Changyou International Group Limited - Proxy Solicitation & Information Statement 2018

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 stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Fortunet e-Commerce Group Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchasers or the transferees or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchasers or the transferees.

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.

==> picture [179 x 57] intentionally omitted <==

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

(1) CONNECTED TRANSACTION IN RELATION TO THE ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE AND

(2) NOTICE OF EXTRAORDINARY GENERAL MEETING

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

Capitalised terms used in this cover page shall have the same meanings as those defined in this circular.

A letter from the Board is set out on pages 5 to 26 of this circular and a letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 27 to 28 of this circular. A letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 29 to 60 of this circular.

A notice convening the EGM to be held at 10:30 a.m. on Tuesday, 31 July 2018 at Room 1001-1009, 10/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong is set out on pages EGM-1 to EGM-2 of this circular. A proxy form for use by the shareholders of the Company 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 proxy form 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 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, 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 adjournment 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, and in such event, the instrument appointing a proxy shall be deemed to be revoked.

5 July 2018

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Letter from the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .EGM-1

– i –

DEFINITIONS

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

“associate(s)”
has the meaning ascribed to it under the Listing Rules
“Announcement”
the announcement of the Company dated 26 March 2018 in respect of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder
“Board” the board of Directors
“Business Day(s)”
a day on which commercial banks in Hong Kong are generally open for business, other than Saturday and Sunday or a public holiday or a day on which commercial banks do not open for business owing to a tropical cyclone warning signal number 8 or above or a black rainstorm warning signal being in force in Hong Kong at any time between 9:30 a.m. and 5:30 p.m.
“CIH”
Century Investment (Holding) Limited, a company incorporated in the British Virgin Islands with limited liability, being the controlling shareholder of the Company
“CIH Group” CIH and its subsidiaries
“Closing”
the consummation of the issue of the Warrants by the Company to CIH pursuant to the Warrant Subscription Agreement
“Company”
Fortunet e-Commerce Group Limited（鑫網易商集團有限公司）, a company incorporated in the Cayman Islands, the shares of which are listed on the Main Board of the Stock Exchange (stock code: 1039)
“connected person(s)” has the meaning ascribed to it under the Listing Rules “controlling shareholder” has the meaning ascribed to it under the Listing Rules
“Director(s)”
director(s) of the Company

– 1 –

DEFINITIONS

“EGM” an extraordinary general meeting of the Company to be convened and held at 10:30 a.m. on Tuesday, 31 July 2018 to consider, and if thought fit, approve (i) the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder; and (ii) the grant of the Specific Mandate to the Board
“Exercise Period” the period commencing on the date that is six (6) months after the date of the issue of the Warrants and ending at 5:00 p.m. (Hong Kong time) on the Termination Date
“Group” the Company and its subsidiaries
“HK$” Hong Kong dollar, the lawful currency of Hong Kong
“Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China
“Independent Board Committee” the independent committee of the Board, comprising all the independent non-executive Directors, namely Mr. Wong Chi Keung, Mr. Liu Jialin and Mr. Chan Chi Keung Alan, established to advise the Independent Shareholders as to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder
“Independent Financial Adviser” Amasse Capital Limited, a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, being the independent financial adviser appointed by the Company to provide advice to the Independent Board Committee and the Independent Shareholders in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder
“Independent Shareholders”
Shareholders other than CIH and its associates
“Latest Practicable Date”
27 June 2018, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained therein
“Listing Rules”

the Rules Governing the Listing of Securities on the Stock Exchange

– 2 –

DEFINITIONS

“Market Price” the average closing price per Share as quoted on the Stock Exchange for the five (5) consecutive trading days ending on the last trading day preceding the day on or as of which the Market Price is to be ascertained
“PRC” the People’s Republic of China, and for the purposes of this circular, excluding Hong Kong, the Macau Special Administrative Region of the People’s Republic of China and Taiwan
“RMB” Renminbi, the lawful currency of the PRC “SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share Option Scheme” means the share option scheme adopted by the Company on 28 June 2010
“Share(s)” the ordinary share(s) of a par value of US$0.01 each in the share capital of the Company, and if there is a subdivision, consolidation or reclassification of those Shares, the Shares resulting from it
“Shareholder(s)” the holder(s) of the Shares “Specific Mandate” the specific mandate to be sought from the Shareholders at the EGM to allot and issue the Warrant Shares issuable by the Company upon the full exercise of the Subscription Rights
“Stock Exchange” The Stock Exchange of Hong Kong Limited “Strike Price” the price payable per Warrant Share upon the exercise of the Subscription Rights (subject to adjustment pursuant to the Warrant Instrument)
“Subscription Price” HK$0.01 per Warrant payable by CIH to the Company in relation to the subscription of the Warrants pursuant to the Warrant Subscription Agreement
“Subscription Rights” the subscription rights attached to each Warrant to subscribe for one Warrant Share (subject to adjustment pursuant to the Warrant Instrument)
“subsidiary” a company which is, for the time being and from time to time, a subsidiary of the Company within the meaning of section 15 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong)

– 3 –

DEFINITIONS

“substantial shareholder”	has the meaning ascribed to it under the Listing Rules
“Takeovers Code”	The Codes on Takeovers and Mergers and Share
	Buy-backs in Hong Kong from time to time
“Termination Date”	the earliest of (i) the date on which all Subscription
	Rights have been exercised in full; and (ii) the date
	that is the fifth anniversary date of the issue date of
	such Warrants
“US$”	United States dollar(s), the lawful currency of the
	United States of America
“Warrant(s)”	warrant(s) to be issued by the Company to CIH, which
	attaches the Subscription Rights
“Warrant Instrument”	the instrument constituting the Warrants
“Warrant Share(s)”	Share(s) to be allotted and issued by the Company to
	CIH pursuant to the Subscription Rights
“Warrant Subscription	the warrant subscription agreement dated 26 March
Agreement”	2018 and entered into between the Company and CIH
	in relation to the issue and subscription of the Warrants
“%”	per cent.

For illustration purposes, amounts in RMB in this circular have been translated into HK$ at RMB1.00 = HK$1.1858.

– 4 –

LETTER FROM THE BOARD

==> picture [179 x 57] intentionally omitted <==

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

Executive Directors:

Mr. Cheng Jerome (Chairman) Mr. Yuan Weitao

Non-executive Director:

Mrs. Guo Yan

Registered Office: Royal Bank House 3rd Floor 24 Shedden Road P.O. Box 1586 Grand Cayman, KY1-1110 Cayman Islands

Independent non-executive Directors:

Mr. Wong Chi Keung Mr. Liu Jialin Mr. Chan Chi Keung Alan

Principal place of business in Hong Kong: Room 1001-1009 10/F, Sun Hung Kai Centre 30 Harbour Road Wan Chai Hong Kong

5 July 2018

To the Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION IN RELATION TO THE ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE

INTRODUCTION

Reference is made to the Announcement in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

The Board is pleased to announce that on 26 March 2018 (after trading hours), the Company (as the issuer) and CIH (as the subscriber) entered into the Warrant Subscription Agreement, pursuant to which the Company conditionally agreed to issue, and CIH conditionally agreed to subscribe for, 298,000,000 Warrants at the Subscription Price.

– 5 –

LETTER FROM THE BOARD

The purpose of this circular is to provide you with, among other things, (i) further information on the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder; (ii) a letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder; (iii) a letter of recommendation from the Independent Board Committee to the Independent Shareholders in respect of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder; (iv) a notice convening the EGM; and (v) other information required under the Listing Rules.

WARRANT SUBSCRIPTION AGREEMENT

Date

26 March 2018 (after trading hours)

Parties

(a) the Company as the issuer; and
(b) CIH as the subscriber.

Information on the Warrants

Pursuant to the Warrant Subscription Agreement, the Company has conditionally agreed to issue, and CIH has conditionally agreed to subscribe for, 298,000,000 Warrants at the Subscription Price. Each Warrant carries the right to subscribe for one Warrant Share at the Strike Price (subject to adjustment pursuant to the Warrant Instrument), exercisable in full or in part at any time during the Exercise Period.

As at the Latest Practicable Date, the Company had a total of 1,813,509,272 Shares in issue. Upon the full exercise of the Subscription Rights and assuming no adjustment pursuant to the Warrant Instrument, a total of 298,000,000 Warrant Shares of par value of US$0.01 each will be allotted and issued by the Company to CIH, representing (i) approximately 16.43% of the existing issued share capital of the Company as at the Latest Practicable Date; and (ii) assuming there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of the full exercise of the Subscription Rights, approximately 14.11% of the issued share capital of the Company as enlarged by the issue of the Warrant Shares.

Subscription Price

The total consideration for the issue and subscription of the Warrants is HK$2,980,000, representing the Subscription Price of HK$0.01 per Warrant payable by CIH in cash upon Closing.

– 6 –

LETTER FROM THE BOARD

The Subscription Price was determined after arm’s length negotiations between the Company and CIH after taking into account (i) the prevailing market prices of the Shares; and (ii) that the Subscription Price together with the Strike Price is at a premium to the market price of the Shares.

Colliers International (Hong Kong) Limited (“ Independent Valuer ”), a valuation firm which is an independent third party, has been engaged by the Company to assess the fair value of the Warrants by making reference to the Binomial Lattice Model (“ BLM ”). Based on the BLM, the Independent Valuer concluded that, among others, the unit Warrant value was approximately HK$0.3354 (“ Fair Value ”) as at 26 March 2018, being the date of the Warrant Subscription Agreement, which implied that the Subscription Price has a discount of approximately 97% to the Fair Value (“ Discount ”). However, the BLM and the assessment of the Fair Value is subject to a number of key assumptions and parameters, including but not limited to the following:

Assumptions

As advised by the Independent Valuer, the major assumptions in the BLM and the assessment of the Fair Value are as follows:

the risk-free rate is equal to the yield of 5-year Hong Kong Exchange Fund Notes issued by the Hong Kong Monetary Authority on or around 26 March 2018;
the volatility measured at the standard deviation of expected share price returns was determined with reference to the average weekly volatility of the comparable companies (“ Comparable Companies ”) engaged in similar e-commerce business as the Company over the five consecutive years preceding 26 March 2018;
in the financial year ended 31 December 2016 and 2017, respectively, approximately 78% and 80% of the revenue of the Company, respectively, was attributable to the Group’s e-commerce business, while around 75% of the revenue of the Company was attributable to the Group’s axle and train business in 2015. After considering that the historical 5-year volatility of the Company mainly reflected the Group’s axle and train business, which was disposed of in April 2017, companies engaging in e-commerce business are assumed to be a better reference and comparison in determining the expected 5-year volatility of the Company;
there is no material difference between the expected volatility over the whole life of the Warrants and the historical volatility of the Comparable Companies;
the risk-free rate, dividend yield and volatility will be kept constant throughout the valuation period; and
the number of trading weeks per year is 52 weeks.

– 7 –

LETTER FROM THE BOARD

Parameters

the closing price of HK$1.08 per Share as quoted on the Stock Exchange on 26 March 2018, being the date of the Warrant Subscription Agreement;
the Strike Price of HK$1.38;
a vesting period of 0.5 years;
a risk free rate of 1.84%;
the term of the Warrants is 5 years;
an expected volatility of 43.15%;
an expected dividend yield of 0%; and
an expected exercise multiple of 2.47x of the exercise price.

As advised by the Independent Valuer, save for item 3 of the assumptions and items 1, 2, 3 and 5 of the parameters, the above assumptions and parameters (which are theoretical and may not be observable in real practice) may not hold in real practice and should be used as a reference only. While the Independent Valuer has exercised its professional knowledge in adopting the above assumptions and other relevant key factors in the valuation, such factors and assumptions are still vulnerable to the change of the business, economic environment, competitive uncertainties or any other abrupt alternations of external factors. If any of the key assumptions or parameters are changed, the Fair Value may differ significantly from the actual value of the Warrants.

Notwithstanding that the Subscription Price represents a significant discount to the Fair Value as assessed by the Independent Valuer, the Board considers that the Subscription Price is fair and reasonable since (i) the BLM as a pricing model is for reference only; (ii) the Warrants are non-transferable; (iii) the issue of the Warrants to CIH is more favourable to the Company when compared to the grant of share options under the Share Option Scheme (please refer to the section headed “Reasons for the issue of Warrants and use of proceeds” in this circular for further details); (iv) CIH will continue to contribute its efforts to the financial performance and fundamentals of the Group in order to maximise the potential economic benefits from its subscription of Warrants; and (v) the Share prices will potentially and positively be enhanced by the improved performance of the Group. As such, the Board (including the members of the Independent Board Committee having considered the advice from the Independent Financial Adviser) considers that the Discount is appropriate, and that the Subscription Price is fair and reasonable and is in the interest of the Company and the Shareholders as a whole.

Please also refer to the letter from the Independent Financial Adviser for the assessment of fairness and reasonableness of the Subscription Price set out on pages 29 to 60 of this circular for details.

– 8 –

LETTER FROM THE BOARD

Strike Price

The Strike Price is HK$1.38 per Warrant Share (subject to adjustment pursuant to the Warrant Instrument), which represents:

(a) a premium of approximately 27.78% over the closing price of HK$1.08 per Share as quoted on the Stock Exchange on 26 March 2018, being the date of the Warrant Subscription Agreement;
(b) a premium of approximately 25.45% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including 26 March 2018, being the date of the Warrant Subscription Agreement;
(c) a premium of approximately 25.45% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last ten (10) consecutive trading days up to and including 26 March 2018, being the date of the Warrant Subscription Agreement;
(d) a premium of approximately 51.65% over the closing price of HK$0.91 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(e) a premium of approximately 434.88% over the net asset value of approximately HK$0.258 per Share as at 31 December 2017 (based on the net assets attributable to equity shareholders of the Company as at 31 December 2017 of approximately RMB394,140,000 (equivalent to approximately HK$467,371,000 and 1,813,509,272 issued Shares as at the Latest Practicable Date).

The aggregate of the Subscription Price and the Strike Price, being HK$1.39 per Warrant Share, represents:

(a) a premium of approximately 28.70% over the closing price of HK$1.08 per Share as quoted on the Stock Exchange on 26 March 2018, being the date of the Warrant Subscription Agreement;
(b) a premium of approximately 26.36% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including 26 March 2018, being the date of the Warrant Subscription Agreement;
(c) a premium of approximately 26.36% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last ten (10) consecutive trading days up to and including 26 March 2018, being the date of the Warrant Subscription Agreement;
(d) a premium of approximately 52.75% over the average closing price of HK$0.91 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and

– 9 –

LETTER FROM THE BOARD

(e) a premium of approximately 438.76% over the net asset value of approximately HK$0.258 per Share as at 31 December 2017 (based on the net assets attributable to equity shareholders of the Company as at 31 December 2017 of approximately RMB394,140,000 (equivalent to approximately HK$467,371,000 and 1,813,509,272 issued Shares as at the Latest Practicable Date).

The Strike Price was determined after arm’s length negotiations between the Company and CIH after taking into account (i) the prevailing market prices of the Shares; and (ii) that the Subscription Price together with the Strike Price is at a premium to the market price of the Shares as disclosed above. The Subscription Price together with the Strike Price is also at a huge premium to the net asset value per Share as at 31 December 2017 as disclosed above. The Board (including the members of the Independent Board Committee having considered the advice from the Independent Financial Adviser) considers that the Strike Price is fair and reasonable and is in the interest of the Company and the Shareholders as a whole.

The net price per Warrant Share is approximately HK$1.38, calculated by dividing the estimated aggregate net proceeds from the issue and subscription of the Warrants in full at the Subscription Price and upon the full exercise of the Subscription Rights at the Strike Price by the number of Warrants.

Other principal terms of the Warrants

Other principal terms of the Warrants are as follows:

Exercise Period : The Warrants may be exercised in full or in part at any time between the period commencing on the date that is six (6) months after the date of the issue of the Warrants and ending at 5:00 p.m. (Hong Kong time) on the Termination Date. Conditions on the : The Warrants are exercisable in full or in part at any exercise of the time during the Exercise Period, if and only if, Subscription Rights taking into account the issued share capital of the Company as enlarged by the issue of the Warrant Shares, there will be a sufficient public float of the Shares as required under the Listing Rules, and:

(a) any exercise by CIH does not trigger a mandatory general offer under the Takeovers Code; or

– 10 –

LETTER FROM THE BOARD

(b) the Securities and Futures Commission has granted a waiver pursuant to the Takeovers Code from the obligation of CIH to make a mandatory general offer to the Shareholders to acquire all the Shares not already owned or agreed to be acquired by it pursuant to the Takeovers Code as a result of the issue of the Warrant Shares, and all conditions attached to such waiver are satisfied; or (c) upon any exercise by CIH which triggers a mandatory general offer under the Takeovers Code, CIH has sufficient financial resources to make a mandatory general offer pursuant to the Takeovers Code. Adjustment to the : The number of Warrant Shares shall not be altered number of Warrant under the Warrants, save for when there is a Shares and Strike consolidation or subdivision of Shares resulting in a Price different nominal amount. The Strike Price shall be adjusted as set out in the Warrant Instrument if and whenever:

(a) the Shares, by reason of any consolidation or subdivision, become of a different nominal amount;
(b) the Company issues any Shares credited as fully paid by way of capitalisation of profits or reserves;
(c) the Company makes any distributions in specie to Shareholders (whether on a reduction of capital or otherwise) or grants to Shareholders rights to acquire for cash assets of the Company or any of its subsidiaries;
(d) the Company offers to Shareholders new Shares for subscription by way of rights, or grants to Shareholders any rights to subscribe for new Shares, at a price per new Share which is less than 80% of the Market Price at the date of the announcement of the terms of the offer or grant;

– 11 –

LETTER FROM THE BOARD

(e) the Company or any other company issues wholly for cash any securities which by their terms are convertible into or exchangeable for or carry rights to acquire or subscribe for new Shares and the total effective consideration per new Share initially receivable for such securities is less than 80% of the Market Price at the date of the announcement of the terms of issue of such securities;
(f) the Company issues wholly for cash any new Shares (other than pursuant to a rights issue or an open offer) at a price per Share which is less than 80% of the Market Price at the date of the announcement of the terms of such issue;
(g) the Company purchases any Shares or securities convertible into Shares or any rights to acquire Shares (other than on the Stock Exchange or any other stock exchange recognised for such purpose) and the Directors cancel such Shares, securities convertible into Shares or rights to acquire Shares;
(h) the Company issues any Shares for the acquisition of any asset at a total effective consideration per new Share which is less than 80% of the Market Price at the date of the announcement of the terms of such issue.

Every adjustment to the Strike Price shall be certified by an independent reputable investment bank or a qualified independent public accountant firm of international repute.

Ranking : The Warrants will be constituted by the Warrant Instrument and will rank pari passu among themselves.

The Warrant Shares, when allotted and issued to CIH upon the exercise of the Subscription Rights, will be fully paid and will rank pari passu among themselves and with all other Shares at the date of issue.

Specific Mandate : The Warrant Shares will be issued under the Specific Mandate to be sought at the EGM.

– 12 –

LETTER FROM THE BOARD

Listing

: No listing of the Warrants will be sought on the Stock Exchange or any other stock exchanges. Application will be made to the Stock Exchange for the listing of, and permission to deal in, the Warrant Shares to be allotted and issued upon the exercise of the Subscription Rights.
Transferability : The Warrants are non-transferrable. Voting rights of the : CIH will not be entitled to attend or vote at any Warrants general meetings of the Company, to any dividend or other distribution of the Company or to participate in any offer of securities by reason only of it being a holder of the Warrants.
Rights on liquidation : If the Company is wound up before the Termination Date, all Subscription Rights which have not been exercised prior to the commencement of the winding-up shall lapse and the Warrants will cease to be valid for the purpose of exercising any Subscription Right.

Conditions precedent

The Closing of the Warrant Subscription Agreement and the transactions contemplated thereunder is subject to the fulfilment or waiver (as the case may be) of certain conditions precedent, which include, among other conditions:

(a) all requirements, if any, in addition to such approvals as set out in conditions (e), (f) (g) and (h) below, imposed by the Stock Exchange in connection with the contemplated transactions under the Warrant Subscription Agreement, the Warrant Instrument and the certificate representing the Warrants, having been complied with in full;
(b) the representations and warranties of the Company and CIH, respectively, shall be true, correct, accurate, complete and not misleading as at the date of Closing;
(c) the Company having obtained a copy of any and all approvals or other document, opinion or assurance which are necessary for consummation of the transactions contemplated by the Warrant Subscription Agreement, the Warrant Instrument and the certificate representing the Warrants, on or prior to Closing that are required to be obtained on or prior to Closing;
(d) there shall not, since the date of the Warrant Subscription Agreement, have been any adverse change to the condition (financial or otherwise), results of operations, assets, regulatory status, business and prospects of the Company or the Group taken as a whole or the financial markets or economic conditions in general that has had a material adverse effect;

– 13 –

LETTER FROM THE BOARD

(e) the Shareholders having granted the Specific Mandate to the Board for the allotment and issuance of Warrant Shares at the EGM and such Specific Mandate remains valid, fully effective and has not been revoked;
(f) the resolutions of the Independent Shareholders approving the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, and the allotment and issue of all Warrant Shares issuable by the Company upon full exercise of the Subscription Rights having been passed at the EGM, and such resolutions have not been subsequently amended or revoked;
(g) the Company having obtained the approval of the Stock Exchange for the listing of, and permission to deal in, Warrant Shares (either unconditionally or subject only to the conditions to which neither the Company nor CIH may reasonably object); and
(h) if required, the Company having obtained the approval of the Stock Exchange for the issue of the Warrants (either unconditionally or subject only to the conditions to which neither the Company nor CIH may reasonably object) and such approval is not subsequently revoked or withdrawn prior to Closing.

If the conditions under the Warrant Subscription Agreement (including the above conditions) that are required to be fulfilled prior to Closing are not fulfilled or, in the case of conditions (b), (c) and (d) above and such other conditions as permitted under the Warrant Subscription Agreement, waived (as the case may be) in accordance with the Warrant Subscription Agreement on or before 30 June 2018 (or such other date as may be agreed between the Company and CIH) (the “ Closing Long Stop Date ”), the Company and CIH may (i) defer Closing to a later date; (ii) proceed to Closing so far as practicable or subject to such conditions as the Company and CIH may determine, subject to the terms of the Warrant Subscription Agreement; or (iii) terminate the Warrant Subscription Agreement, whereupon the Company and CIH shall be released from all liabilities and obligations under the Warrant Subscription Agreement, save for such liabilities arising from any breach prior to such termination.

On 27 June 2018, the Company and CIH agreed to extend the Closing Long Stop Date to 30 September 2018. Save as disclosed above, the Warrant Subscription Agreement remains unchanged and remains valid, binding and in full force and effect in all respects.

Closing

Closing shall take place on the third Business Day after the date that all conditions precedent in the Warrant Subscription Agreement, including those referred to in the above section headed “Warrant Subscription Agreement – Conditions precedent” in this circular, have been fulfilled or, in the case of conditions (b), (c) and (d) above and such other conditions as permitted under the Warrant Subscription Agreement, waived (as the case may be) or such other date as agreed to by the Company and CIH.

– 14 –

LETTER FROM THE BOARD

INFORMATION ON CIH

CIH is an investment holding company incorporated in the British Virgin Islands with limited liability. The CIH Group is principally engaged in the telecommunication and media industry and has participated in a number of telecommunication and information technology projects in the past. Such projects included network design and integration, planning and operations of several telecommunication and information technology platforms.

INFORMATION ON THE COMPANY AND THE GROUP

The Company is an investment holding company incorporated in the Cayman Islands with limited liability. The Group is engaged in e-commerce business through cross-border electronic distribution platforms and mobile applications sourcing, importing and channeling authentic goods from suppliers abroad and then distributing and reselling such goods to domestic retailers in the PRC, and other general trading business. However, although the e-commerce business segment generates revenue for the Group, the segment has been reporting a gross loss for at least the past three financial years, as disclosed in the annual reports of the Company for the years ended 31 December 2015, 2016 and 2017, respectively. The e-commerce industry has become increasingly competitive in recent years, resulting in a negative profit margin for the Group due to strong competitors who dominate the market in the e-commerce industry. In light of the above, the Group has decided to seek other business opportunities and different business models with potential growth. The Group has begun to scale down the e-commerce business segment since the first quarter of 2017, and it is expected that the segment will cease operations by 30 June 2018 in order to focus its resources on the development of the “Changyou” platform. However, the Group will continue to maintain the electronic distribution platform, www.ccigmall.com, of the e-commerce business segment and will explore future business prospects if and when suitable opportunities arise. In addition to the electronic distribution platform, the operational office, electronic hardware and technical infrastructure used for the e-commerce business segment, such as computer units, servers data storage and other hardware devices, are also suitable and appropriate for “Changyou”, an electronic trading platform developed by the Group, and as such will be integrated and utilised for the “Changyou” business. Further, there were a total of 12 staff engaged in the e-commerce business segment as at 31 December 2017. The Group intends to arrange for the internal transfer of such staff to the “Changyou” business as their expertise and experience are transferable to the “Changyou” business, or alternatively not renew such employment contracts at the end of the relevant terms of employment, subject to discussion with the staff members.

The Group has developed the “Changyou” platform together with other well-known and leading enterprises from various industries and has formed the “Changyou” Digital Point Business Ecosystem Alliance (the “ Changyou Alliance ”). The “Changyou” platform aims to integrate the digital membership points, resources and strategic advantages of business partners in the Changyou Alliance. The digital membership points from the various partnership entities and industries are interchangeable and redeemable globally as ‘virtual assets’ through the “Changyou” platform, and can be earned and used by customers for the purchase and consumption of merchandise (such as home appliances, electronic goods, food and beverages, cosmetic and health products, maternity and children’s products, auto accessories, sportswear and equipment, mobile phones, cinema tickets and entertainment,

– 15 –

LETTER FROM THE BOARD

electronic gift card and coupons, and others), games and entertainment, financial services and other commercial transactions. “Changyou” users can use digital points, cash, or a combination of both, to purchase goods and services offered on the “Changyou” platform, or to participate in games, rewards and other entertainment services. The “Changyou” platform also allows certain business partners to sell its products through the “Changyou” platform in return for an agency fee or commission payable to the Group. The Group will earn revenue of the sales of merchandise goods or relevant services, and such digital points may be redeemed from the relevant business partner or supplier in return for a cash amount which corresponds to the value of the digital points. Users may choose to purchase digital points from the “Changyou” platform as well. In 2018, the Group plans to bring in new partners into the Changyou Alliance in order to expand the source and variety of digital membership points which can be interchanged and redeemed through the “Changyou” platform and to offer more diversified products and services to its users. The Company also aims to develop and feature new financial technologies such as blockchain in the “Changyou” business, which enables effective extraction and development of big data samples, creating a precise and extensive database of consumer transactions. This will further enhance the Group’s understanding of consumption behaviour in order to satisfy the enhanced consumption needs of the users.

REASONS FOR THE ISSUE OF WARRANTS AND USE OF PROCEEDS

The “Changyou” platform was jointly developed by the Group together with other well-known and leading enterprises from various industries and has formed the Changyou Alliance. Such collaboration was initiated by and is attributable to, among other things, the efforts and contributions of the CIH Group in relation to the development of the “Changyou” business, including but not limited to introducing potential investors, business networks and business partners to the Group, and liaising with the working committee of the Company in relation to the development of the “Changyou” business, and coordinating the discussions and negotiations with such potential investors and business partners throughout 2016 to 2017 in relation to the establishment of the joint venture companies which form the Changyou Alliance, including the following transactions:

(a) the issue and subscription of shares in Treasure Ease Holdings Limited (“ Treasure Ease ”) by the Company and Chance Talent Management Limited (“ Chance Talent ”), an indirect wholly-owned subsidiary of CCB International (Holding) Limited, in June 2016 and January 2017, respectively;
(b) the issue and subscription of shares in Pointsea Holdings Company Limited (“ Pointsea Holdings ”) by Treasure Ease and Easylink Payment Network (Hong Kong) Company Limited (“ Easylink ”), an indirect wholly-owned subsidiary of China UnionPay Merchant Services Company Limited, in September 2016; and
(c) the issue and subscription of shares in Pointsea Company Limited (“ Pointsea ”) by Extra Step Investments Limited (“ Extra Step ”), a wholly-owned subsidiary of China Mobile (Hong Kong) Group Limited, Joy Empire Holdings Ltd. (“ Joy Empire ”), a wholly-owned subsidiary of Bank of China Group Investment Limited, in January 2017, and the further issue and subscription of shares in

– 16 –

LETTER FROM THE BOARD

Pointsea by China Eastern Airlines E-Commerce Co., Ltd（東方航空電子商務有限公司） (“ Eastern E-Commerce ”), a wholly-owned subsidiary of China Eastern Airlines Corporation Limited, in June 2017.

As set out above, each of Chance Talent, Easylink, Extra Step, Joy Empire and Eastern E-Commerce was introduced to the Group by CIH and became the initial investors/business partners of the Changyou Alliance. Please refer to the announcements of the Company dated 22 June 2016, 25 July 2016, 30 August 2016, 13 September 2016, 29 November 2016, 7 December 2016 and 30 June 2017 and the annual report of the Company for the year ended 31 December 2017 for further details.

The CIH Group has also provided continued support, assistance and advice as the Group’s business consultant, such as advising on the methods of integration of digital membership points of business partners into the “Changyou” platform and general operational strategies in relation to the business model. It is also expected that the Group will benefit from the assistance and advice from the CIH Group in the future given its experience and expertise in the planning, design and operational management of several telecommunication and information technology platforms in the past and its knowledge of the telecommunications, multimedia and other industries, such as advising on the operational management of the “Changyou” business and advising on implementing and integrating blockchain and other financial technology applications relevant to the “Changyou” business.

The “Changyou” platform was launched in September 2017, and within a few months of operations, the number of registered users of the “Changyou” platform has substantially increased from approximately 10 million as at 31 December 2017 to approximately 19 million as at the Latest Practicable Date. The significant increase has been due to the calibre of the business partners of the Changyou Alliance who were introduced by CIH, which will expand the variety of membership points on the “Changyou” platform and help attract further potential business partners in the future, and also the continued efforts of the Group in retaining existing users and attracting new users through promotions and enhancing the variety of products and services on the “Changyou” platform. The “Changyou” platform is in its early stages of development. Since its launch in September 2017, revenue from the “Changyou” business amounted to approximately RMB0.94 million for the period since its launch in September 2017 to 31 December 2017, and approximately RMB7 million for the four months ended 30 April 2018. The Group will continue to implement its expansion plans for the future growth of the “Changyou” business.

In view of the operational performance of the “Changyou” platform in the past few months, the Group expects to integrate the resources and strategic advantages of additional potential business partners who are also leaders in their industries (including the petrochemical, travel, hospitality and entertainment industries) into the Changyou Alliance. Since early 2018 and as at the Latest Practicable Date, the Group (with the assistance of the CIH Group) was in negotiations with three potential business partners (being state-owned enterprises and industry leaders in the petrochemical, travel and insurance industries, respectively) introduced by CIH to the Group in relation to the operational and technical integration aspects and other collaboration details with respect to the “Changyou” business. It is currently expected that such collaboration arrangements will be finalised by the end of 2018, with a view to further enhancing and expanding the scope of the “Changyou” platform

– 17 –

LETTER FROM THE BOARD

across other industries. The Company will issue further announcement(s) in relation to the status of such negotiations and related information as and when appropriate in accordance with the Listing Rules.

The Changyou Alliance business is a capital intensive sector, as a large amount of capital is required (i) to attract and retain talented and experienced personnel and management team for the development of the “Changyou” platform; (ii) for promotional and marketing activities to attract and maintain customer loyalty and their participation and consumption of the products and services provided on the “Changyou” platform; and (iii) to develop its technology infrastructure and feature new financial technologies such as blockchain into the “Changyou” platform to enable effective extraction and development of big data samples, creating a precise and extensive database of consumer transactions and consumption behaviour in the future. As such, it is important for the Group to maintain a sufficient level of liquidity and financial flexibility in order to maintain the current level of performance and user network of the “Changyou” platform while implementing expansion plans of the Changyou Alliance in order to increase its competitiveness, given the intense competition from strong market players which have dominated the market in recent years.

As described above, the Board has considered that CIH has made significant contribution to the development of the “Changyou” business. To the best knowledge of the Board, many other large state-owned enterprises and industry leaders introduced by CIH to the Group have demonstrated strong interest to participate in the “Changyou” platform as at the Latest Practicable Date. The Board is of the view that the continued support from CIH through bringing in such additional business partners is of paramount importance for the purpose of facilitating and enhancing the Group’s exposure to further networks and opportunities, which are beneficial to the expansion of the “Changyou” business of the Group. Thus, in view of CIH’s past and expected contributions, the Board considers it is appropriate to incentivise CIH to further assist the Group in expanding its network and diversifying its products and services to the users of the “Changyou” platform.

There are certain disadvantages of issuing the Warrants to CIH, in that (i) the Subscription Price of HK$0.01 per Warrant represents a significant discount to the Fair Value as assessed by the Independent Valuer; and (ii) the exercise of the Warrants is not within the control of the Company.

– 18 –

LETTER FROM THE BOARD

The Board has also considered the alternative of incentivising CIH by granting to CIH share options under the Share Option Scheme (“ Share Options ”) pursuant to which CIH is also an eligible participant. The Board is of the view that the issue of Warrants is more preferable than granting the Share Options to CIH under the Share Option Scheme after considering the following factors:

(a) although the Subscription Price of HK$0.01 per Warrant represents a significant discount to the Fair Value as assessed by the Independent Valuer, the Board considers that the issue of Warrants is more preferable to the Company because (i) the consideration for the issue and subscription of Warrants is the aggregate Subscription Price of HK$2,980,000 as compared to the consideration of only HK$1.00 payable by CIH if the Share Options were granted to CIH; and (ii) the Strike Price is HK$1.38 per Warrant Share, which is at a premium of approximately 25.45% over the average closing price of approximately HK$1.10 per Share (as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including the date of the Announcement); and
(b) the Warrants possess certain characteristics which are similar to the Share Options, in that both are non-transferable and therefore have no liquidity, therefore CIH will not derive any benefit from the holding of the Warrants or any Share Options, and will need to exercise such Warrants or Share Options in order to obtain the economic benefits. The economic benefits of the Warrants is dependent on the increase in the trading price of the Shares, which is driven by, among other things, the financial and operational performance of the Group. The Board considers that, although the exercise of the Warrants is not within the control of the Company the maximum exercise period of five years permitted under the Listing Rules in relation to the Warrants as compared to the maximum exercise period of ten years pursuant to the Option Scheme in relation to the Share Options (if granted to CIH) is more favourable to the Company. The shorter five-year timeframe in relation to the Warrants will allow the Group to obtain additional capital to achieve the business development and expansion objectives of the Group in a relatively shorter period when CIH exercises the Warrants if and when the Company is in need of financial resources, particularly in light of the increasing competition in recent years.

In addition to the above factors considered, since CIH is the controlling shareholder of the Group, CIH’s interest is aligned with the development of the “Changyou” business and hence the performance of the Group, it is mutually understood between the Company and CIH that CIH will exercise the Subscription Rights when funding is required. The issue of the Warrants to CIH will also be an added motivation and incentive for CIH to continue to contribute its efforts to the Company’s business as and when needed in order to maintain a sufficient level of liquidity and financial flexibility of the Group, with the aim of improving the financial and operational performance of the Group which will be reflected in the share price of the Company, thereby allowing CIH to gain potential economic benefits from the exercise of the Warrants. Further, the Board considers that the issue of the Warrants provides flexibility for the Group when funding is required as the Warrants are not interest-bearing and will not result in any immediate dilution effect on the shareholding of the existing Shareholders.

– 19 –

LETTER FROM THE BOARD

Further capital would be raised upon the exercise of the Subscription Rights to further assist the development and expansion of the “Changyou” business and other potential projects which complement the “Changyou” business, which include funding promotional activities and the establishment of the operational technology and networks for potential partnerships and collaborations in relation to the Changyou Alliance with leading enterprises in other industries. Although the Company held cash amounting to RMB393 million as at 31 December 2017, and RMB298 million as at 31 March 2018, given that the Changyou Alliance business is a capital intensive sector and the current expansion plans of the Group, it is expected that the cash balance of RMB298 million as at 31 March 2018 will be applied as follows and will be fully utilised by the end of 2018:

(a) approximately RMB107 million for the recruitment of approximately 325 additional staff for the “Changyou” business, including (i) the technological services department （技術服務部）, which is responsible for the research and development of new products and services and application, quality control and the daily operations of the “Changyou” platform; (ii) the operations department（運營部）, which is responsible for monitoring the operations and user traffic of the “Changyou” platform, organizing promotional activities and liaising with other departments in conducting market research; (iii) the business development department（業務拓展部）, which is responsible for developing business plans and strategies and conducting market research and analysis, and other various departments, and to pay staff costs for existing and additional staff;
(b) approximately RMB24 million for the technology development costs of the “Changyou” business, including platform development, technology outsourcing services, testing and trials and the connection of systems of the merchandising sales business of “Changyou”;
(c) approximately RMB113 million for the marketing and promotion costs to increase the number of customers and maintaining the loyalty of existing customers, including but not limited to advertisements and campaigns, public relations events, maintaining customer services and other brand building activities;
(d) approximately RMB29 million for the other operating, administrative and miscellaneous costs of the “Changyou” business;
(e) approximately RMB20 million for the general working capital of the Group; and
(f) approximately RMB5 million for the capital expenditure of the Group.

– 20 –

LETTER FROM THE BOARD

(a) approximately HK$40 million will be applied towards the general working capital of the Group;
(b) approximately HK$150 million will be applied towards financing other potential projects of the Group which complement the “Changyou” business of the Group should suitable opportunities arise; and
(c) the remaining balance will be applied towards the further development and expansion of the “Changyou” business of the Group (including approximately HK$83 million for the recruitment of personnel for the development of the “Changyou” platform, approximately HK$135 million for promotional and marketing activities and approximately HK$5 million for the capital expenditure of the “Changyou” business such as technology infrastructure and financial technologies as mentioned above).

The Board (including the members of the Independent Board Committee having considered the advice from the Independent Financial Adviser) considers that the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 21 –

LETTER FROM THE BOARD

FUND RAISING ACTIVITY BY THE COMPANY IN THE PAST TWELVE MONTHS

Date of				Actual use of
announcement	Event	Net proceeds	Intended use of proceeds	proceeds
7 December	Issue of	US$10 million	Setting off the aggregate	Utilised as
2017	US$10,000,000		outstanding amount of	intended
	13% secured		US$10 million payable by
	convertible		the Company under the
	bonds due 2019		convertible bonds issued
	under general		by the Company to Chance
	mandate		Talent Management
			Limited in the principal
			amount of US$6 million on
			3 June 2015 and in the
			principal amount of US$4
			million on 3 June 2015

Save as disclosed above, the Company has not conducted any other equity fund raising exercise in the past twelve months prior to the Latest Practicable Date.

SHAREHOLDING STRUCTURE OF THE COMPANY

As at the Latest Practicable Date, the Company had a total of 1,813,509,272 Shares in issue. The shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) upon the full exercise of the Subscription Rights (assuming there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of the full exercise of the Subscription Rights and no adjustment pursuant to the Warrant Instrument) are as follows:

CIH (Note 1) Starr International Foundation (Note 2) Other public Shareholders Total	As at the Latest Practicable Date No. of Shares Approximate % 598,885,818 33.02% 224,710,691 12.39% 989,912,763 54.59% 1,813,509,272 100.00%	Immediately after the full exercise of the Subscription Rights No. of Shares Approximate % 896,885,818 42.48% 224,710,691 10.64% 989,912,763 46.88% 2,111,509,272 100.00%	Immediately after the full exercise of the Subscription Rights No. of Shares Approximate % 896,885,818 42.48% 224,710,691 10.64% 989,912,763 46.88% 2,111,509,272 100.00%
			100.00%

Notes:

CIH is wholly owned by Ms. Pun Tang. A charge over the 109,343,662 Shares held by CIH had been created in favour of Chance Talent Management Limited. Chance Talent Management Limited is wholly owned by CCBI Investments Limited, which is in turn wholly owned by CCB International (Holdings) Limited. CCB International (Holdings) Limited is wholly owned by CCB Financial

– 22 –

LETTER FROM THE BOARD

Holdings Limited, which is in turn wholly owned by CCB International Group Holdings Limited. CCB International Group Holdings Limited is wholly owned by China Construction Bank Corporation, which is owned as to 57.11% by Central Huijin Investment Ltd.

Starr Investments Cayman II, Inc. and Starr Investments Cayman V Inc. are the beneficial owners of Shares as to 6.33% and 6.06% respectively. Starr Investments Cayman II, Inc. 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. and Starr Investments Cayman V, Inc. are wholly-owned subsidiaries of Starr International Investments Ltd., which is in turn wholly-owned by Starr International Company Inc.. Starr International Company Inc. is wholly-owned by Starr International AG, which is wholly-owned by Starr International Foundation, a charitable foundation established in Switzerland.

LISTING RULES IMPLICATION

CIH, being the controlling shareholder of the Company, is a connected person of the Company. As such, the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder constitute a connected transaction of the Company under Chapter 14A of the Listing Rules, and are subject to the reporting, announcement, circular and Independent Shareholders’ approval requirements under the Listing Rules.

Pursuant to Rule 15.02(1) of the Listing Rules, the Warrant Shares to be allotted and issued on the exercise of the Subscription Rights must not, when aggregated with all other equity securities which remain to be issued on exercise of any other subscription rights, if all such rights were immediately exercised, whether or not such exercise is permissible, exceed 20% of the issued share capital of the Company at the time the Warrants are issued. Options granted under employee or executive share schemes which comply with Chapter 17 of the Listing Rules are excluded for the purpose of such limit. Further, pursuant to Rule 15.02(2) of the Listing Rules, the Warrants must expire not less than one and not more than five years from the date of issue or grant, and must not be convertible into further rights to subscribe for securities which expire less than one year or more than five years after the date of issue or grant of the Warrants.

Pursuant to the resolutions in writing passed by all Shareholders on 28 June 2010, the Company approved and adopted the Share Option Scheme. As at the Latest Practicable Date, there were 75,000,000 outstanding options granted on 3 October 2016 which are convertible into 75,000,000 Shares; and 72,000,000 outstanding options granted on 4 May 2018 which are convertible into 72,000,000 Shares (subject to the approval by the Shareholders) (collectively, the “ Option Shares ”).

On 7 December 2017, the Company and Chance Talent Management Limited entered into a subscription agreement (“ Agreement ”) pursuant to which the Company issued, and Chance Talent Management Limited subscribed for, US$10,000,000 13% secured convertible bonds due 2019 (“ Convertible Bonds ”), which are convertible into 64,534,590 Shares (“ Conversion Shares ”) pursuant to the terms and conditions of the Convertible Bonds.

As at the Latest Practicable Date, save for the Option Shares and the Conversion Shares, the Company did not have any other securities with subscription rights outstanding which may be convertible into Shares. The Warrant Shares, when aggregated with the Conversion Shares, will not exceed 20% of the issued share capital of the Company at the time the Warrants are issued. The Exercise Period will commence from the date that is six

– 23 –

LETTER FROM THE BOARD

(6) months from the date of issue of the Warrants and will end on the Termination Date, and the Warrants will not be convertible into further rights to subscribe for securities which expire less than one year or more than five years after the date of issue of the Warrants. Accordingly, the issue of the Warrants will be in compliance with Rule 15.02(1) and Rule 15.02(2) of the Listing Rules.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee, comprising all the independent non-executive Directors, namely Mr. Wong Chi Keung, Mr. Liu Jialin and Mr. Chan Chi Keung Alan, has been established to advise and give recommendations to the Independent Shareholders in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

Mr. Yuan Weitao, an executive Director, is also a director of CIH. Pursuant to the articles of association of the Company, Mr. Yuan Weitao has declared the nature of his interest at the relevant meeting of the Board to approve the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, and was not required to abstain from voting on the relevant board resolutions. Further, Mr. Yuan Weitao does not have any shareholding interest in the Company or CIH. Save as aforesaid, none of the Directors has a material interest in the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder and none of them has abstained from voting on the relevant board resolutions to approve the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

Amasse Capital Limited has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

EGM

The EGM will be convened and held at 10:30 a.m. on Tuesday, 31 July 2018 at Room 1001-1009, 10/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong to consider and, if thought fit, approve the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder (including the issue of the 298,000,000 Warrants and the grant of the Specific Mandate for the allotment and issuance of the Warrant Shares upon the full exercise of the 298,000,000 Warrants). The voting on such resolutions will be conducted by way of poll at the EGM in accordance with Rule 13.39(4) of the Listing Rules.

To the best of the Directors’ knowledge, information and belief after having made all reasonable enquiries, as at the Latest Practicable Date, CIH and its associates were interested in 598,885,818 Shares, representing approximately 33.02% of the issued share capital of the Company. As CIH has a material interest in the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, it is

– 24 –

LETTER FROM THE BOARD

required to abstain from voting on the resolutions at the EGM to approve the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

A proxy form for use by the Independent 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 proxy form 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 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, 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 adjournment 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, and in such event, the instrument appointing a proxy shall be deemed to be revoked.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee containing its recommendations to the Independent Shareholders in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder set out on pages 27 to 28 of this circular; and (ii) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders containing its advice in respect of the fairness and reasonableness on the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder set out on pages 29 to 60 of this circular.

The Directors (including the members of the Independent Board Committee having considered the advice from the Independent Financial Adviser) consider that the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors (including the members of the Independent Board Committee having considered the advice from the Independent Financial Adviser) recommend that all Independent Shareholders to vote in favour of the resolutions proposed at the EGM to approve the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

– 25 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendix to this circular and the notice of the EGM.

Yours faithfully By order of the Board Fortunet e-Commerce Group Limited Mr. Cheng Jerome Chairman

– 26 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [179 x 57] intentionally omitted <==

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

5 July 2018

To the Independent Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION IN RELATION TO THE ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE

We refer to the circular of the Company to the Shareholders dated 5 July 2018 (the “ Circular ”), of which this letter forms part. Unless the context requires otherwise, capitalised terms used in this letter will have the same meanings as defined in the Circular.

The Independent Board Committee has been established to advise the Independent Shareholders on whether the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

We wish to draw your attention to the letter from the Board as set out on pages 5 to 26 of the Circular and the letter of advice from Amasse Capital Limited, the Independent Financial Adviser appointed to advise the Independent Board Committee and the Independent Shareholders as set out on pages 29 to 60 of the Circular in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.

Having taken into consideration the factors and reasons as stated in the letter from the Board, and the opinion as stated in the letter of advice from the Independent Financial Adviser, we consider that (i) the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) the issue and subscription of the Warrants are not in the ordinary and usual course of business of the Group; and (iii) the issue and subscription of the Warrants are in the interests of the

– 27 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Company and the Shareholders as a whole. We recommend the Independent Shareholders to vote in favour of the ordinary resolutions in relation to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder to be proposed at the EGM.

Yours faithfully For and on behalf of the Independent Board Committee of Fortunet e-Commerce Group Limited Mr. Wong Chi Keung Mr. Liu Jialin Mr. Chan Chi Keung Alan Independent non-executive Directors

– 28 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter from the Independent Financial Adviser which sets out its advice to the Independent Board Committee and the Independent Shareholders in respect of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, which has been prepared for the purpose of incorporation in this circular:

5 July 2018

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONNECTED TRANSACTION ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, details of which are set out in the letter from the Board contained in the circular of the Company dated 5 July 2018 (the “ Circular ”), of which this letter forms a part. Capitalized terms used in this letter shall have the same meanings as those defined in the Circular unless the context requires otherwise.

On 26 March 2018 (after trading hours), the Company entered into the Warrant Subscription Agreement with CIH, pursuant to which the Company conditionally agreed to issue, and CIH conditionally agreed to subscribe for, 298,000,000 Warrants at the Subscription Price.

The 298,000,000 Warrants will entitle CIH to subscribe for 298,000,000 Warrant Shares (subject to adjustment pursuant to the Warrant Instrument) at the Strike Price of HK$1.38 per Warrant Share (subject to adjustment pursuant to the Warrant Instrument). The Subscription Rights attaching to each Warrant will be exercisable in full or in part during the Exercise Period.

As at the Latest Practicable Date, the Company had a total of 1,813,509,272 Shares in issue. Upon the full exercise of the Subscription Rights and assuming no adjustment pursuant to the Warrant Instrument, a total of 298,000,000 Warrant Shares will be allotted and issued by the Company to CIH, representing (i) approximately 16.43% of the existing issued share capital of the Company as at the Latest Practicable Date; and (ii) assuming there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of the full exercise of the Subscription Rights, approximately 14.11% of the issued share capital of the Company as enlarged by the issue of the Warrant Shares.

– 29 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee comprising all of the independent non-executive Directors has been formed pursuant to the Listing Rules to advise the Independent Shareholders on the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder. We have been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this respect, and such appointment has been approved by the Independent Board Committee.

OUR INDEPENDENCE

As at the Latest Practicable Date, we did not have any relationships or interests with the Company, CIH or any other parties that could reasonably be regarded as relevant to our independence. In the last two years, we have not acted as an independent financial adviser to the Independent Board Committee and the Independent Shareholders for any transaction.

With regard to our independence from the Company, it is noted that, apart from normal professional fees paid or payable to us in connection with the current appointment as the Independent Financial Adviser, no arrangements exist whereby we had received or will receive any fees or benefits from the Company, CIH or any other parties that could reasonably be regarded as relevant to our independence.

BASIS OF OUR OPINION

In formulating our opinion 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 and the management of the Company (the “ Management ”).

We have assumed that all information and representations that have been provided by the Management, for which the Directors are solely and wholly responsible, are true and accurate 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 enquiry and careful consideration.

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. Our opinion is based on the representation and confirmation of the Management that there are no undisclosed private

– 30 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

agreements/arrangements or implied understanding with anyone concerning the issue of Warrants. We consider that we have taken sufficient and necessary steps on which to form a reasonable basis and an informed view for our opinion in compliance with 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, that the information contained in the 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 in the Circular or the Circular as a whole misleading. We, as the Independent Financial Adviser, take no responsibility for the contents of any part of the Circular, save and except for this letter of advice.

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, carried out any independent verification of the information provided by the Management, nor have we conducted any independent in-depth investigation into the business and affairs of any members of the Group, the counter party(ies) or their respective subsidiaries or associates. We also have not considered the taxation implication on the Group or the Shareholders as a result of the issue of Warrants. We have not carried out any feasibility study on the past, and forthcoming investment decision, opportunity or project undertaken or to be undertaken by the Group. Our opinion has been formed on the assumption that any analysis, estimation, anticipation, condition and assumption provided by the Group are feasible and sustainable. Our opinion shall not be constructed as to give any indication to the validity, sustainability and feasibility of any past, existing and forthcoming investment decision, opportunity or project undertaken or to be undertaken by the Group.

Our opinion is necessarily based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note that subsequent developments (including any material change in market and economic conditions) may affect and/or change our opinion and we have no obligation to update this opinion to take into account events occurring after the Latest Practicable Date or to update, revise or reaffirm our opinion. In addition, 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. We expressly disclaim any liability and/or any loss arising from or in reliance upon the whole or any part of the contents of this letter.

Lastly, where information in this letter has been extracted from published or otherwise publicly available sources, we are not obligated to conduct any independent in-depth investigation into the accuracy and completeness of those information.

PRINCIPAL FACTORS TAKEN INTO CONSIDERATION

In formulating our opinion in respect of the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, we have taken into consideration the following principal factors and reasons.

– 31 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. INFORMATION ON THE GROUP AND CIH

1.1 The Company and the Group

Based on the annual report of the Company for the year ended 31 December 2017 (the “ 2017 Annual Report ”), we note that the Group has the following three operating segments for the year ended 31 December 2017:

(i) Digital point business : this segment operates an electronic platform, i.e. the “Changyou” platform, to facilitate awards earned by customers of loyalty programmes of other companies to be exchanged globally in the form of virtual assets and credits for consumption of merchandises, games, services and other commercial transactions.
(ii) E-commerce business : this segment trades goods through electronic distribution platform, mobile applications and other related means.
(iii) Axle business : this segment manufactures and sells axles and related components to truck manufacturers and after-sales services market. The segment has been disposed of during the year ended 31 December 2017.

– 32 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1.2 Financial information of the Group

Set out below is a summary of the financial information of the Group as extracted from the 2017 Annual Report, details of which are as follows:

	For the year ended	For the year ended
	31 December
	2017	2016
	RMB’000	RMB’000
	(audited)	(audited)
Revenue	167,632	385,468
Cost of sales	(175,216)	(398,180)
Gross loss	(7,584)	(12,712)
Loss before tax	(152,471)	(265,879)
Loss and total comprehensive income for the year	(199,681)	(240,367)
Loss and total comprehensive income for the year
attributable to equity shareholders of the
Company	(66,413)	(176,604)
	As at 31 December
	2017	2016
	RMB’000	RMB’000
	(audited)	(audited)
Total assets	451,569	733,837
Total equity	332,398	86,613

For the year ended 31 December 2017

The Group recorded a revenue of approximately RMB167.6 million (2016: approximately RMB385.5 million), representing a decrease of approximately 56.5% as compared to 2016.

Revenue from the Changyou Alliance business, i.e. the “Changyou” platform, was approximately RMB0.94 million for the year ended 31 December 2017, representing approximately 0.6% (2016: Nil) of the Group’s total revenue.

Revenue from the Group’s e-Commerce business segment was approximately RMB134.0 million for the year ended 31 December 2017 (2016: approximately RMB302.1 million), representing approximately 80.0% (2016: approximately 78.4%) of the Group’s total revenue.

Revenue from the Group’s axle business segment for the year ended 31 December 2017 was diminishing as a result of the disposal of the axle business in April 2017.

– 33 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Gross loss for the year ended 31 December 2017 amounted to approximately RMB7.6 million, as compared with the gross loss of approximately RMB12.7 million for the year ended 31 December 2016. The gross loss was mainly attributable to the gross loss in the amount of approximately RMB0.24 million, approximately RMB2.4 million and approximately RMB4.9 million generated from digital point business, e-Commerce business and axle business respectively.

The Group recorded a loss and total comprehensive income for the year ended 31 December 2017 of approximately RMB199.7 million as compared to a loss and total comprehensive income for the year ended 31 December 2016 of approximately RMB240.4 million, representing a decrease of approximately 16.9%.

We have discussed with and understood from the Management that the decrease in revenue of the Group for the year ended 31 December 2017 was mainly due to (a) increased competition in the e-commerce industry, resulting in a negative profit margin; and (b) decreasing level of the Company’s market share in the traditional e-commerce business, due to the increased competition of large market players. Given the above, the Group has deployed its efforts and resources to the Digital Point Business, which has potential growth. Further, the decrease in loss and total comprehensive income of the Group for the year ended 31 December 2017 was mainly attributable to, among other things, the loss for the year including the impairment losses of goodwill and intangible assets and reversal of deferred tax assets offset by (a) one-off profit of approximately RMB141 million from the disposal of axle business; and (b) gain on changes in fair value of the derivative component of approximately RMB32 million on the secured convertible bonds issued by the Company.

The total assets of the Group as at 31 December 2017 amounted to approximately RMB451.6 million, which represented a decrease of approximately 38.5% as compared to approximately RMB733.8 million as at 31 December 2016. The total equity of the Group as at 31 December 2017 amounted to approximately RMB332.4 million, which represented an increase of approximately 283.8% as compared to approximately RMB86.6 million as at 31 December 2016.

– 34 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1.3 Fund raising activity in the last 12 months

The Company conducted one fund raising activity in the past 12 months prior the date of the Warrant Subscription Agreement, details of which are set out below:

Date of		Net		Actual use
announcement	Event	proceeds	Intended use of proceeds	of proceeds
7 December 2017	Issue of	US$10	Setting off the aggregate	Utilised as
	US$10,000,000	million	outstanding amount of	intended
	13% secured		US$10 million payable by
	convertible		the Company under the
	bonds due		convertible bonds issued
	2019 under		by the Company to Chance
	general		Talent Management
	mandate		Limited in the principal
			amount of US$6 million on
			3 June 2015 and in the
			principal amount of US$4
			million on 3 June 2015

1.4 Information on CIH

CIH is an investment holding company incorporated in the British Virgin Islands with limited liability. CIH and its subsidiaries are principally engaged in the telecommunication and media industry and have participated in a number of telecommunication and information technology projects in the past. Such projects included network design and integration, planning and operations of several telecommunication and information technology platforms.

As at the Latest Practicable Date, CIH is the controlling shareholder of the Company and thus a connected person of the Company. CIH is wholly owned by Ms. Pun Tang.

2. PRINCIPAL TERMS OF THE WARRANT SUBSCRIPTION AGREEMENT

2.1 Date

26 March 2018 (after trading hours)

2.2 Parties

(1) the Company as the issuer; and
(2) CIH as the subscriber.

– 35 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2.3 Information on the Warrants

As at the Latest Practicable Date, the Company has a total of 1,813,509,272 Shares in issue. Upon the full exercise of the Subscription Rights and assuming no adjustment pursuant to the Warrant Instrument, a total of 298,000,000 Warrant Shares of par value of US$0.01 each will be allotted and issued by the Company to CIH, representing (i) approximately 16.43% of the existing issued share capital of the Company as at the Latest Practicable Date; and (ii) assuming there is no change in the issued share capital of the Company from the Latest Practicable Date to the date of the full exercise of the Subscription Rights, approximately 14.11% of the issued share capital of the Company as enlarged by the issue of the Warrant Shares.

2.4 Subscription Price and Strike Price

The total consideration for the subscription and issue of the Warrants is HK$2,980,000, representing the Subscription Price of HK$0.01 per Warrant payable by CIH in cash upon Closing.

The Strike Price is HK$1.38 per Warrant Share (subject to adjustment pursuant to the Warrant Instrument), which represents:

(a) a premium of approximately 27.78% over the closing price of HK$1.08 per Share as quoted on the Stock Exchange on the date of the Warrant Subscription Agreement;
(b) a premium of approximately 25.45% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including the date of the Warrant Subscription Agreement;
(c) a premium of approximately 25.45% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last ten (10) consecutive trading days up to and including the date of the Warrant Subscription Agreement;
(d) a premium of approximately 51.65% over the closing price of HK$0.91 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(e) a premium of approximately 434.88% over the net asset value of approximately HK$0.258 per Share as at 31 December 2017 (based on the net assets attributable to equity shareholders of the Company as at 31

– 36 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

December 2017 of approximately RMB394,140,000 (equivalent to approximately HK$467,371,000) and 1,813,509,272 issued Shares as at the Latest Practicable Date).

The aggregate of the Subscription Price and the Strike Price, being HK$1.39 per Warrant Share, represents:

(a) a premium of approximately 28.70% over the closing price of HK$1.08 per Share as quoted on the Stock Exchange on the date of the Warrant Subscription Agreement;
(b) a premium of approximately 26.36% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including the date of the Warrant Subscription Agreement;
(c) a premium of approximately 26.36% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last ten (10) consecutive trading days up to and including the date of the Warrant Subscription Agreement;
(d) a premium of approximately 52.75% over the closing price of HK$0.91 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and
(e) a premium of approximately 438.76% over the net asset value of approximately HK$0.258 per Share as at 31 December 2017 (based on the net assets attributable to equity shareholders of the Company as at 31 December 2017 of approximately RMB394,140,000 (equivalent to approximately HK$467,371,000) and 1,813,509,272 issued Shares as at the Latest Practicable Date).

The net price per Warrant Share is approximately HK$1.38, calculated by dividing the estimated aggregate net proceeds from the subscription and issue of the Warrants in full at the Subscription Price and upon the full exercise of the Subscription Rights by the number of Warrants.

Both the Subscription Price and the Strike Price were determined after arm’s length negotiations between the Company and CIH after taking into account (i) the prevailing market prices of the Shares; and (ii) that the Subscription Price together with the Strike Price is at a premium to the market price of the Shares. The Subscription Price together with the Strike Price are also at a huge premium to the net asset value per Share as at 31 December 2017. The Company considers that both the Subscription Price and the Strike Price are fair and reasonable and are in the interest of the Company and the Shareholders as a whole.

– 37 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2.5 Other principal terms of the Warrants

Please refer to the section headed “Other Principal Terms of the Warrants” set out under “Letter from the Board” of the Circular for further details of the principal terms of the Warrants.

2.6 Conditions precedent

(a) all requirements, if any, in addition to such approvals as set out in conditions (e), (f) (g) and (h) below, imposed by the Stock Exchange in connection with the contemplated transactions under the Warrant Subscription Agreement, the Warrant Instrument and the certificate representing the Warrants, having been complied with in full;
(b) the representations and warranties of the Company and CIH, respectively, shall be true, correct, accurate, complete and not misleading as at the date of Closing;
(c) the Company having obtained a copy of any and all approvals or other document, opinion or assurance which are necessary for consummation of the transactions contemplated by the Warrant Subscription Agreement, the Warrant Instrument and the certificate representing the Warrants, on or prior to Closing that are required to be obtained on or prior to Closing;
(d) there shall not, since the date of the Warrant Subscription Agreement, have been any adverse change to the condition (financial or otherwise), results of operations, assets, regulatory status, business and prospects of the Company or the Group taken as a whole or the financial markets or economic conditions in general that has had a material adverse effect;
(e) the Shareholders having granted the Specific Mandate to the Board for the allotment and issuance of Warrant Shares at the EGM and such Specific Mandate remains valid, fully effective and has not been revoked;
(f) the resolutions of the Independent Shareholders approving the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder, and the allotment and issue of all Warrant Shares issuable by the Company upon full exercise of the Subscription Rights having been passed at the EGM, and such resolutions have not been subsequently amended or revoked;

– 38 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(g) the Company having obtained the approval of the Stock Exchange for the listing of, and permission to deal in, Warrant Shares (either unconditionally or subject only to the conditions to which neither the Company nor CIH may reasonably object); and
(h) if required, the Company having obtained the approval of the Stock Exchange for the issue of the Warrants (either unconditionally or subject only to the conditions to which neither the Company nor CIH may reasonably object) and such approval is not subsequently revoked or withdrawn prior to Closing.

On 27 June 2018, the Company and CIH agreed to extend the Closing Long Stop Date to 30 September 2018.

3. REASONS FOR THE ISSUE OF WARRANTS AND USE OF PROCEEDS

We have discussed with the Management and understand that while the Company has no immediate need for financial resources, it is always in the interests of the Company and the Shareholders to prepare for the expansion of the existing businesses of the Group in the long run.

In particular, the Group has developed a membership point alliance, namely the Changyou Alliance, and has launched the “Changyou” platform with various business partners/investors, including CCB International Holdings Limited (“ CCBI ”), China UnionPay Merchant Services Company Limited (“ China UnionPay ”), Bank of China Group Investment Limited (“ BOC ”), China Mobile (Hong Kong) Group Limited (“ China Mobile ”) and China Eastern Airlines Corporation Limited (“ China Eastern Airlines ”). The “Changyou” platform is an e-commerce platform which primarily focuses on the PRC market, whereby digital membership points earned by users (who are mainly PRC customers) from respective loyalty programmes and/or platforms of other partnership entities are interchangeable and redeemable as “virtual assets” (i.e. the alliance points) through and can be used by the “Changyou” platform. Through the “Changyou” platform, users can redeem the alliance points for customized merchandise, games and entertainment, financial services which are provided by suppliers of the Group and/or the business partners of the Changyou Alliance. The platform intends to facilitate inclusive financing through the use of

– 39 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the internet by allowing users to exchange and convert points earned under various channels into alliance points, a virtual asset used for online and offline consumption in merchandise (such as home appliances, electronic goods, food and beverages, cosmetic and health products, maternity and children’s products, auto accessories, sportswear and equipment, mobile phones, cinema tickets and entertainment, electronic gift card and coupons, and others) or service transactions, which aims to promote better financial planning and wealth preservation for potential consumers in a secured environment. For example, the “Changyou” platform currently provides its users, among others (i) money lending services where users may apply for loans; (ii) instalment services where users may apply for instalment plans to purchase merchandises, games, services as provided on the platform; and (iii) asset and wealth management services such as purchasing financial products, including but not limited to gold, funds, insurance etc., with alliance points. The Changyou Alliance also proposes to feature new financial technologies such as blockchain, which enables users to effectively extract and develop big data samples and a precise and extensive database of consumer transactions and consumption behaviour for the purposes of developing a new three-in-one internet credit system comprising corporate credit, individual credit and commodity credit. The Group also plans to collaborate with leading enterprises for blockchain technology research and development in the future to develop a universal standardised software and system solution for blockchain technology so as to make full use of the Changyou Alliance.

The Changyou Alliance was initially set up jointly by the Group, CCBI and China UnionPay since late 2016 and the “Changyou” platform was launched in September 2017. By the end of 2017, BOC, China Mobile and China Eastern Airlines have further invested in the Changyou Alliance and integrated the digital membership points of their respective platforms into the “Changyou” platform, which allows such digital membership points from various partnership entities and industries to be interchangeable and redeemable as “virtual assets” through and can be used by the “Changyou” platform. It is estimated that currently BOC, China Mobile and China Eastern Airlines have an aggregate of over 900 million users at their respective platforms, all of which are potential customers of the “Changyou” platform. It is anticipated that these virtual assets will be widely applicable in the future, given the continuous expansion of the “Changyou” platform and the increasing demand for a more integrated, centralised and secure digital platform in the market to allow for more cost efficient commercial transactions and provides an asset management platform for users, thus increasing the level of customer consumption and loyalty. The following table sets out the milestones in relation to the development of the “Changyou” Platform:

			Date of
			announcement
			of the
Date		Event	Company
June	2016	The Group entered into a joint venture agreement with	22 June
		Chance Talent Management Limited, a wholly owned	2016
		special purpose vehicle of CCB International (Holdings)
		Limited, for the establishment of the Digital Point
		Business Ecosystem Alliance.

– 40 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

				Date of
				announcement
				of the
Date	Event			Company
July 2016	The Group was in discussion with certain		famous	25 July 2016
	business partners/investors (which are		leading
	enterprises in their respective industries) for		possible
	cooperation to establish the Digital Point	Business
	Ecosystem Alliance.
August 2016	Easylink Payment Network (Hong Kong)	Company		30 August
	Limited, an indirect wholly owned subsidiary	of China		2016
	UnionPay Merchant Services Company Limited,		became
	one of the Group’s joint venture partners		for the
	establishment of the Digital Point Business Ecosystem
	Alliance.
November	The Group entered into a joint venture agreement with			29
2016	Extra Step Investments Limited, a wholly		owned	November
	subsidiary of China Mobile (Hong Kong)		Group	2016
	Limited, and Joy Empire Holdings Limited,	a	wholly
	owned subsidiary of Bank of China Group Investment
	Limited, for the establishment of the Digital Point
	Business Ecosystem Alliance.
May 2017	China Eastern Airlines E-Commerce Co.,		Ltd, a	30 June
	wholly-owned subsidiary of China Eastern		Airlines	2017
	Corporation Limited, has executed a deed of	accession
	and joined as a party for the establishment		of the
	Digital Point Business Ecosystem Alliance		in its
	capacity as one of the investors.
June 2017	Establishment of the Digital Point Business Ecosystem			N/A
	Alliance.
September	Launch of the “Changyou” platform.			N/A
2017

As of 31 December 2017, the number of users of the platform has increased substantially to approximately 10 million with only a few months of operations. For the year ended 31 December 2017, revenue from the Changyou Alliance business amounted to approximately RMB0.94 million (2016: Nil). The total revenue from this segment accounted for approximately 0.6% of the Group’s total revenue. The Group has committed and will continue to commit more time and resources to develop its digital point business segment in light of the decline in the business performance of the e-commerce business segment of the Group and the increased competition in the e-commerce industry.

– 41 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Changyou Alliance business is a capital intensive sector, as a large amount of capital is required (i) to attract and retain talented and experienced personnel and management team for the development of the “Changyou” platform; (ii) for promotional and marketing activities to attract and maintain customer loyalty and their participation and consumption of the products and services provided on the “Changyou” platform; and (iii) to develop its technology infrastructure and feature new financial technologies such as blockchain into the “Changyou” platform to enable effective extraction and development of big data samples, creating a precise and extensive database of consumer transactions and consumption behaviour in the future. We have discussed with the Management and understood that the “Changyou” platform had approximately 290 staff as at 31 March 2018. It is targeted by the Company to increase the number of staff for the operations of the “Changyou” platform to over 600 staff by 31 December 2018, in order to cope with the development and expansion of the platform. It is important for the Group to maintain a sufficient level of liquidity and financial flexibility in order to maintain the current level of performance and user network of the “Changyou” platform while implementing expansion plans of the Changyou Alliance in order to increase its competitiveness, given the intense competition from strong market players which have dominated the market in recent years.

The existing e-commerce business segment of the Group is engaged in traditional ecommerce distribution platforms and mobile applications for sourcing, importing and channeling authentic goods from suppliers abroad and then distributing and reselling such goods to domestic retailers in the PRC, and other general trading business, and principally adopts a business-to-business model. As for the “Changyou” platform, it is an innovative ecommerce platform with membership points element which primarily focuses on the PRC market and provides customers/users an integrated and comprehensive medium for the purchase and consumption of merchandise, games and entertainment, financial services and other commercial transactions on-line, and principally adopts a business-to-customer model. Although there are differences in the nature and mode of operations between the existing ecommerce business segment of the Group and the “Changyou” platform, we consider that both businesses are e-commerce in nature and target the PRC as the primary market, and therefore fall under the e-commerce industry in the PRC. Despite there is an overall growth trend of the e-commerce industry in the PRC, we note that the existing traditional e– commerce segment of the Group has been underperforming mainly due to strong competition in the market. Therefore, the Group has decided to scale-down such traditional e-commerce business segment, and seek other business opportunities and different business models with potential growth within the new innovative e-commerce regions in the PRC, i.e. the “Changyou” business.

We have, on our best effort basis, performed independent researches and also discussed with the Company, however, given the uniqueness and innovativeness of the “Changyou” platform, to our best knowledge and belief, we are not aware of any industry report or public materials that is directly relating to the business of the “Changyou” platform. Accordingly, we have made reference to the《2017中國電子商務報告》(2017 E-Commerce in China Report*) issued by Ministry of Commerce of the PRC in May 2018 which studies and reflects the latest development status of the e-commerce industry in the PRC. The total transaction volume of e-commerce business and the e-commerce services volume in the PRC during the years ended 2011 to 2017 are illustrated as follows:

– 42 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

E-commerce transaction volume in the PRC

==> picture [409 x 404] intentionally omitted <==

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

35,000
29,160
30,000
26,100
25,000
21,790
20,000
16,390
15,000
10,400
10,000 8,110
6,090
5,000
0
2011 2012 2013 2014 2015 2016 2017
E-commerce services turnover in the PRC
3,500
2,920
3,000
2,450
2,500
1,980
2,000
1,500 1,250
1,000
425
500
125
41
0
2011 2012 2013 2014 2015 2016 2017
In billion’ RMB
In billion’ RMB
----- End of picture text -----

Source: Ministry of Commerce of the PRC

The transaction volume of e-commerce in the PRC had recorded approximately RMB6,090 billion, RMB8,110 billion, RMB10,400 billion, RMB16,390 billion, RMB21,790 billion, RMB26,100 billion and RMB29,160 billion for the years ended 2011, 2012, 2013, 2014, 2015, 2016 and 2017 respectively, representing an average annual growth of approximately 63%.

The e-commerce services volume in the PRC had recorded approximately RMB41 billion, RMB125 billion, RMB425 billion, RMB1,250 billion, RMB1,980 billion, RMB2,450 billion and RMB2,920 billion for the years ended 2011, 2012, 2013, 2014, 2015, 2016 and 2017 respectively, representing a significant increase of approximately 70 times from the year ended 2011 to the year ended 2017.

– 43 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As illustrated above, we note that there had been a continuous overall growth trend for the e-commerce industry in the PRC during the years 2011 to 2017. In addition, as stated in the report, the development of new innovative e-commerce regions such as the digital economy has become a global trend, and the PRC government has also pointed out to focus and expedite its development on the same while the digital economy in the PRC is stepping into a new stage of development and dynamic growth. Besides, it is expected that the growth trend of the e-commerce industry in the PRC will continue to sustain and the market size will continue to expand. Despite that the existing traditional e-commerce segment of the Group is underperforming, after taking the above into account, we consider that there will be promising prospects for the new innovative e-commerce regions in the PRC, such as the “Changyou” business of the Group.

Further, we understand from the Management that the CIH Group has been making significant contribution to the development of the “Changyou” business of the Group by introducing business networks and business partners and/or potential investors, who are well-known and leading enterprises in their respective various industries (including CCBI, China UnionPay, BOC, China Mobile and China Eastern Airlines), to the Group, and facilitating the collaborations (such as liaising with the working committee of the Company and coordinating the discussions and negotiations) between the Group and those business partners and/or potential investors in the development of the “Changyou” platform throughout 2016 to 2017 in relation to the establishment of the joint venture companies which form the Changyou Alliance, including the following transactions:

(a) the issue and subscription of shares in Treasure Ease by the Company and Chance Talent, an indirect wholly-owned subsidiary of CCBI, in June 2016 and January 2017, respectively;
(b) the issue and subscription of shares in Pointsea Holdings by Treasure Ease and Easylink, an indirect wholly-owned subsidiary of China UnionPay, in September 2016; and
(c) the issue and subscription of shares in Pointsea by Extra Step, a wholly-owned subsidiary of China Mobile, Joy Empire, a wholly-owned subsidiary of BOC, in January 2017, and the further issue and subscription of shares in Pointsea by China Eastern Airlines E-Commerce Co., Ltd （東方航空電子商務有限公司） (“ Eastern E-Commerce ”), a wholly-owned subsidiary of China Eastern Airlines, in June 2017.

As set out above, each of Chance Talent, Easylink, Extra Step, Joy Empire and Eastern E– Commerce was introduced to the Group by CIH and became the initial investors/business partners of the Changyou Alliance. Details of the aforesaid transactions are disclosed in the announcements dated 22 June 2016, 25 July 2016, 30 August 2016, 13 September 2016, 29 November 2016, 7 December 2016 and 30 June 2017 and the annual report for the year ended 31 December 2017 of the Company. We have discussed with the Management and understood that, during the process of undertaking the aforementioned transactions by the Group, besides introducing the investors/business partners to the Group and collaborating the establishment of the joint venture companies, the CIH Group has also involved and acted as the role of a business consultant and provided continued support, assistance and advice

– 44 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

covering different aspects such as (i) the general operational strategies in relation to the business model, i.e. planning, design and operation management; and (ii) the methods of integration of digital membership points of the business partners into the “Changyou” platform. It is also expected that the Group will benefit from the assistance and advice from the CIH Group in the future, by leveraging on its experience and expertise in the planning, design and operational management of several telecommunication and information technology platforms in the past and its knowledge of the telecommunications, multimedia and other industries, such as advising on the operational management of the “Changyou” business and advising on implementing and integrating blockchain and other financial technology applications relevant to the “Changyou” business.

In view of the operational performance of the “Changyou” platform in the past few months, the Group expects to integrate the resources and strategic advantages of additional potential business partners who are also leaders in their industries (including the petrochemical, travel, hospitality and entertainment industries) into the Changyou Alliance. Since early 2018 and as at the Latest Practicable Date, the Group (with the assistance of the CIH Group) was still in negotiations with three potential business partners (being state-owned enterprises and industry leaders in the petrochemical, travel and insurance industries, respectively) introduced by CIH to the Group in relation to the operational and technical integration aspects and other collaboration details with respect to the “Changyou” business. It is expected that such collaboration arrangements will be finalised by the end of 2018, with a view to further enhancing and expanding the scope of the “Changyou” platform across other industries. The Company will issue further announcement(s) in relation to the status of such negotiations and related information as and when appropriate in accordance with the Listing Rules.

Based on CIH’s experience, expertise and business network in providing assistance, advice and contributions to the development of the “Changyou” platform (including advices on the operational management of the “Changyou” business, and implementation and integration of blockchain and other financial technology applications relevant to the “Changyou” business) as discussed above, the Board considers that the continued support from CIH is of paramount importance for the purpose of facilitating and enhancing the Group’s exposure to further networks and opportunities and developing more products and services so as to enrich and improve the experience of the users and customers of the “Changyou” platform, which are beneficial to the expansion of the “Changyou” business of the Group. As such, we concur with the Board that it is appropriate to incentivise CIH, through issuing the Warrants, to further assist the Group in bringing in additional business partners/investors into the “Changyou” business in order to expand the users source and variety of digital membership points which can be interchanged and redeemed through the “Changyou” platform and to offer more diversified products and services to its users. At the same time, given that (i) CIH is a controlling shareholder of the Company who has been making continuing efforts and contributions along the path of the development of the “Changyou” platform; and (ii) improving the financial and operational performance of the Group by further development of the “Changyou” platform will potentially and positively affect the Share prices, thereby allowing CIH to capitalise potential economic benefits from exercise of the Warrants, we concur with the Management that CIH (as holder of the Warrants) will be motivated to improve the Company’s financial performance and it is the

– 45 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

mutual understanding between the Company and CIH that CIH will exercise the Subscription Rights when the Group is in need of financial resources in order to capture valuable market opportunities and further development of the Group’s businesses.

On the other hand, we note that Mr. Yuan Weitao is an executive Director and also one of the three directors of CIH. However, since (i) Mr. Yuan Weitao is not a shareholder but only one of the three directors of CIH; and (ii) the CIH Group is principally engaged in other business in the telecommunication and media industry, we are of the view that it is reasonable to incentivize CIH to further assist the Company in developing the “Changyou” business by issuing the Warrants.

After discussing with the Management, we understand that the Company has considered the alternative of incentivising CIH by granting to CIH Share Options under the existing Share Option Scheme, pursuant to which CIH is also an eligible participant.

In the event that the Company had granted to CIH Share Options on the date of the Warrant Subscription Agreement, pursuant to the terms of the Share Option Scheme, (i) the consideration payable by CIH would have been only HK$1.00; and (ii) the exercise price of each Share Option would have been approximately HK$1.10 (assuming the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including the date of the Warrant Subscription Agreement was being adopted, which also equals to the price floor for determining the exercise price pursuant to the Listing Rules).

Further, given the Warrants possess certain characteristics which are similar to the Share Options, in that both are non-transferable and therefore have no liquidity, which implies that CIH will not derive any benefit from simply holding the Warrants or any Share Options, and will need to exercise the Warrants into the Warrant Shares in order to obtain the economic benefits, we consider that incentivising CIH by the issue of the Warrants are in effect the same as the grant of Share Options which are issued at nominal value (e.g. HK$1.00 under the Share Option Scheme). As such, we are of the view that the Subscription Price of the Warrants should be made reference to the Share Option Scheme, and the Valuation conducted by the Independent Valuer in respect of the fair value of the Subscription Price of the Warrant (as defined and discussed under the section headed “Valuation on the Subscription Price” below) should only be used as a general reference. Further, we note that the exercise period of the Warrants is determined at five years, which equals to the maximum exercise period of a warrant from the date of issue pursuant to the Listing Rules requirements, while the maximum exercise period of a share option would be ten years from the date of grant pursuant to the Listing Rules requirements. Taking the share options with a maximum exercise period of ten years for comparison purpose, we consider that issuing the Warrants which has a shorter exercise period of five years to CIH will allow the Group to obtain additional capital to achieve the business development and expansion objectives of the Group in a relatively shorter period as CIH will be motivated to capitalise the potential economic benefits through exercising the Warrants within the five-year timeframe (instead of a ten-year timeframe) in full.

– 46 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Despite the Subscription Price of HK$0.01 per Warrant represents a significant discount to the fair value as assessed by the Independent Valuer, after taking into consideration of:

(i) the aggregate Subscription Price of HK$2,980,000 (as compared to the consideration of HK$1.00 payable by CIH if the Share Options were granted to CIH);
(ii) the Strike Price of HK$1.38 (a premium of approximately 25.45% over the average closing price of approximately HK$1.10 per Share as quoted on the Stock Exchange for the last five (5) consecutive trading days up to and including the date of the Warrant Subscription Agreement); and
(iii) the maximum exercise period of a warrant is five years as compared with the maximum exercise period of a share option of ten years from the date of issue or grant pursuant to applicable Listing Rules requirements, which would further motivate CIH to continue contributing its efforts to the Company’s business within such timeframe and allow the Group to obtain additional capital in a relatively shorter period.

we concur with the Company that the issue of Warrants is more favourable to the Company and more appropriate and preferable than granting the Share Options to CIH under the Share Option Scheme.

Although the Warrant Subscription Agreement enables CIH to maintain and/or increase its level of shareholding in the Group without granting pro-rata entitlement to all shareholders, the continued support of CIH to the Company through its controlling shareholding interests is, in the view of the Company, one of the Group’s critical elements and assets in further developing its existing businesses together with its business partners/ investors, especially the strategic cooperation with the sizeable enterprises as aforementioned. The Company is of the view, and we concur, that the entering by CIH into the Warrant Subscription Agreement demonstrates CIH’s continuous support to the Group and the confidence in the future performance of the Group.

It should also be noted that the Warrants are non-transferable and thus have no liquidity, implying that CIH could not derive any benefit from simply holding the Warrants. Therefore the economic benefits of the Warrants is dependent on the increase in trading price of the Shares which is driven by, among others, financial performance and fundamentals of the Group. CIH will therefore be motivated by its potential economic benefits from the subscription of Warrants to continue contributing its efforts to the Company’s businesses with the aim to improve the Company’s financial performance. Hence, we believe the benefit of the Warrants, when realised, will potentially be extended to all Shareholders, and the exercise of the Warrants would align the interest of CIH (as holder of the Warrants) with that of all the other Shareholders.

Given (i) the continued support from CIH (i.e. bringing in business partners/investors into the “Changyou” business) is of paramount importance for the purpose of facilitating and enhancing the Group’s exposure to further networks and opportunities and developing more products and services so as to enrich and improve the experience of the users and customers

– 47 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

of the “Changyou” platform; (ii) CIH will be motivated by its potential gain from the issue and subscription of Warrants to continue contributing its efforts to the Company’s businesses, i.e. the “Changyou ” platform, with the aim to improve the Company’s financial performance; (iii) further development of the “Changyou” platform is expected to generate promising financial results to the Group as substantiated by (a) the promising prospects for the new innovative e-commerce regions in the PRC as discussed above; (b) the satisfactory operational performance of the “Changyou” platform since its release in September 2017; and (c) the collaborations with several well-known and leading enterprises; (iv) the Share prices will potentially and positively be affected by the improved Company’s performance as a result of the development of the “Changyou” platform; and (v) the Shareholders would then be benefited and able to achieve capital gain from selling their Shares at a higher market price, we concur with the Company that the subscription and issue of the Warrants are in the interests of the Company and the Shareholders as a whole.

Notwithstanding the dilution effect as set out in the sub-section headed “5. Dilution effect of shareholding interests of existing shareholders”, and after having taken into account:

(i) the Company has no immediate need for financial resources;
(ii) the issue and exercise of the Warrants will allow the Group to strengthen its capital base and financial position, which provide opportunities for the Group to better equip itself for development of business activities in the future;
(iii) the focused development by the Group in the “Changyou” platform together with various well-known and leading enterprises from various industries, including CCBI, China UnionPay, BOC, China Mobile and China Eastern Airlines which is expected to generate promising financial results to the Group as substantiated by (a) the promising prospects for the new innovative e-commerce regions in the PRC as discussed above; (b) the satisfying operational performance of the “Changyou” platform since its release in September 2017; and (c) the collaborations with the said well-known and leading enterprises;
(iv) with reference to the 《2017中國電子商務報告》 (2017 E-Commerce in China Report*) issued by Ministry of Commerce of the PRC in May 2018, the total transaction volume of e-commerce business and the e-commerce services volume in the PRC had increased continuously during the years 2011 to 2017, showing a continuous growth trend for the e-commerce industry in the PRC. In addition, as stated in the report, the development of new innovative e-commerce regions such as the digital economy has become a global trend, and the PRC government has also pointed out to focus and expedite its development on the same while the digital economy in the PRC is stepping into a new stage of development and dynamic growth. Besides, it is expected that the growth trend of the e-commerce industry in the PRC will continue to sustain and the market size will continue to expand;

– 48 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(v) the total transaction volume of e-commerce business and the e-commerce services volume in the PRC had increased continuously during the years 2011 to 2017, showing a continuous growth trend for the e-commerce industry in the PRC;
(vi) the Warrants are non-interest bearing and do not incur any other significant costs and expenses to the Company;
(vii) the issue of the Warrants does not have any immediate dilution effect on the shareholding of the existing Shareholders; and
(viii) the continuous support demonstrated by CIH, and the motivation to improve the Company’s financial performance and exercise the Subscription Rights when the Company is in need of financial resources (given CIH’s interest is aligned with the development of the “Changyou” business, and hence the performance of the Group and the Share prices of the Company, it is the mutual understanding between the Company and CIH that CIH will exercise the Subscription Rights when funding is required), which helps easing uncertainties in raising funds by the Company to cope with its development in future,

we consider that (i) the subscription and issue of the Warrants provide flexibility to the Group when funding is required; (ii) the issue of Warrants would increase the net asset value of the Group and thus improves its financial position which is further discussed in the section headed “6. Possible financial effects of the issue of Warrants” below; and (iii) the issue of the Warrants is in the interests of the Company and the Shareholders as a whole.

The gross proceeds from the issue of Warrants will amount to approximately HK$2,980,000. The net proceeds from the issue of Warrants, after the deduction of related expenses, are expected to be approximately HK$1,480,000. Upon the full exercise of the Subscription Rights, it is expected that additional proceeds of approximately HK$411,240,000 will be raised. The Group intends that of the net proceeds of approximately HK$412,720,000, approximately HK$40 million will be applied towards the general working capital of the Group, approximately HK$150 million will be applied towards financing other potential projects of the Group which complement the “Changyou” business of the Group should suitable opportunities arise, and the remaining balance will be applied towards the further development and expansion of the “Changyou” business of the Group (including for the recruitment of personnel for the development of the “Changyou” platform, promotional and marketing activities and capital expenditure of the “Changyou” business such as technology infrastructure and financial technologies as mentioned above).

– 49 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. ASSESSMENT OF PRINCIPAL TERMS OF THE WARRANT SUBSCRIPTION AGREEMENT

In order to further assess the terms of the Warrant Subscription Agreement, we have reviewed (i) performance of the Share price; (ii) trading liquidity of the Shares; and (iii) fairness and reasonableness of the aggregate of the Subscription Price and the Strike Price (the “ Aggregate Price ”) over a 12-month period prior to the date of the Warrant Subscription Agreement from 27 March 2017 to 26 March 2018 (the “ Review Period ”). We consider that the length of the Review Period could reasonably enough to capture and demonstrate the latest price movements of the Shares.

(a) Review of Share price performance

Set out below is the movement of the Share price during the Review Period:

The daily closing price of the Shares during the Review Period Vs the Aggregate Price

==> picture [420 x 162] intentionally omitted <==

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

HK$
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
3/2017 4/2017 5/2017 6/2017 7/2017 8/2017 9/2017 10/2017 11/2017 12/2017 1/2018 2/2018
Closing Price Aggregate Price
----- End of picture text -----

During the Review Period, the lowest closing Share price was HK$1.01 on 8 September 2017, the highest closing Share price was HK$1.50 on 22 November 2017 and the average closing Share price was HK$1.24. The Aggregate Price of HK$1.39 represents a premium of approximately 37.6% over the lowest closing Share price, a discount of approximately 7.3% to the highest closing Share price and a premium of approximately 12.1% over the average closing Share price, respectively, during the Review Period. We note that the Aggregate Price (i.e. HK$1.39) falls within the range of the closing Share prices and is higher than the average closing Share price of HK$1.24 during the Review Period.

– 50 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) Review of trading liquidity

For the purpose of assessing the trading volume of the Shares, we set out below the average daily number of Shares traded for each month during the Review Period:

			Percentage of	Percentage of
			average daily
			turnover over
			total	number of
	Number of	Average daily	Shares in issue
	trading days	turnover		(%) *(note)*
2017
March	5	4,422,200		0.24
April	17	3,079,000		0.17
May	20	1,912,400		0.11
June	22	3,252,727		0.18
July	21	3,783,452		0.21
August	23	4,910,391		0.27
September	21	4,148,190		0.23
October	20	2,619,450		0.14
November	22	4,708,864		0.26
December	19	2,578,158		0.14
2018
January	22	754,636		0.04
February	18	1,644,444		0.09
March	18	2,335,500		0.13

Note: the percentage of average daily turnover over the total number of Shares in issue is based on the total number of issued Shares as at the last trading day of the respective month.

Based on table above, we note that the average daily trading volume of the Shares during the Review Period has been less than 0.27% of the total number of issued Shares. For the last three months prior to 26 March 2018, the average daily trading volume of the Shares has recorded 0.04%, 0.09% and 0.13% of the total number of issued Shares, respectively. In view of the data above, the Company is of the view, and we concur, that such relatively thin trading volume of the Shares in the open market would reduce the attractiveness to public investors in investing the Shares.

– 51 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(c) Fairness and reasonableness of the Aggregate Price

To assess the fairness and reasonableness of the Aggregate Price, we have attempted to identify comparable warrant issue exercises (the “ Comparable Transactions ”) which are (i) conducted by issuers who are listed on the Stock Exchange; (ii) involved in the placing or subscription of unlisted warrants under specific mandate; and (iii) carried out during the Review Period from 27 March 2017 to 26 March 2018.

To the best of our knowledge, effort and endeavour, we have identified 5 Comparable Transactions during the Review Period, which we consider them an exhaustive list based on the aforesaid selection criteria and represents a reasonable number of Comparable Transactions for analysis purpose.

In the above selection process, we have also (i) considered to extend the aforesaid selection criteria to connected transaction as defined under Chapter 14A of the Listing Rules. However, in such circumstance, it yields no comparable transaction results for analysis purpose; and (ii) noted that the reasons for the issue of the warrants of the Comparable Transactions mainly include offering the company of the Comparable Transactions a good opportunity to raise funds to, among others, strengthen their capital base for future business development. Although the reasons for the issue of the Warrants to CIH is to primarily incentivise CIH to further assist the Group in developing the “Changyou” business, but at the same time, we also note that it will allow the Group to raise additional financial resources as and when the Warrants are exercised, which is similar to the reasons for the issue of the Warrants by the companies of the Comparable Transactions.

Independent Shareholders should note that the Comparable Transactions are not connected transactions and the companies of the Comparable Transactions/the Comparable Transactions are not closely similar to the Company/the issue of the Warrants in terms of their business operations, financial positions and future prospects and the reasons in issuing the warrants. However, we consider that the Comparable Transactions were determined under similar market conditions and sentiment and hence, reflect the general market trend of warrant issue in the open market and therefore, the Comparable Transactions provide a general reference in assessing the fairness and reasonableness of the Aggregate Price.

– 52 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

				Premium/
				(Discount) of the
				strike price and
				the subscription
				price, if any, (the	Premium/
				“Aggregate	(Discount) of the
				Subscription	Aggregate
				Price”) of the	Subscription Price
				warrants over/(to)	of the warrants
				closing price per	over/(to) the net
				share on the last	asset value
				trading day prior	attributable to the
				to the date of	owners of the
Date of	Stock	Company	Term	announcement/	Company per	Reasons for the issue
announcement(s)	code	name	(Year)	agreement	share (Note)	of warrants
18 July 2017	690	Uni-Bio	3 years	25.03%	295.75%	The issue of the
		Science Group				warrants offers the
		Limited				company an
						opportunity to issue
						new shares at a
						premium to the
						prevailing market price
						of the shares to raise
						further fund when the
						warrant subscription
						rights are exercised.
5 June 2017 and	8326	Tonking New	3 years	13.07%	902.23%	The issue of warrants
19 May 2017		Energy Group				represents an
		Holdings				opportunity to raise
		Limited				funds for the company.
2 June 2017	1733	E-Commodities	5 years	10.00%	70.10%	The issue of the
		Holdings				warrants represents an
		Limited				opportunity to raise
						funds for the company.
16 May 2017	8351	Larry Jewelry	1 year	3.45%	(14.29)%	The placing of the
		International				bonds with the
		Company				warrants represents a
		Limited				good opportunity to
						raise additional funds
						for the company to
						enhance its working
						capital and financial
						position for the
						possible future
						investments, and also
						enlarge the shareholder
						and capital bases of the
						company.

– 53 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

				Premium/
				(Discount) of the
				strike price and
				the subscription
				price, if any, (the	Premium/
				“Aggregate	(Discount) of the
				Subscription	Aggregate
				Price”) of the	Subscription Price
				warrants over/(to)	of the warrants
				closing price per	over/(to) the net
				share on the last	asset value
				trading day prior	attributable to the
				to the date of	owners of the
Date of	Stock	Company	Term	announcement/	Company per	Reasons for the issue
announcement(s)	code	name	(Year)	agreement	share (Note)	of warrants
7 May 2017	442	KTL	2 years	33.58%	247.32%	The issue of the
		International				warrants represents a
		Holdings				good opportunity to
		Group Limited				raise additional funds
						for the group while
						broadening the
						shareholder and capital
						base of the company.
		Average	2.6 years	17.03%	305.26%
		Median	3 years	13.07%	247.32%
		Max	5 years	33.58%	927.40%
		Min	1 year	3.45%	(14.29)%
	1039	The Company	5 years	28.70%	438.76%

Source: The website of the Stock Exchange

Note: based on (i) the latest net asset value attributable to the owners of the Company as shown in the annual report or interim report; and (ii) the number of issued share capital of the respective companies of the Comparable Transactions prior to the date of announcement/ agreement

Based on the above table, we note that:

(a) the 28.70% premium of the Aggregate Price over the closing price on the date of the Warrant Subscription Agreement (i) falls within the range of the Aggregate Subscription Price of the Comparable Transactions (from a premium of approximately 3.45% to 33.58%); and (ii) is higher than both the average and median of the Aggregate Subscription Price of the of the Comparable Transactions of approximately 17.03% and 13.07% respectively; and
(b) although the Aggregate Subscription Price of the Comparable Transactions represent a relatively broad range from a discount of 14.29% to a premium of 927.40% over the net asset value attributable to the owners of the company per share, the 438.76% premium of the Aggregate Price of HK$1.39 over the net asset value attributable to the owners of the Company of approximately HK$0.258 per Share as at 31 December 2017 is higher

– 54 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

than the average of 305.26%, the median of 247.32%, and most of the Comparable Transactions. As such, we consider that the Aggregate Price is fair and reasonable and are in the interest of the Company and the Shareholders as a whole.

(d) Valuation on the Subscription Price

Further, we have assessed the fairness and reasonableness of the Subscription Price of HK$0.01 per Warrant by making reference to the Binomial Lattice Model (the “ BLM ”) used by Colliers International (Hong Kong) Limited (the “ Independent Valuer ”), which is an independent valuation firm engaged by the Company to assess the fair value of the Warrants (the “ Valuation ”).

According to the Independent Valuer, the BLM model provides a generalizable numerical method for the valuation of options, and adopts discrete time and non-closed form model of varying price over time of the underlying instruments. Based on the BLM model, the Independent Valuer concluded that, among others, the unit Warrant value was HK$0.3354 as at 26 March 2018, which implied that the Subscription Price of HK$0.01 per Warrant has a discount of approximately 97% to the theoretical unit value of the Warrants.

As advised by the Independent Valuer, the BLM and the assessment of the fair value of the Warrants are subject to a number of key assumptions and parameters, including but not limited to the following:

Assumptions:

(i) the risk-free rate is equal to the yield of 5-year Hong Kong Exchange Fund Notes issued by the Hong Kong Monetary Authority on or around 26 March 2018;
(ii) the volatility measured at the standard deviation of expected share price returns was determined with reference to the average weekly volatility of the comparable companies engaged in similar e-commerce business as the Company over the five consecutive years preceding 26 March 2018;
(iii) in the financial year ended 31 December 2016 and 2017, respectively, approximately 78% and 80% of the revenue of the Company, respectively, was attributable to the Group’s e-commerce business, while around 75% of the revenue of the Company was attributable to the Group’s axle and train business in 2015. After considering that the historical 5-year volatility of the Company mainly reflected its disposal of the Group’s axle and train business, which was disposed of in April 2017, companies engaging in e-commerce business are assumed to be a better reference and comparison in determining the expected 5-year volatility of the Company;

– 55 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iv) there is no material difference between the expected volatility over the whole life of the Warrants and the historical volatility of the comparable companies;
(v) the risk-free rate, dividend yield and volatility will be kept constant throughout the valuation period; and
(vi) the number of trading weeks per year is 52 weeks.

Parameters:

(i) the closing price of HK$1.08 per Share as quoted on the Stock Exchange on 26 March 2018, being the date of the Warrant Subscription Agreement;
(ii) the Strike Price of HK$1.38;
(iii) a vesting period of 0.5 years;
(iv) a risk free rate of 1.84%;
(v) the term of the Warrants is 5 years;
(vi) an expected volatility of 43.15%;
(vii) an expected dividend yield of 0%; and
(viii) an expected exercise multiple of 2.47x of the exercise price.

Nevertheless, after discussing with the Independent Valuer, it must however be pointed out that the BLM model is subject to a number of key assumptions and parameters. Save for item 3 of the assumptions and items 1, 2, 3 and 5 of the parameters, the above assumptions and parameters (which are theoretical and may not be observable in real practice) may not hold in real practice. If any of the assumptions or parameters of the BLM model are changed, the theoretical unit value of the warrants calculated by this pricing model may differ significantly from the actual value. We understand that the Independent Valuer has exercised its professional knowledge in adopting the above assumptions and other relevant key factors in the valuation, but such factors and assumptions are still vulnerable to the change of the business, economic environment, competitive uncertainties or any other abrupt alternations of external factors. Given that the usefulness of BLM as a pricing model is limited by its assumptions which may not hold in practice, the unit Warrant value calculated by way of the BLM model in the Valuation should be used as a reference only.

Given the aforesaid limitations would yield significant difference in the results of the unit value of the warrants, we are of the view that the fair value of the Subscription Price should not solely rely on the Valuation, but to also consider other factors such as the prevailing market prices of the Shares (which show that the

– 56 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Subscription Price together with the Strike Price are at a premium to the market price of the Shares) and the trading volume of the Shares (which is relatively thin and would reduce attractiveness to public investors).

In addition, we have observed and considered:

(i) upon issue and/or exercise of the Warrants, the Company’s net asset value is expected to be increased by the net proceeds generated;
(ii) the Warrants are non-transferable and thus have no liquidity, implying that CIH could not derive any benefit from simply holding the Warrants, and will need to exercise the Warrants into the Warrant Shares in order to obtain the economic benefits;
(iii) the relatively thin trading volume of the Shares in the open market would reduce the attractiveness to public investors in investing the Shares;
(iv) the 28.70% premium of the Aggregate Price over the closing price on the date of the Warrant Subscription Agreement (a) falls within the range of the Aggregate Subscription Price of the Comparable Transactions (from a premium of approximately 3.45% to 33.58%); (b) is higher than the average Aggregate Subscription Price of the of the Comparable Transactions of approximately 17.03%;
(v) the Aggregate Price of HK$1.39 falls within the range of the closing Share prices and is higher than the average closing Share Price of HK$1.24 during the Review Period; and
(vi) the Aggregate Price of HK$1.39 represents a premium of approximately 438.76% over the net asset value attributable to the owners of the Company of approximately HK$0.258 per Share as at 31 December 2017, and such premium is higher than most of the Comparable Transactions.

(e) The Exercise Period

According to the “Letter from the Board” of the Circular, the Subscription Rights attaching to the Warrants may be exercised at any time between the period commencing on the date that is six (6) months after the date of the issue of the Warrants and ending at 5:00 p.m. (Hong Kong time) on the Termination Date. As illustrated above, the subscription periods of the Comparable Transactions range from 1 year to 5 years. The Exercise Period, being a term of 5 years, therefore falls within the range of the Comparable Transactions.

After having considered the factors as discussed above, we concur with the Company that the terms of the Warrant Subscription Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

– 57 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

5. DILUTION EFFECT ON THE EXISTING SHAREHOLDERS

The following table illustrates changes in shareholding structure before and after the exercise of the Warrants:

CIH (Note 1) Starr International Foundation (Note 2) Other public Shareholders Total	As at the Latest Practicable Date No. of Shares Approximate % 598,885,818 33.02% 224,710,691 12.39% 989,912,763 54.59% 1,813,509,272 100.00%	Immediately after the full exercise of the Subscription Rights No. of Shares Approximate % 896,885,818 42.48% 224,710,691 10.64% 989,912,763 46.88% 2,111,509,272 100.00%	Immediately after the full exercise of the Subscription Rights No. of Shares Approximate % 896,885,818 42.48% 224,710,691 10.64% 989,912,763 46.88% 2,111,509,272 100.00%
			100.00%

Notes:

CIH is wholly owned by Ms. Pun Tang. A charge over the 109,343,662 Shares held by CIH had been created in favour of Chance Talent Management Limited. Chance Talent Management Limited is wholly-owned by CCBI Investments Limited, which is in turn wholly-owned by CCB International (Holdings) Limited. CCB International (Holdings) Limited is wholly-owned by CCB Financial Holdings Limited, which is in turn wholly-owned by CCB International Group Holdings Limited. CCB International Group Holdings Limited is wholly-owned by China Construction Bank Corporation, which is owned as to 57.11% by Central Huijin Investment Ltd.
Starr Investments Cayman II, Inc. and Starr Investments Cayman V Inc. are the beneficial owners of Shares as to 6.33% and 6.06% respectively. Starr Investments Cayman II, Inc. 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. and Starr Investments Cayman V, Inc. are wholly-owned subsidiaries of Starr International Investments Ltd., which is in turn wholly-owned by Starr International Company Inc. Starr International Company Inc. is wholly-owned by Starr International AG, which is wholly-owned by Starr International Foundation, a charitable foundation established in Switzerland.

It is noted from the above table that upon full exercise of Warrants by CIH, the shareholding interests of the public Shareholders would decrease by approximately 7.71%, from approximately 54.59% to 46.88%. It is also noted that CIH will increase its shareholding interest by approximately 9.46%, from approximately 33.02% to 42.48% (subject to the conditions on the exercise of the Subscription Rights under the Warrant Subscription Agreement).

Despite the dilution effects in terms of percentage of shareholdings to the public Shareholders as discussed above, after having taken into account (i) the reasons for and benefits of the subscription and issue of the Warrants, in particular, as CIH will be motivated by its potential economic benefits from the subscription of Warrants to continue contributing its efforts to the Company’s businesses with the aim to improve the Company’s financial performance, and hence when realised, the Share prices will potentially and positively be affected by the improved Company’s performance, and Shareholders would be benefited and able to achieve capital gain from selling their Shares at a higher market price;

– 58 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(ii) the subscription and issue of the Warrants would strengthen the capital base of the Company; (iii) the factors as discussed under the sub-section headed “(c) Fairness and reasonableness of the Aggregated Price” above, such as (x) the 28.70% premium of the Aggregate Price over the closing price on the date of the Warrant Subscription Agreement is higher than the average Aggregate Subscription Price of the Comparable Transactions; and (y) the 438.76% premium of the Aggregate Price of HK$1.39 over the net asset value attributable to the owners of the Company of approximately HK$0.258 per Share as at 31 December 2017 is higher than most of the Comparable Transactions; and (iv) the terms of the Warrant Subscription Agreement are fair and reasonable so far as the Independent Shareholders are concerned, such as (xx) the issue of Warrants will not incur any interest burden nor other significant costs and expenses to the Company while the Company may obtain potential funds from time to time to cope with its development in future; and (xy) the Exercise Period, being a term of 5 years, falls within the range of the Comparable Transactions, we are of the view that the level of dilution to the shareholding interests of the existing public Shareholders as aforementioned would be off-set by the potential benefits to the Company and the Shareholders and is justifiable as a whole.

6. POSSIBLE FINANCIAL EFFECTS OF THE ISSUE OF WARRANTS

As extracted from the 2017 Annual Report, the audited consolidated net asset value and the gearing ratio (calculated as total borrowing to total equity) of the Group were approximately RMB332.4 million and 0.26 respectively as at 31 December 2017. In the event that the Warrants are exercised in full, the Group’s net asset value and the total assets are expected to increase by the net proceeds therefrom in the amount of approximately HK$411.2 million. Since the issue and exercise of Warrants would not lead to any change in the total debt borrowings of the Group while the total assets of the Group are expected to increase, the gearing ratio of the Group is expected to improve upon issue and exercise of the Warrants.

RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we are of the opinion that (i) the terms of the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) the issue and subscription of Warrants are not in the ordinary and usual course of business of the Group; and (iii) the issue and the subscription of Warrants are in the interests of the Company and the Shareholders as a whole.

– 59 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution(s) to be proposed at the EGM to approve the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder and we recommend the Independent Shareholders to vote in favour of the resolution(s) in this regard.

Yours faithfully, For and on behalf of Amasse Capital Limited May Tsang Director

– 60 –

GENERAL INFORMATION

APPENDIX

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 INTEREST AND SHORT POSITIONS IN THE SHARES, UNDERLYING SHARES AND DEBENTURES OR ANY ASSOCIATED CORPORATIONS

(a) As at the Latest Practicable Date, the interests and short positions of the Directors, chief executive 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 (i) 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 in which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange, were as follows:

Long position in the Shares

	Number of underlying	Approximate
	Shares comprised in	percentage of the
Name of Director	options	Shares in issue(Note 3)
Cheng Jerome	87,000,000_(Note 1)_	4.80%
Yuan Weitao	15,000,000_(Note 2)_	0.83%
Guo Yan	15,000,000_(Note 2)_	0.83%

Notes:

This represents the interest in underlying Shares of the Share Option Scheme to be allotted and issued upon the exercise of the 15,000,000 options granted on 3 October 2016 and 72,000,000 options granted on 4 May 2018 (subject to the approval by the Shareholders).
These represent the interests in the underlying Shares of the Share Option Scheme to be allotted and issued upon the exercise of the options granted on 3 October 2016.
The approximate percentage is based on a total of 1,813,509,272 issued Shares as at the Latest Practicable Date.
(b) Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors, chief executive of the Company or their respective associates had any interests or short positions in the Shares, underlying Shares or debentures of the

– I-1 –

GENERAL INFORMATION

APPENDIX

Company or its associated corporations (within the meaning of Part XV of the SFO) which (i) 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 in which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, 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:

			Approximate
		Interest in	percentage of
Name of Shareholder	Nature of interest	Shares	interest(Note 6)
Century Investment (Holding)	Beneficial interest	598,885,818	33.02%
Limited_(Note 1)_
Starr International	Interest of controlled	224,710,691	12.39%
Foundation_(Note 2)_	corporation
Central Huijin Investment	Interest of controlled	173,878,252	9.59%
Ltd.(Note 1)	corporation
China Construction Bank	Interest of controlled	173,878,252	9.59%
Corporation_(Note 1)_	corporation
Beijing Enterprises Real	Beneficial interest	151,515,000	8.35%
Estate (HK) Limited_(Note 3_)
Yang Liu_(Note 4)_	Interest of controlled	148,400,000	8.18%
	corporation
Taiping Trustees	Beneficial interest	138,888,000	7.66%
Limited_(Note 5)_

– I-2 –

GENERAL INFORMATION

APPENDIX

Notes:

CIH is wholly owned by Ms. Pun Tang. A charge over the 109,343,662 Shares held by CIH had been created in favour of Chance Talent Management Limited. Chance Talent Management Limited is wholly owned by CCBI Investments Limited, which is in turn wholly owned by CCB International (Holdings) Limited. CCB International (Holdings) Limited is wholly owned by CCB Financial Holdings Limited, which is in turn wholly owned by CCB International Group Holdings Limited. CCB International Group Holdings Limited is wholly owned by China Construction Bank Corporation, which is owned as to 57.11% by Central Huijin Investment Limited.
Starr Investments Cayman II, Inc. and Starr Investments Cayman V, Inc. are the beneficial owners of Shares as to 6.33% and 6.06% respectively. Starr Investments Cayman II, Inc. is wholly-owned by Starr International Cayman, Inc., which is in turn wholly owned by Starr Insurance and Reinsurance Limited. Starr Insurance and Reinsurance Limited and Starr Investments Cayman V, Inc. are wholly-owned subsidiaries of Starr International Investments Limited, which is in turn wholly-owned by Starr International Company Inc. Starr International Company Inc. is wholly-owned by Starr International AG, which is wholly-owned by Starr International Foundation, a charitable foundation established in Switzerland.
Beijing Enterprises Real Estate (HK) Limited is wholly owned by 北京北控置業有限責任公司, which is in turn wholly owned by Beijing Enterprises Group Company Limited. Beijing Enterprises Group Company Limited is wholly owned by the State-owned Assets Supervision and Administration Commission of the People’s Government of Beijing Municipality.
Riverwood Asset Management (Cayman) Limited, Atlantis Investment Management (Ireland) Limited and Atlantis Investment Management (Hong Kong) Limited are the beneficial owners of the Shares. Riverwood Asset Management (Cayman) Limited is wholly owned by Yang Liu. Atlantis Investment Management (Ireland) Limited and Atlantis Investment Management (Hong Kong) Limited are wholly owned by Atlantis Capital Holdings Limited which is in turn wholly owned by Yang Liu.
Taiping Trustees Limited is the beneficial owner of the Shares. The ultimate controlling shareholder of Taiping Trustees Limited is China Taiping Insurance Group Limited, which is ultimately controlled by the State Council of the PRC.
The approximate percentage is based on a total of 1,813,509,272 issued Shares as at the Latest Practicable Date.

4. DIRECTORS’ INTERESTS IN CONTRACTS AND ASSETS

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

As at the Latest Practicable Date, none of the Directors had any direct or indirect interests in any assets which had been, since 31 December 2017 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to, any member of the Group.

5. DIRECTOR’S INTERESTS IN COMPETING BUSINESS

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

– I-3 –

GENERAL INFORMATION

APPENDIX

6. LITIGATION

As at the Latest Practicable Date, the Group was not engaged in any litigation, arbitration or claims of material importance, and no litigation, arbitration or claims of material importance were known to the Directors to be pending or threatened against any member of the Group.

7. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with the Group which is not determinable by the Company within one year without payment of compensation other than statutory compensation.

8. EXPERT’S QUALIFICATION AND CONSENT

The following is the qualification of the expert whose statements have been included in this circular:

Name Qualification Amasse Capital Limited A corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, and the independent financial adviser to the Independent Board Committee and the Independent Shareholders

Amasse Capital Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter, opinion and report and references to its name in the form and context in which it appears.

As at the Latest Practicable Date, Amasse Capital Limited had not had any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Amasse Capital Limited had not had any direct or indirect interests in any assets which have been, since 31 December 2017 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to, or are proposed to be acquired or disposed of by or leased to, any member of the Group.

9. MATERIAL ADVERSE CHANGE

The Directors confirm that, as at the Latest Practicable Date, there had been no material adverse change in the financial or trading position of the Group since 31 December 2017 (being the date to which the latest published audited consolidated financial statements of the Group have been made up).

– I-4 –

GENERAL INFORMATION

APPENDIX

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the Company’s principal place of business in Hong Kong at Room 1001-1009, 10/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong from the date of this circular up to and including 31 July 2018:

(a) the Warrant Subscription Agreement;
(b) the Warrant Instrument;
(c) the letter from the Independent Board Committee to the Independent Shareholders, the text of which is set out on pages 27 to 28 of this circular;
(d) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 29 to 60 of this circular;
(e) the written consent referred to in the section headed “Expert’s Qualification and Consent” in this Appendix; and
(f) this circular.

11. GENERAL

In the event of inconsistency, the English version of this circular shall prevail over the Chinese text.

– I-5 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [179 x 57] intentionally omitted <==

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (“ EGM ”) of Fortunet e-Commerce Group Limited (“ Company ”) will be held at 10:30 a.m. on Tuesday, 31 July 2018 at Room 1001-1009, 10/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong, or at any adjournment thereof, to consider and, if thought fit, pass the following resolutions, with or without amendments, as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT :

(a) the Warrant Subscription Agreement (as defined in the circular of the Company dated 5 July 2018 (the “ Circular ”)), a copy of which has been produced to the EGM and marked “A” and initialed by the chairman of the EGM for identification purposes, pursuant to which the Company conditionally agreed to issue, and Century Investment (Holding) Limited conditionally agreed to subscribe for, 298,000,000 Warrants (as defined in the Circular) at the Subscription Price (as defined in the Circular) and the transactions contemplated thereunder, be and are hereby considered, approved, confirmed and ratified;
(b) the Warrant Instrument (as defined in the Circular), a copy of which has been produced to the EGM and marked “B” and initialed by the chairman of the EGM for identification purposes, and the transactions contemplated thereunder, be and are hereby considered, approved, confirmed and ratified;
(c) the grant of the Specific Mandate (as defined in the Circular) to the directors of the Company to allot and issue the Warrant Shares (as defined in the Circular) at the Strike Price (as defined in the Circular) upon the exercise of the Subscription Rights (as defined in the Circular) be and is hereby approved, and subject to the completion of the Warrant Subscription Agreement, 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 for the purpose of, or in connection with, implementing and/or giving effect to any matter relating to or incidental to the Specific Mandate; and

– EGM-1 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

(d) 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 for the purpose of, or in connection with, implementing and/or giving effect to the Warrant Subscription Agreement, the Warrant Instrument and the transactions contemplated thereunder.”

By order of the Board Fortunet e-Commerce Group Limited Mr. Cheng Jerome Chairman

Hong Kong, 5 July 2018

Notes:

A member of the Company entitled to attend and vote at the EGM 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.
Where there are joint holders of any share of the Company, any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he/she 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.
In order to be valid, a form of proxy together with the power of attorney 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, Wan Chai, 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.

As at the date of this notice, the executive Directors are Mr. Cheng Jerome and Mr. Yuan Weitao; the non-executive Director is Mrs. Guo Yan; and the independent non-executive Directors are Mr. Wong Chi Keung, Mr. Liu Jialin and Mr. Chan Chi Keung Alan.

– EGM-2 –

AI assistant

Changyou International Group Limited — Proxy Solicitation & Information Statement 2018

49641_rns_2018-07-05_d73d27e5-4bf4-48ad-9f8b-be7993aa7788.pdf

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

(1) CONNECTED TRANSACTION IN RELATION TO THE ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE AND

(2) NOTICE OF EXTRAORDINARY GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

(Stock Code: 1039)

Executive Directors:

Non-executive Director:

Independent non-executive Directors:

CONNECTED TRANSACTION IN RELATION TO THE ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE

INTRODUCTION

LETTER FROM THE BOARD

WARRANT SUBSCRIPTION AGREEMENT

Date

Parties

Information on the Warrants

Subscription Price

LETTER FROM THE BOARD

Assumptions

Parameters

Strike Price

LETTER FROM THE BOARD

Other principal terms of the Warrants

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Listing

Conditions precedent

Closing

INFORMATION ON CIH

INFORMATION ON THE COMPANY AND THE GROUP

LETTER FROM THE BOARD

REASONS FOR THE ISSUE OF WARRANTS AND USE OF PROCEEDS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

FUND RAISING ACTIVITY BY THE COMPANY IN THE PAST TWELVE MONTHS

SHAREHOLDING STRUCTURE OF THE COMPANY

LETTER FROM THE BOARD

LISTING RULES IMPLICATION

LETTER FROM THE BOARD

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

EGM

LETTER FROM THE BOARD

RECOMMENDATION

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

FORTUNET E-COMMERCE GROUP LIMITED 鑫網易商集團有限公司

CONNECTED TRANSACTION IN RELATION TO THE ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE

CONNECTED TRANSACTION ISSUE OF UNLISTED WARRANTS UNDER SPECIFIC MANDATE

INTRODUCTION

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

OUR INDEPENDENCE

BASIS OF OUR OPINION

PRINCIPAL FACTORS TAKEN INTO CONSIDERATION

1. INFORMATION ON THE GROUP AND CIH

1.1 The Company and the Group

1.2 Financial information of the Group

1.3 Fund raising activity in the last 12 months

1.4 Information on CIH

2. PRINCIPAL TERMS OF THE WARRANT SUBSCRIPTION AGREEMENT

2.1 Date

2.2 Parties

2.3 Information on the Warrants

2.4 Subscription Price and Strike Price

2.5 Other principal terms of the Warrants

2.6 Conditions precedent

3. REASONS FOR THE ISSUE OF WARRANTS AND USE OF PROCEEDS

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

E-commerce transaction volume in the PRC

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. ASSESSMENT OF PRINCIPAL TERMS OF THE WARRANT SUBSCRIPTION AGREEMENT

(a) Review of Share price performance

Changyou International Group Limited Proxy Solicitation & Information Statement 2018