies set out below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Goodwill

Goodwill arising on acquisitions prior to 1 January 2005

Goodwill arising on an acquisition of a subsidiary for which the agreement date is before 1 January 2005 represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of the relevant subsidiary at the date of acquisition. Such goodwill is carried at cost less amortization and any accumulated impairment losses.

For previously capitalized goodwill arising on acquisitions, the Group has discontinued amortisation from 1 July 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired.

Capitalised goodwill arising on an acquisition of a business is presented separately in the consolidated balance sheet.

On subsequent disposal of a subsidiary, the attributable amount of goodwill capitalized is included in the determination of the amount of profit or loss on disposal.

Revenue recognition

Sales of goods are recognized when goods are delivered and title has been passed.

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

Property, plant and equipment

Property, plant and equipment are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives, on a straight line basis, at the following rates per annum:

Leasehold land and building	2%-5%
Leasehold improvements	Over the term of the lease
Furniture and fixtures	20%
Office equipment and computers	20%
Motor vehicles	30%

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is dereognised.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Rentals payable under operating leases are charged to consolidated income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognized as a reduction of rental expense over the lease term on a straight-line basis.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognized in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in equity, in which cases, the exchange differences are also recognized directly in equity.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognized as a separate component of equity (the translation reserve). Such exchange differences are recognized in profit or loss in the period in which the foreign operation is disposed of.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Impairment losses

At each balance sheet date, the Group reviews the varying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately.

Where an impairment loss subsequently reverses, the varying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized as income immediately

Financial instruments

Financial assets and financial liabilities are recognized on the consolidated balance sheet when an entity of the Group becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in consolidated income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Financial assets

The Group’s financial assets are classified into financial assets at fair value through profit or loss and loans and receivables. All regular way purchases or sales of financial assets are recognized and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss have two subcategories, including financial assets held for trading and those designated at fair value through profit or loss on initial recognition. At each balance sheet date subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value with changes in fair value recognized directly in profit or loss in the period in which they arise.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade receivables and deposits, pledged bank deposits and bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognized.

Financial liabilities and equity instruments

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Financial liabilities

Financial liabilities of trade and other payables are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognized directly in equity is recognized in profit or loss.

For financial liabilities, they are removed from the Group’s balance sheet (i.e. when the obligation specified in the relevant contract is discharged, cancelled or expired). The difference between the carrying amount of the financial liability derecognised and the consideration paid or payable is recognized in profit or loss.

Retirement benefit costs

Payments to defined contribution retirement benefit plans and state-sponsored pension plan are charged as expenses as they fall due.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s major financial instruments include trade receivables and deposits, investments held-for-trading, pledged bank deposits, bank balances and cash and other payables Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Currency risk

Several subsidiaries of the Company have foreign currency sales, which expose the Group to foreign currency risk. Certain trade receivables of the Group are denominated in foreign currencies. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties’ failure to perform their obligations in relation to each class of recognized financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimize the credit risk, the management has credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

Although the bank balances are concentrated on certain counterparties, the credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.

Price risk

The Group is exposed to equity security price risk. The management manages this exposure by maintaining a portfolio of investments with different risk profiles.

5. SEGMENTAL INFORMATION

Revenue

Revenue represents the net amounts received and receivable for goods sold, less returns and allowance, to outside customers during the year.

Business segments

Revenue and contribution to operating results and assets and liabilities by business segments have not been prepared as the Group’s revenue was solely derived from the trading of computers and related products.

Geographical segments

For management purposes, the Group is currently organized into two major geographical segments based on the destination of shipment of products. These segments are the basis on which the Group reports its primary segment information.

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The following is an analysis of the Group’s sales by geographical market irrespective of the origin of the goods:

CONSOLIDATED INCOME STATEMENT

Year ended 30 June 2007

REVENUE External sales RESULT Segment result Interest income Unallocated corporate incomes Unallocated corporate expenses Loss before taxation Income tax credit Loss for the year CONSOLIDATED BALANCE SHEET At 30 June 2007 ASSETS Segment assets Unallocated corporate assets Consolidated total assets LIABILITIES Segment liabilities Unallocated corporate liabilities Consolidated total liabilities OTHER INFORMATION Year ended 30 June 2007 Capital additions Depreciation and amortisation of property, plant and equipment	Hong Kong HK$’000 17,775 (2,265 ) – Hong Kong HK$’000 2,931 325 Hong Kong HK$’000 27 36	The People’s Republic of China (the “PRC”) other than Hong Kong HK$’000 2,124 (385 ) 53 PRC other than Hong Kong HK$’000 12,099 340 PRC other than Hong Kong HK$’000 – 4	Consolidated HK$’000 19,899 (2,650 ) 1,067 295 (1,332 ) (2,620 ) 53 (2,567 ) Consolidated HK$’000 15,030 17,085 32,115 655 14 679 Consolidated HK$’000 27 40

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

CONSOLIDATED INCOME STATEMENT

Year ended 30 June 2006

REVENUE External sales RESULT Segment result Interest income Unallocated corporate expenses Loss before taxation Income tax credit Loss for the year CONSOLIDATED INCOME STATEMENT Year ended 30 June 2006 ASSETS Segment assets Unallocated corporate assets Consolidated total assets LIABILITIES Segment liabilities Unallocated corporate liabilities Consolidated total liabilities OTHER INFORMATION Year ended 30 June 2006 Capital additions Depreciation and amortisation of property, plant and equipment Write-back of bad debts	Hong Kong HK$’000 35,405 (1,924 ) – Hong Kong HK$’000 194 162 Hong Kong HK$’000 2 58 (6 )	PRC other than Hong Kong HK$’000 381 (583 ) 14 PRC other than Hong Kong HK$’000 57 262 PRC other than Hong Kong HK$’000 – 3 –	Consolidated HK$’000 35,786 (2,507 ) 815 (1,510 ) (3,202 ) 14 (3,188 ) Consolidated HK$’000 251 33,845 34,096 424 320 744 Consolidated HK$’000 2 61 (6 )

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. LOSS BEFORE TAXATION

Loss before taxation has been arrived at after charging: Directors’ remuneration_(note 7)_ Fees Other emoluments Other staff costs Salaries Retirement benefit scheme contributions Total staff costs Auditors’ remuneration Depreciation of property, plant and equipment Loss on change in fair value of investments held-for-trading Net foreign exchange losses and after crediting: Gain on change in fair value of investments held-for-trading Net foreign exchange gain Write-back of bad debts Gain on disposal of property, plant and equipment	2007 HK$’000 718 46 1,695 44 2,503 166 41 – – (25 ) (25 ) – –	2006 HK$’000 410 74 1,882 59 2,425 371 61 25 40 – – (6 ) (26 )

7. DIRECTORS’ EMOLUMENTS

The aggregate amounts of emoluments paid and payable to directors of the Company during the year are as follows.

Name of directors Executive directors Ms. Zhou Liping Ms. Guan Mei Mr. Chase J Wong Mr. Flynn Xuxian Huang Independent non-executive directors Mr. Shea Chun Lok, Quadrant Mr. Ngai Chi Yung Mr.Chan Wai Kwong, Peter Mr.Chan Yiu Kwong Total emoluments	Fees HK$’000 478 – 52 – 530 68 60 57 3 188 718	Other benefits HK$’000 31 – 15 – 46 – – – – – 46	2007 Total emoluments HK$’000 509 – 67 – 576 68 60 57 3 188 764

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Name of director Executive directors Ms. Zhou Liping Ms. Guan Mei Mr. Flynn Xuxian Huang Independent non-executive directors Mr. Shea Chun Lok, Quadrant Mr. Ngai Chi Yung Mr. Chan Yiu Kwong Total emoluments	Fees HK$’000 214 – – 214 68 60 68 196 410	Other benefits HK$’000 74 – – 74 – – – – 74	2006 Total emoluments HK$’000 288 – –
			288 68 60 68
			196
			484

During the years ended 30 June 2007 and 2006, no emoluments were paid by the Group to the five highest paid individuals, including directors, as an inducement to join or upon joining the Group or as compensation for loss of office. No directors waived any emoluments in both years.

8. EMPLOYEES’ EMOLUMENTS

Of the five individuals with the highest emoluments in the Group, one (2006: one) was a director of the Company. Aggregate emoluments of the four (2006: four) other highest paid individuals were as follows:

Salaries and other benefits Contributions to retirement benefits scheme Their emoluments were within the following band: Nil to HK$1,000,000 9. INCOME TAX CREDIT The (credit) comprises: PRC Enterprise Income Tax Current year Overprovision in prior years	2007 2006 HK$’000 HK$’000 1,082 1,172 29 34 1,111 1,206 Number of employees 2007 2006 4 4 2007 2006 HK$’000 HK$’000 – – (53 ) (14 ) (53 ) (14 )	2006 HK$’000 1,172 34
		1,206


		2006 HK$’000 – (14 )
		(14 )

No provision was made for the PRC Enterprise Income Tax for the year ended 30 June 2006 and 2007 as the subsidiary incurred a loss for both years.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

No provision for Hong Kong Profits Tax has been made in the financial statements as the Group’s operations in Hong Kong incurred tax losses for both years.

The tax credit for the year can be reconciled to the loss before taxation as follows:

Loss before taxation Tax at Hong Kong Profits Tax rate of 17.5% (2006:17.5%) Tax effect of expenses not deductible for tax purposes Tax effect of income not taxable for tax purposes Tax effect of deferred tax assets utilised Tax effect of tax losses not recognized Effect of different tax rates of a subsidiary operating in the PRC Overprovision of taxation in prior years Tax credit for the year	2007 HK$’000 (2,620 ) (458 ) 84 (187 ) (44 ) 627 (22 ) (53 ) (53 )	2006 HK$’000 (3,203 ) (560 ) 166 (167 ) (16 ) 520 57 (14 ) (14 )

At 30 June 2007, the Group has deductible temporary differences and estimated unused tax losses of approximately HK$53,993 (2006: HK$272,000) and HK$78,963,892 (2006: HK$75,918,029) respectively available for offset against future profits. No deferred tax assets have been recognized in the consolidated financial statements due to the unpredictability of the future profits streams. The tax losses may be carried forward indefinitely.

10. LOSS PER SHARE

The calculation of the loss per share is based on the loss for the year of approximately HK$2,567,000 (2006: HK$3,188,000) and on weighted average number of 83,285,449 (2006: 81,108,618) shares in issue throughout the year.

On 27 July 2007, the Company issued convertible bonds in the aggregated principal amount of HK$100,000,000. The convertible bonds are zero coupon-based and have maturity terms of three years until 27 July 2010. No diluted loss per share for the year ended 30 June 2007 is presented as the potential ordinary shares in respect of the convertible bonds are anti-dilutive.

No diluted loss per share ended 30 June 2006 is presented as no dilutive potential ordinary shares is in issue for the year.

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

11. PROPERTY, PLANT AND EQUIPMENT

Leasehold improvements HK$’000 COST At 1 July 2005 134 Additions – Disposals – At 30 June 2006 134 Additions – Disposals – At 30 June 2007 134 DEPRECIATION AND IMPAIRMENT At 1 July 2005 30 Provided for the year 44 Eliminated on disposals – At 30 June 2006 74 Provided for the year 27 Eliminated on disposals – At 30 June 2007 101 CARRYING VALUES At 30 June 2007 33 At 30 June 2006 60 GOODWILL COST At 1 July 2005 and 30 June 2006 and 2007 AMORTISATION At 1 July 2005 and 30 June 2006 and 2007 NET BOOK VALUE At 30 June 2007 At 30 June 2006	Furniture and fixtures HK$’000 41 – – 41 – – 41 21 8 – 29 4 – 33 8 12	Office equipment and computers HK$’000 166 2 (10 ) 158 27 (26 ) 159 134 9 (10 ) 133 9 (13 ) 129 30 25	Motor vehicles HK$’000 809 – (809 ) – – – – 809 – (809 ) – – – – – –	Total HK$’000 1,150 2 (819 ) 333 27 (26 ) 334 994 61 (819 ) 236 40 (13 ) 263 71 97 HK$’000 18,600 18,600 –

12. GOODWILL

In previous year, goodwill arising from acquisition of a subsidiary was amortised on a straight-line basis over a period of 3 years. With effect from 1 July 2004, goodwill was amortised on a straight-line basis over a period of 1 year. This change in accounting estimates reflected the Group’s best estimates of the remaining economic life of the goodwill.

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

13. TRADE RECEIVABLES, DEPOSITS AND PREPAYMENTS

The Group allows an average credit period of 60 days to its trade customers. An aged analysis of trade receivables is as follows:

Trade receivables 0 – 30 days 31 – 60 days Over 60 days Deposits and prepayments	2007 HK$’000 2,104 – – 2,104 147 2,251	2006 HK$’000 – – 14
		14 140
		154

The fair value of the Group’s trade receivables and deposits approximates the corresponding carrying amount.

14. INVESTMENTS HELD-FOR-TRADING


	2007	2006
	HK$’000	HK$’000
Equity securities listed in Hong Kong	431	1,682

The fair value of the above investments held-for-trading are determined based on the quoted market bid prices available on the relevant exchanges.

15. PLEDGE OF ASSETS

At 30 June 2007, the Group pledged bank deposits of approximately HK$75,000 (2006: HK$75,000), which carry fixed interest rate of 3.75% to secure general banking facilities granted to a subsidiary.

16. OTHER FINANCIAL ASSETS

Bank balances and cash

The Group’s deposits carrying interest rate at prevailing bank saving deposits rate at average interest rate of 3.5% and mature within 3 months. The directors of the Company consider that the fair value of the Group’s bank balances and cash approximates to the corresponding carrying amount.

17. TRADE AND OTHER PAYABLES

An aged analysis of trade payables is as follows:

Trade payables 0 – 30 days 31 – 60 days Over 60 days Other payables and accrued charges	2007 HK$’000 – – 313 313 366 679	2006 HK$’000 – – 1
		1 743
		744

The fair value of the Group’s trade and other payables approximates the corresponding carrying amount.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. SHARE CAPITAL

Authorised: At beginning and at end of year Issued and fully paid: At beginning of the year Issue of shares_(note i)_ At end of year	Number 2007 1,500,000,000 83,285,449 – 83,285,449	of shares 2006 1,500,000,000 55,523,633 27,761,816 83,285,449	Amount 2007 2006 HK$’000 HK$’000 150,000 150,000 8,328 5,552 – 2,776 8,328 8,328	Amount 2007 2006 HK$’000 HK$’000 150,000 150,000 8,328 5,552 – 2,776 8,328 8,328

				5,552 2,776
				8,328

Notes:

(i) On 22 August, 2005, the Company raised net proceeds of approximately HK$2.6 million by an open offer of 27,761,816 offer shares at HK$0.10 per share on the basis of one offer share for every two shares held (“Open offer”) to provide additional working capital for the Group. Upon the completion of the Open Offer, the number of ordinary shares issued and fully paid of the Company was increased from 55,523,633 to 83,285,449.

19. OPERATING LEASE COMMITMENTS

The Group as lessee

		THE GROUP
	2007	2006
	HK$’000	HK$’000
Minimum lease payments paid under operating leases
in respect of land and buildings	321	369

At the balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating leases in respect of land and buildings which fall due as follows:

Within one year In the second to fifth year inclusive	THE GROUP 2007 2006 HK$’000 HK$’000 237 231 165 39 402 270	THE GROUP 2007 2006 HK$’000 HK$’000 237 231 165 39 402 270
		270

Operating lease payments represent rentals payable by the Group for staff quarters and office premises. Leases are negotiated for terms of one to three years.

20. RETIREMENT BENEFIT SCHEMES

The Group operates a Mandatory Provident Fund Scheme for all qualifying employees. The assets of the scheme are held separately from those of the Group in funds under the control of trustees.

Employees of the Group in the PRC are members of the state-sponsored pension operated by the PRC Government. The Group are required to contribute a certain percentage of their payroll to the pension scheme to fund the benefits. The only obligation of the Group with respect to the pension scheme is to make the required contributions.

The total cost charged to the consolidated in come statement of HK$44,000 (2006: HK$59,000) represents contributions payable to the retirement benefits schemes by the Group in respect of the current year.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. SHARE OPTIONS

The Company’s share option scheme (the “Scheme”) was adopted pursuant to a resolution passed on 20 March 2002 for the primary purpose of providing incentives to directors and eligible employees. Under the Scheme, the Board of directors of the Company may grant options to eligible employees, including directors of the Company and its subsidiaries, to subscribe for shares in the Company. Additionally, the Company may, from time to time, grant share options to outside third parties for settlement in respect of goods or services provided to the Company.

All of the share options were lapsed at 30 June 2003 and no share option has been granted to the directors or employees of the Group during both years ended 30 June 2007 and 2006.

22. PARTICULARS OF PRINCIPAL SUBSIDIARIES

At 30 June 2007, the Company had interests in the following principal subsidiaries:

		Paid-up	Proportion of	Proportion of
	Place of	issued/	nominal value
	incorporation	registered	of issued share
	or registration/	ordinary	capital/Registered
Name of subsidiary	operations	share capital	capital	held by	Principal activities
			Company	Subsidiaries
			%	%
Carion Technology Limited	Hong Kong	HK$10,000	100	–	Trading of computer
永裕科技（香港）有限公司					related products
Shanghai Classic Limited	British Virgin Islands	US$1	100	–	Investment holding
Wanon Industries Limited	Hong Kong	HK$500,000	100	–	Trading of computers and
運亮實業有限公司					related products
Wanon Trading Limited	Hong Kong	HK$2	–	100	Trading of computer
運亮貿易有限公司					and related products
Shanghai Jian Kai Intemational	PRC	HK$11,000,000	–	100	Trading of computer
Trading Company Limited*					and related products
上海建開國際貿易有限公司
Shang Hua Capital Limited	Hong Kong	HK$200,000	100	–	Provision of financial
上華融資有限公司					services
Shang Hua Properties Limited	Hong Kong	HK$2	100	–	Dormant
上華資產有限公司

None of the subsidiaries had issued any debt securities at any time during the year or at the end of year.

A wholly foreign owned enterprise.

23. RELATED PARTY TRANSACTIONS

Compensation of key management personnel

The remuneration of directors and other members of key management during the year was as follows:

Short-term benefits Post-employment benefits	2007 HK$’000 1,191 – 1,191	2006 HK$’000 1,401 22
		1,423

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24. SUBSEQUENT EVENTS

On 27 July 2007, Shang Hua Holding Limited issued convertible bonds in the aggregate principal amount HK$100,000,000. These convertible bonds are zero coupon-based, have maturity term of three year until 27 July 2010 and are convertible into the Company’s ordinary shares at a conversion price of HK$0.4 per share.

25. BALANCE SHEET OF THE COMPANY

Non-current asset Interests in subsidiaries Current assets Bank balances and cash Amounts due from subsidiaries Current liability Trade and other payables Amounts due to a subsidiary Net current assets Capital and reserves Share capital Reserves	2007 HK$’000 202 2,307 30,697 33,004 8 1,700 1,708 31,296 31,498 8,328 23,170 31,498	2006 HK$’000 202
		2,610 29,870
		32,480
		8 –
		8
		32,472
		32,674

		8,328 24,346
		32,674

3. INDEBTEDNESS

The information in this section is updated as at the close of business on 31 December 2007, being the latest practicable date for the purpose of preparing this indebtedness statement prior to the printing of this circular.

On 27 July 2007, the Company issued the Tranche 1 Bond in the principal amount of HK$100,000,000. The Tranche 1 Bond is zero coupon-based and has maturity terms of three years until 27 July 2010.

Save as aforesaid and apart from intra-group liabilities, the Group did not have any mortgages, charges, debentures, loan capital, debt securities (issued and outstanding, or authorized or otherwise created but unissued), loans, bank overdrafts, or other borrowings or similar indebtedness, hire purchase commitments or finance lease, liabilities under acceptances or acceptance credits, or any guarantees or other material contingent liabilities outstanding at the close of business on 31 December 2007.

To the best understanding and knowledge of the Directors, the Directors confirm that there are no material changes to the indebtedness position of the Group since 31 December 2007 up to the Latest Practicable Date.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. MATERIAL CHANGE

The Directors confirm that, save for the proceeds of HK$100,000,000 raised from the issue of the Tranche 1 Bond as disclosed in the announcement of the Company dated 27 July 2007 and the entering into of the Subscription Agreement, there are no material changes in the financial or trading position or outlook of the Group since 30 June 2007, the date to which the latest audited financial statements of the Group were made up.

GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

This document includes particulars given in compliance with the Listing Rules and the Takeovers Code for the purpose of giving information with regard to the Group. The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this document, other than those relating to BEHL and the Subscriber and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document misleading.

The directors of BEHL and the Subscriber jointly and severally accept full responsibility for the accuracy of the information relating to BEHL and the Subscriber contained in this document and confirms, having made all reasonable inquiries, that to the best of their knowledge, opinions expressed in this document have been arrived at after due and careful consideration and there are no other facts relating to the Subscriber not contained in this document, the omission of which would make any statement in this document misleading.

2. DISCLOSURE OF INTEREST

(a) Interests in the Company

(i) Directors’ interests in Shares

As the Latest Practicable Date, the interests of the Directors in the securities of the Company were as follows:

			Approximate
			percentage
			in the issued
Name of Directors	Capacity	Number of Shares	share capital
Ms. Guan Mei	Interest in	13,957,000	16.76%
	controlled	(Note)
	corporation
Mr. Chase J Wong	Beneficial owner	394,800	0.47%

Note: These Shares were held by Aster Well Limited, a company incorporated in the British Virgin Islands and is beneficially and wholly owned by Ms. Guan Mei.

GENERAL INFORMATION

APPENDIX II

(ii) The Subscriber and parties acting in concert with it

Save for the Subscription Agreement, as at the Latest Practicable Date, BEHL the Subscriber, the respective directors of BEHL and the Subscriber and parties acting in concert with any of them did not own of control any securities, convertible securities, warrants, options and derivatives of the Company.

(iii) Others

As at the Latest Practicable Date,

(aa) none of the subsidiaries of the Company, nor any pension funds of the Company or of any of its subsidiaries, nor Macquarie nor South China Capital nor any other advisors to the Company as specified in class (2) of the definition of “associate” under the Takeovers Code owned or controlled any securities, convertible securities, warrants, options or derivatives of the Company;
(bb) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or any person who is an associate of the Company by virtue of clauses (1), (2), (3) and (4) of the definition of associate under the Takeovers Code, the Subscriber, BEHL or any party acting in concert with any of them; and
(cc) no shareholding in the Company was managed on a discretionary basis by fund managers connected with the Company.

(b) Dealing in Securities

(i) Directors

None of the Directors or parties acting in concert with any of them had dealt in any Shares, convertible securities, warrants, options or derivatives of the Company during the period beginning six months prior to the date of the Announcement and ended on the Latest Practicable Date (the “Relevant Period”).

(ii) The Subscriber and parties acting in concert with it

During the Relevant Period, save for entering into the Subscription Agreement, neither the Subscriber, BEHL, the directors of the Subscriber, the directors of BEHL nor any person acting in concert with any of them had dealt in any securities, convertible securities, warrants, options or derivatives of the Company.

GENERAL INFORMATION

APPENDIX II

(iii) Others

During the Relevant Period, none of the subsidiaries of the Company, nor any pension fund of the Company or any of its subsidiaries, nor Macquarie, nor South China Capital or any other advisors to the Company as specified in class (2) of the definition of “associate” under the Takeovers Code had dealt for value in any securities, convertible securities, warrants, options or derivatives of the Company.

During the Relevant Period, no fund managers (other than exempted fund managers) who managed funds on a discretionary basis or connected with the Company had dealt for value in any securities, convertible securities, warrants, options and derivatives of the Company.

(c) Interests and dealings in the Subscriber

None of the Directors nor the Company had any interest in the securities, convertible securities, options, warrants or derivatives of the Subscriber or BEHL nor any of them dealt for value in any securities, convertible securities, options, warrants or derivatives of the Subscriber or BEHL during the Relevant Period.

3. SHARE CAPITAL

(a) Authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:

Authorised: 1,500,000,000 shares of HK$0.10 each Issued and fully paid up or credited as following paid up: 83,285,449 shares of HK$0.10 each	HK$ 150,000,000

	8,328,544.9

All existing Shares rank equally in all aspects, including in particular as to dividend, voting rights and return on capital. The Shares in issue are listed on the Stock Exchange.

No Share has been issued since 30 June 2007, the date to which the latest audited financial statements of the Group were made up.

GENERAL INFORMATION

APPENDIX II

(b) Options, warrants and conversion rights affecting the Shares

On 27 July 2007, the Company issued the Tranche 1 Bond in the principal amount of HK$100,000,000. The Tranche 1 Bond is zero coupon-based and has maturity terms of three years until 27 July 2010.

The Company agreed to issue the Trache 2 Bond in the principal amount of HK$100,000,000 by 31 March 2008 or any other date as agreed by the Company and PWL.

Save as disclosed above, no Share has been put under option or agreed conditionally or unconditionally to be put under option and no warrant, conversion right or derivatives affecting the Shares has been issued or granted or agreed conditionally or unconditionally to be issued or granted.

4. MARKET PRICE

(a) The table below shows the closing price of the Shares on the Stock Exchange on (i) the last day on which trading took place in each of the calendar months during the period commencing 28 July 2007 (being the date falling six months preceding the date of the Announcement) and ending on the Latest Practicable Date (the “Relevant Period”); and (ii) the Latest Practicable Date:

Date	Closing price per Share
	HK$
31 July 2007	1.40
31 August 2007	1.42
28 September 2007	1.30
25 October 2007	1.27
30 November 2007	1.04
31 December 2007	0.80
31 January 2008	1.55
Latest Practicable Date	1.28

(b) The closing price on the Last Trading Date was HK$0.76 per Share.
(c) The highest and lowest closing price of the Shares as quoted on the Stock Exchange during the Relevant Period are HK$2.00 recorded on 2 August 2007 and HK$0.52 recorded on 7 January 2008 respectively.

5. LITIGATIONS AND CLAIMS

As at the Latest Practicable Date, neither the Company nor any other members of the Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was or is known to the Directors to be pending or threatened by or against any member of the Group.

GENERAL INFORMATION

APPENDIX II

6. SERVICE CONTRACTS

Mr. Chase J Wong, an executive Director whose appointment was effective from 5 June 2007, has entered into a service agreement dated 5 June 2007 with the Company for a period of two years. The total amount of current remuneration of Mr. Wong under his service agreement with the Company is HK$60,000 per month and there is no variable remuneration payable thereunder.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors have entered into any service contracts with the Company or any of its subsidiaries or associated companies:

(a) which (including both continuous and fixed term contracts) have been entered into or amended within 6 months before the date of the Announcement and up to the Latest Practicable Date;
(b) which are continuous contracts with a notice period of 12 months or more; or
(c) which are fixed term contracts with more than 12 months to run irrespective of the notice period.

7. DIRECTORS’ INTEREST IN CONTRACTS

As at the Latest Practicable Date,

(a) there is no agreement, arrangement or understanding (including any compensation arrangement) between any of the Directors and (a) any other persons; or (b) BEHL, the Subscriber or any person acting in concert with any of them which is conditional on or dependent upon the outcome of the Subscription Agreement and/or the Whitewash Waiver;
(b) there is no material contract entered into by BEHL or the Subscriber in which any Director has a material personal interest; and
(c) no benefit has been or will be given to any Director as compensation for loss of office or otherwise in connection with the Subscription Agreement and/or the Whitewash Waiver.

8. EXPERT AND CONSENT

The following is the qualification of the expert whose letter is contained in this circular:

Name Qualification

South China Capital

a licensed corporation to carry out type 6 (advising on corporate finance) regulated activity as set out in Schedule 5 to the SFO

South China Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and the reference to its name in the form and context in which it appears.

GENERAL INFORMATION

APPENDIX II

As at the Latest Practicable Date, South China Capital did not have any shareholding in any member of the Group and did not have any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for shares, options, warrants, convertible securities or derivatives in any member of the Group.

9. MATERIAL CONTRACTS

Save as disclosed below, as of the Latest Practicable Date, the Company or its subsidiaries had not entered into any material contacts (not being contracts entered into in the ordinary course of business) after the date two years immediately preceding the date of the Announcement:

(a) a subscription agreement dated 12 April 2007 between PWL and the Company whereby PWL agreed to subscribe for the Tranche I Bond and the Tranche II Bond in the aggregate principal amount of HK$200,000,000;
(b) a letter dated 21 June 2007 from the Company to PWL whereby the Company agreed to postpone the Tranche 1 Bond’s issue date to 31 July, 2007 or any later day as agreed between the parties;
(c) a letter dated 18 January 2008 from the Company to PWL whereby the Company agreed to postpone the Tranche 2 Bond’s issue date to 31 March 2008;
(d) the MOU;
(e) the Subscription Agreement;
(f) a letter dated 20 January 2008 from PWL to the Company whereby PWL unconditinally and irrevocably agrees to, and shall procure that any subsequent holder(s) of the Tranche 1 Bond and the Tranche 2 Bond to, waive the rights for any adjustment of conversion price under the subscription agreement referred to in paragraph (a) above, the Tranche 1 Bond and Tranche 2 Bond arising from or in connection with (i) the entering into of the Subscription Agreement; and (ii) the Possible Acquisition and any actions including the issue of any Shares contemplated by or referred to therein; and
(g) an addendum dated 28 January 2008 between the Company, the Subscriber and BEHL amending certain terms of the Subscription Agreement, pursuant to which among others, the Company shall use its reasonable endeavours to ensure that the relevant provisions as to the minimum public float requirement of the Listing Rules are complied with and the holder(s) of the Bonds shall not exercise any of the conversion rights attaching to the Bonds, if following such exercise, the Company’s minimum public float of the Shares as required under the Listing Rules cannot be maintained.

GENERAL INFORMATION

APPENDIX II

10 GENERAL

(a) The registered office of the Company is Canon’s Court, 22 Victoria Street, Hamilton HM 12 Bermuda. The head office of the Company is Room 1601, 16/F, Cosco Tower, No.183 Queen’s Road Central, Sheung Wan, Hong Kong.
(b) The registered office of the Subscriber is Portcullis TrustNet Chambers, Road Town, Tortola, British Virgin Islands and its correspondence address is Room 4301, 43/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
(c) The registered office and correspondence address of BEHL, which is regarded as the principal member of the Subscriber’s concert group, is Room 4301, 43/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
(d) The correspondence address of Macquarie is 19th Floor CITIC Tower, 1 Tim Mei Avenue Central, Hong Kong.
(e) The correspondence address of South China Capital is 28th Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong.
(f) The branch share registrar of the Company in Hong Kong is Tricor Tengis Limited, 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(g) As at the Latest Practicable Date, the Board comprised three executive Directors, namely Mr. Huang Flynn Xuxian, Ms. Guan Mei and Mr. Chase J Wong and three independent nonexecutive Directors, namely Mr. Shea Chun Lok Quadrant, Mr. Chan Wai Kwong Peter and Mr. So Kwok Keung.
(h) The company secretary of the Company is Mr. Chow Kim Hang, a practicing solicitor in Hong Kong and a member of The Law Society of Hong Kong.
(i) The qualified accountant of the Company is Mr. Mak Kwong Yiu, Certified Public Accountant in Hong Kong.
(j) As at the Latest Practicable Date, the board of BEHL comprised eleven executive directors, namely Yi Xi Qun, Zhang Hong Hai, Li Fu Cheng, Bai Jin Rong, Zhou Si, Liu Kai, Guo Pu Jin, E Meng, Lei Zhen Gang, Jiang Xin Hao and Tam Chun Fai and four independent nonexecutive directors, namely, Lau Hon Chuen, Ambrose, Lee Tung Hai, Leo, Wang Xian Zhang, Wu Jiesi and Robert A Theleen.
(k) As at the Latest Practicable Date, the board of the Subscriber comprised Liu Kai, E Meng and Tam Chun Fai.
(l) As at the Latest Practicable Date, none of the Independent Shareholders had irrevocably committed themselves to vote for or against the Subscription Agreement and/or the Whitewash Waiver.

GENERAL INFORMATION

APPENDIX II

(m) The Directors have indicated their intention, in respect of their own beneficial shareholdings, if any, to vote for the Subscription Agreement and/or the Whitewash Waiver.
(n) There is no agreement, arrangement or understanding (including any compensation arrangement) between the Subscriber or any person acting in concert with it and any of the Directors, recent Directors, Shareholders and recent Shareholders having any connection with or dependence upon the outcome of the Subscription Agreement and/or the Whitewash Waiver.
(o) As at the Latest Practicable Date, there is no agreement, arrangement or understanding to transfer, charge or pledge any voting rights over the Subscription Shares and/or the Conversion Shares.
(p) The English text of this circular and form of proxy shall prevail over the Chinese text.

11 DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection (i) at the principal place of business in Hong Kong of the Company at Room 1601, 16/F, Cosco Tower, No.183 Queen’s Road Central, Sheung Wan, Hong Kong during 9:00 a.m. to 6:00 p.m. on any weekday (public holidays excepted); (ii) on the website of the Company (www.shanghua.com.hk); and (iii) the website of SFC (www.sfc.hk) from the date of this circular up to and including 4 March 2008, being the date of SGM:

(a) the memorandum of association and Bye-laws of the Company;
(b) the memorandum and articles of association of the Subscriber;
(c) the memorandum and articles of association of BEHL;
(d) the annual reports of the Company for each of the two years ended 30 June 2007;
(e) the material contracts referred to under the paragraph headed “Material Contracts” in this appendix;
(f) the service contracts referred to in paragraph headed “Service contracts” in this appendix;
(g) the letter from the Independent Board Committee, the text of which is set out on page 23 of this circular;
(h) the letter of advice from South China Capital to the Independent Board Committee and Independent Shareholders, the text of which is set out on pages 24 to 45 of this circular; and
(i) the written consent referred to in the paragraph headed “Expert and consent” in this appendix.

NOTICE OF THE SGM

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SHANG HUA HOLDINGS

SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock code: 371)

NOTICE OF THE SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting (the “SGM”) of Shang Hua Holdings Limited (the “Company”) will be held at Room 1601, 16/F., Cosco Tower, No. 183 Queen’s Road Central, Sheung Wan, Hong Kong on Tuesday, 4 March 2008, at 3:00 p.m. for the purpose of considering and, if thought fit, passing the following resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT the entry by the Company into the subscription agreement dated 21 January 2008 (the “ Subscription Agreement ”) with Lucky Crown Management Limited (the “ Subscriber ”) and Beijing Enterprises Holdings Limited (a copy of which has been produced at the meeting and signed by the chairman of the meeting for identification purposes), the terms and conditions thereof and transactions contemplated thereunder, including (but not limited to) (a) the allotment and issue of 247,000,000 shares of the Company (the “ Subscription Shares ”); (b) the issue of zero coupon convertible bonds due 2011 in the aggregate principal amount of HK$200,000,000 (the “ Firm Bonds ”); (c) the grant of an option (the “ First Option ”) to require the Company to issue the zero coupon convertible bonds in the aggregate principal amount of HK$300,000,000 (the “ First Option Bonds ”); (d) the grant of an option (the “ Second Option ”) to require the Company to issue the zero coupon convertible bonds in the aggregate principal amount of HK$200,000,000 (the “ Second Option Bonds ”); (e) the issue of the First Option Bonds upon the exercise of the First Option; (f) the issue of the Second Option Bonds upon the exercise of the Second Option; and (g) the allotment and issue of shares of the Company upon exercise of the conversion rights attaching to the Firm Bonds, the First Option Bonds and Second Option Bonds, in accordance with the terms of the Subscription Agreement to the Subscriber pursuant thereto, be and are hereby approved, ratified and confirmed and that the directors of the Company (the “ Directors ”) be and are generally and unconditionally authorised to prepare and execute all documents and to do all things as they consider necessary, expedient and appropriate to effect and implement the Subscription Agreement and transactions contemplated thereunder or incidental thereto.”
“ THAT the waiver (the “ Whitewash Waiver ”) granted or to be granted by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission of Hong Kong (or any delegate of the Executive Director) pursuant to Note 1 on dispensations

NOTICE OF THE SGM

from Rule 26 of the Hong Kong Code on Takeovers and Mergers in respect of the obligation on the part of the Subscriber and any parties acting in concert with it, to make a mandatory general offer to shareholders of Company for all the issued shares of the Company not already owned or agreed to be acquired by them upon completion of the subscription of the Subscription Shares be and is hereby approved and that the Directors be and are generally and unconditionally authorised to prepare and execute all documents and to do all such other things as they consider necessary, expedient and appropriate to give effect to any matters relating to, or incidental to, the Whitewash Waiver.”

“ THAT conditional upon passing of resolutions numbered 1 and 2 above, the authorised share capital of the Company be increased from HK$150,000,000 to HK$1,500,000,000 divided into 15,000,000,000 shares of HK$0.10 each (the “ Shares ”) by the creation of an additional 13,500,000,000 Shares and that the Directors be and are hereby generally and unconditionally authorised to prepare and execute all documents and to do all things as they consider necessary, expedient and appropriate to effect and implement the same.”

SPECIAL RESOLUTION

“ THAT conditional upon passing of resolution numbered 1 and 2 above and subject to the approval of the Registrar of Companies in Bermuda, the English name of the Company be changed from “Shang Hua Holdings Limited” to “Beijing Enterprises Water Group Limited” and, subject to the new English name of the Company becoming effective, “北控水務集團有限公司” be adopted as the Chinese name of the Company for identification purposes, and the Directors be and are hereby generally and unconditionally authorised to prepare and execute all documents and to do all things as they consider necessary, expedient and appropriate to effect the change of name of the Company.”

By Order of the Board Shang Hua Holdings Limited Flynn Xuxian Huang Chairman

Hong Kong, 18 February 2008

Registered office:

Canon’s Court 22 Victoria Street Hamilton HM 12 Bermuda

Principal place

of business in Hong Kong: Room 1601, 16/F Cosco Tower No.183 Queen’s Road Central Sheung Wan Hong Kong

NOTICE OF THE SGM

Notes:

A member entitled to attend and vote at the SGM is entitled to appoint not more than two proxies to attend and vote instead of him. In the case of a recognized clearing house, it may authorize such person(s) as it thinks fit to act as its representative(s) at the SGM and vote in its stead. A proxy need not be a member of the Company.
In order to be valid, the form of proxy together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power or authority must be deposited at the branch share registrar of the Company in Hong Kong, Tricor Tengis Limited, of 26/F, Tesbury Centre, 28 Queen’s Road East, Hong Kong not less than 48 hours before the time fixed for holding the SGM or any adjournment thereof.

AI assistant

Beijing Enterprises Water Group Limited — Proxy Solicitation & Information Statement 2008

49167_rns_2008-02-17_3bbfafe1-7fc4-4613-99ca-4716c4862c75.pdf

SHANG HUA HOLDINGS

SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

SUBSCRIPTION OF NEW SHARES AND BONDS GRANT OF OPTIONS TO SUBSCRIBE FOR BONDS WHITEWASH WAIVER CHANGE OF COMPANY NAME AND INCREASE IN AUTHORISED SHARE CAPITAL

South China Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

Directors:

Registered office:

Principal place of business:

SUBSCRIPTION OF NEW SHARES AND BONDS GRANT OF OPTIONS TO SUBSCRIBE FOR BONDS WHITEWASH WAIVER CHANGE OF COMPANY NAME AND INCREASE IN AUTHORISED SHARE CAPITAL

INTRODUCTION

LETTER FROM THE BOARD

THE SUBSCRIPTION AGREEMENT

Date

Parties

The Subscription Shares

LETTER FROM THE BOARD

The Subscription Price

The Firm Bonds

The Call Options

LETTER FROM THE BOARD

Principal terms of the Bonds

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions Precedent

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Indemnification

CHANGE OF THE SHAREHOLDING STRUCTURE

LETTER FROM THE BOARD

HIGHEST AND LOWEST SHARE PRICE

THE SUBSCRIBER’S DEALING AND INTERESTS IN THE COMPANY’S SECURITIES

INFORMATION OF THE SUBSCRIBER

LETTER FROM THE BOARD

FUTURE INTENTIONS OF THE SUBSCRIBER REGARDING THE GROUP

LETTER FROM THE BOARD

PROPOSED CHANGE OF BOARD COMPOSITION OF THE COMPANY

PROPOSED CHANGE OF COMPANY NAME

LETTER FROM THE BOARD

REASONS FOR ENTERING INTO THE SUBSCRIPTION AGREEMENT

USE OF PROCEEDS

FUND RAISING ACTIVITIES FOR THE PAST 12 MONTHS

LETTER FROM THE BOARD

PROPOSED INCREASE IN AUTHORISED SHARE CAPITAL

APPLICATION FOR LISTING

THE WHITEWASH WAIVER

LETTER FROM THE BOARD

THE SGM

PROCEDURES FOR DEMANING A POLL AT GENERAL MEETING

RECOMMANDATION

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

SHANG HUA HOLDINGS LIMITED 上華控股有限公司 *

SUBSCRIPTION AGREEMENT AND WHITEWASH WAIVER

SUBSCRIPTION OF NEW SHARES AND BONDS GRANT OF OPTIONS TO SUBSCRIBE FOR BONDS WHITEWASH WAIVER

INTRODUCTION

LETTER FROM SOUTH CHINA CAPITAL

BASIS OF OUR OPINION

LETTER FROM SOUTH CHINA CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED

THE SUBSCRIPTION AGREEMENT

(1) Background of and reasons for the Subscription Agreement

LETTER FROM SOUTH CHINA CAPITAL

Business and financial information on the Group

LETTER FROM SOUTH CHINA CAPITAL

Information on the Subscriber and BEHL

The Subscriber’s future intentions in relation to the Group

LETTER FROM SOUTH CHINA CAPITAL

Use of proceeds

LETTER FROM SOUTH CHINA CAPITAL

Reasons for entering into of the Subscription Agreement

Beijing Enterprises Water Group Limited Proxy Solicitation & Information Statement 2008