CA Cultural Technology Group Limited - Proxy Solicitation & Information Statement 2017

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

If you have sold or transferred all your shares in China Animation Characters Company Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

==> picture [73 x 76] intentionally omitted <==

China Animation Characters Company Limited 華夏動漫形象有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 01566)

MAJOR TRANSACTION IN RELATION TO THE ACQUISITION OF 85.1% OF THE SHARES IN SEGA LIVE CREATION INC.

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

Independent Financial Adviser to the Independent Board Committee and the Shareholders

==> picture [141 x 42] intentionally omitted <==

A letter from the Board is set forth on pages 7 to 18 of this circular. A letter from the Independent Board Committee containing its recommendation to the Shareholders is set forth on page 19 of this circular. A letter from the Independent Financial Adviser containing its advice to the Independent Board Committee and the Shareholders is set forth on pages 20 to 32 of this circular.

29 June 2017

TABLE OF CONTENTS

		Page
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM	THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
LETTER FROM	THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . .	19
LETTER FROM	THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . .	20
APPENDIX I	— FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . .	I-1
APPENDIX II	— ACCOUNTANTS’ REPORT OF THE TARGET GROUP . .	II-1
APPENDIX III	— UNAUDITED PRO FORMA FINANCIAL
	INFORMATION OF THE ENLARGED GROUP . . . . . . .	III-1
APPENDIX IV	— GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .	IV-1

DEFINITIONS

In this circular, unless the context otherwise requires, the capitalised terms and expressions used herein shall have the following meanings:

“Acquired Shares” 851 SLC Shares, representing 85.1% of all issued shares of SLC;
“Acquisition”
the acquisition of the Acquired Shares by CTP pursuant to the Share Purchase Agreement;
“Affiliates”
with respect to any entity, any other entity directly or indirectly controlling, controlled by, or under common control with such entity. For the purposes of this definition, “control”, “controlled by” and “under common control with” means the ownership of a majority of the voting share capital of an entity or the possession, directly or indirectly, of the power to direct or cause the direction of the affairs or management of an entity, whether through the ownership of voting securities, by agreement or otherwise;
“Attraction”
rides which require construction works upon setting up and operation staff to operate;
“Board”
the board of Directors;
“Bonville”
Bonville Glory Limited, a limited company incorporated in the BVI on 26 August 2013, the issued share capital of which is wholly-owned by Mr. TING, an executive Director, being one of the Concert Parties;
“Bright Rise”
Bright Rise Enterprises Limited (明揚企業有限公司), a limited company incorporated in the BVI on 6 February 2008, the issued share capital of which is held by Newgate (PTC) Limited acting as the trustee of a trust created in the Cayman Islands by Mr. ZHAUNG on 18 November 2014, namely The Fortune Trust, being one of the Concert Parties;
“BVI”
the British Virgin Islands;
“China Animation (BVI)”
China Animation Holdings (BVI) Limited (華夏動漫集團（英屬處女島）有限公司), a company incorporated in the BVI on 24 June 2014 and a wholly-owned subsidiary of the Company;

– 1 –

DEFINITIONS

“Company”
China Animation Characters Company Limited (華夏動漫形象有限公司), a company incorporated in the Cayman Islands on 25 September 2013 with all the Shares listed on the Stock Exchange (stock code: 01566);
“Completion” completion of the Acquisition;
“Completion Date” the date of Completion, being 1 January 2017;
“Concert Parties”
collectively, Mr. ZHUANG, Bright Rise, Mr. TING, Bonville, Ms. LI, Fortress Strength, Mr. IKEDA, Dragon Year, Ms. OR and East Jumbo;
“Concert Party Agreement”
the agreement dated 25 November 2014 and entered into amongst the Concert Parties, further information on which is set forth in the section headed “Controlling Shareholders and Substantial Shareholders” in the Prospectus;
“Conditions”
the Purchaser ’s Conditions and the Seller ’s Conditions under the Share Purchase Agreement, further information of which is set forth in the section headed “Letter from the Board – Acquisition and principal terms of the Share Purchase Agreement – Conditions precedent” in this circular;
“connected person(s)”
has the meaning ascribed to it by the Listing Rules;
“Consideration”
cash consideration for the Acquisition, being JPY600.0 million (equivalent to approximately HK$44.5 million);
“CTP”
China Theme Park Limited (中國主題樂園有限公司), a company incorporated in the BVI on 21 September 2012 and a wholly-owned subsidiary of the Company;
“Director(s)”
the director(s) of the Company;
“Dragon Year”
Dragon Year Group Limited, a limited company incorporated in the BVI on 3 January 2012, being one of the Concert Parties;
“East Jumbo”
East Jumbo Development Limited (華寶發展有限公司), a limited company incorporated in the BVI on 3 April 2012, the share capital of which is wholly-owned by Ms. OR, being one of the Concert Parties;

– 2 –

DEFINITIONS

“Enlarged Group”
“Excluded Business”
“Existing Interactive Entertainment Parks”
“First Announcement”
“Fortress Strength”
“Group”
“HK$”
“Hong Kong”
“Independent Board Committee”
“JPY”
“Latest Practicable Date”
“Lego” or “Independent Financial Adviser”
the Company and its subsidiaries following Completion, including members of the SLC Group;
the business operations and activities conducted by SLC using the trademark of “ Orbi ” as of the date of the Share Purchase Agreement;
collectively, Tokyo JOYPOLIS, Umeda JOYPOLIS, Shanghai JOYPOLIS, Qingdao JOYPOLIS and SEGA Republic;
the announcement of the Company dated 1 November 2016 on the Acquisition;
Fortress Strength Limited, a limited company incorporated in the BVI on 8 July 2013, the share capital of which is wholly-owned by Ms. LI, being one of the Concert Parties;
the Company and its subsidiaries;
Hong Kong dollars, the lawful currency of Hong Kong;
The Hong Kong Special Administrative Region of the PRC;
an independent committee of the Board, comprising all the independent non-executive Directors, namely Mr. NI Zhenliang, Mr. TSANG Wah Kwong and Mr. HUNG Muk Ming, established for the purpose of advising the Shareholders on the grant of the Put Option;
Japanese yen, the lawful currency of Japan;
27 June 2017, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained herein;
Lego Corporate Finance Limited, a corporation licenced to carry on type 6 (advising on corporate finance) regulated activity under the SFO), and the independent financial adviser to Independent Board Committee and the Shareholders on the grant of the Put Option;

– 3 –

DEFINITIONS

“Listing Rules”
The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited;
“Mr. IKEDA”
Mr. Shinichiro IKEDA (池田慎一郎), the Honourable Chairman of the Company, being one of the Concert Parties;
“Mr. TING”
Mr. TING Ka Fai Jeffrey (丁家輝), the Chief Operating Officer of the Group and an executive Director, being one of the Concert Parties;
“Mr. ZHUANG”
Mr. ZHUANG Xiangsong (庄向松), the Chief Executive Officer of the Group and an executive Director, being one of the Concert Parties;
“Ms. LI”
Ms. LI Ruifang (李瑞芳), the spouse of Mr. ZHUANG, being one of the Concert Parties;
“Ms. OR” Ms. OR Den Fung Bonnie (柯丹鳳), being one of the Concert Parties;
“percentage ratio(s)” the percentage ratio(s) set forth in Rule 14.07 of the Listing Rules to be applied for determining the classification of a transaction;
“Prospectus” the prospectus of the Company issued on 28 February 2015;
“PRC” or “China” The People’s Republic of China which for the purpose of this circular, does not include Taiwan, Hong Kong and The Macau Special Administrative Region of the People’s Republic of China;
“Put Option”
the put option granted to SEGA SAMMY by CTP under the SLC Shareholders Agreement, pursuant to which SEGA SAMMY may sell all SLC Shares owned by SEGA SAMMY (or its permitted transferees) to CTP at the relevant Put Prices during the relevant Put Period;
“Put Period”
the period during which the Put Option may be exercised which will commence from the third anniversary of the Completion Date and ending on the day immediately before the sixth anniversary of the Completion Date;

– 4 –

DEFINITIONS

“Put Prices”
“Qingdao JOYPOLIS”
“Remaining Business”
“Restructuring”
“Second Announcement”
“SEGA Holdings”
“SEGA Qingdao”
“SEGA Republic”
“SEGA SAMMY”
“SEGA SAMMY Group”
the prices at which SEGA SAMMY will be entitled to sell all SLC Shares owned by it to CTP during the Put Period pursuant to the SLC Shareholders Agreement, further information on which is set forth in the section headed “Letter from the Board – SLC Shareholders Agreement”;
an interactive entertainment park operated by the Group at the Mixc of Qingdao (青島華潤萬象城) at 6A, Shangdong Road, Shi Nan District, Qingdao City, Shangdong Province, the PRC;
the remaining business operations and activities conducted by members of the SLC Group following completion of the Restructuring;
the restructuring of SLC which includes, amongst others, the disposal of the Excluded Business prior to Completion;
the announcement of the Company dated 3 January 2017 on, inter alia, Completion and the major and connected transaction in relation to the grant of the Put Option;
SEGA Holdings Co., Ltd, a company incorporated in Japan with limited liability, a wholly-owned subsidiary of SEGA SAMMY;
SEGA (Qingdao) Entertainment Park Co., Ltd. (世嘉
（青島）娛樂有限公司), a company established in the PRC with limited liability with the entire capital contribution made by SLC. SEGA Qingdao is a subsidiary of SLC;
an interactive entertainment park operated by Emaar Malls Group, L.L.C (a licenced operator under the brand of “JOYPOLIS” owned by SLC) at The Dubai Mall, Dubai, United Arab Emirates;
Sega Sammy Holdings Inc., a company incorporated in Japan with limited liability, the shares of which are listed on the Tokyo Stock Exchange (TYO: 6460);

Sega Sammy Holdings Inc. and its subsidiaries;

– 5 –

DEFINITIONS

“SFO”

the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);

“Shanghai JOYPOLIS” an interactive entertainment park operated by the Group at Shanghai Global Harbour (上海環球港), 3300 Zhong Shan Bei Road, Shanghai City, the PRC;
“Share Purchase Agreement” the share purchase agreement dated 31 October 2016 entered into among CTP as the purchaser, SEGA SAMMY as the seller and the Company as the guarantor of CTP in relation to the Acquisition;
“Share(s)” the share(s) of the Company;
“Shareholder(s)” holders of the Shares;
“SLC” CA Sega Joypolis Limited, formerly known as Sega Live Creation Inc., a company incorporated in Japan on 1 April 2015 with limited liability and a non-wholly owned subsidiary of the Company;
“SLC Group” SLC and SEGA Qingdao;
“SLC Shares” share of common stock of SLC;
“SLC Shareholders Agreement” the shareholders agreement entered into among SEGA SAMMY, CTP, SLC and the Company on 31 December 2016, pursuant to which, the Put Option has been granted to SEGA SAMMY by CTP;
“Stock Exchange” The Stock Exchange of Hong Kong Limited;
“subsidiaries”
has the meaning ascribed to it by the Listing Rules;
“Tokyo JOYPOLIS” an interactive entertainment park operated by the Group at the address Daiba 1-6-1, Minato-ku, Tokyo, Japan; and
“Umeda JOYPOLIS” an interactive entertainment park operated by the Group at the address Kakuda-cho 5-15, Kita-ku, Osaka-shi, Japan.

For the purpose of this circular, the exchange rates of HK$1.00 = JPY13.48 has been used, where applicable, for illustrative purposes only and does not constitute a representation that any amount has been, could have been or may be exchanged at such rate or any other rate or at all on the date or dates in question or any other date.

– 6 –

LETTER FROM THE BOARD

==> picture [73 x 76] intentionally omitted <==

China Animation Characters Company Limited 華夏動漫形象有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 01566)

Executive Directors:– Mr. ZHUANG Xiangsong (Chief Executive Officer) Mr. TING Ka Fai Jeffrey Ms. LIU Moxiang

Independent Non-executive Directors:– Mr. NI Zhenliang Mr. TSANG Wah Kwong Mr. HUNG Muk Ming

Registered office:– Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman, KY1-1111 Cayman Islands

Principal place of business in Hong Kong:– Suites 2808–2811, Concordia Plaza 1 Science Museum Road Tsim Sha Tsui East Kowloon Hong Kong

29 June 2017

To the Shareholders:

Dear Sir or Madam,

MAJOR TRANSACTION IN RELATION TO THE ACQUISITION OF 85.1% OF THE SHARES IN SEGA LIVE CREATION INC.

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

INTRODUCTION

The Board refers to the First Announcement and the Second Announcement, in which the Company announced, among other matters, the Acquisition and certain matters following Completion, respectively. SLC has become a non-wholly owned subsidiary of the Company since 1 January 2017.

– 7 –

LETTER FROM THE BOARD

This circular is issued pursuant to the requirements under Chapters 14 and 14A of the Listing Rules for the purpose of providing the Shareholders with further information on the Acquisition, the SLC Shareholders Agreement and the grant of the Put Option. The Acquisition and the grant of the Put Option have been approved by the written approval from Bright Rise, Bonville, Fortress Strength, Mr. IKEDA, Dragon Year and East Jumbo, being a closely allied group of Shareholders which together hold more than 50% in nominal value of the shares of the Company for the purpose of Rules 14.44 and 14A.37 of the Listing Rules.

ACQUISITION AND PRINCIPAL TERMS OF THE SHARE PURCHASE AGREEMENT

As set forth in the First Announcement, on 31 October 2016, the Share Purchase Agreement was entered into whereby CTP conditionally agreed to acquire from SEGA SAMMY the Acquired Shares at the Consideration. The following sets forth the principal terms and conditions of the Share Purchase Agreement:–

Date	:	31 October 2016
Seller	:	SEGA SAMMY
Purchaser	:	CTP
Guarantor	:	the Company as the guarantor of CTP for its payment obligations
		under the Share Purchase Agreement

To the best knowledge, information and belief of the Directors having made all reasonable enquiries, SEGA SAMMY and its ultimate beneficial owner are third parties independent of the Company and its connected persons.

Subject matter of the Share Purchase Agreement

851 SLC Shares, representing 85.1% of the number of the SLC Shares in issue.

Consideration

The consideration for the Acquisition is JPY600.0 million (equivalent to approximately HK$44.5 million) payable by CTP to SEGA SAMMY on or before the Completion Date. The Consideration was determined after arm’s length negotiations between CTP and SEGA SAMMY and is on normal commercial terms with reference to the unaudited net asset value of the Remaining Business as of 31 August 2016 and the business development of the Enlarged Group as a result of the synergy brought by the Acquisition, further information on which is set forth in the paragraphs under “Reasons for and benefits” below. CTP has settled the Consideration by the internal resources of the Group.

– 8 –

LETTER FROM THE BOARD

Conditions Precedent

The obligations of CTP is conditional upon, among others, the satisfaction (or where applicable, waiver by CTP (other than item (h)) of the following conditions (the “ Purchaser’s Conditions ”):–

(a) Representations and warranties of SEGA SAMMY provided in the Share Purchase Agreement are true and accurate in material respects;
(b) SEGA SAMMY has performed and complied with its obligations as set forth in the Share Purchase Agreement which shall continue until Completion in all material respects;
(c) The approval of the board of directors of SLC has been obtained with respect to the transfer of the Acquired Shares;
(d) Certain officers of the sell side have submitted resignation letters to SLC to the effect that they will resign from a director or a statutory auditor of SLC as of the Completion Date;
(e) Relevant agreements in relation to various post-completion arrangements to the business of SLC have been fully executed by SEGA SAMMY or its Affiliates;
(f) The lessors to certain proprietary lease agreements have consented to the Acquisition and consented to continue the contractual relationship with SLC after Completion;
(g) SLC has completed the Restructuring;
(h) All necessary approvals by the Shareholders in respect of the transactions contemplated under the Share Purchase Agreement having been obtained by way of either a majority vote at a general meeting of the Company, or (if acceptable to the Stock Exchange) in lieu of holding such general meeting, a written shareholders’ approval from a closely allied group of Shareholders who together hold more than 50% in nominal value of the shares of the Company in a manner as required under the Listing Rules;
(i) At any time on or after the date of the Share Purchase Agreement, no material adverse effect which has resulted or would reasonably be expected to result in any liability to SLC of JPY150.00 million or more in the aggregate, for avoidance of doubt, CTP will substantiate its claim with evidence; and
(j) No approval, no-action letter or waiting period is outstanding in connection with any competition authority to which CTP owes a duty to notify or seek approval in respect of the Acquisition.

– 9 –

LETTER FROM THE BOARD

The obligations of SEGA SAMMY is conditional upon, among others, the satisfaction (or, where applicable, waiver by SEGA SAMMY (other than item (e)) of the following conditions (the “ Seller’s Conditions ”):–

(a) Representations and warranties of CTP provided in the Share Purchase Agreement are true and accurate in all material respects;
(b) CTP has performed and complied with its obligations as set forth in the Share Purchase Agreement which shall continue until Completion in all material respects;
(c) Relevant agreements in relation to various post-completion arrangements to the business of SLC have been fully executed by CTP (where applicable);
(d) SLC has completed the Restructuring;
(e) All necessary approvals by the Shareholders in respect of the transactions contemplated under the Share Purchase Agreement having been obtained by way of either a majority vote at a general meeting of the Company, or (if acceptable to the Stock Exchange) in lieu of holding such general meeting, a written shareholders’ approval from a closely allied group of Shareholders who together hold more than 50% in nominal value of the shares of the Company in a manner as required under the Listing Rules; and
(f) No approval, no-action letter or waiting period is outstanding in connection with any competition authority to which CTP owes a duty to notify or seek approval in respect of the Acquisition.

Restructuring and Non-competition undertaking

Before Completion, the Excluded Business will be transferred from SLC to SEGA SAMMY for such amount of consideration to be agreed by the parties. The Excluded Business will be operated under the “Orbi” brand only.

There are non-competition undertakings set forth in the Share Purchase Agreement. SEGA SAMMY has agreed that it and its Affiliates will not, with certain exceptions, open or operate other interactive entertainment park with attractions and indoor arcade centre modelled upon the Tokyo JOYPOLIS business operated by SLC in DECKS Tokyo Beach for a certain period of time in various places. This restriction does not apply to any acquisition and merger of any business concern which is operating interactive entertainment park and does not use the name of “SEGA” or “JOYPOLIS”.

Termination

If any Condition that has not been waived (as applicable) cannot be fulfiled, or when a petition for winding up has been filed against CTP or SEGA SAMMY or when Completion has not taken place on or before 28 February 2017, the Share Purchase Agreement may be terminated with immediate effect.

– 10 –

LETTER FROM THE BOARD

COMPLETION OF THE ACQUISITION

The Board refers to the Second Announcement and is pleased to announce that the Company has obtained the written approval for the Share Purchase Agreement and the transactions contemplated thereunder from a closely allied group of Shareholders comprising Bright Rise, Bonville, Fortress Strength, Mr. IKEDA, Dragon Year and East Jumbo, which hold in aggregate more than 50% of the Shares in issue carrying rights to vote at a general meeting. Such written approval has been accepted to approve the Acquisition in lieu of general meeting pursuant to Rule 14.44 of the Listing Rules. Following which, all Conditions have been satisfied or waived and Completion took place on 1 January 2017.

Upon Completion, SLC became a non-wholly owned subsidiary of the Company holding 85.1% of the SLC Shares with the remaining 14.9% of the SLC Shares held by SEGA SAMMY. Accordingly, the assets, liabilities and financial results of SLC will be consolidated into the financial statements of the Company effective from the Completion Date.

SLC SHAREHOLDERS AGREEMENT

The SLC Shareholders Agreement was entered into on 31 December 2016 among SEGA SAMMY, CTP, SLC and the Company regarding the post-completion arrangements of SLC, including the restriction on the transfer of the SLC Shares and the right of first refusal (relating to the SLC Shares held by SEGA SAMMY only) and grant of the Put Option to SEGA SAMMY. All terms of the SLC Shareholders Agreement (other than the grant of the Put Option which was subject to approval from the Shareholders) has become effective from 1 January 2017.

Restriction of transfer

Pursuant to the SLC Shareholders Agreement, each of SEGA SAMMY and CTP shall not transfer, dispose of, create any encumbrances over, or otherwise give any other person any rights in relation to any SLC Share held by each of them within a period of three years from the Completion Date. However, such transfer restrictions shall not restrict transfer of the SLC Shares from SEGA SAMMY and CTP to their respective Affiliates.

Right of first refusal

Pursuant to SLC Shareholders Agreement, CTP has been granted a right of first refusal on all SLC Shares proposed to be sold by SEGA SAMMY to third party other than its Affiliates from the third anniversary of the Completion Date to the day immediately before the ninth anniversary of the Completion Date. CTP would have 14 days to exercise its right of first refusal. These restrictions on transfer and the right of first refusal will be uplifted if the grant of the Put Option is not approved by the Shareholders by 28 February 2017.

– 11 –

LETTER FROM THE BOARD

Grant of the Put Option

Pursuant to the SLC Shareholders Agreement, subject to the approval from the Shareholders having been obtained in a manner as required under the Listing Rules, the Put Option has been granted by CTP to SEGA SAMMY whereby SEGA SAMMY may sell all the SLC Shares held by it to CTP within the Put Period at the Put Prices. No premium is payable for the grant of the Put Option.

Put Period and Put Price

On or after the third anniversary of the Completion Date and until the day immediately before the fifth anniversary of the Completion Date, SEGA SAMMY may, by giving a prescribed notice to CTP, to demand CTP to purchase all but not part of the SLC Shares held by SEGA SAMMY at JPY705,052 (equivalent to HK$46,754.11) for each SLC Share. If the Put Option is exercised during such period, the aggregate consideration payable by CTP will be JPY105,052,748 (equivalent to HK$6.97 million).

On or after the fifth anniversary of the Completion Date and until the day immediately before the sixth anniversary of the Completion Date, SEGA SAMMY may, by giving a prescribed notice to CTP, to demand CTP to purchase all but not part of the SLC Shares held by SEGA SAMMY at JPY1,410,104 (equivalent to HK$93,508.22) for each SLC Share. If the Put Option is exercised during such period, the aggregate consideration payable by CTP will be JPY210,105,496 (equivalent to HK$13.93 million).

In the event that CTP has purchased all the SLC Shares held by SEGA SAMMY, SLC will become a wholly-owned subsidiary of the Company.

Guarantee by the Company

The payment obligation of CTP in respect of the exercise of the Put Option by SEGA SAMMY is guaranteed by the Company.

INFORMATION ON SLC, SEGA SAMMY AND SEGA HOLDINGS

SLC is a company incorporated in Japan on 1 April 2015 with limited liability. Upon Completion, SLC has become a non-wholly owned subsidiary of the Company holding 85.1% of the SLC Shares in issue. The principal business activities of SLC and SEGA Qingdao (being a subsidiary of SLC) are planning, development and operation of entertainment facilities and indoor interactive entertainment parks.

– 12 –

LETTER FROM THE BOARD

The audited combined financial information of SLC and its subsidiaries in the year ended 31 March 2015, 2016 and 2017 are set further in Appendix II to this circular.

The following is a summary of the audited combined financial information of the SLC Group for the two financial years ended 31 March 2015 and 2016:

	For the	For the
	year ended	year ended
	31 March 2015	31 March 2016
	JPY (’000)	JPY (’000)
Loss before taxation	1,099,498	1,265,575
Loss after taxation	1,099,498	1,265,575
Net assets	6,096,474	2,854,989

SEGA SAMMY is a company incorporated in Japan with limited liability, the shares of which are listed on the Tokyo Stock Exchange (stock code: 6460). The principal business activity of SEGA SAMMY is management of SEGA SAMMY Group as the holding company. The principal business activities of its major subsidiaries are Pachinslot and Pachinko machine business, entertainment contents business and resort business.

SEGA Holdings, a wholly owned subsidiary of SEGA SAMMY, is a company incorporated in Japan on 1 April 2015 with limited liability. The principal business activities of SEGA Holdings are control entertainment contents business as an intermediate holding company.

INFORMATION ABOUT THE GROUP

The Company is an investment holding company. The Group is engaged in (i) multi-line business in the animation-related industry, with primary focus on the trading of animation derivative products (mainly toys) featuring renowned third-party owned animation characters for the Japanese market with the provision of value-added services; and (ii) operation of indoor interactive entertainment parks in Shanghai, Qingdao and Japan (after Completion) through its subsidiaries and Dubai (after Completion) through SLC’s licenced operator.

It is the business objective of the Group to build a multimedia animation business in China. In this connection, the Group has been actively expanding its business and seeking for potential opportunities that can fulfil its future development needs.

– 13 –

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS

Acquisition

The Group is currently operating an amusement park in Shanghai, i.e. Shanghai JOYPOLIS, under the trademark of “JOYPOLIS”. The grand opening of Shanghai JOYPOLIS on 6 February 2016 remarked the Group’s first project in the indoor theme park business in China, and constitutes a core revenue stream of the Group. As disclosed in the Company’s annual report for the year ended 31 March 2016, with the grand opening of the Shanghai JOYPOLIS, the Group realised an increase of 17.2% in revenue generated from establishment of indoor theme park, from HK$28.50 million for the year ended 31 March 2015 to HK$33.40 million for the year ended 31 March 2016.

The Group is the first licenced operator of JOYPOLIS in China, whereas the relevant right to operate JOYPOLIS granted under the corresponding licence agreement as of the Latest Practicable Date is only limited to Shanghai, the PRC. Since Completion, the Group has been able to broaden its participation in operating interactive entertainment parks in additional cities on a global basis, namely Tokyo and Osaka in Japan respectively, Dubai in the United Arab Emirates and Qingdao in the PRC.

The Directors are therefore of the view that the Acquisition presents an excellent opportunity for the Group to (i) bring in a much stronger revenue force; (ii) leverage on the expertise and resources of the SLC Group to broaden its participation in the amusement parks operation business; and (iii) establish an all-around strategic planning for its amusement parks operation business. Upon Completion, SEGA SAMMY retains 14.9% of the equity interest in SLC. The Directors consider that the partnership with SEGA SAMMY will also strengthen the position of the Company as a leader of amusement park operation business. With reference to the profitable trading records of the Group’s existing JOYPOLIS operation in Shanghai, the Directors are optimistic to the future operation of the Remaining Business, especially the future expansion of the Enlarged Group’s theme park operation in the PRC.

In view of the above, the Board is of the view that the terms of the Share Purchase Agreement are on normal commercial terms and the Acquisition is fair and reasonable, and in the interests of the Company and its Shareholders taken as a whole.

– 14 –

LETTER FROM THE BOARD

SLC Shareholders Agreement

The Directors consider that the terms of the SLC Shareholders Agreement, including the transfer restrictions, the right of first refusal and the grant of the Put Option, are beneficial to the Group as a whole as all the arrangements enable the Group to consolidate its equity interest in SLC should SEGA SAMMY exercise the Put Option during the Put Period. Based on the profitable track records of Shanghai JOYPOLIS, the Directors are confident on the future business development of the SLC Group and the future expansion of the interactive entertainment park business in the PRC. Accordingly, the Directors are of the view that the entering into of the SLC Shareholders Agreement (including the grant of the Put Option) is in the interest of the Company and its Shareholders as a whole. The Directors consider that the Put Prices are fair and reasonable and in the interest of the Company and the Shareholders as a whole, taking into account, among other things, the Put Period, the aggregate three years transfer restrictions imposed to SEGA SAMMY and the right of first refusal available to CTP pursuant to the SLC Shareholders Agreement. The Directors are of the view that the terms of the SLC Shareholders Agreement (including the grant of the Put Option), which have been agreed after arm’s length negotiations among the relevant parties, are on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole.

FINANCIAL EFFECTS OF THE ACQUISITION AND EXERCISE OF THE PUT OPTION

Upon Completion, SLC would become a subsidiary of the Group and thus the assets, liabilities and financial results of SLC and its subsidiaries will be consolidated into those of the Group.

Assets and liabilities

As illustrated in the unaudited pro forma financial information as set out in Appendix III to this circular, had both the Acquisition and exercise of the Put Option been completed at the Completion date on 1 January 2017, the total assets of the Enlarged Group would increase from HK$1,042.14 million to approximately HK$1,183.10 million on a pro forma basis, and the total liabilities of the Enlarged Group would increase from HK$268.35 million to approximately HK$425.12 million on a pro forma basis.

Earnings

As set out in the Accountant’s Report of the Target Group included as Appendix II to this circular, the turnover and net loss attributable to shareholders of the Target Company were approximately JPY4,469.83 million and JPY2,529.31 million for the year 31 March 2017, respectively.

The attention of the Shareholders is also drawn to the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to this circular.

– 15 –

LETTER FROM THE BOARD

IMPLICATIONS UNDER THE LISTING RULES

Acquisition

CTP is a wholly-owned subsidiary of the Company. As one or more of the applicable percentage ratios calculated pursuant to Rule 14.07 of the Listing Rules in respect of the Acquisition exceeds 25% but is less than 75%, the Acquisition constitutes a major transaction for the Company, and is therefore subject to the reporting, announcement and shareholders’ approval requirements pursuant to Chapter 14 of the Listing Rules.

As no Shareholder is required to abstain from voting at a general meeting of the Company to be convened for the approval of the Acquisition, the Company has obtained written shareholder’s approval from a closely allied group of Shareholders, namely Bright Rise, Bonville, Fortress Strength, Mr. IKEDA, Dragon Year and East Jumbo, which holds 365,382,000 Shares, 12,900,000 Shares, 16,092,000 Shares, 50,280,000 Shares, 12,000,000 Shares and 29,658,000 Shares as of the Latest Practicable Date, respectively (representing in aggregate 486,312,000 Shares and 54.31% of the total number of Shares as of the Latest Practicable Date) for the Acquisition in lieu of holding the general meeting of the Company, pursuant to Rule 14.44 of the Listing Rules.

Grant of the Put Option as a major transaction and connected transaction for the Company

Pursuant to Rule 14.74(1) of the Listing Rules, the grant of the Put Option (the exercise of which is not at the Company’s discretion) will be classified as if the Put Option had been exercised. Pursuant to Rule 14.22 of the Listing Rules, the Acquisition and the grant of the Put Option shall be aggregated as if they were one transaction for the purpose of the Chapter 14 of the Listing Rules. As one or more of the applicable percentage ratios in respect of the exercise of the Put Option as aggregated with the Acquisition exceeds 25% but is less than 100%, the grant of the Put Option as aggregated with the Acquisition constitutes a major transaction (as defined in Chapter 14 of the Listing Rules) for the Company and is subject to the notification, announcement and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

As SEGA SAMMY holds 14.9% of the SLC Shares, SEGA SAMMY is a connected person at the subsidiary level (as defined in Chapter 14A of the Listing Rules) of the Company. Accordingly, the grant of the Put Option also constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules.

Pursuant to Rule 14A.79(1) of the Listing Rules, the grant of the Put Option (the exercise of which is not at the Company’s discretion) will be classified as if the Put Option had been exercised. As one or more of the applicable percentage ratios in respect of any exercise of the Put Option are more than 25%, the grant of the Put Option as aggregated with the Acquisition constitutes a non-exempt connected transaction for the Company under Chapter 14A of the Listing Rules and is subject to independent shareholders’ approval and all disclosures requirements.

– 16 –

LETTER FROM THE BOARD

Shareholders’ Meeting Waiver and Voting at the Board Meeting

None of the Shareholders is materially interested in the grant of the Put Option. As such, no Shareholder would be required to abstain from voting if a general meeting were to be convened to approve the grant of the Put Option. The closely allied group of Shareholders, namely Bright Rise, Bonville, Fortress Strength, Mr. IKEDA, Dragon Year and East Jumbo, which holds 369,982,000 Shares, 12,900,000 Shares, 16,092,000 Shares, 12,000,000 Shares, 50,280,000 Shares and 29,658,000 Shares as of the Latest Practicable Date, respectively (representing in aggregate 490,912,000 Shares and 54.31% of the Shares in issue as of the Latest Practicable Date) has given their approval to the grant of the Put Option. The Company has applied for, and the Stock Exchange has granted, a waiver from strict compliance with the requirement to convene a Shareholders’ meeting for approving the grant of the Put Option, such that the written approval would be accepted in lieu of convening a general meeting under Rule 14.44 and Rule 14A.37 of the Listing Rules.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, none of the Directors was in any way materially interested in the grant of the Put Option and therefore none of the Directors had abstained from voting in the board meeting approving the grant of the Put Option.

GRANT OF WAIVER FROM STRICT COMPLIANCE WITH RULE 14.41(A) AND RULE 14A.46(2) OF THE LISTING RULES AND DELAY IN DESPATCH OF THIS CIRCULAR

Under Rule 14.41(a) of the Listing Rules, the Company is required to despatch a circular containing, among other things, (i) further information on the SLC Group, the Share Purchase Agreement and the transactions contemplated thereunder; (ii) the financial information of the SLC Group; and (iii) the unaudited pro forma financial information of the Enlarged Group within 15 business days after publication of the First Announcement. Under Rule 14.41(a) and Rule 14A.46(2) of the Listing Rules, the Company is required to despatch a circular containing, among other things, (i) further information on the SLC Group and the grant of the Put Option; (ii) the financial information of the SLC Group; and (iii) the unaudited pro forma financial information of the Enlarged Group within 15 business days after publication of the Second Announcement. As additional time is required for the Company and the professional parties to prepare and finalise the financial information for inclusion in the circular, the Company has applied for, and the Stock Exchange has granted, a waiver from strict compliance with Rule 14.41(a) and Rule 14A.46(2) of the Listing Rules such that the time limit for the despatch of the circular has been extended to 29 June 2017.

Recommendation

The Directors are pleased that the Acquisition and the grant of the Put Option can be completed according to its original timetable. Following Completion, the Directors are working on integration matters and formulating business initiatives to further develop the interactive entertainment park business of the Enlarged Group leveraging the brand of JOYPOLIS. The Directors believe that the Acquisition represents a major business development milestone of the Enlarged Group.

– 17 –

LETTER FROM THE BOARD

The Directors consider that the terms and conditions of the Share Purchase Agreement and the SLC Shareholders Agreement have been negotiated among the relevant parties on an arm’s length basis, are fair and reasonable and on normal commercial terms, and the Acquisition and the grant of the Put Options are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors would have recommended the Shareholders to approve the Share Purchase Agreement and the SLC Shareholders Agreement and the transactions contemplated thereunder if a physical general meeting were to be held.

The Independent Board Committee has been established to advise the Shareholders as to the fairness and reasonableness of the terms of the grant of the Put Option. Having considered the terms and conditions of the SLC Shareholders Agreement, including the terms and conditions relates to the grant of the Put Option and after taking into account the advice of Lego, the Independent Board Committee considers that the terms and conditions of the grant of the Put Option are fair and reasonable and on normal commercial terms, and the grant of the Put Option are in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee would have recommended the Shareholders to approve the grant of the Put Option if a physical general meeting were to be held.

ADDITIONAL INFORMATION

Although there will be no Shareholders’ meeting convened for the purpose of approving the Acquisition and the grant of the Put Option, your attention is to drawn to the advice of the Independent Board Committee and the Independent Financial Adviser on their opinion and bases of the reasonableness of the grant of the Put Option. Set forth on page 19 and pages 20 to 32 of this circular respectively.

The appendices to this circular contain the financial information on SLC as well as the unaudited pro forma financial information of the Enlarged Group. Certain financial information on the Group is also included. Your attention is also drawn to this additional information set forth in the appendices to this circular.

By order of the Board China Animation Characters Company Limited ZHUANG Xiangsong

Chief Executive Officer and Executive Director

– 18 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [73 x 76] intentionally omitted <==

China Animation Characters Company Limited 華夏動漫形象有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 01566)

29 June 2017

To the Shareholders

Dear Sirs,

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

We refer to the circular (the “ Circular ”) dated 29 June 2017 issued by the Company, of which this letter forms part. Unless the context requires otherwise, the capitalised terms used herein shall have the same meanings as defined in the Circular.

We have been appointed as members of the Independent Board Committee to consider the terms of the grant of the Put Option to SEGA SAMMY and to advise the Shareholders as to the fairness and reasonableness of the grant of the Put Option. We wish to draw your attention to the letter from the Board set forth on pages 7 to 18 of this circular and the Independent Financial Adviser set forth on pages 20 to 32 of this circular, in which detailed reasons of the Independent Financial Adviser in arriving its conclusion that the grant of the Put Option is fair and reasonable are set forth.

Having taken into account the advice from the Independent Financial Adviser on the terms of the grant of the Put Option, we are of the view the grant of the Put Option is fair and reasonable and on normal commercial terms and is in the interests of the Company and the Shareholders of the Company. Accordingly, we would have recommended the Shareholders to approve the grant of the Put Option if a physical meeting were to be held.

Yours faithfully, For and on behalf of Independent Board Committee

NI Zhenliang TSANG Wah Kwong Independent non-executive Director Independent non-executive Director

HUNG Muk Ming Independent non-executive Director

– 19 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter of advice from Lego, the Independent Financial Adviser to the Independent Board Committee and the Shareholders, in respect of the terms of the SLC Shareholders Agreement which have been prepared for the purpose of inclusion in this circular.

==> picture [406 x 42] intentionally omitted <==

29 June 2017

To the Independent Board Committee and the Shareholders

Dear Sirs or Madams,

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to the Independent Board Committee and the Shareholders in respect of the grant of the Put Option, details of which are set out in the letter from the Board (the “ Letter from the Board ”) contained in the circular dated 29 June 2017 issued by the Company to the Shareholders (the “ Circular ”), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

On 31 October 2016, the Share Purchase Agreement has been entered into whereby CTP has conditionally agreed to acquire from SEGA SAMMY 85.1% of the entire issued shares of SLC and the Completion took place on 1 January 2017. On 3 January 2017, the Board further announced that the SLC Shareholders Agreement was entered into on 31 December 2016 among SEGA SAMMY, CTP, SLC and the Company regarding the post-completion arrangements of SLC, including the restriction on transfer of SLC Shares, the right of first refusal (relating to the SLC Shares held by SEGA SAMMY only) and the grant of the Put Option to SEGA SAMMY.

As SEGA SAMMY holds 14.9% of the SLC Shares, SEGA SAMMY is a connected person at the subsidiary level (as defined under Chapter 14A of the Listing Rules) of the Company. Accordingly, the grant of the Put Option also constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. Pursuant to Rule 14A.79(1) of the Listing Rules, the grant of the Put Option (the exercise of which is not at the Company’s discretion) will be classified as if the Put Option had been exercised. As one or more of the applicable percentage ratios in respect of the exercise of the Put Option as aggregated with the Acquisition are more than 25%, the grant of the Put Option constitutes a non-exempt connected transaction for the Company under Chapter 14A of the Listing Rules and is subject to shareholders’ approval and all disclosures requirements.

– 20 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee, comprising all the independent non-executive Directors, namely Mr. Ni Zhenliang, Mr. Tsang Wah Kwong and Mr. Hung Muk Ming, has been established to advise the Shareholders as to whether the grant of the Put Option are conducted in the ordinary and usual course of business, fair and reasonable so far as the Company and Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole, and to advise the Shareholders on how to vote if a general meeting were to be convened to approve the grant of the Put Option. As the Independent Financial Adviser, our role is to give an independent opinion to the Independent Board Committee and the Shareholders in such regard.

As at the Latest Practicable Date, Lego did not have any relationships or interests with the Company that could reasonably be regarded as relevant to the independence of Lego. In the last two years, Lego has acted as an independent financial adviser to explain the reasons for the Trademark License Agreement requiring a longer period and to confirm that it is normal business practice for agreements of this type to be of such duration (details of which were set out in the announcement of the Company dated 3 January 2017). Apart from normal professional fees paid or payable to us in connection with this appointment as the Independent Financial Adviser, no arrangements exist whereby we have received or will receive any fees or benefits from the Company. Accordingly, we are qualified to give independent advice in respect of the grant of the Put Option.

BASIS OF OUR OPINION

In formulating our opinion and advice, we have relied on (i) the information and facts contained or referred to in the Circular; (ii) the information supplied by the Group and its advisers; (iii) the opinions expressed by and the representations of the Directors and the management of the Group; and (iv) our review of the relevant public information. We have assumed that all the information provided and representations and opinions expressed to us or contained or referred to in the Circular were true, accurate and complete in all respects as at the date thereof and may be relied upon. We have also assumed that all statements contained and representations made or referred to in the Circular are true at the time they were made and continue to be true as at the date of the Circular and all such statements of belief, opinions and intention of the Directors and the management of the Group and those as set out or referred to in the Circular were reasonably made after due and careful enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and/or the management of the Group. We have also sought and received confirmation from the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular and that all information or representations provided to us by the Directors and the management of the Group are true, accurate, complete and not misleading in all respects at the time they were made and continued to be so until the Latest Practicable Date.

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information provided,

– 21 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

representations made or opinion expressed by the Directors and the management of the Group, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of the Company or the Target Company or any of their respective subsidiaries or associates.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation, we have taken into consideration the following principal factors and reasons:

1. Background of and reasons for the SLC Shareholders Agreement

1.1 Information on the Group

The following table is a summary of the audited financial information of the Group for the financial years ended 31 March 2015 and 2016, as extracted from the annual report of the Company for the year ended 31 March 2016 (the “ 2016 Annual Report ”) and the unaudited financial information of the Group for the six months ended 30 September 2015 and 2016, as extracted from the interim report of the Company for the six months ended 30 September 2016 (the “ 2016 Interim Report ”).

		For the year	For the six months	For the six months	For the six months
	ended 31 March		ended	30	September
	2015	2016	2015		2016
	HK$’000	HK$’000	HK$’000		HK$’000
			(unaudited)	(unaudited)
Revenue	488,283	544,880	258,621		312,493
– Trading of animation
derivative products	443,122	508,600	252,771		262,524
– Licensing of animation
characters	15,000	–	–		–
– Establishment and operation
of indoor theme parks	28,537	33,362	3,945		47,917
– Multimedia animation
entertainment	1,624	2,918	1,905		2,052
Gross profit	186,935	168,116	62,498		97,549
Profit for the year/period	71,971	98,390	24,773		38,381

– 22 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

	As at	As at	As at
	31 March	31 March	30 September
	2015	2016	2016
	HK$’000	HK$’000	HK$’000
			(unaudited)
Bank balances and cash	339,017	81,619	84,316
Secured bank borrowings	–	94,550	94,550
Total assets	714,868	963,044	1,042,138
Net assets	555,210	690,485	773,786

As set out in the table above, revenue of the Group amounted to approximately HK$544.9 million for the year ended 31 March 2016, representing an increase of approximately 11.6% as compared to that of approximately HK$488.3 million for the prior year. According to the 2016 Annual Report, the increase in revenue was mainly attributable to (i) the increase in revenue of approximately HK$65.5 million in the trading of animation derivative products which was primarily due to an increase in sales volume to two of the major customers; (ii) the increase in revenue of approximately HK$4.8 million from the establishment and operation of indoor theme park which was mainly due to the grand opening of Shanghai JOYPOLIS in February 2016. Without taking into account of the joining fees of HK$25 million recognised for the year ended 31 March 2015 from the Group’s joint venture in operating the other JOYPOLIS, revenue in this segment significantly increased by approximately 854.3% from approximately HK$3.5 million for the year ended 31 March 2015 to approximately HK$33.4 million for the year ended 31 March 2016; and (iii) the increase of approximately HK$1.3 million from multimedia animation entertainment which comprises ticket sales for VR Gaming Showroom and concert income in respect of the Group’s animation concert performed on 30 September 2015. For the year ended 31 March 2016, the Group reported profit of approximately HK$98.4 million, representing an increase of approximately 36.7% as compared to that of approximately HK$72.0 million for the prior year, which was mainly due to the listing expense incurred in relation to the global offering of the Company was only recognised during the year ended 31 March 2015.

With reference to the 2016 Interim Report, revenue of the Group increased by approximately 20.8% from approximately HK$258.6 million for the six months ended 30 September 2015 to approximately HK$312.5 million for the six months ended 30 September 2016. Such increase was primarily due to (i) the increase of approximately HK$9.8 million generated from the trading of animation derivative products which was mainly attributable to an increase in higher unit price products sold to a major customer; and (ii) the increase of approximately HK$44.0 million generated from the establishment and operation of an indoor theme park which was mainly due to the grand opening of Shanghai JOYPOLIS. With the Shanghai JOYPOLIS commenced full operation, the number of visitors of Shanghai JOYPOLIS based on ticket sales significantly increased by approximately 674.9% from 50,279 for the six months ended 30 September 2015 to 389,592 for the six months ended 30 September 2016. In this regard, revenue generated from establishment and

– 23 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

operation of indoor theme parks increased by approximately 1,128.2% from approximately HK$3.9 million for the six months ended 30 September 2015 to approximately HK$47.9 million for the six months ended 30 September 2016.

With the profitable track record from the operation of Shanghai JOYPOLIS since its grand opening, we note that the Group is pursuing to further expand the theme park business through, among others, the Acquisition. As disclosed in the announcement of the Company dated 1 November 2016, the Directors are of the view that the Acquisition presents an excellent opportunity for the Group to (i) bring in a much stronger revenue source; (ii) leverage on the expertise and resources of the SLC group to broaden its participation in the amusement parks operation business.; and (iii) establish an all-around strategic planning for its amusement parks operation business. In light of the above, the Directors are optimistic to the future operation of the indoor theme park under the trademark JOYPOLIS and the future expansion of the Group’s theme park operation in the PRC, particularly in North-West and major cities of the PRC by working with partners through licencing and co-operation with land developers.

As at 31 March 2016, the Group had bank balances and cash of approximately HK$81.6 million, representing a decrease of approximately 75.9% as compared to that of approximately HK$339.0 million as at 31 March 2015 which was mainly due to the payment for the property, plant and equipment of HK$219.0 million for the grand opening of Shanghai JOYPOLIS and another JOYPOLIS in China. As at 30 September 2016, the Group’s bank balances and cash remained stable at approximately HK$84.3 million. On the other hand, the Group had secured bank borrowings of approximately HK$94.6 million as at 31 March 2016 and 30 September 2016 as compared to nil as at 31 March 2015. As disclosed in the 2016 Interim Report, the Group’s working capital requirement is primarily financed by its internal resources and the Board is of the view that the existing financial resources will be sufficient to execute future expansion plans of the Group. Nonetheless, the Group may obtain additional financing with favorable terms from time to time, if necessary.

1.2 Information on SEGA SAMMY and SLC Group

SLC is a company incorporated in Japan on 1 April 2015 with limited liability. Since 1 January 2017, SLC has become a non-wholly owned subsidiary of the Company holding 85.1% of the SLC Shares with the remaining 14.9% of the SLC Shares held by SEGA SAMMY. The principal business activities of SLC and SEGA Qingdao (being a subsidiary of SLC) are planning, development and operation of entertainment facilities and indoor interactive entertainment parks.

– 24 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As extracted from the accountant’s report of the SLC Group as set out in Appendix II to the circular, the following is a summary of the audited combined financial information of the SLC Group for the three financial years ended 31 March 2015, 2016 and 2017:

	For the	year ended 31	March
	2015	2016	2017
	JPY’000	JPY’000	JPY’000
Revenue	4,614,958	6,656,174	4,469,832
Gross profit	861,195	657,105	19,138
Administrative expenses	(1,501,038)	(1,114,478)	(1,715,151)
Loss for the year	(1,099,498)	(1,265,575)	(2,529,310)

As noted from the above, revenue of the SLC Group increased by approximately 44.2% from approximately JPY4.6 billion for the year ended 31 March 2015 to approximately JPY6.7 billion for the year ended 31 March 2016, which was mainly attributable to the commencement of the business of Orbi and the business of the Joypolis in Qingdao was in the upward trend. Despite the increase in revenue, the SLC Group recorded increase in net loss, which was primarily due to decrease in gross profit and the more research and development cost incurred for the commencement of business of Orbi. The SLC Company carried out reorganisation and transferred all assets and liabilities of Orbi to SEGA SAMMY on 1 January 2017 pursuant to the Share Purchase Agreement. Due to the aforementioned transfer as well as the decrease in machines sales in the PRC market, revenue for the year ended 31 March 2017 decreased by approximately 32.8%. The SLC Group also recorded the worsening in loss to approximately JPY2.5 billion for the year ended 31 March 2017, which was primarily due to the decrease in revenue and the significant administrative expenses of approximately JPY1.7 billion, among which approximately JPY1.6 billion were resulted from the impairment loss on property, plant and equipment.

2. Reasons for and benefits of the SLC Shareholders Agreement

The Put Option has been granted by CTP to SEGA SAMMY under the SLC Shareholders Agreement, whereby SEGA SAMMY may sell all the SLC Shares held by it to CTP within the Put Period at the Put Prices. The Put Option can be exercised anytime on or after the third anniversary of the Completion Date and until the day immediately before the sixth anniversary of the Completion Date which demand CTP to purchase all but not part of the SLC Shares held by SEGA SAMMY. If the Put Option is not exercised by SEGA SAMMY during the Put Period, the Put Option shall lapse on the expiry of the Put Period and all the rights and interests of SEGA SAMMY under the Put Option Deed shall also cease and terminate.

Pursuant to the SLC Shareholders Agreement, each of SEGA SAMMY and CTP shall not transfer, dispose of, create any encumbrances over, or otherwise give any other person any rights in relation to any SLC Share held by each of them within a period of three years from the Completion Date. In addition, CTP has been granted a right of first refusal on all

– 25 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

SLC Shares proposed to be sold by SEGA SAMMY to third party other than its Affiliates from the third anniversary of the Completion Date to the day immediately before the ninth anniversary of the Completion Date. CTP would have 14 days to exercise its right of first refusal. However, these restrictions on transfer and the right of first refusal will be uplifted if the grant of the Put Option is not approved by the Shareholders.

As advised by the Directors, the aforesaid restrictions on transfer are designed to maintain the involvement of SEGA SAMMY in SLC during the three years restricted period. Given that SEGA SAMMY being a renowned amusement machine manufacturer and video game developer, as well as the founder of JOYPOLIS, the Directors believe that the partnership with SEGA SAMMY will also strengthen the position of the Company as a leader of amusement park operation business and ensure the due operation of JOYPOLIS during the initial period. Therefore, we concur with the Directors that the three-year transfer restrictions imposed on SEGA SAMMY is likely to have a positive impact to the operation of SLC as well as business performance of the Group.

During the Put Period, SEGA SAMMY will be entitled to exercise the Put Option at their discretion and put the SLC Shares to CTP at the Put Price, which was determined after arm’s length negotiations among CTP, the Company and SEGA SAMMY upon normal commercial terms with reference to the available financial information of the SLC Group and the business development of the Group as a result of the synergy brought by the Acquisition. Despite the fact that the SLC Group has been loss making for the three years ended 31 March 2017 as illustrated in the paragraph headed “Information on SLC and SEGA SAMMY” above, we note that the Group has recorded increase in revenue as well as profitability from the operation of indoor theme park, particularly during the six months ended 30 September 2016 since the grand opening of Shanghai JOYPOLIS in February 2016. We understand that there is no assurance that the Group will be able to achieve turnaround in the SLC Group when the time the Put Option is exercised by SEGA SAMMY. Nonetheless, based on the successful and profitable track record of the operation of Shanghai JOYPOLIS and that one of the primary reason to the loss making position of the SLC Group was due to its significant administrative expenses resulted from the impairment loss on property, plant and equipment, and excluding which the SLC Group shall record a narrowing in loss as compared to the prior year, the Directors are confident on the future business development of the SLC Group and the future expansion of the interactive entertainment park business in the PRC.

Moreover, the Directors consider that the transfer restrictions, the right of first refusal and the grant of the Put Option, are beneficial to the Group as a whole as all the arrangements enable the Group to consolidate its equity interest in SLC. Without such transfer restrictions, in the event that SEGA SAMMY decided to transfer or dispose of all the SLC Shares held by it to parties other than the Company, the incoming shareholders may have a different view on the strategy or business plan of SLC and therefore give rise to uncertainties on the existing commercial relationship among SEGA SAMMY, SLC and the Company as well as the prospect of the SLC Group. Nonetheless, pursuant to the SLC Shareholders Agreement, the restrictions on transfer and the right of first refusal will be uplifted if the grant of the Put Option is not approved by the Shareholders. In view of the above, given that the grant of Put Option is the condition precedent to the aforesaid

– 26 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

arrangements, we therefore concur with the Directors’ view that while the Put Option has been granted to SEGA SAMMY at no consideration and the exercise of which is not at the Company’s discretion, the grant of the Put Option is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Having considered that (i) partnership with SEGA SAMMY will strengthen the position of the Company as a leader of amusement park operation business and the three-year transfer restrictions imposed on SEGA SAMMY shall ensure the due operation of JOYPOLIS; (ii) the Group had a successful and profitable track record of the operation of Shanghai JOYPOLIS; (iii) the grant of Put Option is the condition precedent to the transfer restrictions and the right of first refusal; and (iv) the Group would be able to consolidate its equity interest in SLC under the aforementioned arrangements, we concur with the Directors that the SLC Shareholders Agreement is conducted in the ordinary and usual course of business, and is in the interests of the Company and the Shareholders as a whole.

3. Terms of the SLC Shareholders Agreement

On 31 December 2016, the SLC Shareholders Agreement was entered into among SEGA SAMMY, CTP, SLC and the Company regarding the post-completion arrangements of SLC, including the restriction on the transfer of the SLC Shares and the right of first refusal (relating to the SLC Shares held by SEGA SAMMY only) and grant of the Put Option to SEGA SAMMY. All terms of the SLC Shareholders Agreement (other than the grant of the Put Option which was subject to approval from the Shareholders) has become effective from 1 January 2017.

Restriction of transfer

Right of first refusal

– 27 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Grant of the Put Option

Put Period and Put Prices

In the event that CTP has purchased all the SLC Shares held by SEGA SAMMY, SLC will become a wholly-owned subsidiary of the Company.

The consideration has been determined after arm’s length negotiations among CTP, the Company and SEGA SAMMY and upon normal commercial terms with reference to the available financial information of the Remaining Business and the business development of the Group as a result of the synergy brought by the Acquisition, further information on which is set forth in the paragraphs under “Reasons for and benefits — SLC Shareholders Agreement” in the Letter from the Board.

Analysis of the Put Prices

While the price to earnings ratio and the price to book ratio (“ P/B ”) are the most commonly used benchmark to valuate companies that generate recurring revenue and income, the price to earnings ratio is not applicable in considering the Put Prices as the SLC Group has been loss making during its latest financial year. In assessing the fairness and reasonableness of the Put Prices, we note that based on the unaudited net asset value of the SLC Group as at 31 March 2017, (i) if the Put Option is exercised on or after the third anniversary of the Completion Date and until the day immediately before the fifth anniversary of the Completion Date, the aggregate consideration payable by CTP for the 149 SLC Shares will be

– 28 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

JPY105,052,748 (the “ First Put Price ”), representing an implied P/B of approximately 2.5 times; and (ii) if the Put Option is exercised on or after the fifth anniversary of the Completion Date and until the day immediately before the sixth anniversary of the Completion Date, the aggregate consideration payable by CTP for the 149 SLC Shares will be JPY210,105,496 (the “ Second Put Price ”), representing an implied P/B of approximately 4.9 times. It should be noted that as the Put Option would only be exercisable on or after the third anniversary of the Completion Date, the net asset value of the SLC Group may different from its net asset value as at 31 March 2017. Nonetheless, in view of the Group’s future expansion plan for theme park operation in the PRC as well as the prospect of the SLC Group as detailed in the paragraph headed “Reasons for and benefits of the SLC Shareholders Agreement” above, it is unlikely that the net asset value of the SLC Group in the future being less than its net asset value as at 31 March 2017.

For the purpose of our analysis, we have identified and reviewed, on a best effort basis, companies listed on the Stock Exchange which are principally engaged in the operation of theme parks in the PRC and/or Japan. Due to the limited number of companies listed on the Stock Exchange with business nature comparable to the SLC Group being identified, we have extended our research to companies which are listed in other internationally recognized stock exchanges and engaged in the operation of theme parks in the PRC and/or Japan. To the best of our knowledge and as far as we are aware of, we have identified four companies (the “ Comparable Companies ”) that are engaged in similar line of business to the SLC Group and we consider that the Comparable Companies are fair and representative samples.

Shareholders should note that the business operations and prospects of the SLC Group are not exactly the same as the Comparable Companies and we have not conducted any in depth investigation into the business operations and prospects of the Comparable Companies. In addition, the P/Bs of the Comparable Companies reflect in a particular period of time market consensus of, amongst other things, the prospects, business, financial position and market price performance of the shares of the respective Comparable Companies and therefore, the P/Bs of the Comparable Companies are for information and reference only. The table below illustrates the details of the Comparable Companies:

	Stock	Stock
Company name	code	exchange	Principal business	P/B (times)
				(Note)
Haichang Ocean Park	2255	Hong Kong	Development, construction and	1.5
Holdings Limited			operation of theme parks, property
			development and investment and
			hotel operations in the PRC.

– 29 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

	Stock	Stock
Company name	code	exchange	Principal business	P/B (times)
				(Note)
Aeon Fantasy Company	4343	Tokyo	Operation of play facilities in	2.5
Limited			shopping centers which are operated
			by the AEON group and other
			developers. It is involved in the
			establishment and operation of
			indoor theme parks which include
			entertainment and amusement
			facilities, as well as the operation of
			attached shops.
Izu Shaboten Resort	6819	Tokyo	Operation of leisure business which	1.7
Company Limited			includes the operation, management
			and supervision of theme parks and
			others. It also engages in the
			entertainment business, investment
			and leasing of real estate.
Oriental Land Company	4661	Tokyo	Operation and management of theme	3.2
Limited			parks and hotels. It is also engaged in
			the management and operation of a
			shopping mall located at a theme
			park resort and monorails.
			Maximum	3.2
			Minimum	1.5
			Average	2.2
Put Prices payable by			If the Put Option is exercised on or	2.5
CTP for the			after the third anniversary of the
remaining SLC			Completion Date and until the day
Shares held by SEGA			immediately before the fifth
SAMMY			anniversary of the Completion Date
			If the Put Option is exercised on or	4.9
			after the fifth anniversary of the
			Completion Date and until the day
			immediately before the sixth
			anniversary of the Completion Date

Source: the Stock Exchange website (www.hkex.com.hk), the Japan Exchange Group website (www.jpx.co.jp) and Thomson Reuters

Note: The P/Bs of the Comparable Companies were calculated based on their respective closing price as at 30 December 2016, being the last trading day immediately preceding the date of the SLC Shareholders Agreement, and their net asset value per share based on their respective latest published financial reports.

– 30 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As illustrated in the above, the Comparable Companies were trading at P/B ranging from approximately 1.5 times to approximately 3.2 times (the “Market Range” ). The implied P/B of the First Put Price of approximately 2.5 times hence fall within the Market Range while the Second Put Price of approximately 4.9 times was higher than the Market Range. Nonetheless, we noted that while the SLC Group does not own intangible assets, SEGA Holdings granted to SLC the right to use the Trademarks pursuant to the Trademark Licence Agreement as disclosed in the announcement of the Company dated 3 January 2017. With reference to the unaudited pro forma financial information as set out in Appendix III to the Circular, the pro forma fair value of the Trademark amounted to approximately HK$24.2 million. If such value of the Trademark is included in the net assets value of the SLC Group, the implied P/Bs of the First Put Price and the Second Put Price would be approximately 1.1 times, which fall below the Market Range, and 2.2 times, which fall within the Market Range, respectively.

Having considered that (i) the reasons for and benefits of the SLC Shareholders Agreement (including the grant of the Put Option); and (ii) the analysis on the implied P/B of the First Put Price and the Second Put Price as set out in the above, we are of the view that the Put Prices are fair and reasonable so far as the Shareholders are concerned.

4. Possible financial effects of the SLC Shareholders Agreement

SLC is a non-wholly owned subsidiary of the Company and the assets, liabilities and financial results of SLC is consolidated into the financial statements of the Company effective from the Completion Date. Upon exercise of the Put Option, SLC will become a wholly owned subsidiary of the Company.

(a) Net asset value

The unaudited consolidated net asset value of the Group as at 30 September 2016 was approximately HK$773.8 million. With reference to the unaudited pro forma financial information of the Group as contained in Appendix III to the Circular, the Put Option is treated as a derivative and is recognised at fair value upon initial recognition, which is the effective date on 1 January 2017. The fair value of the Put Option is to be measured by valuation.

(b) Earnings

As confirmed by the Directors, the Company does not expect to record any gain or loss in its consolidated income statement for the year ended 31 March 2017 as a result of the grant of Put Option.

– 31 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(c) Working capital

As disclosed in the 2016 Interim Report, the Group’s bank balances and cash amounted to approximately HK$84.3 million. In view of that the maximum consideration payable by CTP to acquire the SLC Shares, being the Second Put Price, amounted only to approximately HK$13.9 million, the Directors consider that the exercise of Put Option will not materially impact the working capital and financial position of the Group.

RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we are of the opinion that the entering into of the SLC Shareholders Agreement is conducted in the ordinary and usual course of business of the Group, and the terms of the SLC Shareholders Agreement (including the grant of Put Option) are on normal commercial terms, fair and reasonable so far as the Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Shareholders, as well as the Independent Board Committee to recommend the Shareholders, to vote in favour of the relevant resolution if a general meeting were to be convened to approve the grant of the Put Option.

Yours faithfully, For and on behalf of Lego Corporate Finance Limited Joshua Liu Managing Director

Mr. Joshua Liu is a licensed person registered with the SFC and a responsible officer of Lego to carry out Type 6 (advising on corporate finance) regulated activity under the SFO. He has over 19 years of experience in the investment banking and securities industry.

– 32 –

APPENDIX I

FINANCIAL INFORMATION

1. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP

The Company is required to set forth in this circular the financial information for the last three financial years with respect to the profits and losses, financial record and position, set out as a comparative table and the latest published audited statement of financial position together with the notes on the annual accounts for the last financial year for the Group.

The audited consolidated financial statements of the Group for the financial year ended 31 March 2014, 2015 and 2016 are disclosed in the Company’s annual reports for the financial years ended 31 March 2014, 2015 and 2016 respectively. All of these financial statements have been published on the website of the Stock Exchange www.hkex.com.hk and the Company’s website at www.animatechina.com.

2. STATEMENT OF INDEBTEDNESS

At the close of business on 31 May 2017, being the latest practicable date for the purpose of this statement of indebtedness prior to the printing of this circular, the Enlarged Group had outstanding borrowings of approximately HK$187 million, comprising of:

Secured and guaranteed bank borrowings Unsecured and guaranteed other borrowings Unsecured and unguaranteed amounts due to a director Unsecured and unguaranteed amount due to a non-controlling interest	As of 31 May 2017 HK$’000 118,550 24,325 17,082 27,071
	187,028

Pursuant to a placing agreement entered into between the Company and a placing agent on 29 May 2017, the placing agent agreed to act as the exclusive placing agent for the purposes of arranging subscribers on a best effort basis for the issue of the bonds with an aggregate principal amount of up to HK$100,000,000. At 31 May 2017, bonds with an aggregate principal amount of HK$100,000,000 have not yet been issued under the Placing Agreement.

Save as aforesaid and apart from intra-group liabilities, the Enlarged Group did not have, as of 31 May 2017, any outstanding mortgages, charges, debentures, other loan capital, bank overdrafts, loans or other similar indebtedness, hire purchase commitments, liabilities under acceptances or acceptance credits or any guarantees or other material contingent liabilities as of the close of business on 31 May 2017.

– I-1 –

APPENDIX I

FINANCIAL INFORMATION

3. WORKING CAPITAL STATEMENT

The Directors are of the opinion that, after taking into account the Acquisition and the financial resources available to the Enlarged Group, including funds internally generated from operations and available banking facilities and in the absence of unforeseen circumstances, the Enlarged Group has sufficient working capital for its operations for at least the next twelve months from the date of this circular.

4. INFORMATION ABOUT THE VENDOR AND THE SLC GROUP

SEGA SAMMY

SEGA SAMMY is a company (kabushiki kaisha) incorporated in Japan with limited liability, the shares of which are listed on the Tokyo Stock Exchange (stock code: 6460).

The principal business activity of SEGA SAMMY is management of SEGA SAMMY Group as the holding company. The principal business activities of its major subsidiaries are Pachislot and Pachinko machine business, entertainment contents business and resort business.

The SLC Group

SLC is a company (kabushiki kaisha) incorporated in Japan on 1 April 2015 with limited liability and a wholly-owned subsidiary of SEGA SAMMY as of the date of this announcement. The principal business activity of SLC is planning, development and operation of entertainment facilities. SEGA Qingdao, a subsidiary of SLC, is a limited company established in the PRC on 25 September 2013 with the principal business activity of planning, development and operation of amusement parks in the PRC.

– I-2 –

APPENDIX I

FINANCIAL INFORMATION

The audited total assets and net assets value of the SLC Group as of 31 March 2017 were approximately JPY2,455,681,000 and JPY286,827,000 respectively. Set forth below is the audited financial information of the SLC Group for the three financial years ended 31 March 2015, 2016 and 2017 as extracted from the audited statements of profit or loss and other comprehensive income set forth in Appendix II to this circular:

	For the	year ended 31	March
	2015	2016	2017
	JPY(’000)	JPY(’000)	JPY(’000)
Revenue	4,614,958	6,656,174	4,469,832
Net loss before taxation	1,099,498	1,265,575	2,529,310
Net loss after taxation	1,099,498	1,265,575	2,529,310

Note 1: As SLC was incorporated on 1 April 2015, the above unaudited financial information represented the financial information of the Remaining Business, which is the subject of the Acquisition.

Upon completion of the Transaction, the SLC Group will become an indirect wholly owned subsidiary of the Company. Accordingly, the financial results of the SLC Group will be consolidated into the financial statements of the Company.

5. MANAGEMENT DISCUSSION AND ANALYSIS OF THE SLC GROUP

The Accountants’ Report of the SLC Group for the financial years ended 31 March 2015, 2016 and 2017 was set forth in Appendix II to this circular. Set forth below is the management discussion and analysis of the SLC Group for the corresponding period:

Business overview

SLC, being a company ( kabushiki kaisha ) incorporated in Japan on 1 April 2015, is principally engaged in planning, development and operation of entertainment facilities. SEGA Qingdao, a subsidiary of SLC and established in the PRC on 25 September 2013, is principally engaged in planning, development and operation of amusement parks in the PRC. Business operation of the SLC Group, immediately prior to the completion of the Restructuring, had covered both the Remaining Business and the Excluded Business.

Revenue

The SLC Group recorded revenue of approximately JPY4,614,958,000, JPY6,656,174,000 and JPY4,469,832,000 for the three financial years ended 31 March 2015, 2016 and 2017 respectively, which represented by the revenue generated from two segments (i) establishment and operation of indoor theme park; and (ii) sale of amusement machines: JPY337,240,000 and JPY1,237,718,000 respectively for the year ended 31 March 2015; JPY5,708,216,000 and JPY947,958,000 respectively for the year ended 31 March 2016; and JPY4,202,445,000 and JPY267,387,000 respectively for the year ended 31 March 2017.

– I-3 –

APPENDIX I

FINANCIAL INFORMATION

The revenue for the year ended 31 March 2016 increased by approximately 44.23%, as compared to the year ended 31 March 2015. The increase in revenue was mainly due to the increase in the revenue from the establishment and operation of indoor theme park by approximately 69.02% from JPY3,377,240 to approximately JPY5,708,216,000, which was mainly attributable to the commencement of the business of Orbi and the business of the Joypolis in Qingdao was in the upward trend.

The revenue for the year ended 31 March 2017 decreased by approximately 32.85%, as compared to the year ended 31 March 2016. The decrease was mainly due to (i) the decrease in the revenue from the establishment and operation of indoor theme park by approximately 26.38% from JPY5,708,216,000 to approximately JPY4,202,445,000; and (ii) the decrease in the revenue from the sales of amusement machines by 71.79% from JPY947,958,000 to approximately JPY267,387,000 as compared to the year ended 31 March 2015, which was mainly resulted from the transfer of the business of Orbi to Sega Sammy pursuant to the sales and purchase agreement on 31 December 2016 and the decreased in the machines sales in PRC market.

Cost of sales

The SLC Group recorded cost of sales of approximately JPY3,753,763,000, JPY5,999,069,000 and JPY4,450,694,000 for the financial year ended 31 March 2015, 2016 and 2017 respectively, which comprise of rental expenses, staff costs, utilities of the amusement parks and cost of the amusement machines.

The cost of sales for the year ended 31 March 2016 increased by approximately 59.81%, as compared to the year ended 31 March 2015. The increase in cost of sales was in line with the increase in the revenue from the segment of establishment and operation of indoor theme park. The higher rate of increment in the cost of sales than that of the revenue was primarily due to the commencement of the business of Orbi, more research and development cost has been incurred.

The cost of sales for the year ended 31 March 2016 decreased by approximately 25.81%, as compared to the year ended 31 March 2017 The decrease in revenue was in line with the decrease in the revenue of both segments. The lower rate of decrement in the cost of sales than that of the revenue was primarily due to the transfer of the business of Orbi to Sega Sammy pursuant to the sales and purchase agreement on 31 December 2016.

Gross profit

Based on the aforesaid, the SLC Group recorded gross profit of approximately JPY861,195,000, JPY657,105,000 and JPY19,138,000 for the financial year ended 31 March 2015, 2016 and 2017 respectively.

– I-4 –

APPENDIX I

FINANCIAL INFORMATION

Other income and gain

The SLC Group recorded other income of approximately JPY330,000, JPY15,315,000 and JPY19,053,000 for the financial years ended 31 March 2015, 2016 and 2017 respectively, which mainly comprised of bank interest income, exchange gain, gain on scrape disposals and other items. The significant increase for the year ended 31 March 2016 as compared to the year ended 31 March 2015 was mainly attributable to increase in bank interest income amounting to approximately JPY7,118,000.

Finance costs

The SLC Group recorded finance costs for the two financial years ended 31 March 2016 and 2017 of approximately JPY23,726,000 and JPY16,394,000 respectively, which mainly comprised of interest expenses and exchange differences.

Other expenses

The other expenses incurred by the SLC Group during the financial years ended 31 March 2015, 2016 and 2017 of approximately JPY85,525,000, JPY83,771,000 and JPY541,962,000 respectively which mainly comprised of disposal, written off and impairment of property, plant and equipment.

The other expenses decreased by approximately 2.05% for the year ended 31 March 2016 as compared to the year ended 31 March 2015. The decrease was mainly due to the decrease in written off of property, plant and equipment, which was mainly attributable to some projects finished in 2015.

The other expenses increased by approximately 646.96% for the year ended 31 March 2017 as compared to the year ended 31 March 2016 mainly due to the increase in the impairment of property, plant and equipment in Qingdao Joypolis.

Loss for the year

For the three financial years ended 31 March 2015, 2016 and 2017, the SLC Group recorded net loss of approximately JPY1,099,498,000, JPY1,265,575,000 and JPY2,529,310,000 respectively.

The net loss for the year ended 31 March 2016 increased by approximately 15.41%, as compared to the year ended 31 March 2015. The increase in net loss, despite the increase in revenue by 44.23% for the same period, was mainly due to the increase in (i) cost of sales by approximately 59.81% to approximately JPY5,999,069,000; and (ii) selling and distribution expenses by approximately 91.21% to approximately JPY716,020,000.

The net loss for the year ended 31 March 2017 increased by approximately 97.56%, as compared to the year ended 31 March 2016. The increase in net loss was mainly due to (i) increase in the revenue by approximately 32.85% to approximately JPY4,469,832,000; (ii) decrease in the gross profit by approximately 97.09% to approximately JPY19,138,000; and (iii) increase in the other expenses by approximately 561.71% to approximately JPY541,962,000.

– I-5 –

APPENDIX I

FINANCIAL INFORMATION

Liquidity and financial resources

As of 31 March 2015, the SLC Group had net current assets of approximately JPY2,699,652,000; as at 31 March 2016 and 2017, the SLC Group had net current liability of approximately JPY1,097,200 and JPY652,533,000 respectively. The current ratio (being current assets over current liabilities) as of 31 March 2015, 2016 and 2017 were approximately 1.85 times, 0.68 times and 0.58 times respectively. The decrease in current ratio as of 31 March 2016 as compared to 31 March 2015 was mainly due to the decrease in cash and cash equivalents, which was attributable to the payment for property, plant and equipment for the commencement of the business of Orbi. The decrease in current ratio as of 31 March 2017 as compared to 31 March 2016 was mainly due to decrease in both cash and cash equivalents and amount due from former shareholder, which was attributable to continuing operating losses and the transfer of Orbi business to Sega Sammy.

As of 31 March 2015, 2016 and 2017, the SLC Group had net assets of approximately JPY6,096,474,000, JPY2,854,959,000 and JPY286,827,000 respectively. The debt ratio (being total liabilities over total assets) as of 31 March 2015, 2016 and 2017 were approximately 46.35%, 65.34% and 98.07% respectively. The increase in debt ratio as of 31 March 2016 as compared to 31 March 2015 was mainly due to the decrease in investment in subsidiary and cash and cash equivalents. The increase in debt ratio as of 31 March 2017 as compared to 31 March 2016 was mainly due to the decrease in prepayments, other receivables, and cash and cash equivalents.

As of 31 March 2015, 2016 and 2017, the cash and bank balances of the SLC Group amounted to approximately JPY2,608,644,000, JPY867,405,000 and JPY389,910,000 respectively, which were mainly denominated in Japanese Yen. These amounts comprise both cash at bank and cash in hand.

As of 31 March 2016 and 2017, the outstanding borrowings of the SLC Group amounted to approximately JPY235,417,000 and JPY755,707,000 respectively. The borrowing primarily includes (i) amount due to former shareholder and ultimate/intermediate holding company which are unsecured, interest free and repayable on demand; and (ii) unsecured loan from former shareholder which bearing fixed interest rate.

As of 31 March 2015, 2016 and 2017, the outstanding obligations under finance lease of the SLC Group amounted to approximately JPY2,383,338,000, JPY1,589,147,000 and nil respectively.

– I-6 –

APPENDIX I

FINANCIAL INFORMATION

Capital structure

During the three financial years ended 31 March 2015, 2016 and 2017, the capital structure of the SLC Group consisted of borrowings and obligations under finance lease, net of cash and cash equivalent and equity attributable to owners of the SLC Group, comprising share capital, reserve and retained profits. The directors of the SLC Group review the capital structure regularly. As part of the review, the directors consider the cost of capital and the risk associated with each class of capital. Based on recommendations of the directors, the SLC Group will balance its overall capital structure through payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debt.

As of 31 March 2017, the issued and paid up capital of SLC was JPY100,000,000 divided into 1,000 shares. Movements in the share capital of SLC are reflected in note 25 to the financial statements of the SLC Group in Appendix II to this circular.

Gearing ratio

As of 31 March 2015, 2016 and 2017, the gearing ratios of the SLC Group, which were calculated as sum of borrowings and obligations under finance lease divided by total equity were 39.09%, 63.91%, and 263.47% respectively.

The increase in gearing ratio as of 31 March 2016 as compared to 31 March 2015 was mainly due to decrease in total equity which was attributable to loss for the year ended 31 March 2016, which is partly offset by increases in both borrowings and obligations under finance lease.

The increase in gearing ratio as of 31 March 2017 as compared to 31 March 2016 was mainly due to an substantial decrease in total equity which was attributable to loss for the year ended 31 March 2017.

Treasury and funding policies

During the reported period, the SLC Group usually financed its working capital through internal funds, finance lease and funding from immediate holding company. To manage liquidity risk, the management of the SLC Group closely monitors the liquidity position to ensure that the liquidity structure of the SLC Group’s asset, liabilities and commitments can meet its funding requirements.

Currency and interest risk

The cash and bank balances, the borrowings and the obligations under finance lease of the SLC Group were mainly denominated in Japanese Yen. The operation of the SLC Group had been primarily conducted in Japanese Yen. The SLC Group did not carry out any foreign exchange forward contracts to hedge against exchange rate fluctuations. Foreign exchange risk arising from the normal course of operations is considered to be minimal and the management will closely monitor the fluctuation in the currency and take appreciate actions when conditions arises.

– I-7 –

APPENDIX I

FINANCIAL INFORMATION

In terms of the interest rate exposure, as the SLC Group was only exposed to fixed interest rate charges arising from obligation under finance lease and loan from former shareholder, the SLC Group’s exposure to risk of changes in market interest rates is considered to be minimal. The SLC Group currently does not have any interest rate hedging policy. The management of the SLC Group closely monitors the interest rate exposure of the SLC Group and would consider hedging significant interest rate exposure should the need arise.

Credit risk

The SLC Group’s credit risk is primarily attributable to accounts receivable, other receivables, amounts due from related companies and loans receivables. Management has a credit policy in place and the exposure to these credit risks are monitored on an ongoing basis.

Included in the amount that is past due but not impaired are mainly attributable to trade receivables due from a number of independent customers that have a good track record with the SLC Group, which increased from approximately JPY31,223,000 as of 31 March 2015 to approximately JPY112,274,000 as of 31 March 2017. In terms of concentration of credit risk, no concentration of credit risk of total accounts receivable due from the SLC Group’s largest customer and five largest customers as of 31 March 2015, 2016 and 2017 respectively.

In order to minimise the credit risk in accounts receivable due from customers, the management of the SLC Group is responsible for determination of credit limits, credit approvals and other monetary procedures to ensure that follow-up action is taken to recover overdue amounts. In addition, the management of the SLC Group reviews the recoverable amount of each individual receivable periodically to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the SLC Group consider that the SLC Group’s credit risk is significantly reduced.

The credit risk arising from amounts due from related companies and loans receivables is limited as the counterparties have good history of repayment and the SLC Group does not expect to incur a significant loss for uncollected amounts due from directors and ultimate holding company.

The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

Foreign exchange exposure

Most of the transactions, assets and liabilities attributable to the SLC Group for the years ended 31 March 2015, 2016 and 2017 were denominated mainly in Japanese Yen. The SLC Group had no foreign exchange contracts outstanding as at 31 March 2015, 2016 and 2017.

– I-8 –

APPENDIX I

FINANCIAL INFORMATION

Employees and remuneration policies

As of 31 March 2015, 2016 and 2017, the total number of employees of the SLC Group was 265, 345 and 280 respectively. The staff costs for the three financial years ended 31 March 2015, 2016 and 2017 were approximately JPY1,439,256,000, JPY1,406,839,000 and JPY1,337,545,000 respectively.

The SLC Group reviews staff remuneration once a year, or as their management considers appropriate. Changes in remuneration are based on a range of factors including the SLC Group’s performance, the competitiveness of remuneration with the external market, and individual employee’s performance. The SLC Group’s employees were paid at fixed remuneration with annual bonus, paid annual leave, contribution retirement plan and benefit retirement plans.

Material investments, acquisitions or disposals

On 14 May 2015, SLC acquired the entire interest of SEGA Qingdao. Save as above, there were no other material acquisitions and disposals of subsidiaries and associated companies of the SLC Group and no significant investments made during the years ended 31 March 2015, 2016 and 2017.

Capital commitments

As at 31 March 2015, 2016 and 2017, the SLC Group had capital commitments in respect of the acquisition of property, plant and equipment contracted for bat not provided amounting to JPY107,171,000, JPY15,496,000 and JPY2,229,000 respectively.

Contingent liabilities

As of 31 March 2015, 2016 and 2017, the SLC Group did not have any contingent liabilities.

Pledge of assets

As at 31 March 2015, 2016 and 2017, the Tokyo Joypolis entrance system of the SLC Group with a carrying amount of JPY978,320,000, JPY473,381,000 and Nil were pledged under finance leases.

6. FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

The Enlarged Group is principally engaged in multi-line business in the animation-related industry, with primary focus on the trading of animation derivative products (mainly toys) featuring renowned third-party owned animation characters for the Japanese market with the provision of value-added services.

– I-9 –

APPENDIX I

FINANCIAL INFORMATION

Looking ahead, in addition to the core business of trading toys, the Enlarged Group will continue to expand its theme park business and the multimedia animation entertainment business, which includes online animation games, movies and television and online entertainment programmes, online platform and other entertainment and mobile applications focusing on a series of animation characters. New technology, such as the VR technology, will be used for the purpose of promoting different business segments with synergistic benefits. The Enlarged Group will also continue to explore business opportunities relating to Internet business which may facilitate the development and commercialisation of its animation business and animation characters business, and continue supporting and cooperating with the PRC government to develop the cultural industry.

The Directors are optimistic on the growth opportunities in the interactive entertainment park industry. The Acquisition will enable the Enlarged Group to significantly broaden its business in the interactive entertainment park industry. Upon Completion, the Enlarged Group will develop the amusement parks in North-West and major cities of the PRC by working with partners through licencing and co-operation with land developers. The Enlarged Group will leverage on the expertise and resources of the SLC group in support of the aforesaid future development plan. The Board considers that the Acquisition constitute a strong revenue source for the Enlarged Group.

The Enlarged Group will continue to seek for opportunities for diversification that will benefit the Enlarged Group’s long term development and maximise shareholder value.

– I-10 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

香港銅鑼灣禮頓道77號禮頓中心9樓 9/F Leighton Centre, 77 Leighton Road, Causeway Bay, Hong Kong

The Directors

China Animation Characters Company Limited

Dear Sirs,

We set out below our report on the financial information of CA Sega Joypolis Limited (the “Target Company”, formerly known as Sega Live Creation Inc.), its subsidiary and the Amusement Park Business carried out by predecessor of the Target Company (hereinafter collectively referred to as the “Target Group”) comprising the combined statements of profit or loss and other comprehensive income, the combined statements of changes in equity and the combined statements of cash flows of the Target Group for each of the years ended 31 March 2015, 2016 and 2017 (the “Relevant Periods”) and the combined statements of financial position of the Target Group as at 31 March 2015, 2016 and 2017, and a summary of significant accounting policies and other explanatory information (the “Financial Information”), for inclusion in the circular of China Animation Characters Company Limited (the “Company”) dated 29 June 2017 (the “Circular”) in connection with the proposed acquisition of the 85.1% equity interest of the Company (the “Proposed Acquisition”).

The Target Company was incorporated in Japan under the Companies Act on 1 April 2015. Pursuant to the transfer of the entire shares of 華夏世嘉（青島）娛樂遊藝有限公司 (“Qingdao CA Sega”, formerly known as “世嘉（青島）娛樂有限公司”) and the transfer of the Amusement Park Business to the Target Company, the Target Company became the holding company of the Target Group, including Qingdao CA Sega and succeeded the Amusement Park Business from Sega Corporation, on 1 April 2015 and 14 May 2015 respectively.

As at the date of this report, no statutory financial statements have been prepared for the Target Company, as it is not subject to statutory audit requirements under the relevant rules and regulations in its jurisdiction of incorporation.

As at the end of the Relevant Periods, the Target Company has direct interests in the subsidiary as set out in note 1(a) of Section B below. The Target Company has adopted 31 March as their financial year end date and Qingdao CA Sega has adopted 31 December as its financial year end date. The statutory financial statements of the companies now comprising the Target Group were prepared in accordance with the relevant accounting principles applicable to these companies in the jurisdictions in which they were incorporated and/or established. Details of their statutory auditors during the Relevant Period are set out in note 1(a) of Section B below.

– II-1 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

For the purpose of this report, directors of the Company (the “Directors”) have prepared the combined financial statements for the Relevant Periods (the “Underlying Financial Statements”) on the same basis as used in the preparation of the Financial Information set out in Section B below. The Underlying Financial Statements for each of the years ended 31 March 2015, 2016 and 2017 were audited by us under separate terms of engagement with the Company in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information has been prepared by the directors of the Company for inclusion in the Circular in connection with the Proposed Acquisition based on the Underlying Financial Statements, with no adjustments made thereon and in accordance with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

Directors’ responsibiliy for the financial information

The directors of the Company are responsible for the preparation of the Financial Information that gives a true and fair view in accordance with HKFRSs issued by the HKICPA and the applicable disclosure provisions of the Listing Rules, and for such internal control as the directors of the Company determine is necessary to enable the preparation of the Financial Information that is free from material misstatement, whether due to fraud or error.

Reporting accountants’ responsibility

Our responsibility is to form an opinion on the Financial Information based on our procedures performed in accordance with Auditing Guideline “Prospectuses and Reporting Accountant” (Statement 3.340) issued by the HKICPA. We have not audited any financial statements of the Target Company, its subsidiary or the Target Group in respect of any period subsequent to 31 March 2017.

Opinion

In our opinion, the Financial Information gives, for the purpose of this report and on the basis of preparation set out in note 2(b) of Section B below, a true and fair view of the financial position of the Target Group as at 31 March 2015, 2016 and 2017 and the Target Company as at 31 March 2015, 2016 and 2017 and the Target Group’s financial performance and cash flows for the Relevant Periods then ended.

Crowe Horwath (HK) CPA Limited

Certified Public Accountants Hong Kong, 29 June 2017

Chan Wai Dune, Charles,

Practising Certificate Number P00712

– II-2 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

A. FINANCIAL INFORMATION OF THE TARGET GROUP

1. COMBINED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Notes
Revenue
4
Cost of sales
Gross profit
Other income
9
Selling and distribution expenses
Administrative expenses
Other expenses
Finance costs
5(c)
Loss before tax
5
Income tax
6
Loss for the year attributable to
owners of the Target Company
Other comprehensive income/(loss):
Items that may be reclassified to
profit or loss in subsequent
periods:
– Exchange differences arising on
translation of financial
statements of an overseas
subsidiary
Items that will not be reclassified to
profit or loss in subsequent
periods:
– Remeasurement of defined
benefit retirement obligations
Total comprehensive loss for the
year attributable to owners of the
Target Company
Earnings per share
Earnings per share for loss
attributable to owners of the Target
Company
10

Year ended 31 March
2015
2016
2017
JPY’000
JPY’000
JPY’000
4,614,958
6,656,174
4,469,832
(3,753,763)
(5,999,069)
(4,450,694)
861,195
657,105
19,138
330
15,315
19,053
(374,460)
(716,020)
(293,994)
(1,501,038)
(1,114,478)
(1,715,151)
(85,525)
(83,771)
(541,962)
–
(23,726)
(16,394)
(1,099,498)
(1,265,575)
(2,529,310)
–
–
–
(1,099,498)
(1,265,575)
(2,529,310)
149,887
(181,162)
(104,997)
(18,845)
(73,378)
66,145
(968,456)
(1,520,115)
(2,568,162)
N/A
N/A
N/A

– II-3 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

2. COMBINED STATEMENTS OF FINANCIAL POSITION

Notes Non-current assets Property, plant and equipment 11 Intangible assets 12 Prepayments, deposits and other receivables 15 Current assets Inventories 13 Trade receivables 14 Prepayments, deposits and other receivables 15 Amount due from former shareholder 16 Cash and cash equivalents 17 Bank deposits with maturity greater than three months 17 Current liabilities Trade and bills payables 18 Accruals, deposits received and other payables 19 Obligations under finance lease 22 Deferred income Loan from former shareholder 20 Amount due to former shareholder 16 Amount due to ultimate holding company 21 Amount due to intermediate holding company 21 Provision for annual leave entitlement 24 Provision for reinstatement costs for rented premises 24	At 31 March 2015 2016 JPY’000 JPY’000 4,603,820 4,836,286 – 880 654,933 656,712 5,258,753 5,493,878 - - - - - - - - - - - - - - - - 140,007 261,862 156,840 151,331 677,943 278,047 2,186,499 672,892 2,608,644 867,405 109,137 124,049 5,879,070 2,355,586 - - - - - - - - - - - - - - - - 764,440 69,893 1,553,457 2,278,439 794,191 801,143 – – – 229,340 – 6,077 – – – – 67,330 67,894 – – 3,179,418 3,452,786 - - - - - - - - - - - - - - - -	2017 JPY’000 979,059 – 559,992
		1,539,051 - - - - - - - - 121,510 179,552 108,772 5,146 389,910 111,740
		916,630 - - - - - - - - 53,605 669,340 – 2,406 385,400 54,808 300,834 14,665 54,085 34,020
		1,569,163 - - - - - - - -

– II-4 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Notes Non-current liabilities Provision for reinstatement costs for rented premises 24 Net defined benefit retirement obligations 23 Obligations under finance lease 22 Net assets Equity Equity attributable to owners of the Target Company Share capital 25(a) Reserves 25(b) Total equity	At 31 March 2015 2016 JPY’000 JPY’000 196,604 630,433 76,180 123,252 1,589,147 788,004 1,861,931 1,541,689 - - - - - - - - - - - - - - - 6,096,474 2,854,989 1,821,370 100,000 4,275,104 2,754,989 6,096,474 2,854,989	2017 JPY’000 557,146 42,545 –
		599,691 - - - - - - -
		286,827

		100,000 186,827
		286,827

– II-5 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

3. COMBINED STATEMENTS OF CHANGES IN EQUITY

Share capital JPY’000 688,590	Attributable to owners of the Target Company Capital reserve Defined benefit retirement obligations Translation reserve Accumulated losses JPY’000 JPY’000 JPY’000 JPY’000 (Note 25 (c)(i)) (Note 25 (c)(ii)) (Note 25 (c)(iii)) 4,274,181 38,477 28,696 902,206	Attributable to owners of the Target Company Capital reserve Defined benefit retirement obligations Translation reserve Accumulated losses JPY’000 JPY’000 JPY’000 JPY’000 (Note 25 (c)(i)) (Note 25 (c)(ii)) (Note 25 (c)(iii)) 4,274,181 38,477 28,696 902,206	Attributable to owners of the Target Company Capital reserve Defined benefit retirement obligations Translation reserve Accumulated losses JPY’000 JPY’000 JPY’000 JPY’000 (Note 25 (c)(i)) (Note 25 (c)(ii)) (Note 25 (c)(iii)) 4,274,181 38,477 28,696 902,206	Attributable to owners of the Target Company Capital reserve Defined benefit retirement obligations Translation reserve Accumulated losses JPY’000 JPY’000 JPY’000 JPY’000 (Note 25 (c)(i)) (Note 25 (c)(ii)) (Note 25 (c)(iii)) 4,274,181 38,477 28,696 902,206
– –	– –	– (18,845)	– 149,887	(1,099,498) –
– 1,132,780 1,821,370	– – 4,274,181	(18,845) – 19,632	149,887 – 178,583	(1,099,498) – (197,292)
– –	– –	– (73,378)	– (181,162)	(1,265,575) –
– 100,000 (1,821,370) 100,000	– – – 4,274,181	(73,378) – – (53,746)	(181,162) – – (2,579)	(1,265,575) – – (1,462,867)
– –	– –	– 66,145	– (104,997)	(2,529,310) –
– 100,000	– 4,274,181	66,145 12,399	(104,997) (107,576)	(2,529,310) (3,992,177)

– II-6 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

4. COMBINED STATEMENTS OF CASH FLOWS

Note
Cash flows from operating activities
Loss before tax
Adjustments for:
Bank interest income
9
Amortisation of intangible assets
12
Depreciation of property,
plant and equipment
11
Loss on disposal of property,
plant and equipment
5(b)
Impairment losses on property,
plant and equipment
11
Impairment loss on
intangible assets
12
Provision for annual leave entitlement
24
Provision for reinstatement costs for
rented premises
24
Finance costs
5(c)
Changes in working capital
Changes in inventories
Changes in trade receivables
Changes in other receivables,
deposits and prepayments
Changes in amount due from former
shareholder
Changes in trade and bills payables
Changes in other payables and accruals
Changes in deferred income
Changes in amount due to former
shareholder
Changes in amount due to ultimate
holding company
Changes in amount due to intermediate
holding company
Utilisation of provision for
reinstatement costs for rented
premises
24
Utilisation of provision for annual leave
entitlement
24
Decrease in net defined benefit
retirement obligation
Net cash generated from operating
activities

Years ended 31 March
2015
2016
2017
JPY’000
JPY’000
JPY’000
(1,099,498)
(1,265,575)
(2,529,310)
(13)
(7,118)
(2,468)
–
220
220
788,216
1,021,924
975,700
67,630
28,567
13,154
–
–
1,582,073
–
–
660
674
564
885
583
433,829
2,650
–
23,726
16,394
(242,408)
236,137
59,958
(140,007)
(121,855)
140,352
57,489
5,509
(28,221)
(608,465)
398,117
265,995
1,221,824
(307,763)
2,249,538
742,823
(694,547)
(16,288)
1,194,720
724,982
(1,609,099)
–
–
2,406
–
6,077
48,731
–
–
300,834
–
–
14,665
–
–
(41,917)
(674)
–
(14,694)
(31,375)
(26,306)
(14,562)
2,193,927
220,351
1,357,698
- - - - - - - -
- - - - - - - -
- - - - - - - -

– II-7 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Note
Cash flows from investing activities
Purchases of property, plant and
equipment
11
Proceeds from disposal of property,
plant and equipment
Purchases of intangible assets
12
Placement of bank deposits with
maturity greater than three months
Bank interest received
9
Net cash used in investing activities
Cash flows from financing activities
Capital element of finance lease
payments
Interest element of finance lease
payments
5(c)
Issue of shares of the Target Company
25(a)
Issue of shares of Qingdao CA Sega
before incorporation of Target
Company
25(a)
Proceeds from loan from former
shareholder
20
Repayment to loan from former
shareholder
20
Interest paid on loan from former
shareholder
5(c)
Net cash from/(used in) financing
activities
Net increase/(decrease) in cash and
cash equivalents
Currency translation differences
Cash and cash equivalents at the
beginning of the year
Cash and cash equivalents at the end of
the year
17

Years ended 31 March
2015
2016
2017
JPY’000
JPY’000
JPY’000
(1,313,578)
(1,431,952)
(400,120)
10,933
10,451
8,812
–
(1,100)
–
(109,137)
(14,912)
12,309
13
7,118
2,468
(1,411,769)
(1,430,395)
(376,531)
- - - - - - - -
- - - - - - - -
- - - - - - - -
–
(794,191)
(1,589,147)
–
(17,749)
(8,996)
–
100,000
–
1,132,780
–
–
–
239,721
820,000
–
(10,381)
(663,940)
–
(5,977)
(7,398)
1,132,780
(488,577)
(1,449,481)
- - - - - - - -
- - - - - - - -
- - - - - - - -
1,914,938
(1,698,621)
(468,314)
51,756
(42,618)
(9,181)
641,950
2,608,644
867,405
2,608,644
867,405
389,910

– II-8 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

B. NOTES TO COMBINED FINANCIAL INFORMATION

1. GENERAL INFORMATION

a) Background

The Target Company is a limited liability company incorporated in Japan under the Companies Act on 1 April 2015. The registered address of its office is 1-39-9 Higashi-Shinagawa, Shinagawa Ward, Tokyo, Japan. On 1 January 2017, the name of the Target Company was changed from Sega Live Creation Inc. to CA Sega Joypolis Limited. The Target Group is principally engaged in planning, development and operation of amusement parks in Japan and the People’s Republic of China (the “PRC”).

During the year ended 31 March 2015, Sega Corporation, a wholly owned subsidiary of Sega Sammy Holdings Inc., has a division which is solely engaged in the planning, development and operation of amusement parks in Japan (the “Amusement Park Division”). On 1 April 2015, the Target Company, which was also under the common control of Sega Sammy Holdings Inc., was incorporated in Japan, and the Target Company has taken up all of the business operated under the brand names of “JOYPOLIS” and “Orbi” in Japan (the “Amusement Park Business”) from the Amusement Park Division on 1 April 2015 and the assets and liabilities of the Amusement Park Division was transferred to the Target Company (the “Transfer”). Prior to the incorporation of the Target Company, the Amusement Park Business did not exist as a statutory group and no separate statutory accounts were therefore prepared. Accordingly, the financial information of the Amusement Park Division for the year ended 31 March 2015 has been prepared by carve-out basis.

On 14 May 2015, the Target Company acquired the entire interest of Qingdao Sega (as defined below) at Nil consideration from Sega Corporation and Qingdao Sega (as defined below) became a wholly-owned subsidiary of the Target Company.

The reporting entity comprises the Target Company and its subsidiary, namely Qingdao Sega (as defined below). As at the date of this report, the Target Company has direct interest in the following subsidiary, which is a private company, particulars of which are set out below:

Name of subsidiary Place of establishment and date of establishment Particulars of issued capital 華夏世嘉（青島）娛樂遊藝有限公司# The PRC, 25 September 2013 US$17,000,000	Proportion of ownership interest Target Group’s effective interest Held by the Target Company Principal activity 100% 100% Planning, development and operation of amusement parks in the PRC

The statutory financial statements of Qingdao Sega for the years ended 31 December 2015 and 2016 prepared in accordance with the “Accounting Standards for Business Enterprises” issued by the Ministry of Finance of the People’s Republic of China and other relevant regulations in the PRC were audited by 永潤聯合會計師事務所, certified public accountants registered in the PRC.

The details of group structure and basis of preparation and presentation for the Financial Information of the Target Group are disclosed in notes 2(b) and 2(a) of Section B respectively.

– II-9 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

b) Proposed Acquisition

On 1 November 2016, the Company announced its proposal to acquire 85.1% equity interest of the Target Company at an aggregate consideration of JPY600,000,000 (equivalent to HK$44,510,000) (the “Proposed Acquisition”) pursuant to the sale and purchase agreement entered into between China Theme Park Limited as the purchaser and Sega Sammy Holdings Inc. as the vendor on 31 October 2016 (the “Sales and Purchase Agreement”).

Pursuant to the Sales and Purchase Agreement, the Target Company has to carry out corporate reorganisation, all assets and liabilities of “Orbi” has to transfer to Sega Sammy Holdings Inc. on 1 January 2017. The Proposed Acquisition was completed on 1 January 2017.

2. SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation of Financial Information

The combined statements of profit or loss and other comprehensive income and the combined statements of cash flows which include the results and cash flows of the companies now comprising the Target Group and of the Amusement Park Business have been prepared by applying the principles of merger accounting which is consistent with the principles as stated in Accounting Guideline 5 “Merger accounting under common control combination” issued by the HKICPA, as if the Target Company had always been the holding company of the company now comprising the Target Group throughout the Relevant Periods. The Financial Information has been prepared as if the current group structure had been in existence throughout the Relevant Periods or since the respective dates of incorporation of the entity now comprising the Target Group which are in shorter period.

Although the Amusement Park Business was a division under Sega Corporation as at 31 March 2015 which was not formally transferred to the Target Group, it has been included in the Financial Information for the Relevant Periods as the directors of Company consider that the historical financial information of the Target Group should include all relevant activities that have been a part of the history of the Amusement Park Business that was transferred to the Target Company on 1 April 2015. Accordingly, the Financial Information should reflect all the Amusement Park Business’s activities for the Relevant Periods, including expenses incurred by Sega Corporation on the Amusement Park Business, if any.

The Financial Information was prepared based on management accounts of companies now comprising the Target Group and financial statements of Amusement Park Business which were prepared based on the items of assets, liabilities, income and expenses that can be (i) specifically identified to Amusement Park Business or (ii) allocated to the Amusement Park Business on the basis discussed below (such items include administrative expenses and income tax). Items that do not meet the criteria set out in (i) and (ii) above are not combined into the Financial Information of the Target Group.

Expenses that are relevant to the Amusement Park Business and impracticable to identify specifically are determined on the following basis: (1) administrative expenses (which were incurred for all the operations of Sega Corporation holding the Amusement Park Business and therefore impracticable to identify specifically) were allocated in accordance with working hours associated with operation of Amusement Park Business; (2) income tax expenses were calculated based on the tax rate of the Amusement Park Business as if they are separate tax reporting entity. The directors of the Company believe that the method of allocation of the above items presents a reasonable basis of estimating what the Amusement Park Business operating results would have been on a stand-alone basis for the Relevant Periods. Other than the administrative expenses and income tax expenses mentioned above, all other items of the combined statement of financial position and the combined statement of profit or loss and other comprehensive income of the Amusement Park Business are specifically identified.

– II-10 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The treasury and cash disbursement functions of the Amusement Park Business are centrally administered by Sega Corporation.

On 1 April 2015, all the assets and liabilities of the Amusement Park Business were transferred to the Target Company upon its incorporation. As a result, all the assets and liabilities of the Amusement Park Business were treated as the Target Group’s assets and liabilities throughout the Relevant Periods.

b) Basis of preparation of Financial Information

The Financial Information of the Target Group has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. The Financial Information also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). Significant accounting policies adopted by the Target Group are disclosed below.

The Financial Information has been prepared under the historical cost convention, as modified by the revaluation of the net defined benefit retirement obligation, which is carried at fair value.

Items included in the Financial Information of each entity in the Target Group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The Financial Information are presented in Japanese Yen (“JPY”), rounded to the nearest thousand except for per share data. Japanese Yen is the Target Company’s functional and the Target Group’s presentation currency.

The preparation of Financial Information in conformity with HKFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying amounts of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the Financial Information and major sources of estimate uncertainty are discussed in note 3 of Section B.

Application of HKFRSs

For the purpose of preparing and presenting the Financial Information, the Target Group has applied all HKFRSs which are effective for the Target Group’s financial year beginning on 1 April 2014 consistently throughout the Relevant Periods.

– II-11 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The Target Group has not early applied the following new or revised standards, amendments and interpretations that have been issued but are not yet effective as at the date of this report.

HKFRS 9 Financial Instruments[1] HKFRS 15 Revenue from Contracts with Customers and the related Amendments[1] HKFRS 16 Leases[4] Amendments to HKFRS 2 Classification and Measurement of Share-based Payment Transactions[1] Amendments to HKFRS 10 and Sale or Contribution of Assets between an Investor and its HKAS 28 Associate or Joint Venture[3] Amendments to HKAS 7 Disclosure Initiative[2] Amendments to HKAS 12 Recognition of Deferred Tax Assets for Unrealised Losses[2] Amendments to HKAS40 Transfer of Investment Property[1] Amendments to HKFRS Annual Improvements to HKFRSs 2014-2016 Cycle[5]

1 Effective for annual periods beginning on or after 1 January 2018

2 Effective for annual periods beginning on or after 1 January 2017
3 Effective for annual periods beginning on or after a date to be determined
4 Effective for annual periods beginning on or after 1 January 2019
5 Effective for annual periods beginning on or after 1 January 2017 or 1 January 2018, as appropriate

The Target Group is in the process of making an assessment of what the impact of these amendments and new standards is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Financial Information.

c) Business combination under common control

The Financial Information incorporates the financial statements items of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party.

The net assets of the combining entities or businesses are combined using the existing book values from the controlling party’s perspective. No amount is recognised in respect of goodwill or excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest.

The combined statement of profit or loss and other comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where this is a shorter period, regardless of the date of common control combination.

d) Subsidiaries

Subsidiaries are entities controlled by the Target Group. The Target Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the Target entity and has the ability to affect those returns through its power over the entity. When assessing whether the Target Group has power, only substantive rights (held by the Target Group and other parties) are considered.

An investment in a subsidiary is consolidated into the Financial Information from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the combined financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

– II-12 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Changes in the Target Group’s ownership interests in existing subsidiaries

Changes in the Target Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.

When the Target Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

In the Target Company’s statement of financial position, an investment in a subsidiary is stated at cost less impairment losses (see note 2(h)), unless the investment is classified as held for sale.

e) Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less any accumulated depreciation and any accumulated impairment losses, if any (see note 2(h)).

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

Leasehold improvements	10 years
Fixtures and equipment	5 years
Machinery	5 years
Software	5 years
Others	5 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.

Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of plant and equipment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Target Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are recognised in profit or loss during the financial period in which they are incurred.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains or losses arising from the retirement or disposal of an item of plant and equipment are determined as the difference between the net proceeds on disposal and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.

Property, plant and equipment in the course of construction for production, supply or administrative purposes are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Target Group’s accounting policy. Such plant and equipment are classified to the appropriate categories of plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

– II-13 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

f) Intangible assets

Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less any subsequent accumulated impairment losses.

The following intangible assets with finite useful lives are amortised from the date they are available for use and their estimated useful lives are as follows:

– Trademarks 5 years

Internally-generated intangible assets – research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development activities (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated:

the technical feasibility of completing the intangible asset so that it will be available for use or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
how the intangible asset will generate probable future economic benefits;
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred.

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

Derecognition of intangible assets

An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal.

Gains and losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.

– II-14 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

g) Leased assets

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Target Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

(i) Classification of assets leased to the Target Group

Assets held by the Target Group under leases which transfer to the Target Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Target Group are classified as operating leases, with the following exceptions:

land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Target Group, or taken over from the previous lessee.

(ii) Assets acquired under finance leases

Where the Target Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are recognised as property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost of the assets over the term of the relevant lease or, where it is likely the Target Group will obtain ownership of the asset, the life of the asset, as set out in note 2(e). Impairment losses are accounted for in accordance with the accounting policy as set out in note 2(h). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

(iii) Operating lease charges

Where the Target Group has the use of assets under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged as expenses in the accounting period in which they are incurred.

h) Impairment of assets

(i) Impairment of trade and other receivables

Trade and other receivables that are stated at cost or amortised cost are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Target Group about one or more of the following loss events:

significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal payments;

– II-15 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

it becoming probable that the debtor will enter bankruptcy or other financial reorganisation; and
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

If any such evidence exists, any impairment loss is determined and recognised as follows:

For trade receivables, other receivables, loans receivable and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of customers included within trade receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Target Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against customers directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss.

(ii) Impairment of other assets

Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:

property, plant and equipment;
intangible assets;
investments in a subsidiary the Target Company’s statement of financial position.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.

– II-16 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

Recognition of impairment losses

An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying amount of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).

Reversals of impairment losses

An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

i) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the first in first out formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

j) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method, less allowance for impairment of doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of doubtful debts (see note 2(h)).

– II-17 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

k) Trade and other payables

Trade and other payables are initially recognised at fair value. Trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

l) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

m) Employee benefits

(i) Short term employee benefits and contributions to defined contribution retirement plans

Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

(ii) Retirement benefit obligations

The Target Group operates various post-employment schemes, including both defined contribution retirement plans and defined benefit retirement plans.

(a) Defined contribution retirement plans

Contributions to the plans by the Target Group are calculated as a percentage of employees’ basic salaries. The retirement benefit plan cost charged to profit or loss represents contributions payable by the Target Group to the funds.

(b) Defined benefit retirement plans

The liability recognised in the combined statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of reporting period less the fair value of plan assets.

The present value of the defined benefit obligation, current service costs and past service costs are calculated annually by independent actuaries using the projected unit credit method.

The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation.

The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in profit or loss.

Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, directly in other comprehensive income. They are included in retained earnings in the combined statement of changes in equity and in the combined statement of financial position.

– II-18 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

n) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax loses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided that those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, the Target Company or the Target Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or

– II-19 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

o) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Target Group or the Target Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

p) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Target Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:

(i) Sale of goods

Revenue is recognised when goods are delivered at the customers’ premises which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

(ii) Admission revenue

Revenue from admission tickets sold is recognised when tickets are accepted and surrendered by the customer. Revenue from ticket sold for use at a future date is deferred until the tickets are surrendered or have expired.

Revenue from annual passes is amortised evenly over the period of their validity.

(iii) Interest income

Interest income is recognised as if it accrues using the effective interest method.

q) Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in profit or loss.

Non-monetary assets and liabilities measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was measured.

– II-20 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The results of foreign operations are translated into Japanese Yen at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Statement of financial position items are translated into Japanese Yen at the closing foreign exchange rates ruling at the end of the reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated separately in equity in the exchange reserve.

On the disposal of a foreign operation (i.e. a disposal of the Target Group’s entire interest in a foreign operation, a disposal involving loss of control over a subsidiary that includes a foreign operation, or a partial disposal of an interest in an associate that includes a foreign operation of which the retained interest becomes a financial asset), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Target Company are reclassified to profit or loss.

In addition, in relation to a partial disposal of a subsidiary that includes a foreign operation that does not result in the Target Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. partial disposals of associates that do not result in the Target Group losing significant influence), the proportionate share of the accumulated exchange differences is reclassified to profit or loss.

r) Related parties

(a) A person, or a close member of that person’s family, is related to the Target Group if that person:
(i) has control or joint control over the Target Group;
(ii) has significant influence over the Target Group; or
(iii) is a member of the key management personnel of the Target Group or the Target Group’s parent.
(b) An entity is related to the Target Group if any of the following conditions applies:
(i) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the Target Group or to the Target Group’s parent.

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

s) Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Target Group’s executive

– II-21 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

directors (the chief operating decision maker) for the purposes of allocating resources to, and assessing the performance of, the Target Group’s various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

t) Borrowing costs

Borrowing costs are interest and other costs incurred in connection with the borrowing of funds. These costs are expensed in the income and expenditure account in the period in which they are incurred, except to the extent that they are capitalized as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to prepare for its intended use or sale.

Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or completed.

3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

a) Key sources of estimation uncertainty

In the process of applying the company’s accounting policies which are described in note 2, management has made certain key assumptions concerning the future, and other key sources of estimated uncertainty at the end of the reporting period, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, as discussed below.

(i) Current taxation

Judgment is required in determining the amount of the provision for taxation and the timing of payment of the related taxation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax provisions in the periods in which such determination are made.

(ii) Impairment of receivables

The Target Group estimates impairment losses for bad and doubtful debts resulting from the inability of the customers and other debtors to make the required payments. The Target Group bases the estimates on the ageing of the receivables balances, debtors’ credit-worthiness, and the historical write-off experience. If the financial condition of the debtors were to deteriorate, actual impairment losses would be higher than estimated.

(iii) Useful lives of property, plant and equipment and intangible assets

The Target Group’s management determines the estimated useful lives and related depreciation and amortization charges for its property, plant and equipment and intangible assets. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment and intangible assets of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation and amortization charge where useful lives are less than previously estimated lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

– II-22 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(iv) Impairment of property, plant and equipment

The recoverable amount of an asset is the higher of its fair value less costs of disposal and value in use. In assessing its value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, which requires significant judgment relating to level of revenue and amount of operating costs. The Target Group uses all readily available information in determining an amount that is a reasonable approximation of the recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and operating costs. Changes in these estimates could have a significant impact on the carrying amount of the assets and could result in additional impairment charge or reversal of impairment in future periods.

(v) Pension costs

The Target Group participates in a defined benefit plan operated by the former shareholders of the Company, Sega Sammy Holdings Inc. and its subsidiaries. Pension costs for defined benefit plans are assessed using the projected unit credit service pro-rate method in accordance with HKAS 19, Employee Benefits. Under this method, the cost of providing pensions is charged to the statements of profit or loss and other comprehensive income so as to spread the regular cost over the future service lives of employees in accordance with the advice of the actuaries who carry out a full valuation of the plans. The pension obligation is measured at the present value of the estimated future cash outflows using interest rates determined by reference to market yields at the end of the reporting period based on government agency or high quality corporate bonds with currency and term similar to the estimated term of benefit obligations. Remeasurements arising from defined benefit plans are recognised in other comprehensive income in the year in which they occur and reflected immediately in retained profit. Remeasurements comprise actuarial gains and losses, the return on plan assets (excluding amounts included in net interest on the net defined benefit liability (asset)) and any change in the effect of the asset ceiling (excluding amounts included in net interest on the net defined benefit liability (asset)).

Management appointed actuaries to carry out a full valuation of these pension plans to determine the pension obligations that are required to be disclosed and accounted for in the financial statements in accordance with the HKFRS requirements.

The actuaries use assumptions and estimates in determining the fair value of the defined benefit plans and evaluate and update these assumptions on an annual basis. Judgement is required to determine the principal actuarial assumptions to determine the present value of defined benefit obligations and service costs. Changes to the principal actuarial assumptions can significantly affect the present value of plan obligations and service costs in future periods.

(vi) Provision for reinstatement costs

The Target Group makes provision for reinstatement costs based on the best estimate of the expected costs to be incurred upon expiry of the respective rental agreements, which are subject to uncertainty and might differ from the actual costs incurred. Any increase or decrease in the provision would affect profit or loss in future years.

– II-23 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(vii) Impairment of intangible assets with finite useful lives

The Target Group tests whether the intangible assets which have finite useful lives have suffered any impairment whenever there is any indication that the intangible assets have been impaired. The Target Group has made estimations and assumptions in relation to the potential future cash flows of identifiable intangible assets. This assessment involves estimations and assumptions relating to potential future revenues, appropriate discount rates and the useful lives of such assets. The recoverable amounts of these intangible assets have been determined based on the value-in-use calculations, which have been estimated using discounted cash flow method. The directors of the Company consider that the recoverable amount exceeded the carrying amount of the intangible assets and no impairment was recognised during the year.

4. SEGMENT INFORMATION

The Target Group’s operating segments are determined based on the internal reports about components of the Target Group that are regularly reviewed by the chief operating decision maker (“CODM”) in order to allocate resources to the segment and to assess its performance.

The Target Group’s operating and reportable segments currently are: (i) establishment and operation of indoor theme park and (ii) amusement machine sales. The CODM considers the Target Group has two operating and reportable segments which are based on the internal organization and reporting structure. This is the basis upon which the Target Group is organised.

Segment revenues and results

Segment revenues Establishment and operation of indoor theme park Amusement machine sales Segment profit (loss) Establishment and operation of indoor theme park Amusement machine sales Other income Finance cost Other expenses Loss before tax	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 3,377,240 5,708,216 4,202,445 1,237,718 947,958 267,387 4,614,958 6,656,174 4,469,832 (732,121) (1,042,960) (1,878,800) (282,182) (148,182) (120,203) 330 15,315 19,053 – (5,977) (7,398) (85,525) (83,771) (541,962) (1,099,498) (1,265,575) (2,529,310)	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 3,377,240 5,708,216 4,202,445 1,237,718 947,958 267,387 4,614,958 6,656,174 4,469,832 (732,121) (1,042,960) (1,878,800) (282,182) (148,182) (120,203) 330 15,315 19,053 – (5,977) (7,398) (85,525) (83,771) (541,962) (1,099,498) (1,265,575) (2,529,310)
		4,469,832

		(1,878,800) (120,203) 19,053 (7,398) (541,962)
		(2,529,310)

– II-24 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Segment assets and liabilities

Segment assets

Establishment and operation of indoor theme park Amusement machine sales Total segment assets Prepayments, deposits and other receivables Intangible assets Amount due from former shareholder Cash and cash equivalents Bank deposits with maturity greater than three months Combined assets	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 4,623,586 5,181,877 1,744,746 1,608,430 999,055 197,553 6,232,016 6,180,932 1,942,299 1,527 3,306 6,586 – 880 – 2,186,499 672,892 5,146 2,608,644 867,405 389,910 109,137 124,049 111,740 11,137,823 7,849,464 2,455,681	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 4,623,586 5,181,877 1,744,746 1,608,430 999,055 197,553 6,232,016 6,180,932 1,942,299 1,527 3,306 6,586 – 880 – 2,186,499 672,892 5,146 2,608,644 867,405 389,910 109,137 124,049 111,740 11,137,823 7,849,464 2,455,681
		1,942,299 6,586 – 5,146 389,910 111,740
		2,455,681

Segment liabilities

Establishment and operation of indoor theme park Amusement machine sales Total segment liabilities Loan from former shareholder Amount due to former shareholder Amount due to ultimate holding company Amount due to intermediate holding company Provision for reinstatement cost for rented premise Combined liabilities	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 4,376,769 4,403,531 1,329,952 664,580 355,527 49,175 5,041,349 4,759,058 1,379,127 – 229,340 385,400 – 6,077 54,808 – – 300,834 – – 14,665 – – 34,020 5,041,349 4,994,475 2,168,854	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 4,376,769 4,403,531 1,329,952 664,580 355,527 49,175 5,041,349 4,759,058 1,379,127 – 229,340 385,400 – 6,077 54,808 – – 300,834 – – 14,665 – – 34,020 5,041,349 4,994,475 2,168,854
		1,379,127 385,400 54,808 300,834 14,665 34,020
		2,168,854

– II-25 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Other segment information

		Year ended	31 March 2015	31 March 2015
		JPY’000
	Establishment
	and		Unallocated
	operation			head
	of indoor	Amusement	office and
	theme	machine	corporate
	park	sales	amount		Total
Amounts included in the measure of
segment revenues
Depreciation of property,
plant and equipment	575,398	212,818		–	788,216
Loss on disposal of property,
plant and equipment	49,370	18,260		–	67,630
		Year ended	31 March 2016
		JPY’000
	Establishment
	and		Unallocated
	operation			head
	of indoor	Amusement	office and
	theme	machine	corporate
	park	sales	amount		Total
Amounts included in the measure of
segment revenues
Depreciation of property,
plant and equipment	878,855	143,069		–	1,021,924
Loss on disposal of property,
plant and equipment	24,568	3,999		–	28,567
Amortisation of intangible assets	–	–		220	220
Finance costs	17,749	–		5,977	23,726
	Year	ended 31 March 2017
		JPY’000
	Establishment
	and		Unallocated
	operation			head
	of indoor	Amusement	office and
	theme	machine	corporate
	park	sales	amount		Total
Amounts included in the measure of
segment revenues
Depreciation of property, plant and
equipment	917,158	58,542		–	975,700
Loss on disposal of property, plant and
equipment	12,365	789		–	13,154
Impairment loss recognised in respect of
plant and equipment	1,487,149	94,924		–	1,582,073
Amortisation of intangible assets	–	–		220	220
Impairment loss recognised in respect of
intangible assets	–	–		660	660
Finance costs	8,996	–		7,398	16,394

– II-26 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Geographical information

The Target Company is domiciled in Japan. The Target Group’s operations are, mainly located in Japan and PRC. Information about the Target Group’s revenue from customers is presented based on geographical locations of customers is detailed below:

Japan Canada China Dubai Korea Singapore	Revenue from external customers Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 3,458,177 4,817,704 3,680,564 1,206 5,986 2,140 493,819 1,626,692 675,652 193,803 197,987 66,413 467,953 7,805 4,163 – – 40,900 4,614,958 6,656,174 4,469,832	Specified non-current assets Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 3,713,885 3,566,674 977,127 – – – 889,935 1,270,492 1,932 – – – – – – – – – 4,603,820 4,837,166 979,059

Information about major customers

Revenue from customers during the Relevant Periods contributing over 10% of the total revenue of the Target Company is as follows:

		Year	ended 31 March
		2015	2016	2017
		JPY’000	JPY’000	JPY’000
Customers	A1	618,664	N/A*	628,202
Customers	B1	N/A*	925,344	N/A*
Customers	C1	622,667	N/A*	N/A*
Customers	D2	634,337	N/A*	N/A*

Revenue from establishment and operation of indoor theme park.
Revenue from licensing and amusement machine sales.
The corresponding revenue did not contribute over 10% of the total revenue of the Target Company.

5. LOSS BEFORE TAX

Loss before taxation is arrived at after charging/(crediting) the following:

(a) Staff costs: Salaries, allowances, and other benefits (including directors’ emoluments (Note 7)) Contribution to defined contribution retirement plans Expenses recognised in respect of defined benefit retirement plans	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 1,314,481 1,283,393 1,232,437 78,075 74,876 59,835 46,700 48,570 45,273 1,439,256 1,406,839 1,337,545	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 1,314,481 1,283,393 1,232,437 78,075 74,876 59,835 46,700 48,570 45,273 1,439,256 1,406,839 1,337,545
		1,337,545

– II-27 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(b) Other items Amortisation of intangible asset Depreciation of property, plant and equipment Loss on disposal of property, plant and equipment Impairment loss on property, plant and equipment Impairment loss on intangible assets Exchange difference, net Operating lease charges: – minimum lease payments – contingent rent# Research and development costs (other than amortisation) Cost of inventories (c) Finance costs Interest on loan from former shareholder Interest on finance leases Total interest expenses on financial liabilities not at fair value through profit or loss	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 – 220 220 788,216 1,021,924 975,700 67,630 28,567 13,154 – – 1,582,073 – – 660 – 63,772 (1,291) 373,699 373,699 373,699 189,943 132,568 106,636 788,888 876,832 248,460 – 162,023 149,053 – 5,977 7,398 – 17,749 8,996 – 23,726 16,394	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 – 220 220 788,216 1,021,924 975,700 67,630 28,567 13,154 – – 1,582,073 – – 660 – 63,772 (1,291) 373,699 373,699 373,699 189,943 132,568 106,636 788,888 876,832 248,460 – 162,023 149,053 – 5,977 7,398 – 17,749 8,996 – 23,726 16,394

		7,398 8,996

		16,394

The contingent rent of approximately JPY189,943,000, JPY132,568,000 and JPY106,636,000 for the year ended 2015, 2016 and 2017 respectively refers to the operating lease rentals based on pre-determined percentages to realised sales less minimum lease payment of the respective leases.

6. TAXATION

(a) For the year ended 31 March 2015, as the Amusement Park Business historically did not constitute a legal entity before the incorporation of the Target Company on 1 April 2015, CA Joypolis would not subject to any income tax. All Japan Profits Tax liabilities of the Amusement Park Business prior to its transfer to CA Joypolis were borne by SEGA Sammy Holding Inc.

No provision for Japan Profits Tax has been made as the Target Company has no assessable profit for the years ended 2016 and 2017.

No provision for PRC Enterprise Income Tax has been made in the Financial Information as the subsidiary of the Target Company has no assessable profits for the years ended 31 March 2016 and 2017.

– II-28 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(b) Reconciliation between tax expenses and accounting loss as the applicable tax rate:

Loss before taxation Notional tax on loss before tax, calculated at the rates applicable to profits in the tax jurisdictions concerned Effect of tax loss not recognised Tax effect of non-taxable income Tax effect on non-deductible expenses Actual tax expense	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 (1,099,498) (1,265,575) (2,529,310) (359,861) (413,501) (721,492) 321,383 439,267 455,503 (6,541) (25,766) (856) 45,019 – 266,845 – – –	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 (1,099,498) (1,265,575) (2,529,310) (359,861) (413,501) (721,492) 321,383 439,267 455,503 (6,541) (25,766) (856) 45,019 – 266,845 – – –

		(721,492) 455,503 (856) 266,845
		–

(c) Deferred tax assets

Deferred tax assets in respect of the unused tax losses carried forward are to be recognized to the extent that is probable that future taxable profits will available against which the unused tax losses can be utilised.

The Target Group has not recognized deferred tax assets in respect of the tax losses of approximately JPY945,587, JPY2,314,225 and JPY3,779,578 for the years ended 31 March 2015 to 2017 respectively due to the unpredictability of future profit streams. The unrecognised tax losses can be carried forward indefinitely.

7. DIRECTORS’ EMOLUMENTS

Directors’ remuneration disclosed pursuant to section 383(1) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation is as follows:

Note Chairman and Chief executive director Naoya Tsurumi (i) Executive directors Akitoshi Ogawa (iii) Joseph Peter Schmelzeis, Jr. (ii) Kazuhiko Hayami (iv) Koichi Takahashi (v) Liu Moxiang (vii) Motoharu Sakurai (iv) Ting Ka Fai Jeffrey (vi) Zhuang Xiangsong (vi)	Year ended 31 March 2016 Fees Discretionary bonuses Salaries, allowances and benefits in kind Retirement scheme contributions JPY’000 JPY’000 JPY’000 JPY’000 – – – – 35,274 – – 658 26,883 – – 658 22,744 – – 658 – – – – – – – – – – – – – – – – – – – – 84,901 – – 1,974	Total JPY’000 – 35,932 27,541 23,402 – – – – –
		86,875

– II-29 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Year ended 31 March 2017

	Year ended 31 March 2017
Note Chairman and Chief executive director Naoya Tsurumi (i) Executive directors Akitoshi Ogawa (iii) Joseph Peter Schmelzeis, Jr. (ii) Kazuhiko Hayami (iv) Koichi Takahashi (v) Liu Moxiang (vii) Motoharu Sakurai (iv) Ting Ka Fai Jeffrey (vi) Yoichi Owaki (vi) Yoshimoto Takeshi (viii) Zhuang Xiangsong (vi)	Fees Discretionary bonuses Salaries, allowances and benefits in kind Retirement scheme contributions JPY’000 JPY’000 JPY’000 JPY’000 – – – – 25,293 – – 670 15,631 – – 670 14,498 – – 670 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 55,422 – – 2,010	Total JPY’000 – 25,963 16,301 15,168 – – – – – – –
		57,432

Notes:

(i) Naoya Tsurumi was appointed as chairman and chief executive director of the Company on 1 April 2015.
(ii) Joseph Peter Schmelzeis, Jr. was appointed as executive director of the Company on 1 April 2015 and resigned on 1 January 2017.
(iii) Akitoshi Ogawa was appointed as executive director of the Company on 1 April 2015 and resigned on 1 May 2015.
(iv) Kazuhiko Hayami, Motoharu Sakurai and Yoichi Owaki were appointed as executive director of the Company on 1 May 2016, 1 July 2015 and 13 June 2016 respectively. They were resigned on 1 January 2017.
(v) Koichi Takahashi was appointed as executive director of the Company on 1 April 2015 and resigned on 13 June 2016.
(vi) Ting Ka Fai Jeffrey and Zhuang Xiangsong were appointed as executive directors of the Company on 1 January 2017.
(vii) Liu Moxiang was appointed as executive director of the Company on 1 March 2017.
(viii) Yoshimoto Takeshi was appointed as executive director of the Company on 1 January 2017.

No emoluments were paid by the Target Group to the directors during the year ended 31 March 2015 as their emoluments were borne by Sega Corporation and were not charged to the Target Group. It is not practical to allocate the remuneration for their services to the Target Group.

During the Relevant Periods, no director of the Target Company has waived any emoluments and no emoluments were paid or payable by the Target Group to any of the directors as an inducement to join or upon joining the Target Group, or as compensation for loss of office.

– II-30 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

8. INDIVIDUALS WITH HIGHEST EMOLUMENTS

Of the five individuals with the highest emolument, nil, 3 and 3 are directors of the Target Company whose emoluments are disclosed in Note 7 for the year ended 31 March 2015, 2016 and 2017 respectively. The aggregate of the emoluments of the remaining 5, 2 and 2 individuals were as follows:

Salaries and other emoluments Contributions to retirement scheme	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 50,231 23,219 23,623 3,325 1,316 1,340 53,556 24,535 24,963	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 50,231 23,219 23,623 3,325 1,316 1,340 53,556 24,535 24,963
		24,963

The emoluments of the 5, 2 and 2 individuals for the year ended 31 March 2015, 2016 and 2017 respectively with the highest emoluments are within the followings bands:

HK$ Nil to HK$1,000,000 (2015: equivalent to JPY Nil to JPY17,654,497) (2016: equivalent to JPY Nil to JPY18,824,998) (2017: equivalent to JPY Nil to JPY16,087,060) HK$1,000,001 to HK$1,500,000 (2015: equivalent to JPY17,654,498to JPY26,481,746) (2016: equivalent to JPY18,824,999to JPY28,237,497) (2017: equivalent to JPY16,087,061to JPY24,130,590)	Year ended 31 March 2015 2016 2017 Number of individuals Number of individuals Number of individuals 5 2 2 – – – 5 2 2	Year ended 31 March 2015 2016 2017 Number of individuals Number of individuals Number of individuals 5 2 2 – – – 5 2 2
		2

9. OTHER INCOME

Bank interest income Exchange difference, net Sales of scrape Others	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 13 7,118 2,468 – – 1,291 – 2,511 8,249 317 5,686 7,045 330 15,315 19,053	Year ended 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 13 7,118 2,468 – – 1,291 – 2,511 8,249 317 5,686 7,045 330 15,315 19,053
		19,053

10. EARNINGS PER SHARE

As the Amusement Park Business historically did not constitute a legal entity before the incorporation of the Target Company on 1 April 2015, a disclosure of earnings per share is not relevant for the years ended 31 March 2015.

For the year ended 31 March 2016 and 2017, earnings per share information is not presented as its inclusion, for the purpose of this report, is not considered meaningful due to the Reorganisation as disclosed in note 1in Section B above.

– II-31 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

11. PROPERTY, PLANT AND EQUIPMENT

Leasehold improvement Fixtures and equipment Machinery JPY’000 JPY’000 JPY’000 Cost At 1 April 2014 2,720,868 1,090,277 3,051,823 Additions 130,687 368,318 14,822 Exchange difference – – 448 Write-off/Disposals (6,307) (54,191) (97,441) Transfer from CIP – 1,644 66,383 At 31 March 2015 and 1 April 2015 2,845,248 1,406,048 3,036,035 Additions 493,446 26,809 770,360 Exchange difference – – (115,073) Write-off/Disposals (16,547) (3,388) (207,158) Transfer from CIP – 153,128 862,107 At 31 March 2016 and 1 April 2016 3,322,147 1,582,597 4,346,271 Additions 98,424 6,124 279,202 Exchange difference 2,028 – (50,828) Transfer for corporate reorganization (Note iii) (1,295,286) (1,281,499) (1,573) Write-off/Disposals (8,228) (10,171) (69,647) Transfer from CIP – 80,357 459 At 31 March 2017 2,119,085 377,408 4,503,884 Accumulated depreciation and impairment At 1 April 2014 (944,323) (288,785) (1,935,997) Charge for the year (207,824) (225,821) (320,055) Exchange difference – – (82) Write-off/Written back on disposals 1,900 14,528 77,523 At 31 March 2015 and 1 April 2015 (1,150,247) (500,078) (2,178,611) Charge for the year (250,918) (273,768) (445,541) Exchange difference – – 11,137 Write off/Written back on disposals 13,297 3,219 184,334 At 31 March 2016 and 1 April 2016 (1,387,868) (770,627) (2,428,681)	Software JPY’000 178,645 53,668 296 (16,500) – 216,109 28,361 (365) (25,550) – 218,555 1,241 (104) (107,604) (160) – 111,928 (57,327) (34,023) (19) 1,925 (89,444) (51,204) 47 12,775 (127,826)	Others Construction in progress (CIP) JPY’000 JPY’000 2,596 241,407 – 746,083 97,488 98,232 – – – (68,027) 2,596 1,016,951 – 112,976 – (34,290) – – – (1,015,235) 2,596 80,402 – 15,129 – – (1,796) (13,965) – (750) – (80,816) 800 – (294) – (493) – – – – – (787) – (493) – – – – – (1,280) –	Total JPY’000 7,285,616 1,313,578 (174,439) –
			8,522,987

			1,431,952 (149,728) (252,643) –

			9,552,568

			400,120 (48,904) (2,701,723) (88,956) –
			7,113,105

			(3,226,726) (788,216) (101) 95,876
			(3,919,167)

			(1,021,924) 11,184 213,625
			(4,716,282)

– II-32 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Leasehold improvement Fixtures and equipment Machinery JPY’000 JPY’000 JPY’000 Charge for the year (232,287) (229,004) (481,371) Exchange difference (1,957) – (44,867) Impairment losses recognised in profit or loss (406,390) (15,521) (1,157,833) Transfer for corporate reorganization (Note iii) 398,562 649,031 149 Write-off/Written back on disposals 5,723 8,082 53,025 At 31 March 2017 (1,624,217) (358,039) (4,059,578) Carrying amount At 31 March 2015 1,695,001 905,970 857,424 At 31 March 2016 1,934,279 811,970 1,917,590 At 31 March 2017 494,868 19,369 444,306	Software JPY’000 (32,630) (88) (2,289) 71,222 160 (91,451) 126,665 90,729 20,477	Others Construction in progress (CIP) JPY’000 JPY’000 (408) – – – (40) – 967 – – – (761) – 1,809 1,016,951 1,316 80,402 39 –	Total JPY’000 (975,700) (46,912) (1,582,073) 1,119,931 66,990
			(6,134,046)

			4,603,820

			4,836,286

			979,059

Notes:

(i) On 31 December 2016, the directors of the Target Group conducted a review of the property, plant and equipment and determined that certain of the Target Group’s property, plant and equipment are specially identified to be impaired because those assets used in Qingdao sustained continuing loss and in the opinion of the directors of the Target Company, these item of property, plant and equipment have no or little commercial value. Accordingly, an impairment loss of approximately JPY1,080,314,000 in respect of these property, plant and equipment have been recognised during the year.

In consideration of the performance in Japan in the past few years, the Target Group assessed the recoverable amounts of the property, plant and equipment in Japan on 31 December 2016 and as a result the carrying amount of certain items of property, plant and equipment were written down to their recoverable amount of JPY1,088,600,000. An aggregate impairment loss of approximately JPY501,759,000 was recognised in “administrative expenses”. The estimates of the recoverable amount were based on the fair values using the market approach, which considers prices recently paid for similar assets, with adjustment made to the indicated market prices to reflect condition and utility of the appraised property, plant and equipment relative to the market comparative.

(ii) The carrying amount of property, plant and equipment held by the Target Group under finance leases is approximately JPY976,320,000,JPY473,381,000 and Nil as at 31 March 2015, 2016 and 2017 respectively.
(iii) As set out in note 1(b) in the Section B, pursuant to the sales and purchase agreement entered into between China Theme Park Limited and Sega Sammy Holdings Inc., the Target Company has to carry out corporate reorganization, all assets and liabilities of “Orbi” were transferred to Sega Sammy Holdings Inc.

– II-33 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

12. INTANGIBLE ASSETS

Cost At 1 April 2014 At1 April 2014, 31 March 2015 and 1 April 2015 Additions At 31 March 2016,1 April 2016 and 31 March 2017 Accumulated amortisation and impairment At 1 April 2014, 31 March 2015 and 1 April 2015 Charge for the year At 31 March 2016 and 1 April 2016 Charge for the year Impairment losses recognised in profit or loss At 31 March 2017 Carrying amount At 31 March 2015 At 31 March 2016 At 31 March 2017	Trademark JPY’000 – – 1,100 1,100 – (220) (220) (220) (660) (1,100) – 880 –	Total JPY’000 –
		–

		1,100
		1,100

		– (220)
		(220) (220) (660)
		(1,100)

		–

		880

		–

Notes:

(i) The amortisation charge for the Relevant Periods are included in the administrative expenses in the combined statement of profit or loss and other comprehensive income.
(ii) The amount represents the logo of the Target Company’s former name, Sega Live Creation Inc. (“SLC”). On 31 March 2017, the directors of the Target Company considered that no future economic benefit can be generated as the name of the Target Company was changed to CA Sega Joypolis Limited. Accordingly, impairment loss of JPY660,000 was recognized under administrative expenses in the combined statement of profit or loss and other comprehensive income.

– II-34 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

13. INVENTORIES

Facility products supplies	2015 JPY’000 140,007 140,007	At 31 March 2016 JPY’000 261,862 261,862	2017 JPY’000 121,510
			121,510

The analysis of the amount of inventories recognised as an expense and included in combined statement of comprehensive income is as follows:

Carrying amount of inventories sold 14. TRADE RECEIVABLES Trade receivables	2015 JPY’000 – 2015 JPY’000 156,840	At 31 March 2016 JPY’000 162,023 At 31 March 2016 JPY’000 151,331	2017 JPY’000 149,053

			2017 JPY’000 179,552

All of the trade receivables are expected to be recovered or recognised as expense within one year.

Included in the Target Group’s trade receivables was trade balance with Sega Logistics Service Company Limited, a related company under common control, of approximately JPY2,374,000 as at 31 March 2015.

a) Ageing analysis

As of the end of the reporting period, the ageing analysis of trade receivables based on invoice date is as follows:

0 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days 121 – 150 days Over 150 days Total	2015 JPY’000 121,787 3,830 966 3,854 11,841 14,562 156,840	At 31 March 2016 JPY’000 52,734 6,438 436 34,858 7,339 49,526 151,331	2017 JPY’000 55,789 11,489 4,784 29,995 5,136 72,359
			179,552

Trade receivables are normally due within 60 days from the date of billing. Further details on the Target Group’s credit policy are set out in note 28(b)(i) of Section B.

– II-35 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

b) Impairment of trade receivables

Impairment losses in respect of trade receivables are recorded using an allowance account unless the Target Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against accounts receivable directly (see note 2 of Section B). During the Relevant Periods, no provision is recognised in respect of trade receivables.

c) Trade receivables that are not impaired

The ageing analysis of trade receivables that are neither individually nor collectively considered to be impaired are as follows:

Neither past due nor impaired Past due but not impaired Less than 1 month past due 1 to 3 months past due 3 months to 1 year past due	2015 JPY’000 125,617 966 15,695 14,562 156,840	At 31 March 2016 JPY’000 59,172 436 42,197 49,526 151,331	2017 JPY’000 67,278 4,784 35,131 72,359
			179,552

Receivables that were neither past due nor impaired relate to a range of customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Target Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Target Group does not hold any collateral over these balances.

15. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Rental and other deposits Prepayments Other receivables Analysis of other receivables Non-current portion Current-portion	2015 JPY’000 660,572 484,084 188,220 1,332,876 2015 JPY’000 654,933 677,943 1,332,876	At 31 March 2016 JPY’000 658,655 111,448 164,656 934,759 At 31 March 2016 JPY’000 656,712 278,047 934,759	2017 JPY’000 560,395 62,399 45,970
			668,764

			2017 JPY’000 559,992 108,772
			668,764

– II-36 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Included in prepayments, deposits and other receivables were the balances with the following related parties which are under common control:

ATLUS CO. LTD. OASIS PARK Co., Ltd. SEGA ENTERTAINMENT CO., LTD. SEGA Games Co., Ltd. SEGA Interactive Co., Ltd. TMS ENTERTAINMENT Co., LTD.	2015 JPY’000 – – – – – – –	At 31 March 2016 JPY’000 72 24 1,944 42 1,600 474 4,156	2017 JPY’000 – – 102 – – –
			102

The amount of the Target Group’s prepayments, deposits and other receivables expected to be recovered or recognised as expense after more than one year is approximately JPY654,933,000, JPY656,712,000 and JPY559,992,000 as at 31 March 2015, 2016 and 2017 respectively. Except for the aforesaid, all of the prepayments, deposits and other receivables are expected to be recovered or recognised as expense within one year.

The other receivables mainly relate to a number of independent debtors that have a good track record with the Target Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable.

16. AMOUNT DUE FROM/(TO) FORMER SHAREHOLDER

Sega Sammy Holdings Inc. – Due from – Due to	2015 JPY’000 2,186,499 – 2,186,499	At 31 March 2016 JPY’000 672,892 (6,077) 666,815	2017 JPY’000 5,146 (54,808)
			(49,662)

The amount due from/(to) former shareholder is unsecured, interest-free and repayable on demand.

– II-37 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

17. CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash on hand and bank balances which carry interest at prevailing market rates ranging from 0.01% to 4.21%, 0.01% to 4.21% and 0.02% to 2.07% per annum at 31 March 2015, 2016 and 2017.

Cash at bank Cash in hand Bank deposits with maturity greater than three months Cash and cash equivalents in the combined statement of financial position and combined statement of cash flows 18. TRADE AND BILLS PAYABLES Trade and bills payables	2015 JPY’000 2,576,205 141,576 2,717,781 (109,137) 2,608,644 2015 JPY’000 764,440	At 31 March 2016 JPY’000 812,811 178,643 991,454 (124,049) 867,405 At 31 March 2016 JPY’000 69,893	2017 JPY’000 362,073 139,577
			501,650 (111,740)
			389,910

			2017 JPY’000 53,605

Included in trade and bills payables were the balances with the following related parties which were under common control:

SEGA LOGISTICS SERVICE CO., LTD. SEGA ENTERTAINMENT CO., LTD. SEGA INTERACTIVE CO., LTD.	2015 JPY’000 996 – – 996	At 31 March 2016 JPY’000 626 167 1,069 1,862	2017 JPY’000 1,677 15,816 –
			17,493

– II-38 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

As at the end of the reporting period, the ageing analysis of trade and bills payables based on invoice date were as follows:

0 – 30 days 31 – 60 days 61 – 90 days	2015 JPY’000 762,458 – 1,982 764,440	At 31 March 2016 JPY’000 60,000 – 9,893 69,893	2017 JPY’000 53,605 – –
			53,605

All of the trade and bills payables are expected to be settled or recognised as income within one year or are repayable on demand.

19. ACCRUALS, DEPOSITS RECEIVED AND OTHER PAYABLES

Accruals Deposits received Receipts in advance Other payables	2015 JPY’000 126,313 – 199,765 1,227,379 1,553,457	At 31 March 2016 JPY’000 558,592 26,969 443,956 1,248,922 2,278,439	2017 JPY’000 316,926 10,734 172,338 169,342
			669,340

Included in accruals, deposits received and other payables were the balances with the following related parties which are under common control:

SEGA LOGISTICS SERVICE CO., LTD. SEGA ENTERTAINMENT CO., LTD. SEGA Games Co., Ltd. SEGA Interactive Co., Ltd. WAVEMASTER INC. 20. LOAN FROM FORMER SHAREHOLDER Sega Sammy Holdings Inc.	2015 JPY’000 – – – – 67 67 2015 JPY’000 –	At 31 March 2016 JPY’000 1,000 196 64 7,000 44 8,304 At 31 March 2016 JPY’000 229,340	2017 JPY’000 1,192 2,541 2,805 8,661 78
			15,277

			2017 JPY’000 385,400

The amount, representing the outstanding balance of the loan, is unsecured, bearing fixed interest rate at 2.48%. The loans are unsecured and repayable within 1 year without predetermined maturity date of repayment.

– II-39 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

21. AMOUNTS DUE TO ULTIMATE/INTERMEDIATE HOLDING COMPANY

Amount due to ultimate holding company: China Animation Characters Company Limited Amount due to intermediate holding company: China Animation Holding(BVI) Limited	2015 JPY’000 – –	At 31 March 2016 JPY’000 – –	2017 JPY’000 300,834

			14,665

Amounts due to ultimate/intermediate holding company are unsecured, interest free and repayable on demand.

22. OBLIGATIONS UNDER FINANCE LEASE

Amounts payable: Within one year After 1 year but within 2 years After 2 years but within 5 years Less: Future Finance charges Present value of finance lease payable Less: Portion classified as current liabilities Non-current liabilities	Minimum lease payments At 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 811,940 811,940 – 811,940 584,517 – 792,822 208,305 – 2,416,702 1,604,762 – (33,364) (15,615) – 2,383,338 1,589,147 – (794,191) (801,143) – 1,589,147 788,004 –	Present value of minimum lease payments At 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 794,191 801,143 – 801,143 580,327 – 788,004 207,677 – 2,383,338 1,589,147 –	Present value of minimum lease payments At 31 March 2015 2016 2017 JPY’000 JPY’000 JPY’000 794,191 801,143 – 801,143 580,327 – 788,004 207,677 – 2,383,338 1,589,147 –
			–

The finance lease are secured by Tokyo Joypolis entrance system of the Target Group with a carrying amount of JPY976,320,000, JPY473,381,000 and Nil as at 31 March 2015, 2016 and 2017.The borrowing rates underlying the finance lease is fixed at contract rate of 0.91% per annum. No arrangement has been entered into for contingent rental payment for the year ended 31 March 2015, 2016 and 2017. The obligation was fully settled during 2017.

– II-40 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

23. RETIREMENT BENEFIT OBLIGATIONS

The former shareholders of the Company, Sega Sammy Holdings Inc., and its subsidiaries (collectively known as “Sega Group”) operates various post-employment schemes, including both defined contribution retirement plans and defined benefit retirement plans. The Target Company is a participating company under Sega Group’s plan and has defined benefits retirement plan for eligible employees.

The employees of the Target Group’s subsidiary in the PRC are members of a state-managed retirement benefit scheme operated by the government of the PRC. The subsidiary is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Target Group with respect to the retirement benefit scheme is to make the specified contributions.

(a) The amounts recognised in the statement of financial position and the movements in the net defined benefit obligation over the Relevant Periods are as follows:

At 1 April 2014 Current service cost Interest expenses/(income) Total amount recognised in profit or loss Remeasurements Return on plan assets, excluding amounts included in interest expense/(income) (Gain)/loss from change in financial assumptions Other Total amount recognised in other comprehensive income Contributions: Employer Benefit payments Total contributions	Present value of obligation JPY’000 713,627 45,744 10,580 56,324 – 37,623 6,695 44,318 – (44,657) (44,657)	Fair value of plan assets JPY’000 624,917 – 9,624 9,624 25,473 – – 25,473 78,075 (44,657) 33,418	Total JPY’000 88,710 45,744 956
			46,700
			(25,473) 37,623 6,695
			18,845
			(78,075) –
			(78,075)

– II-41 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

At 31 March 2015 and 1 April 2015 Current service cost Interest expenses/(income) Total amount recognised in profit or loss Remeasurements Return on plan assets, excluding amounts included in interest expense/(income) (Gain)/loss from change in financial assumptions Other Total amount recognised in other comprehensive income Contributions: Employer Benefit payments Total contributions At 31 March 2016 and 1 April 2016 Current service cost Interest expenses/(income) Total amount recognised in profit or loss Remeasurements Return on plan assets, excluding amounts included in interest expense/(income) (Gain)/loss from change in financial assumptions Other Total amount recognised in other comprehensive income Contributions: Employer Benefit payments Total contributions At 31 March 2017	Present value of obligation JPY’000 769,612 47,157 9,206 56,363 – 71,564 580 72,144 – (162,932) (162,932) 735,187 44,162 4,511 48,673 – (6,554) (68,623) (75,177) – (282,127) (282,127) 426,556	Fair value of plan assets JPY’000 693,432 – 7,793 7,793 (1,234) – – (1,234) 74,876 (162,932) (88,056) 611,935 – 3,400 3,400 (9,032) – – (9,032) 59,835 (282,127) (222,292) 384,011	Total JPY’000 76,180 47,157 1,413
			48,570 1,234 71,564 580
			73,378 (74,876) –
			(74,876)
			123,252 44,162 1,111
			45,273 9,032 (6,554) (68,623)
			(66,145) (59,835) –
			(59,835)
			42,545

The weighted average duration of the defined benefit obligation is 16.1 years, 15.6 years and 15.3 years for the year ended 31 March 2015, 2016 and 2017 respectively.

– II-42 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(b) The defined service benefit retirement plans of the Target Group are measured by projected unit credit service pro-rate method with reference to the valuation performed by Willis Towers Watsons, an independent qualified professional valuer.
(c) The current service cost and the net interest on net defined benefit liability are recognised in the following line items in the combined statement of profit or loss and other comprehensive income:

Cost of sales Administrative expenses	2015 JPY’000 6,649 40,051 46,700	2016 JPY’000 3,322 45,248 48,570	2017 JPY’000 6,260 39,013
			45,273

(d) The principal actuarial assumptions adopted at the end of each reporting period are as follows:

		2015	2016	2017
Discount	rate	1.2%	0.6%	0.7%

The Target Group’s sensitivity analysis for the discount rate as of the end of each reporting period based on reasonably possible change of the relevant actuarial assumption is as follows:

					Increase/(decrease)
					in retirement benefit obligations
					in the combined statement of
					financial position
					2015 2016		2017
					JPY’000 JPY’000	JPY’000
0.25%	increase	in	discount	rate	(30,017) (27,959)	(15,927)
0.25%	decrease	in	discount	rate	61,314 29,138		16,587

The above sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to the significant actuarial assumption, the same method (present value of the defined benefit obligation calculated with the projected unit credit service pro-rate method at the end of the reporting period) has been applied as when calculating the pension liability recognised within the combined statement of financial position.

(e) The plan assets are held in the name of the SEGA Group Corporate Pension Fund, which is independently run from Sega Group. The Target Company is a participating company under Sega Group’s plan and has defined benefits retirement plan for eligible employees.

(f) Risk exposure

Management believes that general risks, such as investment, changes in bond yields and life expectancy risk in the defined benefit plan are not significant.

– II-43 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

24. PROVISION FOR REINSTATEMENT COSTS FOR RENTED PREMISES AND ANNUAL LEAVE ENTITLEMENT

At 1 April 2014 Provision for the year Amounts utilised during the year At 31 March 2015 and 1 April 2015 Provision for the year At 31 March 2016 and1 April 2016 Provision for the year Amounts utilised during the year At 31 March 2017	Instatement costs for rented premises (Note i) JPY’000 196,021 583 – 196,604 433,829 630,433 2,650 (41,917) 591,166	Annual leave entitlement (Note ii) JPY’000 67,330 674 (674) 67,330 564 67,894 885 (14,694) 54,085	Total JPY’000 263,351 1,257 (674)
			263,934 434,393
			698,327 2,650 (56,611)
			645,251

(i) Under the terms of rental agreements signed with the landlords, the Target Company shall remove and re-instate the rental premises at the Target Company’s costs upon expiry of the relevant rental agreements. Provisions are therefore made for the best estimate of the expected reinstatement costs to be incurred.
(ii) Annual leave entitlement represents leave entitlements of employees expects to pay as a result of unused leave entitlements at the end of the years.

25. SHARE CAPITAL AND RESERVE

(a) Share capital

For the purpose of presentation of the combined statements of financial position, the balance of share capital as at 31 March 2015 represented the share capital of Sega Qingdao attributable to Sega Corporation prior to the completion of the Restructuring.

The Target Company was incorporated on 1 April 2015 and therefore the acquisition of Sega Corporation by the Target Company has not yet been completed on 31 March 2015. The balance of share capital as at 31 March 2015 represented the share capital of Sega Qingdao attributable to Sega Corporation.

As set out in note 1(a), the Target Company acquired the entire interest of Qingdao Sega on 14 May 2015 at Nil consideration from Sega Corporation and Qingdao Sega became a wholly-owned subsidiary of the Target Company.

As further set out in note 1, the acquisition of Sega Qingdao by the Target Company had been completed on 14 May 2015. The balance of share capital as at 31 March 2016 and 2017 represented solely the share capital of the Target Company.

– II-44 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Details of movements of share capital of the Target Company are as follows:

Ordinary shares of JPY100,000 each Authorised At 1 April 2015 (date of incorporation), 31 March 2016 and 31 March 2017 Issued: At 1 April 2015 (date of incorporation), 31 March 2016 and 31 March 2017	Number of shares 4,000 1,000	Share capital JPY’000 400,000

		100,000

(b) Movements in component of equity

The reconciliation between the opening and closing balances of each component of the Target Group’s combined equity is set out in the combined statements of changes in equity. Details of movements in components of equity of the target company during the years are set out below:

At 1 April 2014 Loss for the year Other comprehensive loss – Remeasurement of defined benefit retirement plans At 31 March 2015 and 1 April 2015 Loss for the year Other comprehensive loss – Remeasurement of defined benefit retirement plans Issue of share capital of the Target Company At 31 March 2016 and 1 April 2016 Loss for the year Other comprehensive loss – Remeasurement of defined benefit retirement plans At 31 March 2017	Share capital JPY’000 – – – – – – 100,000 100,000 – – 100,000	Capital surplus reserve Retirement benefit reserve Accumulated losses JPY’000 JPY’000 JPY’000 (Note 25 (c)(i)) (Note 25 (c)(ii)) 4,274,181 38,477 915,912 – – (772,604) – (18,845) – 4,274,181 19,632 143,308 – – (3,035,213) – (73,378) – – – – 4,274,181 (53,746) (2,891,905) – – (1,273,783) – 66,145 – 4,274,181 12,399 (4,165,688)	Total JPY’000 5,228,570 (772,604) (18,845)
			4,437,121 (3,035,213) (73,378) 100,000
			1,428,530 (1,273,783) 66,145
			220,892

– II-45 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(c) Nature and purpose of reserve

(i) Capital reserve

Capital reserve represents the deemed contribution of net assets by Sega Sammy Holdings Inc., in a division which engaged for the planning, development and operation of amusement parks in Japan before the incorporation of the Target Company.

(ii) Defined benefit retirement obligations reserve

The deemed contribution of retirement fund by Sega Sammy Holdings Inc. before the incorporation of the Target Company.

(iii) Translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the Financial Information of foreign operations. The reserve is dealt with in accordance with the accounting policy set out in note 2(q).

26. SIGNIFICANT RELATED PARTY TRANSACTIONS

During the year ended at 31 March 2015, 2016 and 2017, the Target Group entered into significant transactions with related parties:

Name of the			Year	ended 31	March
related parties	Nature	Relationship	2015	2016	2017
			JPY’000	JPY’000	JPY’000
ARUTEMATE CO., LTD.			–	–	553
ATLUS. CO., LTD.	Amusement operation fee	Common control	–	67	666
Index Corporation	Amusement operation fee	Common control	5,488	440	–
MARZA ANIMATION	Amusement operation fee	Common control	–	165	–
PLANET INC.
OASIS PARK Co., Ltd.	Staff cost	Common control	12,670	–	–
Sammy Corporation	Sales	Common control	–	9,960	–
	Amusement operation fee		–	417	344
SEGA (SHANGHAI)	Amusement operation fee	Common control	57,103	50,093	20,732
SOFTWARE CO., LTD.
SEGA ENTERTAINMENT	Sales	Common control	2,206	–	–
CO., LTD.
	Other income		–	134	102
	Amusement operation fee		2,401	2,857	37,804
SEGA Games Co., Ltd.	Sales	Common control	–	30	114
	Amusement operation fee		–	1,302	17,335
	Staff cost		–	–	6,045
SEGA Holdings Co., Ltd.	Sales	Common control	–	1,848	48,924
	Office rent fee		–	49,849	–
	Service fee		–	269,367	20,238
	Staff cost		–	6,771	17,552
	Amusement operation fee		–	65,558	62,401
	Other expense		–	19,801	–
SEGA Interactive Co., Ltd.	Sales	Common control	–	8	–
	Staff cost		–	21,731	21,048
	Amusement operation fee		–	66,985	52,990
SEGA LOGISTICS	Sales	Common control	88	164	3,266
SERVICE CO., LTD.	Amusement operation fee		34,415	28,262	24,286
SEGA NETWORKS Co.,	Amusement operation fee	Common control	207	–	–
Ltd.

– II-46 –

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Name of the			Year	ended 31	March
related parties	Nature	Relationship	2015	2016	2017
			JPY’000	JPY’000	JPY’000
SEGA SAMMY CREATION	Sales	Common control	–	156	256
INC.
SEGA SAMMY	Interest	Former	–	5,977	6,744
HOLDINGS INC.		shareholder
	Sales		–	464	–
	Staff cost		27,549	40,446	30,317
	Amusement operation fee		–	7,497	–
Sega Shanghai & Co., Ltd.	Amusement operation fee	Common control	8,672	–	–
SEGA TOYS CO., LTD.	Sales	Common control	300	–	–
	Staff cost		486	–	–
TMS ENTERTAINMENT	Staff cost	Common control	–	1,420	10,248
Co., LTD.	Amusement operation fee		–	–	205
CHINA ANIMATION	Royalty income	Intermediate	–	–	11,327
HOLDING (BVI)		holding
LIMITED		company
WAVEMASTER INC.	Sales	Common control	–	–	7
	Amusement operation fee		–	539	1,294
	Purchase		693	–	–

Details of the outstanding balance with other related parties are set out in the combined statement of financial position and in notes 16,20 and 21.

The remuneration of key management personnel which represent of the executive directors and key executives of the Company during the three years was as follows:

	Year	ended 31 March
	2015	2016	2017
	JPY’000	JPY’000	JPY’000
Salaries and other benefits	50,231	137,283	88,156
Retirement benefit schemes contributions	3,325	5,209	4,019

27. COMMITMENTS

(a) Capital commitments

Capital commitments outstanding at 31 March 2015, 2016 and 2017 not provided for in the financial statements were as follows:

Capital expenditure contracted for but not provided in the combined financial statements in respect of acquisition of property, plant and equipment	2015 JPY’000 107,171 107,171	At 31 March 2016 JPY’000 15,496 15,496	2017 JPY’000 2,229
			2,229

– II-47 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

(b) Operating lease commitments

The Target Group as lessee

As at 31 March 2015, 2016 and 2017, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year After one year but within five years After five years	2015 JPY’000 349,818 326,315 69,600 745,733	At 31 March 2016 JPY’000 350,197 69,600 – 419,797	2017 JPY’000 362,114 856,057 69,600
			1,287,771

The Target Group leases shops, office premises and plant and machinery under operating leases. The leases typically run for an initial period of 2 to 5 years, with an option to renew the lease when all terms are renegotiated. Certain the leases include payment obligations with rental varied with gross revenue. The additional rental payable (contingent rents) is determined generally by applying pre-determined percentages to future revenue less minimum lease payment of the respective leases.

28. FINANCIAL RISK MANAGEMENT AND CAPITAL DISCLOSURES

a) Financial instruments by categories

Financial assets Trade receivables Financial instruments included in “prepayments, deposits and other receivables” Amount due from former shareholder Cash and cash equivalents Bank deposits with maturity greater than three months Loans and receivables Financial liabilities Trade and bills payables Financial instruments included in “accruals, deposits received and other payables” Obligations under finance lease Loan from former shareholder Amount due to former shareholder Amount due to ultimate holding company Amount due to intermediate holding company Financial liabilities at amortised cost	2015 JPY’000 156,840 848,792 2,186,499 2,608,644 109,137 5,909,912 764,440 1,353,692 2,383,338 – – – – 4,501,470	At 31 March 2016 JPY’000 151,331 823,311 672,892 867,405 124,049 2,638,988 69,893 1,807,514 1,589,147 229,340 6,077 – – 3,701,971	2017 JPY’000 179,552 606,365 5,146 389,910 111,740
			1,292,713
			53,605 486,268 – 385,400 54,808 300,834 14,665
			1,295,580

– II-48 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

b) Financial risk managements and policies

The Target Group has exposure to the credit risk, liquidity risk, interest rate risk and currency risk arising from financial instruments. 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.

i) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Target Group. The Target Group has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults.

The Target Group’s credit risk is primarily attributable to accounts receivable, other receivables, amounts due from related companies and loans receivables. In order to minimize risk, the management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis. Credit evaluations of its debtors’ financial position and condition are performed on each and every major debtor periodically. These evaluations focus on the debtor’s past history of making payments when due and current ability to pay, and take into account information specific to the debtor as well as pertaining to the economic environment in which the debtor operates. Accounts receivable are usually due within 60 days from the date of billing. Debtors with overdue balances, which will be reviewed on a case-by-case basis, are requested to settle all outstanding balances before any further credit is granted. Normally, the Target Group does not obtain collateral from customers.

The Target Group’s exposure to credit risk is influenced mainly by the individual characteristics of each debtor. The default risk of the industry in which debtors operate also has an influence on credit risk. At the end of the reporting period, the Target Group has no concentration of credit risk of the total accounts receivable due from the Target Group’s largest customer and five largest customers.

With respect to credit risk arising from amounts due from related companies and loans receivables, the Target Group’s exposure to credit risk arising from default of the counterparties is limited as the counterparties have good history of repayment and the Target Group does not expect to incur a significant loss for uncollected amounts due from directors and ultimate holding company.

The credit risk on balances of cash and cash equivalents is low as these balances are placed with reputable financial institutions.

Further quantitative disclosures in respect of the Target Group’s exposure of credit risk arising from accounts receivables and other receivables are set out in notes 14 and 15 respectively.

ii) Liquidity risk

Individual operating entities within the Target Group are responsible for their own cash management, including the raising of loans to cover expected cash demands, subject to approval of the Board of Directors. The Target Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants to ensure that it maintains sufficient amount of cash and adequate committed lines of funding from immediate holding company to meet its liquidity requirements in the short and longer term. The Target Group relies on its liquid funds and borrowings as significant sources of liquidity.

– II-49 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The following table set out the Target Group’s remaining contractual maturities at the end of the reporting period of the Target Group’s non-derivative financial liabilities based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the reporting period) and the earliest date the Target Group can be required to pay.

At 31 March 2015

Trade and bills payables Financial instruments included in “accruals, deposits received and other payables” Obligations under finance lease At 31 March 2016 Trade and bills payables Financial instruments included in “accruals, deposits received and other payables” Loan from former shareholder Amount due to former shareholder Obligations under finance lease	On demand JPY’000 – – – – On demand JPY’000 – – – 6,077 – 6,077	Within one year JPY’000 764,440 1,353,692 811,940 2,930,072 Within one year JPY’000 69,893 1,807,514 232,952 – 811,940 2,922,299	More than 1 year but less than 2 years JPY’000 – – 811,940 811,940 More than 1 year but less than 2 years JPY’000 – – – – 584,517 584,517	More than 2 years but less than 5 years JPY’000 – – 792,822 792,822 More than 2 years but less than 5 years JPY’000 – – – – 208,305 208,305	Total contractual undiscounted cash flows JPY’000 764,440 1,353,692 2,416,702 4,534,834 Total contractual undiscounted cash flows JPY’000 69,893 1,807,514 232,952 6,077 1,604,762 3,721,198	Carrying amount JPY’000 764,440 1,353,692 2,383,338
						4,501,470

						Carrying amount JPY’000 69,893 1,807,514 229,340 6,077 1,589,147
						3,701,971

– II-50 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

At 31 March 2017

Trade and bills payables Financial instruments included in “accruals, deposits received and other payables” Loan from former shareholder Amount due to former shareholder Amount due to ultimate holding company Amount due to intermediate holding company	On demand JPY’000 – – – 54,808 300,834 14,665 370,307	Within one year JPY’000 53,605 486,268 391,470 – – – 931,343	More than 1 but less than 2 years JPY’000 – – – – – – –	More than 2 years but less than 5 years JPY’000 – – – – – – –	Total contractual undiscounted cash flows JPY’000 53,605 486,268 391,470 54,808 300,834 14,665 1,301,650	Carrying amount JPY’000 53,605 486,268 385,400 54,808 300,834 14,665
						1,295,580

iii) Interest rate risk

The Target Group manages its interest rate exposure based on interest rate level and outlook as well as the potential impact on the Target Group’s financial position arising from volatility. The Target Group currently does not have any interest rate hedging policy in relation to fair value and cash flow interest rate risks. The directors monitor the Target Group’s exposure on an ongoing basis and will consider hedging the interest rate should the need arise.

The following table details the interest rate profile of the Target Group’s assets and liabilities as at the end of the relevant period:

Interest rate Assets Fixed deposits Fixed Bank balances Variable Liabilities Obligation under finance lease Fixed Loan from former shareholder Fixed Net	2015 JPY000 109,137 2,576,205 (2,383,338) – 302,004	2016 JPY000 124,049 812,811 (1,589,147) (229,340) (881,627)	2017 JPY000 111,740 362,073 – (385,400)
			88,413

All of the loans from the former shareholder which are fixed rate instrument are insensitive to any change in interest rates. A change in interest rates at the end of the reporting period would not affect profit or loss.

– II-51 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Sensitivity analysis

As at 31 March 2015:

if interest rates had been 100 basis point higher with all other variables held constant, the Target Group’s loss after tax would have decreased by approximately JPY16,487,712.

if interest rates had been 100 basis point lower with all other variables held constant, the Target Group’s loss after tax would have increased by approximately JPY16,487,712.

As at 31 March 2016:
if interest rates had been 100 basis point higher with all other variables held constant, the Target Group’s loss after tax would have decreased by approximately JPY5,445,834.

if interest rates had been 100 basis point lower with all other variables held constant, the Target Group’s loss after tax would have increased by approximately JPY5,445,834.

As at 31 March 2017:

if interest rates had been 100 basis point higher with all other variables held constant, the Target Group’s loss after tax would have decreased by approximately JPY2,462,096.

if interest rates had been 100 basis point lower with all other variables held constant, the Target Group’s loss after tax would have increased by approximately JPY2,462,096.

iv) Currency risk

The Target Group is exposed to currency risk primarily through sales and purchases which give rise to payables and cash balances that are denominated in a foreign currency, i.e. a currency other than the functional currency of the operations to which the transactions relate.

The following table details the Target Group’s exposure at the end of the reporting period to currency risk arising from recognised assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. For presentation purposes, the amounts of the exposure are shown in Japanese Yen, translated using the spot rate at the year-end date.

As at 31 March 2015 Currency USD United States Dollar As at 31 March 2016 Currency CNY China Yuan Renminbi GBP United Kingdom Pound USD United States Dollar	Trade receivables JPY’000 – Trade receivables JPY’000 18,039 – – 18,039	Accrual and other payables JPY’000 (53,134) Accrual and other payables JPY’000 (41,318) (56,926) (1,077,177) (1,175,421)	Cash and bank balances JPY’000 – Cash and bank balances JPY’000 – – 148,586 148,586	Net JPY’000 (53,134)

				Net JPY’000 (23,279) (56,926) (928,591)
				(1,008,796)

– II-52 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

As at 31 March 2017 Currency AED United Arab Emirates Dirham AUD Australia Dollar CNY China Yuan Renminbi GBP United Kingdom Pound KRW Korea (South) Won USD United States Dollar	Trade receivables JPY’000 11,327 – 17,161 – 465 11,169 40,122	Accrual and other payables JPY’000 (2,078) (2,323) (30,611) (88,871) – (17,379) (141,262)	Cash and bank balances JPY’000 – – – – – 8,304 8,304	Net JPY’000 9,249 (2,323) (13,450) (88,871) 465 2,094
				(92,836)

The following table indicates the instantaneous change in the Target Group’s loss after tax (and retained earnings) that would arise of if foreign exchange rates to which the Target Group has significant exposure at the end of the reporting period had changed at that date, assuming all other risk variables remained constant.

			Increase/(decrease) in	Increase/(decrease) in
	Increase/(decrease) in		loss after tax and accumulated		losses
Currency	foreign exchange rates		2015	2016	2017
			JPY’000	JPY’000	JPY’000
AED	United Arab Emirates	5%	2,657	–	(462)
	Dirham	(5%)	(2,657)	–	462
					116
AUD	Australia Dollar	5%	–	–	(116)
		(5%)	–	–
CNY	China Yuan Renminbi	5%	–	1,164	673
		(5%)	–	(1,164)	(673)
GBP	United Kingdom Pound	5%	–	2,277	4,444
		(5%)	–	(2,277)	(4,444)
KRW	Korea (South) Won	5%	–	–	(23)
		(5%)	–	–	23
USD	United States Dollar	5%	–	46,430	(105)
		(5%)	–	(46,430)	105

c) Capital management

The Target Groups manages its capital to ensure that entities in the Target Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the equity balance. The Target Group’s overall strategy remains unchanged from prior periods. The capital structure of the Target Group consists of debt, which include the borrowings and obligation under finance lease, net of cash and cash equivalents and equity attributable to owners of the Target Company, comprising issued share capital, reserves and retained profits. The management of the Target Group reviews the capital structure on a regular basis. As part of this review, the management considers the cost of capital and the risks associated with each class of capital. The management will balance its overall capital structure through the payment of dividends and the issue of new shares as well as the issue of new debt or the redemption of existing debt.

d) Fair value

The carrying amounts of the Target Group’s financial instruments carried at cost or amortised cost are not materially different from their fair value as at 31 March 2015, 2016 and 2017.

– II-53 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

C. STATEMENT OF FINANCIAL POSITION OF THE TARGET COMPANY

Note Non-current assets Property, plant and equipment Intangible assets Other receivables, deposits and prepayments Investment in a subsidiary Current assets Trade receivables Other receivables, deposits and prepayments Amount due from former shareholder Amount due from a subsidiary Cash and cash equivalents Current liabilities Trade and bills payables Other payables and accruals Obligation under finance lease Deferred income Loan from former shareholder Amount due to former shareholder Amount due to ultimate holding company Amount due to intermediate holding company Provision for annual leave entitlement Provision for reinstatement costs for rented premises	2015 JPY’000 3,713,885 – 654,933 – 4,368,818 - - - - - - - - 156,840 458,761 2,135,556 154,847 1,283,115 4,189,119 - - - - - - - - 20,903 1,376,461 794,191 – – – – – 67,330 – 2,258,885 - - - - - - - -	At 31 March 2016 JPY’000 3,565,794 880 656,712 – 4,223,386 - - - - - - - - 151,331 134,260 672,892 90,377 648,490 1,697,350 - - - - - - - - 60,000 1,792,140 801,143 – 229,340 – – – 67,894 – 2,950,517 - - - - - - - -	2017 JPY’000 977,127 – 559,992 –
			1,537,119 - - - - - - - - 179,552 50,482 – 82,790 341,471
			654,295 - - - - - - - - 53,605 471,008 – 2,406 385,400 54,808 300,834 14,665 54,085 34,020
			1,370,831 - - - - - - - -

– II-54 –

APPENDIX II

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

Note Non-current liabilities Provision for reinstatement costs for rented premises Defined benefits liabilities Obligation under finance lease Net assets Equity Equity attributable to owners of the Target Company Share capital 25(a) Reserves 25(b) Total equity	2015 JPY’000 196,604 76,180 1,589,147 1,861,931 4,437,121 – 4,437,121 4,437,121	At 31 March 2016 JPY’000 630,433 123,252 788,004 1,541,689 1,428,530 100,000 1,328,530 1,428,530	2017 JPY’000 557,146 42,545 –
			599,691
			220,892

			100,000 120,892
			220,892

D. ULTIMATE HOLDING COMPANY AND CONTROLLING SHAREHOLDERS

In the opinion of the directors, the ultimate holding company of the Target Company is China Animation Characters Company Limited, a listed company on the Hong Kong Stock Exchange upon the completion of the Proposed Acquisition on 1 January 2017 (the “Completion date”). Before the Completion date, Sega Sammy Holdings Inc. (“Sega Sammy”) was the controlling shareholder of the Target Company. Sega Sammy is a listed company on the Tokyo Stock Exchange.

E. SUBSEQUENT FINANCIAL STATEMENTS AND DIVIDENDS

No audited financial statements have been prepared by the Target Company and its subsidiary in respect of any period subsequent to 31 March 2017. No dividend or distribution have been declared or made by any companies comprising the Target Group in respect of any period subsequent to 31 March 2017.

– II-55 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

A. INTRODUCTION

The following is an unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group (the “Unaudited Pro Forma Consolidated Statement of Assets and Liabilities”) which has been prepared in accordance with paragraph 4.29 of the Listing Rules for the purpose of illustrating the effect of (i) the conditional acquisition of 85.1% interest in CA Sega Joypolis Limited (“CA Sega”) (the “Acquisition”); and (ii) the exercise of Put Option granted to Sega Sammy Holdings Limited (“SEGA SAMMY”) on the Group’s financial information as if both the Acquisition and exercise of the Put Option (collectively referred to as the “Transactions”) had been completed at 30 September 2016. As Put Option may be exercised at the discretion of SEGA SAMMY during the Put Period which is from the third anniversary of the Completion Date until the date immediately before the sixth anniversary of the Completion at different Put Prices, for illustration and for simplicity, it is assumed that Put Option is exercised at a Put Price of Japanese Yen (“JPY”) 210,105,496 (equivalent to Hong Kong Dollars (“HK$”) 13.93 million), which represents the maximum Put Price if the Put Option had been exercised on or after the fifth anniversary of the Completion Date and until the day immediately before the sixth anniversary of the Completion Date. Pursuant to Rule 14.74(1) of the Listing Rules, the grant of Put Option to SEGA SAMMY will be classified as if the Put Option had been exercised. For reference, the alternative scenario assuming Put Option is exercised at minimum Put Price is also detailed in note 4 below.

The Unaudited Pro Forma Consolidated Statement of Assets and Liabilities of the Group is prepared based on (i) the unaudited condensed consolidated statement of financial position of the Group as at 30 September 2016 which has been extracted from the published interim report of the Company for the six months ended 30 September 2016 and (ii) the audited consolidated statement of financial position of CA Sega as at 31 March 2017 as extracted from the accountants’ report thereon set out in Appendix II to this circular, after making unaudited pro forma adjustments that are (i) directly attributable and (ii) factually supportable, as if the Transactions had been completed at 30 September 2016.

The Unaudited Pro Forma Consolidated Statement of Assets and Liabilities has been prepared by the Directors based on a number of assumptions, estimates and uncertainties for illustrative purposes only and because of its nature, it may not give a true picture of the consolidated statement of assets and liabilities of the Group upon completion of the Transactions had taken place at 30 September 2016, or any future dates.

– III-1 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

B. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

	Pro forma adjustments	Pro forma adjustments	Pro forma adjustments
The SLC Group as at 31 March 2017 JPY’000 Note 2 979,059 – – – – 559,992 1,539,051 121,510 179,552 108,772 5,146 – – – – – 389,910 111,740 916,630	The SLC Group as at 31 March 2017 HK$’000 Note 3 68,045 – – – – 38,919	HK$’000 Note 4 – 15,669 24,152 – – –	HK$’000 Note 5 – – – – – –	HK$’000 Note 6 – – – – – –
	106,964	39,821	–	–
	8,445 12,479 7,560 358 – – – – – 27,099 7,766
	63,707

– III-2 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

	Pro forma adjustments	Pro forma adjustments	Pro forma adjustments	Pro forma adjustments
The SLC Group as at 31 March 2017 JPY’000 Note 2 53,605 669,340 2,406 385,400 – 54,808 – 300,834 14,665 – 54,085 34,020 – – 1,569,163 (652,533) 886,518 557,146 – 42,545 599,691 286,827	The SLC Group as at 31 March 2017 HK$’000 Note 3 3,725 46,519 167 26,785 – 3,809 – 20,908 1,019 – 3,759 2,364 – –	HK$’000 Note 4 – – – – – – – – – – – – – –
	109,055	–	–	–
	61,616
	38,722 – 2,957	– 6,038 –	– – –	– – –
	41,679	6,038	–	–
	19,937

– III-3 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

C. NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The unaudited consolidated statement of assets and liabilities of the Group as at 30 September 2016 is extracted from the published interim report of the Group for the six months ended 30 September 2016.
The pro forma adjustment represent 100% of assets and liabilities of the Target Group for consolidation into the Group’s consolidated statement of financial position as if the Transactions had completed as of 30 September 2016. The audited consolidated statement of assets and liabilities of the Target Group as at 31 March 2017 is extracted from the accountants’ report of the Target Group as set out in Appendix II to this circular.
The audited consolidated statement of assets and liabilities of the Target Group is translated into HK$ at an exchange rate of JPY1=HK$0.06950. No representation is made that JPY denominated amounts have been, could have been or could be converted to HK$, or vice versa, at that rate or at any other rates or at all.
For the purpose of preparing the unaudited pro forma financial information, the Directors assumed that with the exception of intangible assets (details set out below), the pro forma fair value of identifiable assets and liabilities of the CA Sega Group are the same as their respective carrying amounts as at 31 March 2017.

The Group has applied the acquisition method in accordance with HKFRS 3 “Business Combinations” to account for the Transactions as if the Transactions had been completed on 30 September 2016 and the calculation of pro forma goodwill is as follows:

Consideration (Note i) Fair value of the identifiable net assets acquired (excluding intangible assets) Pro forma fair value adjustment in relation to intangible assets (Note ii) Deferred tax liability arising from pro forma fair value adjustment to intangible assets (Note iii) Goodwill	HK$’000 53,720 (19,937) (24,152) 6,038
	15,669

Note i: Consideration refers to the aggregate of (i) cash consideration of JPY600 million (equivalent to HK$39.79 million) and (ii) the put price of JPY210,105,496 (equivalent to HK$13.93 million translated by using an exchange rate of JPY1: HK$0.06630), which may be different from the actual exchange rate on the completion date of exercise of Put Option.

For the purpose of preparing the unaudited pro forma financial information, the Directors assumed the Put Price of the Put Option is the maximum Put Price in the case that the Put Option is exercised on or after the fifth anniversary of the Completion Date and until the day immediately before the sixth anniversary of the Completion Date, no representation is made that JPY denominated amounts have been, could have been or could be converted to HK$, or vice versa, at that rate applied or at any other rates or at all.

– III-4 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Note ii: The pro forma fair value adjustments in relation to intangible assets mainly arise from the recognition, on a pro forma basis, of a trademark. The pro forma fair values of the intangible asset are based on directors’ estimation with reference to a valuation carried out by Asset Appraisal Limited, an independent qualified professional valuer not connected with the Group. Asset Appraisal Limited is a member of The Hong Kong Institute of Surveyors.

The Acquisition will enable the Enlarged Group to significantly broaden its business in the interactive entertainment park industry. The Enlarged Group will leverage on the expertise and resources of the CA Sega Group and the well established reputation and market recognition of the Trademarks, which were granted by SEGA Holdings upon Completion of the Acquisition, in support of future development of the interactive entertainment park industry. Accordingly, a pro forma fair value of a trademark amounting to HK$24.2 million is recognised.

Note iii: The deferred tax liability relating to the pro forma fair value of intangible assets amounted to approximately HK$6.0 million, which is calculated at the People’s Republic of China Enterprise Income Tax rate of 25%.

The pro forma fair values of the identifiable assets and liabilities and goodwill, if any, in relation to the Acquisition are subject to change upon the completion of purchase price allocation at the completion date of the Acquisition, which may be substantially different from their estimated amounts used in the preparation of this unaudited pro forma financial information.

The Directors have assessed whether there is any impairment on the goodwill in accordance with HKAS 36 “Impairment of Assets” and concluded that there is no impairment in respect of the goodwill of the Group. The recoverable amount of the cash generating unit comprising the goodwill is determined based on value in use calculation. That calculation uses cash flow projections based on a 5-year financial budgets approved by the management of the CA Sega Group. Key assumptions for the value in use calculations relate to the estimation of cash inflows/outflows which include budgeted gross margins and operating expenses, such estimation is based on the unit’s past performance and the management’s expectations for the market development.

The Directors confirmed that they will apply consistent accounting policies, principal assumptions and valuation methods to assess impairment of the goodwill in subsequent reporting periods in accordance with the requirement of HKAS 36.

For the purpose of preparing the unaudited pro forma financial information, the put price of the Put Option is the maximum exercise price in case if the Put Option will be exercised on or after the fifth anniversary of the Completion Date and until the day immediately before the sixth anniversary of the Completion Date. Whereas, if the put price of the Put Option is the minimum exercise price in case if the Put Option will be exercised on or after the third anniversary of the Completion Date and until the day immediately before the fifth anniversary of the Completion Date, the consideration payable will be the aggregate of (i) cash consideration of JPY600 million (equivalent to HK$39.79 million) and (ii) the put price of JPY105,052,748 (equivalent to HK$6.97 million translated by using an exchange rate of JPY1: HK$0.06635, which may be different from the actual exchange rate on the completion date of exercise of put option). No representation is made that JPY denominated amount have been, could have been or could be converted to HK$, or vice versa, that rate or at any other rates or at all.

In such scenario, the pro forma goodwill will be reduced to HK$8.7 million whereas the amount of the fair value of the identifiable net assets acquired, the pro forma fair value adjustment to intangible assets and the deferred tax liability arising from pro forma fair value adjustment to intangible assets are remain unchanged.

The adjustments are made to reflect the reclassification of (i) amount due to intermediate holding company and ultimate holding company before the Acquisition, to other payables and (ii) amount due from (to) former shareholder and loan from former shareholder to amount due from (to) non-controlling interest and loan from non-controlling interest in the Group. The amounts are unsecured, interest-free and repayable on demand, except for the loan from non-controlling interest bears interest at 2.48% per annum.

– III-5 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The adjustment is made to reflect the estimated transaction expenses, such as legal and professional fees of approximately HK$15.8 million incurred that directly attributable to the Acquisition.
Details of the Put Option are set out in the paragraph headed “SLC Shareholders Agreement” in the section headed “Letter from the Board” of this circular. For the purpose of presenting pro forma financial information and pursuant to Rule 14.74(1) of the Listing Rules, the Option is assumed to be exercised.

For the preparation of the Group’s consolidated financial statements, such Put Option granted to non-controlling shareholders of CA Sega with a variable Put Price, which will be settled other than by exchange of fixed amount of cash for a fixed number of shares in CA Sega, is treated as a derivative and is recognised at fair value upon initial recognition, which is the effective date on 1 January 2017. Any changes in fair value in subsequent reporting periods are recognised in profit or loss.

The gross financial liability arising from the Put Option is recognised when contractual obligation to purchase the shares in CA Sega is established even if the obligation is conditional on SEGA SAMMY exercising a right to sell back the shares to CTP. The liability for the share redemption amount is initially recognised and measured at present value of the estimated purchase price with the corresponding debit to the non-controlling interests. In subsequent periods, the remeasurement of the present value of the estimated gross obligation under the written put option to the SEGA SAMMY is recognised in profit or loss.

The fair value of the Put Option is to be measured by a valuation technique using Level 3 inputs i.e. unobservable inputs for the Put Option, which is subject to estimates.

No adjustments have been made to reflect any trading results or other transactions of the Group and the CA Sega Group entered into subsequent to 30 September 2016.

– III-6 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

D. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the text of a report received from the reporting accountants, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong, in respect of the Group’s unaudited pro forma financial information for the purpose in this circular.

INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION

To the Directors of China Animation Characters Company Limited

We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of China Animation Characters Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) by the directors of the Company (the “Directors”) for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma consolidated statement of assets and liabilities as at 31 March 2017 and related notes as set out on pages III-1 to III-6 of the circular issued by the Company dated 29 June 2017 (the “Circular”). The applicable criteria on the basis of which the Directors have compiled the unaudited pro forma financial information are described on pages III-1 to III-6 of the Circular.

The unaudited pro forma financial information has been compiled by the Directors to illustrate the impact of the conditional acquisition of 85.1% interest in CA Sega Joypolis Limited (“CA Sega”); and (ii) the exercise of put option to acquire the remaining 14.9% interest in CA Sega (the “Put Option”) granted to Sega Sammy Holdings Limited on the Group’s financial information as if both the Acquisition and exercise of the Put Option had been taken place at 30 September 2016. As part of this process, information about the Group’s financial position has been extracted by the Directors from the Group’s condensed consolidated financial statements for the six months ended 30 September 2016, on which a review conclusion has been published.

Directors’ Responsibilities for the Unaudited Pro Forma Financial Information

The Directors are responsible for compiling the unaudited pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” (“AG 7”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

– III-7 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Our Independence and Quality Control

We have complied with the independence and other ethical requirements of the “Code of Ethics for Professional Accountants” issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

Our firm applies Hong Kong Standard on Quality Control 1 “Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements” issued by the HKICPA and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

Reporting Accountants’ Responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 “Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus” issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the unaudited pro forma financial information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA.

For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the unaudited pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the unaudited pro forma financial information.

The purpose of unaudited pro forma financial information included in an investment circular is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the Group as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the event or transaction at 30 September 2016 would have been as presented.

– III-8 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A reasonable assurance engagement to report on whether the unaudited pro forma financial information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the unaudited pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:

the related unaudited pro forma adjustments give appropriate effect to those criteria; and
the unaudited pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgement, having regard to the reporting accountants’ understanding of the nature of the Group, the event or transaction in respect of which the unaudited pro forma financial information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the unaudited pro forma financial information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong 29 June 2017

– III-9 –

APPENDIX IV

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

Directors’ interests

Save as disclosed below, as of the Latest Practicable Date, none of the Directors or the chief executive of the Company, had any other interests or short positions in any shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which any such Director or the chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) were required to be entered into the register maintained by the Company, pursuant to Section 352 of the SFO; or which (c) were required to be notified to the Company and the Stock Exchange, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set forth in Appendix 10 to the Listing Rules:

Long positions in the shares and underlying share of the Company

Name of Directors Mr. ZHUANG Mr. TING	Capacity/ nature of interest Interest of controlled corporation_(Note 1) Interest in persons acting in concert(Note 2) Spouse interest(Note 3) Interest of controlled corporation(Note 4) Interest in persons acting in concert(Note 2)_	Name of the controlled corporations Bright Rise – – Bonville –	Name of Company Company Company Company Company Company	Number of shares (Long position) 372,336,000 (L) 493,266,000 (L) 16,092,000 (L) 12,900,000 (L) 493,266,000 (L)	Approximate percentage of Shares in issue
					40.47% 53.61% 1.75% 2.62% 53.61%

– IV-1 –

APPENDIX IV

GENERAL INFORMATION

Notes:–

All issued shares of Bright Rise are held by Newgate (PTC) Limited. Newgate (PTC) Limited is a company incorporated in the BVI on 12 September 2014 and acts as the trustee of the trust created in the Cayman Islands by Mr. ZHUANG on 18 November 2014, namely The Fortune Trust. The beneficiaries of The Fortune Trust currently include Mr. ZHUANG and his family members.
Pursuant to the Concert Party Agreement, the Concert Parties have agreed with certain arrangements pertaining to their shareholding in the Company. As such, each of the Concert Parties is deemed to be interested in the Shares held by each of them under the SFO.
Ms. LI is the spouse of Mr. ZHUANG. Mr. ZHUANG is deemed to be interested in the Shares interested by Ms. LI under the SFO.
All issued shares of Bonville are held by Mr. TING.

Other interest of the Directors

As at the Latest Practicable Date, except (i) Mr. ZHUANG, the chief executive officer and an executive director of the Company is also the director of Bright Rise, and (ii) Mr. TING, an executive director of the Company is also the director of Bonville, none of the Directors was a director or employee of a company which had or was deemed to have an interest or short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of the Part XV of the SFO.

3. DIRECTORS’ SERVICE CONTRACTS

As of the Latest Practicable Date, none of the Directors has entered into any service contract with the Company, which is not determinable by the Company within one year without payment of compensation (other than statutory compensation).

4. DIRECTORS’ INTERESTS IN COMPETING BUSINESSES

As of the Latest Practicable Date, so far as the Directors were aware, none of the Directors and their respective close associates were considered to have interests in businesses apart from the Group’s businesses which compete, or are likely to compete with the businesses of the Group pursuant to Rule 8.10 of the Listing Rules.

5. DIRECTORS’ INTERESTS IN CONTRACTS AND ASSETS

As of the Latest Practicable Date, there was no contract or arrangement subsisting in which any Director was materially interested and which was significant in relation to the business of the Group.

– IV-2 –

APPENDIX IV

GENERAL INFORMATION

As of the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which have been, since 31 March 2016 (being the date to which the latest published audited consolidated accounts of the Group were made up): (i) acquired or disposed of by; (ii) leased to; (iii) proposed to be acquired or disposed of by; or (iv) proposed to be leased to any member of the Group.

6. LITIGATION

Neither the Company nor any of its subsidiaries was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened against any members of the Group immediately preceding the Latest Practicable Date.

7. MATERIAL CONTRACTS

Save for and except for the transactions disclosed below, there were no material contracts (not being contracts entered into in the ordinary course of business carried on by the Group) being entered into by any member of the Group within the two (2) years immediately preceding the Latest Practicable Date:

(i) the placing agreement (the “ 2016 Placing Agreement ”) dated 24 August 2016 entered into among Bright Rise, the Company and China Galaxy International Securities (Hong Kong) Co., Ltd, pursuant to which China Galaxy International Securities (Hong Kong) Co., Ltd has agreed to act as a placing agent for Bright Rise to procure purchasers, on a best effort basis, to purchase up to 20,000,000 placing shares at the placing price of HK$3.60 per placing shares;
(ii) the subscription agreement dated 24 August 2016 entered into among Bright Rise, Mr. ZHUANG and the Company, pursuant to the Company has conditionally agreed to issue and allot to Bright Rise, and Bright Rise has conditionally agreed to subscribe for the number of new Shares equal to the number of Shares successful placed pursuant to the 2016 Placing Agreement at the subscription price of HK$3.60 per subscription Share;
(iii) the Share Purchase Agreement;
(iv) the subscription agreement dated 16 December 2016 entered into between the Company as the issuer and Wisdom Treasure Holdings Inc. as the subscriber, pursuant to which the Company has conditionally agreed to issue and allot to the subscriber 30,770,000 Shares at the subscription price of HK$3.25 per Share;
(v) the SLC Shareholders Agreement;
(vi) the three subscription agreements dated 7 January 2017 entered into between the Company as the issuer with Mr. ZHANG Hong Wu, Ms. ZHAO Tong Tong and Mr. ZHU Cong Shuang as the subscribers respectively, pursuant to which the Company has conditionally agreed to issue and allot to these three subscribers an aggregate of 16,076,000 Shares at the subscription price of HK$3.25 per Share; and

– IV-3 –

APPENDIX IV

GENERAL INFORMATION

(vii) the placing agreement dated 29 May 2017 entered into between the Company as the issuer and Pacific Foundation Securities Limited as the placing agent, pursuant to which Pacific Foundation Securities Limited has agreed to act as a placing agent for the Company to procure subscribers, on a best effort basis, to subscribe bonds of aggregate principal amount of up to HK$100,000,000.

8. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 March 2016 (being the date to which the latest published audited accounts of the Company were made up).

9. EXPERTS AND CONSENTS

The following is the qualification of the expert who has given opinion or advice which is contained in this circular:

Name Crowe Horwath Deloitte Touche Tohmatsu Lego	Qualification
	Certified Public Accountants Certified Public Accountants A licensed corporation to carry on type 6 (advising on corporate finance) regulatory activity under the SFO

Each of Crowe Horwath (HK) CPA Limited, Deloitte Touche Tohmatsu and Lego has given and has not withdrawn its written consent to the issue of this circular with inclusion of its letter, which has been prepared for inclusion in this circular, and references to its name in the form and context in which it is included.

As of the Latest Practicable Date, each of Crowe Horwath (HK) CPA Limited, Deloitte Touche Tohmatsu and Lego did not have any shareholding interest in any member of the Group or any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As of the Latest Practicable Date, none of Crowe Horwath (HK) CPA Limited, Deloitte Touche Tohmatsu and Lego had any direct or indirect interest in any assets which have been, since 31 March 2016 (being the date to which the latest published audited consolidated accounts of the Group were made up) (i) acquired or disposed of by; (ii) leased to; (iii) proposed to be acquired or disposed of by; or (iv) proposed to be leased to any member of the Group.

– IV-4 –

APPENDIX IV

GENERAL INFORMATION

10. GENERAL

(i) The registered office of the Company is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
(ii) The secretary of the Company is Mr. Luk Sik Tat, Patrick. He is a fellow member of the Hong Kong Society of Accountants and the Association of Chartered Certified Accountant.
(iii) The share registrar of the Company is Computershare Hong Kong Investor Services Limited of Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(iv) The English text of this circular shall prevail over the Chinese translation in the event of inconsistency.

11. DOCUMENTS AVAILABLE FOR PUBLIC INSPECTION IN HONG KONG

Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company in Hong Kong at Suites 2808–2811, Concordia Plaza, 1 Science Museum Road, Tsim Sha Tsui East, Kowloon, Hong Kong, from the date of this circular up to the date which is 14 days after the date of this circular:

(i) the memorandum and articles of association of the Company;
(ii) the annual reports of the Company for the three (3) financial years ended 31 March 2016;
(iii) the accountants’ report of SLC from Crowe Horwath (HK) CPA Limited, the text of which is set forth on page I-1 to I-10 of this circular;
(iv) the letter from the Independent Financial Adviser, the text of which is set forth on pages 20 to 32 of this circular;
(v) the report on the unaudited pro forma financial information of the Enlarged Group prepared by Deloitte Touche Tohmatsu, the text of which is set forth in Appendix to this circular;
(vi) the written consents referred to in the paragraphs under “8. EXPERTS AND CONSENTS” in this Appendix;
(vii) the material contracts as referred to in the paragraphs under “Material Contracts” in this Appendix; and
(viii) this circular.

– IV-5 –

AI assistant

CA Cultural Technology Group Limited — Proxy Solicitation & Information Statement 2017

50006_rns_2017-06-28_3c26d52d-0b61-4521-9253-a1c6e1955cc6.pdf

China Animation Characters Company Limited 華夏動漫形象有限公司

MAJOR TRANSACTION IN RELATION TO THE ACQUISITION OF 85.1% OF THE SHARES IN SEGA LIVE CREATION INC.

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

China Animation Characters Company Limited 華夏動漫形象有限公司

MAJOR TRANSACTION IN RELATION TO THE ACQUISITION OF 85.1% OF THE SHARES IN SEGA LIVE CREATION INC.

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

INTRODUCTION

LETTER FROM THE BOARD

ACQUISITION AND PRINCIPAL TERMS OF THE SHARE PURCHASE AGREEMENT

Subject matter of the Share Purchase Agreement

Consideration

Conditions Precedent

Restructuring and Non-competition undertaking

Termination

COMPLETION OF THE ACQUISITION

SLC SHAREHOLDERS AGREEMENT

Restriction of transfer

Right of first refusal

Grant of the Put Option

Put Period and Put Price

Guarantee by the Company

INFORMATION ON SLC, SEGA SAMMY AND SEGA HOLDINGS

INFORMATION ABOUT THE GROUP

REASONS FOR AND BENEFITS

Acquisition

SLC Shareholders Agreement

FINANCIAL EFFECTS OF THE ACQUISITION AND EXERCISE OF THE PUT OPTION

Assets and liabilities

Earnings

IMPLICATIONS UNDER THE LISTING RULES

Acquisition

Grant of the Put Option as a major transaction and connected transaction for the Company

Shareholders’ Meeting Waiver and Voting at the Board Meeting

GRANT OF WAIVER FROM STRICT COMPLIANCE WITH RULE 14.41(A) AND RULE 14A.46(2) OF THE LISTING RULES AND DELAY IN DESPATCH OF THIS CIRCULAR

Recommendation

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

By order of the Board China Animation Characters Company Limited ZHUANG Xiangsong

China Animation Characters Company Limited 華夏動漫形象有限公司

(Stock code: 01566)

To the Shareholders

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE GRANT OF THE PUT OPTION TO SEGA SAMMY HOLDINGS INC.

INTRODUCTION

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background of and reasons for the SLC Shareholders Agreement

1.1 Information on the Group

1.2 Information on SEGA SAMMY and SLC Group

2. Reasons for and benefits of the SLC Shareholders Agreement

3. Terms of the SLC Shareholders Agreement

Restriction of transfer

Right of first refusal

Grant of the Put Option

Put Period and Put Prices

Analysis of the Put Prices

4. Possible financial effects of the SLC Shareholders Agreement

(a) Net asset value

(b) Earnings

(c) Working capital

RECOMMENDATION

1. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP

2. STATEMENT OF INDEBTEDNESS

3. WORKING CAPITAL STATEMENT

4. INFORMATION ABOUT THE VENDOR AND THE SLC GROUP

SEGA SAMMY

The SLC Group

5. MANAGEMENT DISCUSSION AND ANALYSIS OF THE SLC GROUP

Business overview

Revenue

Cost of sales

Gross profit

Other income and gain

Finance costs

Other expenses

Loss for the year

Liquidity and financial resources

CA Cultural Technology Group Limited Proxy Solicitation & Information Statement 2017