Changyou International Group Limited - Proxy Solicitation & Information Statement 2014

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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 stock broker, or other licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Changfeng Axle (China) Company Limited (the “ Company ”), you should at once hand this circular and the accompanying form of proxy to the purchaser(s) or transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee(s).

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.

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

DISCLOSEABLE AND CONNECTED TRANSACTIONS

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

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United Simsen Securities Limited

A letter from the Board is set out on pages 5 to 14 of this circular and a letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 15 to 16 of this circular. A letter from United Simsen, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 17 to 29 of this circular.

A notice convening the EGM of the Company to be held at Suites 903-905, 9th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong on Monday, 3 March 2014 at 2:00 p.m. is set out on pages EGM-1 to EGM-2 of this circular. A proxy form for use by the Shareholders for the EGM is enclosed with this circular. Whether or not you are able to attend the EGM in person, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the Company’s Hong Kong share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the EGM or any adjourned meeting thereof (as the case may be). Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM or any adjourned meeting thereof (as the case may be) should you so wish.

14 February 2014

CONTENT

			Page
Definitions . . . .		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from	the	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from	the	Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . .	15
Letter from	United Simsen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		17
Appendix I	–	Valuation Report of the Equipments and
		the Turning Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Appendix II –		General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	II-1
Notice of EGM		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, capitalized terms used shall have the following meanings:

“associates”
has the same meaning as given to it under the Listing Rules;
“Account Payable”
the account payable in the sum of RMB33,908,400 (equivalent to HK$43,064,000) due to Lonking Machinery in respect of the Equipments in the financial accounts of the JV Company, which has arisen as a result of the entering into of the Equity Transfer Agreement;
“Announcement”
the announcement of the Company dated 27 December 2013 in respect of the details of the Equity Transfer Agreement and the Debt Waiver Agreement;
“Board”

the board of Directors;

“Capital Injection”
the cash injection of RMB120,000,000 on the part of Fujian Changfeng and the injection of equipments and machinery for the production of gears on the part of Lonking Machinery into the JV Company as contemplated by the Cooperation Agreement;
“Company”
Changfeng Axle (China) Company Limited, a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the Main Board of the Stock Exchange;
“Cooperation Agreement”
the cooperation agreement dated 11 November 2010 entered into between Fujian Changfeng and Lonking Machinery in relation to the formation of a JV Company to engage in the manufacturing and sales of high quality gears for automobile and construction machinery in the PRC and the supplemental agreements thereto;
“Debt Waiver Agreement”
the Debt Waiver Agreement dated 27 December 2013 entered into among the JV Company, Lonking Machinery and Fujian Changfeng in relation to the extinguishment of the Account Payable and the sale and acquisition of the Turning Centers;
“Director(s)”
the director(s) of the Company;

– 1 –

DEFINITIONS

“EGM” an extraordinary general meeting of the Company to be convened to consider and, if thought fit, approve by the Independent Shareholders, among other things, the Equity Transfer Agreement and the Debt Waiver Agreement and the transactions contemplated thereunder;
“Equipments” certain equipments and machinery for the production of gears, which were injected into the JV Company by Lonking Machinery with an original cost of approximately RMB28,982,000 (equivalent to HK$36,807,140) pursuant to the Cooperation Agreement and accounted for as the Account Payable in the financial accounts of the JV Company as a result of the entering into of the Equity Transfer Agreement;
“Equity Transfer Agreement”
the equity transfer agreement dated 27 December 2013 entered into between Longyan Shengfeng and Lonking Machinery in relation to the acquisition by Longyan Shengfeng of the 40% interest in the JV Company;
“Fujian Changfeng”
Fujian Changfeng Machinery Manufacturing Co., Ltd
（福建暢豐機械製造有限公司）, a company established in PRC with limited liability on 8 July 2013 and a wholly-owned subsidiary of the Company;
“Group” the Company and its subsidiaries;
“HK$”
Hong Kong dollar, the laweful currency of Hong Kong;
“Hong Kong”
the Hong Kong Special Administrative Region of the PRC;
“Independent Board Committee”
an independent committee of the Board, comprising the independent non-executive Directors, which has been appointed by the Board to advise the Independent Shareholders on the Equity Transfer Agreement and the Debt Waiver Agreement;
“Independent Third Party(ies)”
an independent third party, to the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, who is not connected with the Company and its connected persons;

– 2 –

DEFINITIONS

“Independent Financial Adviser” or “United Simsen”
United Simsen Securities Limited, a licensed corporation to carry out Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, and the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Equity Transfer Agreement and the Debt Waiver Agreement;
“Independent Shareholders”
Shareholders other than the associate of Lonking Machinery;
“JV Company”
Changfeng Gear Manufacturing Co. Ltd.*（福建暢豐齒輪有限公司）, a company established in PRC with limited liability on 21 July 2011 pursuant to the Cooperation Agreement;
“Latest Practicable Date” 11 February 2014, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information in this circular;
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange;
“Longyan Shengfeng” Longyan Shengfeng Machinery Manufacturing Co., Ltd.*（龍岩盛豐機械製造有限公司）, a company established in PRC with limited liability on 29 March 2006 and wholly-owned by Fujian Changfeng;
“Lonking Machinery”
Lonking (Jiangxi) Machinery Co., Ltd. (formerly known as Lonking (Jiangxi) Gear Co., Ltd.) （龍工（江西）齒輪有限公司）, a company established in the PRC with limited liability and a wholly owned subsidiary of Lonking Holdings Limited, the shares of which are listed on the Main Board of the Stock Exchange (stock code: 3339);
“PRC”
the People’s Republic of China;
“RMB”
Renminbi, the lawful currency of the PRC;
“SFO”
the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);
“Shares”
ordinary shares of US$0.01 each in the share capital of the Company;

– 3 –

DEFINITIONS

“Shareholder(s)”	the shareholder(s) of the Company;
“Stock Exchange”	The Stock Exchange of Hong Kong Limited;
“substantial shareholder”	has the same meaning as given to it under the Listing
	Rules;
“Turning Centers”	two sets of inverted vertical turning centers (Model No.
	VLC500) for the production of gears;
“%”	per cent.

For illustration purposes, amounts in RMB in this circular have been translated into HK$ at RMB1.00 = HK$1.27.

The English translation of Chinese names is included for information purpose only and should not be regarded as their official English translation.

– 4 –

LETTER FROM THE BOARD

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

Executive Directors: Mr. Wong Kwai Mo (Chairman) Ms. Wu Ching Mr. Lai Fengcai

Non-executive Director: Ms. Dong Ying, Dorothy

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

Independent non-executive Directors:

Mr. Zhu Weizhou Dr. Li Xiuqing Mr. Chong Ching Hei

Principal place of business in Hong Kong: Room 708, 7/F Delta House 3 On Yiu Street Shatin New Territories Hong Kong 14 February 2014

To the Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTIONS

INTRODUCTION

Reference is made to the Announcement in relation to the Equity Transfer Agreement and the Debt Waiver Agreement.

The Board is pleased to announce that on 27 December 2013, (1) Longyan Shengfeng and Lonking Machinery entered into the Equity Transfer Agreement pursuant to which Longyan Shengfeng has conditionally agreed to acquire and Lonking Machinery has conditionally agreed to sell its 40% interest in the JV Company at a consideration of RMB30,000,000 (equivalent to HK$38,100,000); and (2) the JV Company, Lonking Machinery and Fujian Changfeng entered into the Debt Waiver Agreement pursuant to which the JV Company has conditionally agreed to pay to Lonking Machinery and Lonking Machinery has conditionally agreed to accept a sum of RMB27,000,000 (equivalent to HK$34,290,000) in extinguishment of the Account Payable in respect of the Equipments,

– 5 –

LETTER FROM THE BOARD

and Lonking Machinery has conditionally agreed to acquire and the JV Company has conditionally agreed to sell the Turning Centers at a consideration of RMB12,000,000 (equivalent to HK$15,240,000).

The purpose of this circular is to provide you with, among other things, (i) further details of the Equity Transfer Agreement and the Debt Waiver Agreement; (ii) a letter of recommendation from the Independent Board Committee to the Independent Shareholders; (iii) a letter of advice from United Simsen to the Independent Board Committee and the Independent Shareholders on the Equity Transfer Agreement and the Debt Waiver Agreement; (iv) a valuation report on the Equipments and the Turning Centers; and (v) the notice of the EGM and other information as required under the Listing Rules.

THE EQUITY TRANSFER AGREEMENT

The principal terms of the Equity Transfer Agreement are as follows:

Date

27 December 2013

Parties

(1) Longyan Shengfeng; and
(2) Lonking Machinery

Subject matter

Pursuant to the Equity Transfer Agreement, Longyan Shengfeng has conditionally agreed to acquire and Lonking Machinery has conditionally agreed to sell its 40% interest in the JV Company at a consideration of RMB30,000,000 (equivalent to HK$38,100,000).

The JV Company was incorporated in the PRC with limited liability on 21 July 2011 pursuant to the Cooperation Agreement. It is principally engaged in the manufacturing and sales of high quality gears for automobile and construction machinery in the PRC. The paid-up capital of the JV Company as at 30 November 2013 is RMB100,000,000 (equivalent to HK$254,000,000) and is contributed as to 60% by Fujian Changfeng and 40% by Lonking Machinery.

Consideration

The consideration of RMB30,000,000 (equivalent to HK$38,100,000) was determined after arm’s length negotiations between Longyan Shengfeng and Lonking Machinery with reference to the net asset value of the JV Company in the approximate amount of RMB30,700,000 attributable to Lonking Machinery as at 30 November 2013.

– 6 –

LETTER FROM THE BOARD

The consideration of RMB30,000,000 (equivalent to HK$38,100,000) is to be satisfied by Longyan Shengfeng in the following manners:

(i) as to RMB3,500,000 (equivalent to HK$4,445,000) by cash payable on or before 5 January 2014; and
(ii) as to RMB26,500,000 (equivalent to HK$33,655,000) by cash payable in ten equal installments of RMB2,650,000 (equivalent to HK$3,365,500) each on or before the twenty-fifth day of each month commencing from March 2014.

Longyan Shengfeng may elect to settle the consideration by way of assigning bills receivable that the Group may collect in the ordinary course of business in future to Lonking Machinery. The payment of the consideration payable by the Longyan Shengfeng and any damages arising out of the breach of the Equity Transfer Agreement plus any costs incurred in enforcing the payment is guaranteed by Fujian Changfeng, such guarantee to remain in full force and effect until the last installment of the consideration is settled.

Condition

The Equity Transfer Agreement is conditional upon the approval by the Independent Shareholders in a general meeting of the Company.

Completion

Completion shall take place within 30 days from the date of the Equity Transfer Agreement whereupon Longyan Shengfeng and Lonking Machinery shall complete the required registration and procedure with the relevant PRC government authorities.

Upon completion, the JV Company will be owned as to 60% by Fujian Changfeng and 40% by Longyan Shengfeng and will become an indirect wholly-owned subsidiary of the Company.

THE DEBT WAIVER AGREEMENT

Date

27 December 2013

Parties

(i) JV Company;
(ii) Lonking Machinery; and
(iii) Fujian Changfeng

– 7 –

LETTER FROM THE BOARD

Subject Matter

Pursuant to the Debt Waiver Agreement, the JV Company has conditionally agreed to pay to Lonking Machinery and Lonking Machinery has conditionally agreed to accept a sum of RMB27,000,000 (equivalent to HK$34,290,000) in extinguishment of the Account Payable in respect of the Equipments, which Lonking Machinery had injected into the JV Company pursuant to the Cooperation Agreement. Under the Cooperation Agreement, Fujian Changfeng has agreed to make capital contribution to the JV Company by way of cash injection and Lonking Machinery has agreed to make capital contribution to the JV Company by way of assets and/or cash injection in the following manner:

(a) an initial payment of RMB60,000,000 be paid by Fujian Changfeng before 31 December 2010 and part of the equipments and machinery be transferred by Lonking Machinery to the JV Company before 31 December 2010; and
(b) a final payment of RMB60,000,000 be paid by Fujian Changfeng before 31 December 2011 and the remaining part of the equipments and machinery be transferred by Lonking Machinery to the JV Company before 31 December 2011.

The initial payment of RMB60,000,000 was paid by Fujian Changfeng and the equipments and machinery were injected by Lonking Machinery in fulfillment of their respective obligations under the Cooperation Agreement. By virtue of the fifth supplemental agreement as disclosed in the announcement of the Company dated 29 December 2013, payment of the final payment of RMB60,000,000 by Fujian Changfeng shall be postponed to a day before 31 December 2014, pending the completion the Equity Transfer Agreement and the Debt Waiver Agreement whereupon the obligation on the part of Changfeng in respect of the final payment shall be discharged.

The Account Payable has arisen following the entering into of the Equity Transfer Agreement given the obligation of Capital Injection on the part of Lonking Machinery has been discharged and an amount representing the carrying value of the Equipments has therefore become payable to Lonking Machinery. The Account Payable represented the amount due to Lonking Machinery and was derived from the cost of the Equipments injected by Lonking Machinery originally for the purpose of Capital Injection under the Cooperation Agreement.

The aggregate original purchase cost of the Equipments was RMB28,982,000 (equivalent to HK$36,807,140). No profit or economic interest has been derived from the Equipments for the two years ended 31 December 2012 and 31 December 2013. Upon the payment of RMB27,000,000 (equivalent to HK$34,290,000) to Lonking Machinery and the extinguishment of the Account Payable pursuant to the Debt Waiver Agreement, a net sum of approximately RMB6,900,000 (equivalent to HK$8,800,000) originally payable to Lonking Machinery will be waived and discharged.

In addition, pursuant to the Debt Waiver Agreement, Lonking Machinery has conditionally agreed to acquire and the JV Company has conditionally agreed to sell the Turning Centers, which had been injected by Lonking Machinery into the JV Company pursuant to the Cooperation Agreement. The aggregate original purchase cost of the Turning

– 8 –

LETTER FROM THE BOARD

Centers was RMB13,723,000 (equivalent to HK$17,428,210). No profit or economic interest has been derived from the Turning Centers for the two years ended 31 December 2012 and 31 December 2013.

Consideration

The amount of the Account Payable was RMB33,908,400 (equivalent to HK$43,064,000), being the net carrying value of the Account Payable as at 30 November 2013. The total payment for the extinguishment of the Account Payable is RMB27,000,000 (equivalent to HK$34,290,000), and is payable by the JV Company to Lonking Machinery. Such amount was arrived at after arms’ length negotiation between the parties taking into account the estimated market price of the Equipments.

The carrying value of the Turning Centres as at 30 November 2013 was approximately RMB13,723,000 (equivalent to HK$17,428,000). The total consideration for the acquisition of the Turning Centers is RMB12,000,000 (equivalent to HK$15,240,000), and is payable by Lonking Machinery to the JV Company.

The payment for the extinguishment of the Account Payable and the consideration for the acquisition of the Turning Centers were determined after arm’s length negotiations between Lonking Machinery and the JV Company with reference to the preliminary valuation of the Equipments and the Turning Centers as at 30 November 2013 as assessed by an independent valuer. The preliminary valuation of the Turning Centers, which was assessed by the independent valuer based on replacement cost approach, was amounted to approximately RMB11,000,000 (equivalent to HK$14,000,000) as at 30 November 2013.

The payment for the extinguishment of the Account Payable payable by the JV Company to Lonking Machinery will be offset by the consideration for the acquisition of the Turning Centers payable by Lonking Machinery to the JV Company and therefore a net amount of RMB15,000,000 (equivalent to HK$19,050,000) is payable to Lonking Machinery in accordance with the following manner:

(i) as to RMB1,500,000 (equivalent to HK$1,905,000) by cash payable on or before 5 January 2014; and
(ii) as to RMB13,500,000 (equivalent to HK$17,145,000) by cash payable in ten equal installments of RMB1,350,000 (equivalent to HK$1,714,500) each on the fifth day of each month commencing from March 2014.

The JV Company may elect to settle the consideration by way of assigning bills receivable that the Group may collect in the ordinary course of business in future to Lonking Machinery. The payment of the consideration payable by the JV Company and any damages arising out of the breach of the Debt Waiver Agreement plus any costs incurred in enforcing the payment is guaranteed by Fujian Changfeng, such guarantee to remain in full force and effect until the last installment of the consideration is settled.

– 9 –

LETTER FROM THE BOARD

Condition

The Debt Waiver Agreement and the transactions thereunder are conditional upon the approval by the Independent Shareholders in general meeting of the Company.

Completion

Delivery of the Turning Centers shall take place on or before 31 March 2014. The Equipments, as having been injected, are currently in the possession of the JV Company and delivery of which is dispensed with.

Financial Effect on the Group

Subject to the final audit of the financial figures of the Group, it is estimated that, the Company will recognise a non-cash gain of approximately RMB3,400,000 (equivalent to HK$4,300,000) as a result of the extinguishment of the Account Payable and the sale of the Turning Centers to Lonking Machinery, taking into account the difference between the Account Payable and the sum of RMB27,000,000 for the extinguishment of the Account Payable, as offset by the difference between the after-tax non-cash proceeds of the sales of the Turning Centers and the carrying value of the Turning Centers as at 30 November 2013.

REASONS FOR AND BENEFITS OF THE TRANSACTIONS UNDER THE EQUITY TRANSFER AGREEMENT AND THE DEBT WAIVER AGREEMENT

The Group is principally engaged in the manufacturing and sales of axle assemblies and axle components in the PRC. The Directors consider that it is now a ripe opportunity for the Group to acquire the 40% equity interests in the JV Company at a consideration less than the registered capital attributable to the 40% equity interests and extinguish the Account Payable with a sum less than its carrying value.

In addition, in view of the increasing uncertainty in the global economic situation and fierce competition in the PRC market, the management of the Group considers that the business environment will remain challenging in the future. In order to maintain competitiveness of the Group, the Company has formulated a number of strategies and measures which include products diversification, overseas market expansion, marketing network expansion and implementation of cost control measures. To this end, the Group has been reviewing its operations and intends to gradually restructure its operations and consolidate production facilities so as to improve the overall operational efficiency. After obtaining full control and ownership of the JV Company, the Company will consider to consolidate the production facilities with the existing factories. At the same time, the Company will dispose of certain machineries in order to increase the efficiency of the future operation.

The terms of the Equity Transfer Agreement and the Debt Waiver Agreement have been determined after arm’s length negotiations on normal commercial terms. The Directors consider that the terms of the Equity Transfer Agreement and the Debt Waiver Agreement are on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 10 –

LETTER FROM THE BOARD

INFORMATION ON THE JV COMPANY

The JV Company was incorporated in PRC with limited liability on 21 July 2011 and is an indirect non-wholly owned subsidiary of the Company. As at the Latest Practicable Date, the JV Company is owned as to 60% by Fujian Changfeng and 40% by Lonking Machinery. The paid-up capital of the JV Company as at 30 November 2013 is RMB100,000,000 (equivalent to HK$254,000,000) and is contributed as to 60% by Fujian Changfeng and 40% by Lonking Machinery. The scope of business of the JV Company includes the manufacturing and sales of high quality gears for automobile and construction machinery in the PRC. For further details of the JV Company, please refer to the announcement of the Company dated 11 November 2010.

Set out below is the unaudited financial information of the JV Company based on the general accepted accounting principles in PRC for the two years ended 31 December 2011 and 31 December 2012:

		For the year	ended 31
		December
		2012	2011
		(unaudited)	(unaudited)
		RMB’000	RMB’000
Net	profit (loss) before tax	(3,467)	(303)
Net	profit (loss) after tax	(3,467)	(303)
Net	assets/(liabilities)	96,304	99,771

INFORMATION ON LONGYAN SHENGFENG

Longyan Shengfeng is a company established in the PRC on 29 March 2006 and is a wholly-owned subsidiary of Fujian Changfeng. Its scope of business includes manufacturing and sales of axle assemblies and axle components in the PRC.

INFORMATION ON LONKING MACHINERY

Lonking Machinery is principally engaged in the manufacturing and distribution of construction machinery and wheel loader components. It is a wholly-owned subsidiary of Lonking Holdings Limited, the shares of which are listed on the Main Board of the Stock Exchange.

– 11 –

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

As the applicable percentage ratios as set out in the Listing Rules in respect of the transactions under the Equity Transfer Agreement and the Debt Waiver Agreement, on an aggregate basis, exceed 5% but are less than 25%, the transactions under the Equity Transfer Agreement and the Debt Waiver Agreement constitute discloseable transactions for the Company under the Listing Rules. As Lonking Machinery is a substantial shareholder of the JV Company and is a connected person at the subsidiary level of the Company for the purpose of the Listing Rules, the transactions contemplated under the Equity Transfer Agreement and the Debt Waiver Agreement also constitute connected transactions for the Company under Chapter 14A of the Listing Rules and are subject to the reporting and announcement requirements and the Independent Shareholders’ approval of the Company under the Listing Rules.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, an associate of Lonking Machinery is interested in 12,209,000 Shares, representing approximately 1.53% of the issued share capital of the Company as at the Latest Practicable Date, and as such, it is required to abstain from voting on the resolutions to approve the Equity Transfer Agreement and the Debt Waiver Agreement at the EGM. Save as aforesaid, none of the shareholders have any material interest in the transactions contemplated under the Equity Transfer Agreement and the Debt Waiver Agreement and therefore are not required to abstain from voting at the EGM.

APPROVAL BY THE BOARD

None of the Directors has a material interest in the transactions contemplated under the Equity Transfer Agreement and the Debt Waiver Agreement. Accordingly, none of them was required to abstain from voting on the relevant board resolutions to approve the Equity Transfer Agreement and the Debt Waiver Agreement.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

An independent board committee comprising Mr. Zhu Weizhou, Dr. Li Xiuqing and Mr. Chong Ching Hei, being the independent non-executive Directors, has been established to advise the Independent Shareholders on the terms of the Equity Transfer Agreement and the Debt Waiver Agreement. United Simsen has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of the Equity Transfer Agreement and the Debt Waiver Agreement.

GENERAL

Shareholders and potential investors should note that completion of the Equity Transfer Agreement and the Debt Waiver Agreement are subject to the fulfillment of the conditions under the Equity Transfer Agreement and the Debt Waiver Agreement. As the transactions may or may not proceed to completion, Shareholders and potential investors are reminded to exercise caution when dealing in the Shares.

– 12 –

LETTER FROM THE BOARD

EGM

The Company will convene the EGM at Suites 903-905, 9th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong on 3 March 2014 (Monday) at 2:00 p.m. to consider and if thought fit, approve the Equity Transfer Agreement and the Debt Waiver Agreement and the transactions contemplated thereunder. The notice of the EGM is set out on pages EGM-1 and EGM-2 of this circular. The voting on such resolutions will be conducted by way of poll in accordance with Rule 13.39(4) of the Listing Rules.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, an associate of Lonking Machinery is interested in 12,209,000 Shares and as such, it is required to abstain from voting on the resolutions to approve the Equity Transfer Agreement and the Debt Waiver Agreement at the EGM.

The Company will publish an announcement on the results of the EGM in accordance with Rule 13.39(5) of the Listing Rules after the EGM.

A notice convening the EGM to be held at 2:00 p.m. on 3 March 2014 at Suites 903-905, 9th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong is set out on pages EGM-1 to EGM-2 of this circular.

A form of proxy for the EGM for use by the Shareholders is enclosed with this circular. Whether or not you are able to attend the EGM in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event no later than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish (as the case may be).

RECOMMENDATIONS

Your attention is drawn to (i) the letter from the Independent Board Committee set out on pages 15 to 16 of this circular which contains the recommendations of the Independent Board Committee to the Independent Shareholders on the terms of the Equity Transfer Agreement and the Debt Waiver Agreement, and (ii) the letter from United Simsen set out on pages 17 to 29 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in respect of the fairness and reasonableness on the terms of the Equity Transfer Agreement and the Debt Waiver Agreement.

The Directors consider that the terms of the Equity Transfer Agreement and the Debt Waiver Agreement are fair and reasonable, on normal commercial terms, in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend all Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Equity Transfer Agreement and the Debt Waiver Agreement and the transactions contemplated thereunder.

– 13 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

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

Yours faithfully, By Order of the Board Changfeng Axle (China) Limited Mr. Wong Kwai Mo Chairman

– 14 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

14 February 2014

To: the Independent Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 14 February 2014 (the “ Circular ”), of which this letter forms part. Unless the context requires otherwise, capitalized terms used in this letter will have the same meanings as defined in the Circular unless the context otherwise requires.

We have been authorised by the Board to form the Independent Board Committee to advise the Independent Shareholders on whether the terms of the Equity Transfer Agreement and the Debt Waiver Agreement are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Group and the Shareholders as a whole.

We wish to draw your attention to the letter of advice from United Simsen, the Independent Financial Adviser appointed to advise the Independent Board Committee and the Independent Shareholders on the terms of the Equity Transfer Agreement and the Debt Waiver Agreement as set out on pages 5 to 14 of the Circular and the letter from the Board as set out on pages 15 to 16 of the Circular.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having considered, among other matters, the factors and reasons considered, and the opinion as stated in its letter of advice, we consider that the terms of the Equity Transfer Agreement and the Debt Waiver Agreement and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, and are in the interests of the Company and the Independent Shareholders as a whole and accordingly recommend the Independent Shareholders to vote in favour of the ordinary resolutions in relation to the Equity Transfer Agreement and the Debt Waiver Agreement to be proposed at the EGM.

Yours faithfully,

For and on behalf of the

Independent Board Committee of Changfeng Axle (China) Company Limited Mr. Zhu Weizhou Dr. Li Xiuqing Mr. Chong Ching Hei Independent Non-executive Directors

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LETTER FROM UNITED SIMSEN

Set out below is the text of a letter received from United Simsen, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders regarding the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement for the purpose of inclusion in this circular.

==> picture [147 x 33] intentionally omitted <==

Suites 7001-02, 70/F. Two International Finance Centre No. 8 Finance Street Central Hong Kong

14 February 2014

To: The independent board committee and the independent shareholders of Changfeng Axle (China) Company Limited

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Equity Transfer Agreement and the Debt Waiver Agreement, details of which are set out in the letter from the Board (the “ Board Letter ”) contained in the circular dated 14 February 2014 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 requires otherwise.

On 27 December 2013, (i) Longyan Shengfeng and Lonking Machinery entered into the Equity Transfer Agreement pursuant to which Longyan Shengfeng has conditionally agreed to acquire and Lonking Machinery has conditionally agreed to sell its 40% interest in the JV Company at a consideration of RMB30,000,000 (equivalent to approximately HK$38,100,000); and (ii) the JV Company, Lonking Machinery and Fujian Changfeng entered into the Debt Waiver Agreement pursuant to which the JV Company has conditionally agreed to pay to Lonking Machinery and Lonking Machinery has conditionally agreed to accept a sum of RMB27,000,000 (equivalent to approximately HK$34,290,000) in extinguishment of the Account Payable in respect of the Equipments, and Lonking Machinery has conditionally agreed to acquire and the JV Company has conditionally agreed to sell the Turning Centers at a consideration of RMB12,000,000 (equivalent to approximately HK$15,240,000).

With reference to the Board Letter, the respective transactions contemplated under the Equity Transfer Agreement and the Debt Waiver Agreement constitute discloseable and connected transactions for the Company under Chapters 14 and 14A of the Listing Rules respectively. Accordingly, the Equity Transfer Agreement and the Debt Waiver Agreement are subject to the reporting, announcement and the independent shareholders’ approval requirements under the Listing Rules.

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LETTER FROM UNITED SIMSEN

The Independent Board Committee comprising Mr. Zhu Weizhou, Dr. Li Xiuqing and Mr. Chong Ching Hei (all being independent non-executive Directors) has been established to advise the Independent Shareholders on (i) whether the terms of the Equity Transfer Agreement and the Debt Waiver Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement are in the interests of the Company and the Shareholders as a whole; and (iii) how the Independent Shareholders should vote in respect of the resolutions to approve the Equity Transfer Agreement, the Debt Waiver Agreement and the respective transactions contemplated thereunder at the EGM. We, United Simsen Securities Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this respect.

BASIS OF OUR OPINION

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

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

We consider that we have been provided sufficient information to reach an informed view and to provide a reasonable basis for our recommendation. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company, or its subsidiaries or associates, nor have we considered the taxation implication on the Group or the Shareholders as a result of the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement. In addition, we have no obligation to update this opinion to take into account events occurring after the issue of this letter. Nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

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LETTER FROM UNITED SIMSEN

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the transactions under the Equity Transfer Agreement and the Debt Waiver Agreement, we have taken into consideration the following principal factors and reasons:

1. Background of and reasons for the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement

Business overview of the Group

The Group is principally engaged in the manufacturing and sales of axle assemblies and axle components in the PRC.

Set out below are the consolidated financial information on the Group for the six months ended 30 June 2013 and the two years ended 31 December 2012 as extracted from the Company’s interim report for the six months ended 30 June 2013 (the “ 2013 Interim Report ”) and its annual report for the year ended 31 December 2012 (the “ 2012 Annual Report ”):

		For the six	For the year	For the year
		months	ended 31	ended 31	% change
		ended 30	December	December	from 2011 to
		June 2013	2012	2011	2012
		(unaudited)	(audited)	(audited)
		RMB’000	RMB’000	RMB’000	%
Turnover		222,779	503,841	920,681	(45.3)
– OEM and related
	market	92,783	264,493	382,610	(30.9)
– Aftermarket		118,585	239,348	538,071	(55.5)
– Train and railway
	business	11,411	–	–	–
Profit/(loss) for the period/					Not
year		(69,095)	(460,738)	59,646	applicable

The business activities of the Group can be divided into three categories, namely, (i) the OEM and related market; (ii) the aftermarket; and (iii) train and railway business. The OEM and related market segment involves selling of axle assemblies directly to OEMs in the PRC on a made-to-order basis to match its customers’ specification requirements. A small portion of axle components is occasionally sold to other axle assembly providers. The aftermarket segment involves selling of axle components to customers in the aftermarket through its extensive sales, marketing and services network across China. The train and railway segment was started by the Group in the second quarter of 2013 and involves export of the train side frame and train bolster. We noted from the above table that the Group’s total turnover showed a significant decline of approximately 45.3% for the year ended 31 December 2012 as compared to the

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LETTER FROM UNITED SIMSEN

year ended 31 December 2011. According to the 2012 Annual Report, such substantial decrease in turnover was mainly attributable to (i) for the aftermarket segment: (a) the less favorable industry environment caused by the slowdown of construction and infrastructure development projects in the PRC, which hampered the demand in the aftermarket industry; and (b) the decrease in unit selling price of certain products of the Group which were under keen competition in the aftermarket industry; and (ii) for the OEM and related market: the decline in growth rate in the trucking industry together with the delay in the launch of new trucks. For the six months ended 30 June 2013, the aforesaid unfavourable market condition persisted but the Group started to record revenue from the export of train side frame and train bolster.

As advised by the Directors, in view of the increasing uncertainty in the global economic situation and fierce competition in the PRC truck market, the Company expects business to continue to be challenging and the Group’s management has formulated various strategies and measures to cope with those challenges, including diversifying the range of the Group’s casting and punching products in other industry, exploring the opportunities in overseas market and improvement of the Group’s product quality management program.

Information on the JV Company

As referred to in the Board Letter, the JV Company was incorporated in the PRC with limited liability on 21 July 2011 under the Cooperation Agreement. It is principally engaged in the manufacturing and sales of high quality gears for automobile and construction machinery in the PRC. The paid-up capital of the JV Company as at 30 November 2013 was RMB100,000,000 (equivalent to approximately HK$127,000,000) and was contributed as to 60% by Fujian Changfeng and 40% by Lonking Machinery. As such, the JV Company is an indirect non-wholly owned subsidiary of the Company.

Set out below are the key unaudited financial information of the JV Company for the period from 21 July 2011 (being the date of establishment) to 31 December 2011 and the year ended 31 December 2012 prepared in accordance with the general accepted accounting principles in PRC:

		For the period
	For the	from 21 July
	year ended	2011 to
	31 December	31 December
	2012	2011
	RMB’000	RMB’000
Revenue	260	–
Net (loss) after taxation	(3,467)	(303)
Net assets	96,304	99,771

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LETTER FROM UNITED SIMSEN

From the above table, we noted that the JV Company recorded increasing loss after taxation for the year ended 31 December 2012 as compared to the prior year. The Directors advised us that the worsening in the loss making position of the JV Company was largely due to the weak market demand for high quality gear components.

On the other hand, pursuant to the Cooperation Agreement and the supplemental agreements thereto, the Equipments were injected into the JV Company by Lonking Machinery with an aggregate original purchase cost of approximately RMB28,982,000 (equivalent to approximately HK$36,807,140) and accounted for as the Account Payable in the financial accounts of the JV Company. In addition, the Turning Centers with an aggregate original purchase cost of RMB13,723,000 (equivalent to approximately HK$17,428,210) were also injected into the JV Company by Lonking Machinery pursuant to the Cooperation Agreement and the supplemental agreements thereto. No profit or economic interest has been derived from both of the Equipments and the Turning Centers for the period from 21 July 2011 to 31 December 2011 and the year ended 31 December 2012.

Reasons for and possible benefits of the Equity Transfer Agreement and the Debt Waiver Agreement

As aforementioned, the Group is principally engaged in the manufacturing and sales of axle assemblies and axle components in the PRC. According to the announcement of the Company dated 11 November 2010, the JV Company was formed to strengthen the Group’s axle components and related business and present the Company with a suitable platform to further develop the business of the Group in the production of gears in the PRC. However, the financial performance of the JV Company has been unsatisfactory since its establishment.

As extracted from the Board Letter, the Directors consider that it is now a ripe opportunity for the Group to acquire the 40% equity interest in the JV Company at a consideration less than the registered capital attributable to the 40% equity interest and extinguish the Account Payable with a sum less than its carrying value. In addition, in view of the increasing uncertainty in the global economic situation and fierce competition in the PRC market, the management of the Group considers that the business environment will remain challenging in the future. In order to maintain competitiveness of the Group, the Company has formulated a number of strategies and measures which include products diversification, overseas market expansion, marketing network expansion and implementation of cost control measures. To this end, the Group has been reviewing its operations and intends to gradually restructure its operations and consolidate production facilities so as to improve the overall operational efficiency. After obtaining full control and ownership of the JV Company, the Company will consider to consolidate the production facilities of the JV Company with the Group’s existing factories. At the same time, the Company will dispose

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LETTER FROM UNITED SIMSEN

of certain machineries and utilise the remaining assets of the JV Company, mainly the land and building, for the axle business instead of solely for the gear business in order to increase the efficiency of the Group’s future operation.

In relation to the above, we noted that on 27 December 2013, the JV Company (as the vendor) entered into an assets acquisition agreement pursuant to which the JV Company has agreed to sell certain tools, equipments and machinery for the production of gear, which were mainly injected by Lonking Machinery as capital injection, at a consideration of RMB38,000,000 (equivalent to approximately HK$48,260,000). The Directors are of the view that the sale of those assets would enable the Group to better utilise and devote its resources to the operation of other businesses of the Group and to improve the working capital of the Group. After the disposal of the said assets, the Company will utilize the readily fixed assets of the JV Company such as land and buildings to start its axle business immediately for its business expansion. Upon our further enquiry, the Directors confirmed that upon completion of the Equity Transfer Agreement and the Debt Waiver Agreement, the Group shall continue to identify other suitable opportunities for disposal of the assets of the JV Company. The Directors consider that the Group will be benefited from the acquisition of the 40% equity interest in the JV Company at a favourable consideration amount (as further elaborated in the latter paragraphs of this letter) by expanding its axle business immediately with existing fixed assets of the JV Company.

In view of that (i) the consideration of the Equity Transfer Agreement is less than the registered capital attributable to the 40% equity interest in the JV Company; (ii) the Account Payable can be extinguished with a sum less than its carrying value under the Debt Waiver Agreement; (iii) after obtaining full control and ownership of the JV Company upon completion of the Equity Transfer Agreement, the Company can consolidate the production facilities of the JV Company with the Group’s existing factories and thereby increasing the efficiency of the Group’s future operation; and (iv) the Group has been successful in realising the remaining interests in the JV Company through the sale of the assets of the JV Company on 27 December 2013 and shall continue to do so in the future, we concur with the Directors that the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement are in the interests of the Company and the Shareholders as a whole.

2. Principal terms of the Equity Transfer Agreement

On 27 December 2013, Longyan Shengfeng and Lonking Machinery entered into the Equity Transfer Agreement pursuant to which Longyan Shengfeng has conditionally agreed to acquire and Lonking Machinery has conditionally agreed to sell its 40% interest in the JV Company at a consideration of RMB30,000,000 (equivalent to approximately HK$38,100,000) (the “ JV Company Consideration ”).

The JV Company Consideration is to be satisfied by Longyan Shengfeng in the following manners:

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LETTER FROM UNITED SIMSEN

(i) as to RMB3,500,000 (equivalent to HK$4,445,000) by cash payable on or before 5 January 2014; and
(ii) as to RMB26,500,000 (equivalent to HK$33,655,000) by cash payable in ten equal installments of RMB2,650,000 (equivalent to HK$3,365,500) each on or before the twenty-fifth day of each month commencing from March 2014.

Longyan Shengfeng may elect to settle the consideration by way of assigning bills receivable that the Group may collect in the ordinary course of business in future to Lonking Machinery.

As a significant portion of the JV Company Consideration could either be settled in ten installments or by way of assigning bill receivables by Longyan Shengfeng, we consider that the above payment terms could provide flexibility to the cashflows of Longyan Shengfeng and hence is in the interests of the Company and the Shareholders as a whole.

The JV Company Consideration

The Directors confirmed that the JV Company Consideration was determined after arm’s length negotiations between Longyan Shengfeng and Lonking Machinery with reference to the net asset value of the JV Company in the approximate amount of RMB30,700,000 attributable to by Lonking Machinery as at 30 November 2013.

The JV Company Consideration is to be satisfied by Longyan Shengfeng in two instalments following the manner as described in details in the Board Letter.

Trading multiples analysis

For the purpose of assessing the fairness and reasonableness of the JV Company Consideration, we have performed a trading multiples analysis which includes only the price to book ratio (“ PBR ”) since the JV Company had been loss making during its latest financial year of which the financial information is available. To perform the trading multiples analysis, we have attempted to search for companies listed in Hong Kong which are engaged in similar lines of business as the JV Company, being the manufacture and sale of high quality gears for automobile and construction machinery, and derive a majority of their turnover from such business (the “ Comparables ”) for comparison. Nevertheless, based on our research, there are no listed companies in Hong Kong which purely focus on the manufacture and sale of gears. We have therefore extended our search to include Hong Kong listed companies which are engaged in the manufacture and sale of auto parts and components based on their respective latest published financial information. To the best of our knowledge and endeavor, we found 12 Hong Kong listed companies which met the said criteria and they are exhaustive as far as we are aware of. It should be noted that the operations and prospects of the JV Company are not exactly the same as the Comparables even though the Comparables are engaged in similar lines of business as the JV Company, and we

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have not conducted any in-depth investigation into the businesses and operations of the Comparables. Nevertheless, we consider that the Comparables are fair and representative to illustrate the general PBRs of Hong Kong listed companies which are engaged in the manufacture and sale of auto parts and components business.

Set out below are the PBRs of the Comparables based on their closing share prices as at 27 December 2013, being the date of the Equity Transfer Agreement, and their latest published financial information:

Company name
(stock code)	Principal business	PBR
		(times)
China Vehicle	Research, development and	1.50
Components	manufacture of automobile shock
Technology Holdings	absorber and suspension system for the
Limited (1269)	OEM market and automobile
	aftermarket.
Huazhong Holdings	Manufacture and sale of internal and	1.70
Company Limited	external decorative and structural
(6830)	automobile parts, moulds and tooling,
	casing and liquid tank of air
	conditioning or heater units and other
	non-automobile products.
Jinheng Automotive	Production and sales of automotive	0.36
Safety Technology	safety products and other automotive
Holdings Limited	components.
(872)
Minth Group Limited	Design, manufacturing, processing,	1.89
(425)	developing and sales of exterior
	automobile body parts and moulds of
	passenger cars.
Nexteer Automotive	Supply of steering systems &	5.47
Group Limited (1316)	components driveline systems &
	components, utilised on a broad range
	of vehicles.
Shuanghua Holdings	Design, development, manufacture and	0.35
Limited (1241)	sale of parts of auto air-conditioner.

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LETTER FROM UNITED SIMSEN

Company name
(stock code)	Principal business	PBR
		(times)
Weichai Power Company	Manufacturing and sale of diesel	1.49
Limited (2338)	engines and related parts, automobiles
	and major automobile components,
	non-major automobile components, and
	provision of import and export
	services.
Xiezhong International	Development, production and sales of	0.73
Holdings Limited	automotive heating, ventilation and
(3663)	air-conditioning (HVAC) systems and a
	range of automotive HVAC
	components.
Xinchen China Power	Manufacture automotive engine of the	2.51
Holdings Limited	passenger vehicle and light commercial
(1148)	vehicle; development, manufacture and
	sale of light-duty gasoline and diesel
	engines.
Zhejiang Prospect	Manufacturing and sale of universal	0.78
Company Limited	joints and automotive components for
(8273)	automobiles including cardan universal
	joints, wing bearing universal joints
	and differential spiders.
Zhejiang Shibao	Development, design, manufacture and	0.92
Company Limited	sales of automotive steering gears and
(1057)	other key components and parts of
	steering system.
ZMFY Automobile Glass	Sales of automobile glass with	2.47
Services Limited	installation/repair services and the
(8135)	trading of automobile glass.
	Maximum	5.47
	Minimum	0.35
	Average	1.68
	Median	1.49
The JV Company		0.98
Consideration		(Note)

Source: the Stock Exchange’s website (www.hkex.com.hk)

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LETTER FROM UNITED SIMSEN

Note: The implied PBR of the JV Company Consideration was calculated based on the JV Company Consideration of RMB30 million and divided by approximately RMB30.7 million, being 40% of the “unaudited adjusted net asset value of the JV Company (adjusted the effects of the disposal of the Turning Centers, the net cash outflow from the JV Company of RMB15 million being payable to Lonking Machinery and the elimination of the Account Payable under the Debt Waiver Agreement) as at 30 November 2013 of approximately RMB77 million”.

We noticed from the above table that the PBRs of the Comparables ranged from approximately 0.35 times to 5.47 times, with an average of approximately 1.68 times and a median of approximately 1.49 times. Given that the implied PBR of the JV Company Consideration is approximately 0.98 times, the implied PBR of the JV Company Consideration is within the PBR range of the Comparables and lower than the average and median PBR of the Comparables. As the PBR range of the Comparables reflect the general PBRs of Hong Kong listed companies which are engaged in the manufacture and sale of auto parts and components business as at the date of the Equity Transfer Agreement, the JV Company Consideration is acceptable based on market comparison.

Taking into account that (i) the JV Company Consideration was set with reference to the net asset value of the JV Company contributed by Lonking Machinery as at 30 November 2013; (ii) the implied PBR of the JV Company Consideration is within the PBR range of the Comparables and lower than the average and median PBR of the Comparables; and (iii) the JV Company Consideration of RMB30 million is lower than RMB30.74 million, being the 40% of the unaudited adjusted net asset value of the JV Company (taking into account the effect of the Debt Waiver Agreement) as at 30 November 2013 of approximately RMB76.86 million, we are of the opinion that the JV Company Consideration is on normal commercial terms and is fair and reasonable so far as the Independent Shareholders are concerned.

3. Principal terms of the Debt Waiver Agreement

On 27 December 2013, the JV Company, Lonking Machinery and Fujian Changfeng entered into the Debt Waiver Agreement pursuant to which the JV Company has conditionally agreed to pay to Lonking Machinery and Lonking Machinery has conditionally agreed to accept a sum of RMB27,000,000 (equivalent to approximately HK$34,290,000) (the “ AP Consideration ”) in extinguishment of the Account Payable in respect of the Equipments, and Lonking Machinery has conditionally agreed to acquire and the JV Company has conditionally agreed to sell the Turning Centers at a consideration of RMB12,000,000 (equivalent to approximately HK$15,240,000) (the “ Turning Centers Consideration ”).

As disclosed in the Board Letter, under the Cooperation Agreement, Fujian Changfeng has agreed to make capital contribution to the JV Company by way of cash injection and Lonking Machinery has agreed to make capital contribution to the JV Company by way of assets and/or cash injection in the following manner:

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(a) an initial payment of RMB60,000,000 be paid by Fujian Changfeng before 31 December 2010 and part of the equipments and machinery be transferred by Lonking Machinery to the JV Company before 31 December 2010; and
(b) a final payment of RMB60,000,000 be paid by Fujian Changfeng before 31 December 2011 and the remaining part of the equipments and machinery be transferred by Lonking Machinery to the JV Company before 31 December 2011.

Upon payment of the AP Consideration to Lonking Machinery and the extinguishment of the Account Payable pursuant to the Debt Waiver Agreement, a net sum of approximately RMB6.9 million (equivalent to approximately HK$8.8 million) originally payable to Lonking Machinery will be waived and discharged.

The AP Consideration and the Turning Centers Consideration

The Directors confirmed that the AP Consideration and the Turning Centers Consideration were determined after arm’s length negotiations between Lonking Machinery and the JV Company with reference to the respective preliminary valuation of the Equipments and the Turning Centers as at 30 November 2013 as assessed by an independent valuer.

The payment for the AP Consideration by the JV Company to Lonking Machinery will be offset by the Turning Centers Consideration payable by Lonking Machinery to the JV Company and hence a net amount of RMB15,000,000 (equivalent to approximately HK$19,050,000) is payable by the JV Company to Lonking Machinery following the manner as described in details in the Board Letter.

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The Valuation

Based on the Valuation Report, the market value of the Turning Centers as at 30 November 2013 was approximately RMB11,000,000 (equivalent to approximately HK$13,970,000). As a result, the Turning Centers Consideration represents a premium of approximately 9% over the market value of the Turning Centres.

The Valuation was conducted by the Valuer, an independent valuer, using both the cost approach as well as the sales comparison approach. For our due diligence purpose, we have reviewed and enquired into (i) the terms of engagement of the Valuer with the Company; (ii) the Valuer’s qualification and experience in relation to the performance of the Valuation; and (iii) the steps taken by the Valuer when conducting the Valuation. From the mandate letter and other relevant information provided by the Valuer, we are satisfied with the terms of engagement of the Valuer as well as their qualification and experience for performing the Valuation. Furthermore, to form a better understanding on the Valuation, we have enquired into and discussed with the Valuer regarding the methodology of, and basis and assumptions adopted for the Valuation. Based on the due diligence work as just mentioned, we consider that the Valuation was fairly and reasonably determined by the Valuer.

In light of that (i) upon payment of the AP Consideration to Lonking Machinery and the extinguishment of the Account Payable pursuant to the Debt Waiver Agreement, a net sum of approximately RMB6.9 million (equivalent to approximately HK$8.8 million) originally payable to Lonking Machinery will be waived and discharged; and (ii) the Turning Centers Consideration represents a premium of approximately 9% over the market value of the Turning Centers which was determined fairly and reasonable by the Valuer, we are of the view that the AP Consideration and the Turning Centers Consideration are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

4. Possible financial effects of the Equity Transfer Agreement and the Debt Waiver Agreement

Upon completion of the Equity Transfer Agreement, the JV Company will be owned as to 60% by Fujian Changfeng and 40% by Longyan Shengfeng and will become an indirect wholly-owned subsidiary of the Company.

Effect on net asset value and earnings

As confirmed by the Directors, since the JV Company has already been consolidated into the financial statements of the Group, it is expected that the Equity Transfer Agreement would not lead to any material change on the net asset value of the Group. As for the Debt Waiver Agreement, it is expected that the Company will recognise an estimated non-cash gain of approximately RMB3.4 million (equivalent to approximately HK$4.3 million) as a result of the

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extinguishment of the Account Payable and the sale of the Turning Centers to Lonking Machinery, taking into account the difference between the Account Payable and the sum of RMB27,000,000 for the extinguishment of the Account Payable, as offset by the difference between the after-tax non-cash proceeds of the sales of the Turning Centers and the carrying value of the Turning Centers as at 30 November 2013.

Effect on working capital and gearing

Since the Company will satisfy the JV Company Consideration and the net amount of RMB15,000,000 (equivalent to approximately HK$19,050,000) being payable by the JV Company to Lonking Machinery by the internal resources of the Group, the Group’s working capital would be reduced.

Furthermore, the Directors expected that the Group’s gearing ratio (being the ratio of total borrowing to total capital and reserve) would have no significant changes upon completion of the Equity Transfer Agreement and the Debt Waiver Agreement.

It should be noted that the aforementioned analyses are for illustrative purpose only and do not purport to represent how the financial position of the Group will be upon completion of the Equity Transfer Agreement and the Debt Waiver Agreement.

RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we are of the opinion that the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement are fair and reasonable so far as the Independent Shareholders are concerned and is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the entering into of the Equity Transfer Agreement and the Debt Waiver Agreement and we recommend the Independent Shareholders to vote in favour of the ordinary resolutions in this regard.

Your Faithfully, For and on behalf of United Simsen Securities Limited Chiu Ka Him Louis Lam Responsible Officer Responsible Officer

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VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

The following is the text of a valuation report prepared for inclusion in this circular and received from Roma Appraisals Limited, an independent property valuer, in connection with the property valuation as at 30 November 2013 of the Equipments and the Turning Centers.

==> picture [97 x 56] intentionally omitted <==

Unit 3806, 38/F, China Resources Building, 26 Harbour Road, Wan Chai, Hong Kong Tel (852) 2529 6878 Fax (852) 2529 6806 E-mail [email protected] http://www.romagroup.com

14 February 2014

Changfeng Axle (China) Company Limited

Longyan Economic Zone of Fujian Province, Longyan City, Fujian Province, The People’s Republic of China

Dear Sir/Madam,

In accordance with your recent instructions for us to value (A) the Machineries and Equipments (the “Equipments”) held by; and, (B) two sets of inverted vertical turning centres (Model No.VLC500) for the production of gears (the “Turning Centres”) agreed to be acquired by Changfeng Axle (China) Company Limited (the “Company”), and/ or its subsidiaries (hereinafter together referred to as the “Group”) located in the People’s Republic of China (the “PRC”), we confirm that we have carried out inspection, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the valuation as at 30 November 2013 (the “Date of Valuation”) for your circular purpose.

(A) VALUATION OF EQUIPMENTS

1. BASIS OF VALUATION

Our valuation of the Equipments is our opinion of the market value of the concerned Equipments which we would define as intended to mean “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

Our opinion of market value is not intended to represent the amount that might be realized from piecemeal disposition of Equipments in the open market or from alternative use of the Equipments.

Underlying our valuation is an assumption that the prospective earnings of the business of the Group would provide a reasonable return to the Equipments valued, plus the value of other equipments included in this valuation, and adequate working capital.

– I-1 –

VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

2. VALUATION METHODOLOGIES

2.1 The Cost Approach

The cost approach considers the cost to reproduce or replace in new condition the Equipments appraised in accordance with current market prices for similar Equipments, with allowance for accrued depreciation as evidence by observed condition or obsolescence present, whether arising from physical, functional or economic cause. The cost approach generally furnishes the most reliable indication of value for Equipments without known used market.

Physical depreciation is the loss in value due to physical deterioration resulting from wear and tear in operation and exposure to elements. Deterioration due to age and deterioration due to usage are the main factors that affect physical condition.

2.2 The Sales Comparison Approach

The sales comparison approach considers prices recently paid for similar equipment, with adjustments made to the indicated market prices to reflect condition and utility of the appraised Equipments relative to the market. Comparative Equipments for which there is established and the used market may be appraised by this approach.

2.3 Conclusion

In the course of our valuation, all two approaches should be considered as one or more approaches may be applicable in the valuation of the Assets. In some situations, elements of both approaches may be combined in our valuation.

3. LOCATION

Part of the Equipments held by the Group are currently situated in an industrial complex located at Laiwu City, Shandong Province, the PRC (the “Laiwu Factory”) while some of them are on the way shipping to the Laiwu Factory.

Accessibilities of the localities are considered reasonable. Main roads and air network are linked to the subject localities.

4. THE EQUIPMENTS

The Equipments valued were held by Changfeng Gear Manufacturing Co. Ltd.（福建暢豐齒輪有限公司）(“Changfeng Gear”) as at the Date of Valuation, which is effectively owned as to 60% to the Company. The Company was principally engaged in the manufacturing and sales of gears of motor vehicles in the PRC.

At the time of our inspection, the Equipments were observed to be generally in good condition. We are of the opinion that all of the Equipments should be capable of operating the purpose for which they were designed and produced.

– I-2 –

VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

In valuing the Equipments, we have relied on the advice given by the Group that the Group has valid and enforceable title to the Equipments and the records of the Equipments including the costs and acquisition dates.

5. VALUATION CONSIDERATION AND ASSUMPTION

During our inspection of the sample Equipments, the Equipments had been observed to be kept in reasonable conditions. Any deferred maintenance, physical wear and tear, operating malfunctions, lack of utility, or other observable conditions distinguishing the appraised equipments from Equipments of like kind in new condition were noted and made part of our judgment in arriving at the value.

We have also investigated market condition, discussed with local staff and professional and examined relevant documents and specification supplied to us before arriving at our opinion of value.

The situation being such, we have to a substantial extent relied upon our best judgment, while giving full consideration to the local condition.

We have not investigated any safety regulations regarding the subject production. It is assumed that all necessary licenses, procedures and measures were implemented in accordance with the relevant government legislation and guidance.

To the best of our knowledge, all data set forth in this report are true and accurate. The data, opinions, or estimates, identified as being furnished by others which have been used in formulating this analysis are gathered from reliable sources, yet, no guarantee is made nor liability assumed for the accuracy.

We did not investigate any financial data pertaining to the present or prospective earning capacity of the operation in which the Equipments are used. It was assumed that prospective earnings would provide a reasonable return on the appraised value of the Equipments, plus the value of any equipments not included in the valuation, and adequate net working capital.

It must be noted that our valuation is relied on the information supplied by the Group that the Equipments are in reasonable operating conditions. We did not attempt to operate or test the Equipments. In addition, our valuation has been prepared based upon the assumptions that the Equipments will continue in the existing use and the Equipments will be used in the existing state with the benefit of continuity of tenure of land and buildings in the foreseeable future.

We have not carried out a mechanical survey, nor have we inspected covered or inaccessible areas of the Equipments. Also no investigation was conducted as to whether the operation of specific pieces of Equipments complied with the relevant environmental standard and ordinances; we have assumed that the Equipments continue and will continue

– I-3 –

VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

to comply with the current environmental standards and ordinances. We have made no allowance in our valuation for costs, if any, associated with the disposal or handling of materials required to comply with current or changing environment legislations.

We have made no investigation and assume no responsibility for titles or liabilities against the Equipments.

In the course of our valuation, land and buildings, leasehold improvements in respect of the leasehold property, spare parts, inventories, supplies, materials, on-hand company records or any current and intangible equipments are excluded.

6. REMARKS

Our valuation is prepared in compliance with the International Valuation Standard 2013 published by International Valuation Standards Council.

In accordance with our standard practice, we must state that this report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents and neither the whole, nor any part of this report may be included in any published documents or statement nor published in any way without our prior written approval of the form and context in which it may appear.

Unless otherwise stated, all monetary amounts stated in our valuation are in Renminbi (“RMB”).

7. VALUATION

Our opinion of the market value of the Equipments, based on the aforesaid basis, assumptions and considerations, as at 30 November 2013 was RMB27,000,000 (RENMINBI TWENTY SEVEN MILLION ONLY) .

(B) VALUATION OF THE TURNING CENTRES

8. BASIS OF VALUATION

Our valuation of the Turning Centres is our opinion of the market value of the concerned Turning Centres which we would define as intended to mean “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

Our opinion of market value is not intended to represent the amount that might be realized from piecemeal disposition of Turning Centres in the open market or from alternative use of the Turning Centres.

– I-4 –

VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

Underlying our valuation is an assumption that the prospective earnings of the business of the Group would provide a reasonable return to the Turning Centres valued, plus the value of other assets included in this valuation, and adequate working capital.

9. VALUATION METHODOLOGIES

2.1 The Cost Approach

The cost approach considers the cost to reproduce or replace in new condition the Turning Centres appraised in accordance with current market prices for similar turning centres, with allowance for accrued depreciation as evidence by observed condition or obsolescence present, whether arising from physical, functional or economic cause. The cost approach generally furnishes the most reliable indication of value for Turning Centres without known used market.

10. LOCATION

The Turning Centres to be acquired by the Group are currently situated in an industrial complex located at Yong Ding County, Longyan City, Fujian Province, the PRC.

Accessibilities of the localities are considered reasonable. Main roads and air network are linked to the subject localities.

11. THE TURNING CENTRES

The Turning Centres valued were to be acquired by Changfeng Gear Manufacturing Co. Ltd.（福建暢豐齒輪有限公司）(“Changfeng Gear”) as at the Date of Valuation. The Company was principally engaged in the manufacturing and sales of gears of motor vehicles in the PRC.

At the time of our inspection, the Turning Centres were observed to be generally in good condition. We are of the opinion that all of the Turning Centres should be capable of operating the purpose for which they were designed and produced.

In valuing the Turning Centres, we have relied on the advice given by the Group that the Group has valid and enforceable title to the Turning Centres and the records of the Turning Centres including the costs and acquisition dates.

– I-5 –

VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

12. VALUATION CONSIDERATION AND ASSUMPTION

During our inspection of the Turning Centres, they had been observed to be kept in reasonable conditions. Any deferred maintenance, physical wear and tear, operating malfunctions, lack of utility, or other observable conditions distinguishing the appraised Turning Centres from Turning Centres of like kind in new condition were noted and made part of our judgment in arriving at the value. We have also investigated market condition, discussed with local staff and professional and examined relevant documents and specification supplied to us before arriving at our opinion of value.

The situation being such, we have to a substantial extent relied upon our best judgment, while giving full consideration to the local condition. We have not investigated any safety regulations regarding the subject production. It is assumed that all necessary licenses, procedures and measures were implemented in accordance with the relevant government legislation and guidance.

We did not investigate any financial data pertaining to the present or prospective earning capacity of the operation in which the Turning Centres are used. It was assumed that prospective earnings would provide a reasonable return on the appraised value of the Turning Centres, plus the value of any Turning Centres not included in the valuation, and adequate net working capital.

It must be noted that our valuation is relied on the information supplied by the Group that the Turning Centres are in reasonable operating conditions. We did not attempt to operate or test the Turning Centres. In addition, our valuation has been prepared based upon the assumptions that the Turning Centres will continue in the existing use and the Turning Centres will be used in the existing state with the benefit of continuity of tenure of land and buildings in the foreseeable future.

We have not carried out a mechanical survey, nor have we inspected covered or inaccessible areas of the Turning Centres. Also no investigation was conducted as to whether the operation of specific pieces of Turning Centres complied with the relevant environmental standard and ordinances; we have assumed that the Turning Centres continue and will continue to comply with the current environmental standards and ordinances. We have made no allowance in our valuation for costs, if any, associated with the disposal or handling of materials required to comply with current or changing environment legislations.

We have made no investigation and assume no responsibility for titles or liabilities against the Turning Centres.

– I-6 –

VALUATION REPORT OF THE EQUIPMENTS AND THE TURNING CENTERS

APPENDIX I

13. REMARKS

Our valuation is prepared in compliance with the International Valuation Standard 2013 published by International Valuation Standards Council.

Unless otherwise stated, all monetary amounts stated in our valuation are in Renminbi (“RMB”).

14. VALUATION

Our opinion of the market value of the Turning Centres, based on the aforesaid basis, assumptions and considerations, as at 30 November 2013 was RMB11,000,000 (RENMINBI ELEVEN MILLION ONLY).

Yours faithfully, For and on behalf of

Roma Appraisals Limited Dr. Alan W K Lee

BCom(Property) MFin PhD(BA) AAPI CPV CPV(Business) Associate Director

Note: Dr. Alan W K Lee is an Associate of Australian Property Institute. He has over 10 years’ valuation experience of plant and machinery in Hong Kong and the PRC.

– I-7 –

GENERAL INFORMATION

APPENDIX II

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. Directors’ and chief executive’s interests and short positions in Shares, underlying Shares and debentures

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives of the Company or their respective associates in the Shares, underlying Shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which 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 and short positions which were taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, to be notified to the Company and the Stock Exchange were as follows:

(i) Interest in the Company:

			Approximate
			percentage
		Number of	of
Name of Director	Nature of interest	Shares held	shareholding
Wu Ching (Note)	Interest of a controlled	404,762,592	50.60%
	corporation
Wong Kwai Mo	Interest of a controlled	404,762,592	50.60%
(Note)	corporation

Note: Each of Wu Ching and Wong Kwai Mo holds 50% of the issued share capital of Changfeng Axle Holdings Ltd. (“Changfeng BVI”).

(ii) Interest in associated corporation

			Percentage
	Nature of associated	Number of	of
Name of Director	corporation	shares held	shareholding
Wu Ching (Note)	Changfeng BVI	25,000	50%
Wong Kwai Mo (Note)	Changfeng BVI	25,000	50%

– II-1 –

APPENDIX II

GENERAL INFORMATION

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executives of the Company or their respective associates had any interests or short positions in the Shares, underlying Shares or debentures of the Company or its associated corporations (within Part XV of the SFO) which 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 and short positions which they were taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, to be notified to the Company and the Stock Exchange.

3. Interests and short positions of substantial Shareholders

Save as disclosed below, as at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, no other person or companies (other than the Directors or the chief executive of the Company) had an interest or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

Long position in the Shares

			Approximate
			percentage
Name of substantial		Interest in	of
Shareholders	Nature of interest	Shares	shareholding	Notes
Changfeng BVI	Beneficial owner	404,762,592	50.60%	1
Wu Ching	Interest of a controlled	404,762,592	50.60%	1
	corporation
Wong Kwai Mo	Interest of a controlled	404,762,592	50.60%	1
	corporation
Starr International	Interest of a controlled	114,801,600	14.35%	2
Foundation	corporation
Starr International AG	Interest of a controlled	114,801,600	14.35%	2
	corporation
Starr International	Interest of a controlled	114,801,600	14.35%	2
Company Inc. (“Starr	corporation
International”)
Starr International	Interest of a controlled	114,801,600	14.35%	2
Investments Ltd	corporation
Starr Insurance and	Interest of a controlled	114,801,600	14.35%	2
Reinsurance Ltd	corporation

– II-2 –

APPENDIX II

GENERAL INFORMATION

			Approximate
			percentage
Name of substantial		Interest in	of
Shareholders	Nature of interest	Shares	shareholding	Notes
Starr International	Interest of a controlled	114,801,600	14.35%	2
Cayman, Inc.	corporation
Starr Investments	Beneficial owner	114,801,600	14.35%	2
Cayman II, Inc.
(“Starr Investments”)

Notes:

Changfeng BVI is owned as to 50% by Wu Ching and as to 50% by Wong Kwai Mo. Both Wu Ching and Wong Kwai Mo are deemed to be interested in the Shares held by Changfeng BVI for the purpose of the SFO.
Starr Investments is wholly-owned by Starr International Cayman, Inc., which is in turn wholly-owned by Starr Insurance and Reinsurance Ltd.. Starr Insurance and Reinsurance Ltd. is a wholly-owned subsidiary of Starr International Investments Ltd., which is in turn wholly-owned by Starr International. Starr International is wholly-owned by Starr International AG, which is wholly-owned by Starr International Foundation, a charitable foundation established in Switzerland. Each of Starr International Foundation, Starr International AG, Starr International, Starr International Investments Ltd., Starr Insurance and Reinsurance Ltd. and Starr International Cayman, Inc. is deemed to be interested in the Shares held by Starr Investments for the purpose of the SFO.
Save as Wu Ching and Wong Kwai Mo being the directors of the Changfeng BVI and Dong Ying Dorothy being the director of Starr Investments Cayman II, Inc., none of the Directors is a director or employee of the companies or trust foundation disclosed in this paragraph.

4. Directors’ interests in contracts and assets

As at the Latest Practicable Date, save for the Renewed Purchase Agreement (as defined below) and the Renewed Supply Agreement (as defined below) as disclosed below, there is no contract or arrangement subsisting in which a Director is materially interested and significant in relation to the business of the Group.

(a) On 29 May 2010, the Company entered into a sale and purchase agreement (the “ Purchase Agreement ”) with Yongding Changfeng Machinery Manufacturing Factory (“ Yongding Changfeng ”), pursuant to which the Company agreed to purchase or procure its subsidiaries to purchase roughcast axle housing from Yongding Changfeng for the production of the products for a term of three years commencing from 1 January 2010 to 31 December 2012. Subsequently on 24 December 2012, the parties entered into a renewal agreement to renew the terms of the Purchase Agreement for a fixed term of another three years expiring on 31 December 2015 (“ Renewed Purchase Agreement ”). For the year ended 31 December 2012, the actual aggregate amount of transactions under the Purchase Agreement was approximately RMB18,800,000 and the annual cap amount granted by the Stock Exchange was RMB25,000,000.

– II-3 –

APPENDIX II

GENERAL INFORMATION

(b) On 29 May 2010, the Company entered into a supply agreement (the “ Supply Agreement ”) with Yongding Changfeng, pursuant to which the Company has agreed to supply or procure members of the Group to supply scrap steel which is steel waste created during the production of steel and expected to be disposed of or not required by the Group to Yongding Changfeng for a term of three years commencing from 1 January 2010 to 31 December 2012. Subsequently on 24 December 2012, the parties entered into a renewal agreement to renew the terms of the Supply Agreement for a fixed term of another three years expiring on 31 December 2015 (the “ Renewed Supply Agreement ”). For the year ended 31 December 2012, the actual aggregate amount of transactions under the Supply Agreement was approximately RMB4,600,000 and the annual cap amount granted by the Stock Exchange was RMB20,000,000.

Mr. Lu is a cousin of Mr. Wong Kwai Mo, an executive Director and one of the Controlling Shareholders (as defined in the Listing Rules). As Yongding Changfeng may be substantially influenced or controlled by Mr. Lu, who is the legal representative and the factory manager of Yongding Changfeng, and Mr. Wong Kwai Mo, who had held a prior position and role at Yongding Changfeng, Yongding Changfeng is therefore deemed as a connected person of the Company pursuant to Rules 14A.06 and 14A.11(4) of the Listing Rules. As such, transactions under the Renewed Purchase Agreement and the Renewed Supply Agreement constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

As at the Latest Practicable Date, none of the Directors or the expert whose name is referred to in the section headed “Experts’ qualifications and consents” in this appendix, has, directly or indirectly, any interest in any assets which have since 31 December 2012 (being the date to which the latest published audited accounts of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

5. Competing interest

As at the Latest Practicable Date, none of the Directors and their respective associates was interested in any business (apart from the Group’s business) which competes or is likely to compete, either directly or indirectly, with the Group’s businesses.

6. Litigation

As at the Latest Practicable Date, the Group was not engaged in any litigation, claim 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 member of the Group.

– II-4 –

GENERAL INFORMATION

APPENDIX II

7. Services contracts

Each of the executive Directors and the non-executive Director entered into a service agreement with the Company for a term of three years commencing from 24 September 2010, and renewed for another term of three years commencing from 24 September 2013; whereas each of the independent non-executive Directors entered into a letter of appointment with the Company and was appointed for a term of three years commencing from 24 September 2010 and renewed for another term of three years commencing from 24 September 2013.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors has any existing or proposed service contracts with any member of the Group which is not expiring or determinable by the Group within one year without payment of any compensation, other than statutory compensation.

8. Experts’ qualifications and consents

Each of United Simsen and Roma Appraisals Limited (“ Roma ”) has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and report dated 14 February 2014 and 14 February 2014 respectively and references to its name in the form and context in which it appears.

The following are the qualifications of the expert or professional adviser who have given their opinions and advice in this circular:

Name

Qualification

United Simsen

A licensed corporation to carry out type 1 (dealing in securities), type 2 (dealing in futures contracts), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities as defined under the SFO

Roma Property valuer

As at the Latest Practicable Date, United Simsen and Roma did not have any direct or indirect interest in any assets which had been acquired, disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group, since 31 December 2012, the date to which the latest audited financial statements of the Group was made up; and was not beneficially interested in the share capital of any member of the Group and did not have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

– II-5 –

GENERAL INFORMATION

APPENDIX II

9. Material adverse changes

As disclosed in the announcements of the Company dated 29 May 2013, 21 November 2013 and 22 November 2013, the Group may record a loss for the six months ended 31 December 2013 due to (i) the decrease in sales volume of the Group’s axle components due to the weak market of medium and heavy duty truck; (ii) the continuing pressure on the gross margins of the Group’s axle products under the continuous keen competition within the industry; (iii) the increase in research and development expenses; (iv) the potential impairment losses to be recognised in respect of property, plant and equipment and (v) the potential impairment losses to be recognised in respect of the Group’s trade receivables. As at the Latest Practicable Date, save as aforesaid, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2012, the date to which the latest published audited consolidated financial statements of the Group have been made up.

10. General

(a) None of the Directors had any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group or proposed to be so acquired, disposed of by or leased to any member of the Group since 31 December 2012, being the date to which the latest published audited accounts of the Company were made up, and up to the Latest Practicable Date.
(b) Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group, which was subsisting and was significant in relation to the business of the Group.
(c) The company secretary of the Company is Mr. Chan Wai Shing. Mr. Chan is a certified public accountant of the Hong Kong Institute of Certified Public Accountants and a fellow of the Association of Chartered Certified Accountants. Mr. Chan holds a bachelor’s degree in accountancy from City University of Hong Kong and a master’s degree in financial analysis from Hong Kong University of Science and Technology.
(d) The registered office of the Company is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
(e) The principal place of business of the Company in Hong Kong is Room 708, 7/F., Delta House, 3 On Yiu Street, Shatin, New Territories, Hong Kong.
(f) The branch share registrar of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited.
(g) The principal share registrars of the Company is Royal Bank of Canada Trust Company (Cayman) Limited.

– II-6 –

GENERAL INFORMATION

APPENDIX II

(h) The English texts of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts in the case of inconsistency.

11. Documents available for inspection

Copies of the following documents are available for inspection at the principal place of business of the Company at Room 708, 7/F., Delta House, 3 On Yiu Street, Shatin, New Territories, Hong Kong during normal business hours on any weekday other than public holidays, up to and including 6 March 2014:

(a) the Equity Transfer Agreement;
(b) the Debt Waiver Agreement;
(c) the letter of recommendation from the Independent Board Committee to the Independent Shareholders, the text of which is set out on pages 15 to 16 of this circular; and
(d) the letter from United Simsen, the text of which is set out on pages 17 to 29 of this circular;
(e) the written consent referred to in the paragraph headed “Expert’s qualification and consent” in this Appendix; and
(f) this circular.

– II-7 –

NOTICE OF EGM

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the “ EGM ”) of Changfeng Axle (China) Company Limited (the “ Company ”) will be held at Suites 903-905, 9th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong on 3 March 2014 at 2:00 p.m. for the purpose of considering and, if thought fit, passing the following resolutions:

ORDINARY RESOLUTIONS

1. “ THAT

(a) the equity transfer agreement dated 27 December 2013 (the “ Equity Transfer Agreement ”) entered into between Longyan Shengfeng and Lonking Machinery (as defined in the circular of the Company dated 14 February 2014 (the “ Circular ”)), a copy of which has been produced to the EGM and marked “A” and initialed by the chairman of the EGM for the purpose of identification, pursuant to which Longyan Shengfeng has conditionally agreed to acquire and Lonking Machinery has conditionally agreed to sell its 40% interest in the JV Company (as defined in the Circular) at a consideration of RMB30,000,000 (equivalent to HK$38,100,000), and all transactions contemplated thereunder, be and is hereby approved, confirmed and ratified;
(b) any one director of the Company be and is hereby authorised to do all such further acts and things and to sign and execute all such documents and to take all such steps which in his opinion may be necessary, appropriate, desirable or expedient to implement and/or give effects to the Equity Transfer Agreement and the transactions contemplated thereunder.”
“ THAT
(a) the debt waiver agreement dated 27 December 2013 (the “ Debt Waiver Agreement ”) entered into among the JV Company, Lonking Machinery and Fujian Changfeng (as defined in the Circular), a copy of which has been produced to the Meeting and marked “B” and initialed by the chairman of the Meeting for the purpose of identification, pursuant to which the JV Company has conditionally agreed to pay to Lonking Machinery and Lonking Machinery has conditionally agreed to accept a sum of RMB27,000,000 (equivalent to HK$34,290,000) in extinguishment of the Account Payable (as defined in the Circular) in respect of the Equipments

– EGM-1 –

NOTICE OF EGM

(as defined in the Circular), and Lonking Machinery has conditionally agreed to acquire and the JV Company has conditionally agreed to sell the Turning Centers (as defined in the Circular) at a consideration of RMB12,000,000 (equivalent to HK$15,240,000), and all transactions contemplated thereunder, be and is hereby approved, confirmed and ratified; and

(b) any one director of the Company be and is hereby authorised to do all such further acts and things and to sign and execute all such documents and to take all such steps which in his opinion may be necessary, appropriate, desirable or expedient to implement and/or give effects to the Debt Waiver Agreement and the transactions contemplated thereunder.”

By Order of the Board Changfeng Axle (China) Limited Mr. Wong Kwai Mo Chairman

Hong Kong, 14 February 2014

Notes:

(1) Any member of the Company entitled to attend and vote at the above meeting by the above notice is entitled to appoint one or more proxies to attend and, on a poll, vote instead of him/her. A proxy need not be a member of the Company.
(2) Where there are joint holders of any Share, any one of such joint holder may vote, either in person or by proxy, in respect of such Share as if he were solely entitled thereto, but if more than one of such joint holders be present at the EGM, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.
(3) In order to be valid, a form of proxy together with the power of attorney (if any) or other authority (if any) under which it is signed or a certified copy thereof shall be deposited at the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof. The proxy form will be published on the website of the Stock Exchange.
(4) The register of members of the Company will be closed from Thursday, 27 February 2014 to Monday, 3 March 2014 (both day inclusive) during which period no transfer of Shares will be registered. The record date for determining eligibility to attend and vote at the EGM will be 3 March 2014. In order to qualify for the entitlement to attend and vote at the EGM, all transfers accompanied by the relevant share certificates must be lodged with the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration not later than 4:30 p.m. on 26 February 2014.

As at the date of this notice, the executive directors of the Company are Mr. Wong Kwai Mo, Ms. Wu Ching and Mr. Lai Fengcai; the non-executive director of the Company is Ms. Dong Ying, Dorothy; and the independent non-executive directors of the Company are Mr. Zhu Weizhou, Dr. Li Xiuqing and Mr. Chong Ching Hei.

Website: http://www.changfengaxle.com.hk

– EGM-2 –

AI assistant

Changyou International Group Limited — Proxy Solicitation & Information Statement 2014

49641_rns_2014-02-14_d66c6928-5c09-4be5-af7f-4f2ae009defe.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

DISCLOSEABLE AND CONNECTED TRANSACTIONS

United Simsen Securities Limited

CONTENT

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

(Stock Code: 1039)

DISCLOSEABLE AND CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

THE EQUITY TRANSFER AGREEMENT

Date

Parties

Subject matter

Consideration

Condition

Completion

THE DEBT WAIVER AGREEMENT

Date

Parties

LETTER FROM THE BOARD

Subject Matter

Consideration

Condition

Completion

Financial Effect on the Group

REASONS FOR AND BENEFITS OF THE TRANSACTIONS UNDER THE EQUITY TRANSFER AGREEMENT AND THE DEBT WAIVER AGREEMENT

INFORMATION ON THE JV COMPANY

INFORMATION ON LONGYAN SHENGFENG

INFORMATION ON LONKING MACHINERY

LISTING RULES IMPLICATIONS

APPROVAL BY THE BOARD

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

GENERAL

EGM

RECOMMENDATIONS

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

CHANGFENG AXLE (CHINA) COMPANY LIMITED 暢豐車橋（中國）有限公司

DISCLOSEABLE AND CONNECTED TRANSACTIONS

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

DISCLOSEABLE AND CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM UNITED SIMSEN

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

Business overview of the Group

LETTER FROM UNITED SIMSEN

Information on the JV Company

Reasons for and possible benefits of the Equity Transfer Agreement and the Debt Waiver Agreement

2. Principal terms of the Equity Transfer Agreement

The JV Company Consideration

Trading multiples analysis

LETTER FROM UNITED SIMSEN

3. Principal terms of the Debt Waiver Agreement

The AP Consideration and the Turning Centers Consideration

The Valuation

4. Possible financial effects of the Equity Transfer Agreement and the Debt Waiver Agreement

Effect on net asset value and earnings

Effect on working capital and gearing

RECOMMENDATION

14 February 2014

Changfeng Axle (China) Company Limited

Dear Sir/Madam,

(A) VALUATION OF EQUIPMENTS

1. BASIS OF VALUATION

2. VALUATION METHODOLOGIES

2.1 The Cost Approach

2.2 The Sales Comparison Approach

2.3 Conclusion

3. LOCATION

4. THE EQUIPMENTS

5. VALUATION CONSIDERATION AND ASSUMPTION

6. REMARKS

Changyou International Group Limited Proxy Solicitation & Information Statement 2014