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 Changyou Alliance Group Limited , you should at once hand this circular, together with the enclosed form of proxy, to the purchaser(s) or the transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

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

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

(1) CONTINUING CONNECTED TRANSACTION IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY

AND

(2) NOTICE OF EXTRAORDINARY GENERAL MEETING

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

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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 6 to 15 of this circular and a letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 16 to 17 of this circular. A letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 18 to 34 of this circular.

A notice convening the EGM to be held at Rooms 1908-1916, 19/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong on Monday, 31 May 2021 at 10:00 a.m. is set out on pages EGM-1 to EGM-2 of this circular. A proxy form for use by the Shareholders for the EGM is enclosed with this circular. Whether or not you are able to attend the EGM in person, you are requested to complete the enclosed 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). The 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.

PRECAUTIONARY MEASURES FOR THE EGM
Please refer to the section headed “Precautionary Measures for the EGM” of this circular for the precautionary measures being implemented by the Company in order to safeguard the health and safety of the Shareholders and all attendees at the EGM and to prevent the spread of the coronavirus (“ COVID-19 ”), including: � compulsory body temperature checks will be conducted at the entrance of the EGM venue. Any person with a body temperature of 37.4 degrees Celsius or above, or is exhibiting flu-like symptoms, may be denied entry into the EGM venue and may be required to leave the EGM venue but may be allowed to vote by submitting a voting slip to the scrutineer at the entrance of the EGM venue;
� every attendee will be required to wear a surgical face mask throughout the EGM and at all times within the EGM venue;
� appropriate social distancing and seating arrangements in line with the Regulation (as defined below) will be maintained; and

� no refreshment or drinks will be served at the EGM. Any person who does not comply with the precautionary measures above or is subject to any Hong Kong Government prescribed quarantine may be denied entry to the EGM venue. The Company would like to further remind the Shareholders that physical attendance in person at the EGM is not necessary for the purpose of exercising voting rights. Shareholders are encouraged to appoint the chairman of the EGM as their proxy to vote on the relevant resolution at the EGM, as an alternative to attending the EGM in person.

12 May 2021

	Page
Precautionary Measures for the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . .	16
Letter from the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . .	18
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

PRECAUTIONARY MEASURES FOR THE EGM

To safeguard the health and safety of the Shareholders and all attendees at the EGM and to prevent the spread of COVID-19, the following precautionary measures will be implemented at the EGM, including:

compulsory body temperature checks will be conducted for every attendee at the entrance of the EGM venue. Any person with a body temperature of 37.4 degrees Celsius or above, or is exhibiting flu-like symptoms, may be denied entry into the EGM venue and may be required to leave the EGM venue but may be allowed to vote by submitting a voting slip to the scrutineer at the entrance of the EGM venue;
every attendee will be required to wear[#] a surgical face mask throughout the EGM and at all times within the EGM venue;
in view of the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation (Chapter 599G of the Laws of Hong Kong) (the “ Regulation ”), the Shareholders attending in person at the venue of the EGM in excess of the 20 persons limit (or such other prevailing limit from time to time) under the Regulation will be accommodated in separate room(s) and/or partitioned area(s) in the same room at the venue of the EGM, with not more than 20 (or such other number of persons allowed under the Regulation) persons (including supporting staff for the EGM) in each such room and/or partitioned area; and
no refreshment or drinks will be served at the EGM.

Any person who does not comply with the precautionary measures above or is subject to any Hong Kong Government prescribed quarantine may be denied entry to the EGM venue.

The Company would like to remind the Shareholders that physical attendance in person at the EGM is not necessary for the purpose of exercising voting rights. Shareholders are encouraged to appoint the chairman of the EGM as their proxy to vote on the relevant resolution at the EGM, as an alternative to attending the EGM in person. In order to be valid, a proxy form 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 holding of the EGM or any adjournment thereof (as the case may be) .

Subject to the development of the COVID-19 pandemic and any directive(s) that may be further issued by the Hong Kong Government, the Company may implement further changes and precautionary measures and may issue further announcement(s) on such measures as and when appropriate.

# A reference to a person wearing a mask is a reference to the person wearing a mask over and covering the person’s nose and mouth, with the mask touching the person’s nose, chin and cheeks.

– ii –

DEFINITIONS

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

“2019 Facility Agreement”
the facility agreement dated 3 September 2019 and entered into between the Company as the lender and PCL as borrower in relation to the 2019 Revolving Loan Facility, the details of which are set out in the announcement of the Company dated 3 September 2019 and the circular of the Company dated 15 October 2019
“2019 Revolving Loan Facility”
an unsecured revolving loan facility of a total principal amount not exceeding HK$100 million as set out in the 2019 Facility Agreement, the details of which are set out in the announcement dated 3 September 2019 and the circular dated 15 October 2019 of the Company
“2021 Facility Agreement”
the facility agreement dated 20 April 2021 and entered into between the Company (as lender) and PCL (as borrower) in relation to the 2021 Revolving Loan Facility
“2021 Revolving Loan Facility”
an unsecured revolving loan facility of a total principal amount not exceeding HK$100 million on the terms, and subject to the conditions, set out in the 2021 Facility Agreement, the details of which are set out in the paragraph headed “2021 Facility Agreement” in the section headed “Letter from the Board” in this circular
“Announcement”
the announcement of the Company dated 20 April 2021 in respect of the 2021 Facility Agreement (including the proposed Annual Caps) and the transactions contemplated thereunder
“Annual Caps”
the maximum annual amount in relation to the transactions contemplated under the 2021 Facility Agreement, as required under Rule 14A.53 of the Listing Rules
“associate(s)”
has the meaning ascribed to it under the Listing Rules
“Available Facility”
the total principal amount of the 2021 Revolving Loan Facility available for drawing from time to time pursuant to the 2021 Facility Agreement
“Board”
the board of Directors

– 1 –

DEFINITIONS

“Business Day” a day (other than a Saturday, Sunday or public holiday) on which commercial banks are open for general business in Hong Kong
“Chance Talent” Chance Talent Management Limited, a business company incorporated in the British Virgin Islands with limited liability and an indirect wholly-owned special purpose vehicle of CCB International (Holdings) Limited
“CIH” Century Investment (Holding) Limited, a company incorporated in the British Virgin Islands with limited liability, and a substantial shareholder of the Company. It is wholly-owned by Ms. Pun Tang
“Company” Changyou Alliance Group Limited, a company incorporated in the Cayman Islands with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange
“connected subsidiary(ies)” has the meaning ascribed thereto in the Listing Rules “Director(s)” director(s) of the Company
“Drawdown Date” the date of the first drawdown of each Loan by PCL

“Eastern E-Commerce” China Eastern Airlines E-Commerce Co., Ltd（東方航空電子商務有限公司）, a company established in the PRC and a wholly-owned subsidiary of China Eastern Airlines Corporation Limited “Easylink” Easylink Payment Network (Hong Kong) Company Limited, a company incorporated in Hong Kong with limited liability and an indirect wholly-owned subsidiary of China UnionPay Merchant Services Company Limited

“EGM”

an extraordinary general meeting of the Company to be convened and held on Monday, 31 May 2021 at 10:00 a.m. to consider, and if thought fit, approve, among other things, the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder

“Extra Step”

Extra Step Investments Limited, a company incorporated in the British Virgin Islands with limited liability, and a wholly-owned subsidiary of China Mobile (Hong Kong) Group Limited

– 2 –

DEFINITIONS

“Facility Period”

“Fin-Tech”

the 3-year period from and including the date on which the Company is satisfied that all the conditions precedent of the 2021 Facility Agreement have been fulfilled or specifically waived in writing by the Company Fin-Tech Company Limited, a company incorporated in the Cayman Islands with limited liability, and a wholly-owned subsidiary of CIH

“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 and give recommendations to the Independent Shareholders in relation to the 2021 Facility Agreement (including the proposed Annual Caps) and the transactions contemplated thereunder
“Independent Financial Adviser” or “Red Sun Capital Limited”
Red Sun 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 Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), and the independent financial adviser to the Independent Board Committee and the Independent Shareholders
“Independent Shareholders”

Shareholders other than CIH

“Interest Payment Date”

(i) each 30 June and 31 December of each year, commencing on the relevant Drawdown Date in respect of each Loan; and (ii) the Repayment Date

“Joy Empire”

Joy Empire Holdings Ltd., a company incorporated in the British Virgin Islands with limited liability and a wholly-owned subsidiary of Bank of China Group Investment Limited

– 3 –

DEFINITIONS

“Latest Practicable Date” 10 May 2021, 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
“Loan” a loan made or to be made under the 2021 Revolving Loan Facility or the total principal amount outstanding from time to time of the loan(s) advanced to PCL pursuant to the 2021 Revolving Loan Facility under the 2021 Facility Agreement
“Long Stop Date” 30 September 2021 or such later date as may be agreed between the Company and PCL in writing
“PCL” Pointsea Company Limited, a company incorporated in the Cayman Islands with limited liability, and an indirect non-wholly-owned subsidiary of the Company
“Pointsea Holdings” Pointsea Holdings Company Limited, a company incorporated in the British Virgin Islands with limited liability, and an indirect non-wholly-owned subsidiary of the Company
“PRC” the People’s Republic of China, and for the purpose of this circular, excluding Hong Kong, the Macau Special Administrative Region of the People’s Republic of China and Taiwan
“Repayment Date”
the date falling on the expiry of the Facility Period or such later date as may be agreed between PCL and the Company in writing, being the date for the repayment of all Loan(s) (together with all interest accrued thereon) in full
“Senran Investment”
Senran Investment HK Company Limited (森然投資（香港）有限公司）, a company incorporated in Hong Kong with limited liability and is ultimately beneficially owned by Ms. Yang Xiangru and Ms. Yuan Beiling, who are third parties independent of the Company and its connected persons (as defined in the Listing Rules)
“SFO”
the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share(s)”

the ordinary share(s) of par value US$0.01 each in the share capital of the Company

– 4 –

DEFINITIONS

“Shareholder(s)” the holder(s) of the Shares “Stock Exchange” The Stock Exchange of Hong Kong Limited “substantial shareholder” has the meaning ascribed to it under the Listing Rules “Treasure Ease” Treasure Ease Holdings Limited, a company incorporated in the British Virgin Islands with limited liability, and a direct non-wholly-owned subsidiary of the Company “Zhongjin Qizhi” Zhongjin Qizhi (Shanghai) Equity Investment Centre (Limited Partnership)* （中金祺智（上海）股權投資中心（有限合夥））, a limited partnership established in the PRC and a subsidiary of an equity investment fund managed by CICC Capital (Cayman) Limited, which is in turn a wholly-owned subsidiary of China International Capital Corporation Limited “%” per cent.

* For identification purposes only

– 5 –

LETTER FROM THE BOARD

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

Executive Directors: Registered Office: Mr. Cheng Jerome (Chairman) Royal Bank House Mr. Yuan Weitao 3rd Floor 24 Shedden Road Non-executive Director: P.O. Box 1586 Mrs. Guo Yan 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: Rooms 1908-1916 19/F, Sun Hung Kai Centre 30 Harbour Road Wan Chai Hong Kong 12 May 2021

To the Shareholders

Dear Sir or Madam,

(1) CONTINUING CONNECTED TRANSACTION IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY AND (2) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Reference is made to the Announcement.

On 20 April 2021 (after trading hours), the Company (as lender) and PCL (as borrower) entered into the 2021 Facility Agreement, pursuant to which the Company conditionally agreed to grant the 2021 Revolving Loan Facility of up to HK$100 million to PCL, an indirect non-wholly-owned subsidiary of the Company.

The purpose of this circular is to provide you with, among other things, (a) further information on the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder; (b) a letter from the Independent Board Committee to the Independent Shareholders containing the recommendations in relation to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder; (c) a letter from the Independent Financial Adviser to the Independent Board Committee and the

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LETTER FROM THE BOARD

Independent Shareholders in relation to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder; (d) a notice convening the EGM; and (e) other information required under the Listing Rules.

2021 FACILITY AGREEMENT

The major terms of the 2021 Facility Agreement are set out below:

Date : 20 April 2021 (after trading hours) Parties : (i) the Company, as lender; and (ii) PCL, as borrower Amount of 2021 : Up to HK$100 million Revolving Loan Facility

Purpose of 2021 : For developing the digital point business of PCL’s group Revolving Loan of companies and for capital expenditure and general Facility working capital of PCL’s group companies.
Facility Period : The 3-year period from and including the date on which the Company is satisfied that all the conditions precedent of the 2021 Facility Agreement have been fulfilled or specifically waived in writing by the Company.

Drawdown : During the Facility Period, PCL may draw the Available Facility, in a single amount or in multiple amounts, from time to time on a Business Day after all conditions precedent of the 2021 Facility Agreement are satisfied, provided that PCL gives the Company at least two Business Days’ prior written notice (or a shorter notice as the Company may agree) prior to the date on which PCL wants to draw the Available Facility.

The amount of each drawdown shall be a minimum of HK$1 million and in integral multiples of HK$1 million or if the Available Facility at the time of drawing is less than HK$1 million, the full amount of such Available Facility.

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LETTER FROM THE BOARD

Conditions precedent : The drawing of the Available Facility is conditional upon (i) the Independent Shareholders having approved the 2021 Facility Agreement and the transactions contemplated thereunder at the EGM; and (ii) the Company having received all the documents and evidence required in the 2021 Facility Agreement.

If these conditions have not been fulfilled on or before the Long Stop Date, then the 2021 Facility Agreement shall automatically terminate in accordance with its terms.

Security : None
Interest : (i) PCL shall pay interest on the outstanding principal amount of each Loan at the rate of 6.5% per annum (on the basis of a 365-day year); and (ii) interest shall accrue daily, calculated on the basis of the actual number of days elapsed from (and including) the Drawdown Date and shall be payable on each Interest Payment Date.
Repayment Date : The date falling on the expiry of the Facility Period, or such later date as may be agreed between PCL and the Company in writing, being the date for the repayment of all Loan(s) (together with all interest accrued thereon) in full.
Voluntary : PCL may, at any time after a Loan has been advanced and prepayment prior to the Repayment Date, prepay such Loan in whole or in part (together with all interest accrued thereon), without any penalty.
Reborrowing : PCL may reborrow any part of the 2021 Revolving Loan Facility which has been prepaid or repaid in accordance with the terms of the 2021 Facility Agreement, provided that (i) no event of default as set out in the 2021 Facility Agreement has occurred; and (ii) the aggregate outstanding principal amount of all Loan(s) shall not exceed HK$100 million at any time during the Facility Period.

PROPOSED ANNUAL CAPS OF THE 2021 FACILITY AGREEMENT

The proposed Annual Caps in respect of the 2021 Revolving Loan Facility under the 2021 Facility Agreement for each financial year during the Facility Period shall not exceed HK$100 million. The proposed Annual Caps were determined by reference to (i) the maximum principal amount of the Loan(s) to be granted by the Company to PCL pursuant to the 2021 Facility Agreement; (ii) the principal amounts of the loans granted under the 2019

– 8 –

LETTER FROM THE BOARD

Facility Agreement which has been fully utilized; (iii) the annual caps for the 2019 Facility Agreement; and (iv) the operations and developments of the “Changyou” business of the Group.

As at the Latest Practicable Date, the outstanding loan balance granted to PCL was HK$100 million and the aggregate interest received by the Company under the 2019 Facility Agreement was approximately HK$3.9 million. Up to the Latest Practicable Date, the actual loan amount granted to PCL by the Company in any point of time had not exceeded the approved annual caps (the “ 2019 Annual Caps ”) under the 2019 Facility Agreement.

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 principally engaged in the development and operations of the electronic platform, “Changyou”, which aims to integrate the digital membership points, resources and strategic advantages of business partners in the Changyou digital point business ecosystem alliance. The digital membership points from various partnership entities and industries are interchangeable and redeemable globally as virtual assets and credit on the “Changyou” platform and can be purchased, earned and used by customers for the purpose and consumption of merchandise, games and entertainment, financial services and other commercial transactions.

INFORMATION ON PCL

PCL is an investment holding company incorporated in the Cayman Islands with limited liability. As at the Latest Practicable Date, PCL’s entire issued share capital was owned as to 47.24% by Pointsea Holdings, 15.75% by Joy Empire, 15.75% by Extra Step, 15.75% by Eastern E-Commerce, 2.76% by Zhongjin Qizhi and 2.76% by Senran Investment.

REASONS FOR AND BENEFITS OF THE 2021 REVOLVING LOAN FACILITY

The day-to-day operations of the “Changyou” business are capital intensive, 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 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.

– 9 –

LETTER FROM THE BOARD

With the development of blockchain technology, digital assets have received increasing attention from the industry and transactions by way of digital assets are developing towards better compliance and legalisation. Leveraging advanced technologies such as blockchain and big data analysis, the Group’s “Changyou” platform has undergone rapid development since its launch, with an increasing number of users, more diversified products and services, as well as optimized business models and consumption scenarios. As at 31 December 2020, the cumulative number of registered users of the “Changyou” platform amounted to approximately 59.0 million, representing an increase of approximately 57% as compared with the total number of registered users of approximately 37.6 million as at 31 December 2019. For the year ended 31 December 2020, the total turnover derived from the business operations of the “Changyou” platform amounted to approximately RMB268.8 million, representing an increase of approximately 32% as compared with the total turnover of approximately RMB204.1 million for the year ended 31 December 2019. The gross merchandise volume of the “Changyou” platform amounted to approximately RMB440.1 million for the year ended 31 December 2020, representing an increase of approximately 33% as compared with the gross merchandise volume of approximately RMB330.0 million for the year ended 31 December 2019.

“Changyou” is a cross-channel e-commerce and marketing platform that supports full-channel operation of large institutions such as operators, China UnionPay Merchant Services Company Limited, banks and insurance companies with its supply chain products’ operational capabilities. Based on the needs of the customers, “Changyou” develops cross-channel supply chain products for different user scenarios, in order to provide support and help channel business partners to achieve their digital point conversion. In 2021, the Group will focus on (i) the operation of the main site mobile application and public account, with an aim to build a high-quality supply chain and provide operational solutions to its business partners; and (ii) the cooperation and channel development of the “Changyou” business partners such as China Mobile (Hong Kong) Group Limited, China UnionPay Merchant Services Company Limited, banks and insurance companies, as well as the retail platforms for key account merchants and chain O2O merchants. It is expected that working capital of the “Changyou” business of the Group for the upcoming twelve months will require approximately HK$108 million.

The “Changyou” business is the sole operating segment of the Group which is conducted through PCL and its subsidiaries (the “PCL Group”). As at the Latest Practicable Date, the 2019 Revolving Loan Facility had been fully utilized. Further, as at 31 March 2021, the cash balance held by the PCL Group amounted to approximately HK$25.7 million. Considering PCL Group’s current monthly net cash outflow of approximately HK$9.0 million, it is expected that the PCL Group will deplete all their cash from operations in around June 2021. Therefore, PCL has an urgent need for funding to avoid the risk of discontinuance of its operations and to, among other things, retain its employees. Furthermore, as discussed above, the 2019 Annual Caps have been fully utilized, there is no room for the Company to further inject working capital to the PCL Group to further develop the “Changyou” platform if the 2021 Facility Agreement and the Annual Caps are not approved by the Shareholders.

– 10 –

LETTER FROM THE BOARD

As disclosed in the annual report of the Company for the year ended 31 December 2020, the Company has resolved to change part of the net proceeds from the issuance of the convertible bonds issued by the Company to CIH on 19 October 2020 (the “2020 Convertible Bonds”) to fund the operation of the existing “Changyou” platform in China. It is intended by the Company to utilise such proceeds to finance the 2021 Revolving Loan Facility. Given (i) the “Changyou” business is the sole operating segment of the Group which is conducted through the PCL Group; and (ii) PCL’s urgent need for funding its operations as described above, the Company considers that the aforementioned change in use of proceeds is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

PCL has explored other financing opportunities in order to meet its financing needs. PCL has considered the feasibility of debt financing from banks and/or non-banking financial institutions both in the short term, as well as attempted to seek other sources of fundraising activities for the development and expansion of the “Changyou” business of the Group in the long term. PCL had approached and negotiated with two banks and/or financial institutions to obtain loan facilities. However, due to PCL’s loss-making performance for the year ended 31 December 2020, no principal terms (such as interest rate and requirements for the provision of charges and/or other security) was able to be quoted or offered during the negotiations. On the other hand, PCL has also considered the feasibility of equity financing from private equity firms. However, due to the uncertainties associated with the COVID-19 pandemic outbreak, most private equity firms have been cautious in making investment decisions, impeded the equity fund raising exercises by PCL.

In comparison, the Board considers that the provision of the 2021 Revolving Loan Facility will not create any additional external financing cost to be incurred by the Group.

PCL considers the 2021 Revolving Loan Facility to be a flexible, viable and preferred option for PCL as and when it has to obtain finance for its working capital requirements during the Facility Period. The Board considers the grant of the 2021 Revolving Loan Facility to PCL to be efficient, beneficial and in the interest of PCL and its shareholders as a whole, having considered the time and costs that may be incurred by PCL for other means of fund raising.

In determining the interest rate of the 2021 Revolving Loan Facility, the Directors have primarily made reference to (i) the prime lending rates for Hong Kong dollar from major banks in Hong Kong, which is currently 5% per annum; and (ii) the interest rate of the 2019 Revolving Loan Facility of 6.5% per annum, which is the same as the interest rate of the 2021 Revolving Loan Facility. Having considered the above, and it is the mutual intention of the parties to the 2021 Facility Agreement to maintain the same interest rate as the 2019 Revolving Loan Facility, the Board considers that the interest rate of the 2021 Revolving Loan Facility is fair and reasonable and on normal commercial terms.

According to the 2021 Facility Agreement, the 2021 Revolving Loan Facility to PCL is unsecured. Although PCL is a non-wholly owned subsidiary of the Company, more than half of the directors of PCL are appointed and nominated by the Company. With the above structure of the board of directors of PCL, the Company can actively monitor the operation and management decision of PCL. The Company has control power over PCL so as to

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LETTER FROM THE BOARD

monitor and secure the usage of any capital of the PCL Group including but not limited to the 2019 Revolving Loan Facility and the 2021 Revolving Loan Facility. The release of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of the PCL Group. As such, the Company can assess the default risk of PCL from time to time before releasing any 2021 Revolving Loan Facility. Having considered (a) the Company’s control power over PCL as aforementioned; and (b) the release of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of the PCL Group; and (c) the “Changyou” business is the sole operating segment of the Group which is conducted through PCL and its subsidiaries, the Board is of the view that (i) the default risk of PCL is justifiable; and (ii) the provision of the 2021 Revolving Loan Facility without collateral or guarantee is fair and reasonable.

Further, in order to mitigate the default risk associated with the 2021 Revolving Loan Facility, the Company has taken the following internal control measures, and considers that such measures are adequate and sufficient to safeguard its assets:

(i) the senior management of the Company will conduct continuous monitoring of the operations of the PCL Group through fostering and maintaining regular communication and active interaction between the parties;
(ii) the designated staff of the accounting department of the Company will closely monitor the aggregated outstanding Loan balances and report the latest status to the chief financial officer of the Company on a monthly basis to ensure that it does not exceed the Annual Caps;
(iii) the chief financial officer of the Company will report to the Board on half yearly basis in relation to the transaction status;
(iv) the Company will set an alert alarm when the aggregated outstanding Loan balances is about to reach the Annual Caps. In case that the aggregated principal amount of the Loans is expected to exceed the Annual Caps, the Company could timely re-comply with the requirements under Chapter 14A of the Listing Rules; and
(v) the internal control department and relevant personnel of the Company will monitor and ensure all transactions contemplated under the 2021 Facility Agreement are carried out pursuant to the terms of the 2021 Facility Agreement.

In view of the above, the Directors (including the members of the Independent Board Committee, having considered the advice from the Independent Financial Adviser) are of the view that the terms of the 2021 Facility Agreement (including the proposed Annual Caps) are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 12 –

LETTER FROM THE BOARD

LISTING RULES IMPLICATION

As at the Latest Practicable Date, PCL’s entire issued share capital was owned as to 47.24% by Pointsea Holdings, 15.75% by Joy Empire, 15.75% by Extra Step, 15.75% by Eastern E-Commerce, 2.76% by Zhongjin Qizhi and 2.76% by Senran Investment. Pointsea Holdings was owned as to 80% by Treasure Ease and as to 20% by Easylink. Treasure Ease was owned as to 50.1% by the Company, 30% by Fin-Tech and 19.9% by Chance Talent. The Board considers that PCL is a subsidiary of the Company through its power to control the board of directors of PCL. CIH, being a substantial shareholder of the Company, holds the entire issued share capital of Fin-Tech. PCL is therefore a connected subsidiary of the Company under Rule 14A.16 of the Listing Rules and the grant of the 2021 Revolving Loan Facility constitutes a continuing connected transaction of the Company under Chapter 14A of the Listing Rules.

As one or more of the applicable percentage ratios (as defined under the Listing Rules) in respect of the grant of the 2021 Revolving Loan Facility is more than 5%, the 2021 Facility Agreement, the grant of the 2021 Revolving Loan Facility and the proposed Annual Caps are subject to the reporting, announcement, Independent Shareholders’ approval, circular, annual reporting and annual review requirements under Chapter 14A of the Listing Rules.

APPROVAL BY THE BOARD

As at the Latest Practicable Date, none of the Directors had a material interest in the transactions contemplated under the 2021 Facility Agreement and was required to abstain from voting on the relevant board resolution(s) to approve the 2021 Facility Agreement.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

An Independent Board Committee has been established to advise and give recommendations to the Independent Shareholders in relation to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder. Red Sun Capital Limited has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

EGM

The EGM will be convened and held at Rooms 1908-1916, 19/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong on Monday, 31 May 2021 at 10:00 a.m. to consider and, if thought fit, approve the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder. The voting on such resolution(s) will be conducted by way of poll at the EGM in accordance with Rule 13.39(4) 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 was directly interested in 598,885,818 Shares, representing approximately 33.07% of the issued share capital of the Company and as it had a material interest in the 2021 Facility Agreement, the proposed

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LETTER FROM THE BOARD

Annual Caps and the transactions contemplated thereunder, it is required to abstain from voting on the resolution(s) at the EGM to approve the 2021 Facility Agreement, the proposed Annual Caps 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 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder set out on pages 16 to 17 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 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder set out on pages 18 to 34 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 2021 Facility Agreement, the proposed Annual Caps 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 resolution(s) proposed at the EGM to approve the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder.

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LETTER FROM THE BOARD

ADDITIONAL INFORMATION

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

Yours faithfully By order of the Board Changyou Alliance Group Limited Mr. Cheng Jerome Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1039)

12 May 2021

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTION IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY

We refer to the circular of the Company to the Shareholders dated 12 May 2021 (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 2021 Facility Agreement, the proposed Annual Caps 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 6 to 15 of the Circular and the letter of advice from Red Sun Capital Limited, the Independent Financial Adviser appointed to advise the Independent Board Committee and the Independent Shareholders as set out on pages 18 to 34 of the Circular in relation to the 2021 Facility Agreement, the proposed Annual Caps 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 2021 Facility Agreement, the proposed Annual Caps 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 entering into of the 2021 Facility Agreement and the advancement of the Loan is not in the ordinary and usual course of business of the Group; and (iii) the entering into of the 2021 Facility Agreement and the advancement of the Loan is in the interests of the Company and the Independent Shareholders as a whole. We recommend the Independent Shareholders to vote in favour of the ordinary resolution(s) in relation to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder to be proposed at the EGM.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Set out below is the full text of the letter received from Red Sun Capital Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders regarding the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder, which has been prepared for the purpose of incorporation in this circular:

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Unit 3303, 33/F, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong Tel: (852) 2857 9208 Fax: (852) 2857 9100

12 May 2021

To: The Independent Board Committee and the Independent Shareholders of Changyou Alliance Group Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY

I. INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder, details of which are set out in the letter from the Board (the “ Letter from the Board ”) contained in the circular of the Company to the Shareholders dated 12 May 2021 (the “ Circular ”), of which this letter forms a part. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

As at the Latest Practicable Date, PCL’s entire issued share capital was owned as to 47.24% by Pointsea Holdings, 15.75% by Joy Empire, 15.75% by Extra Step, 15.75% by Eastern E-Commerce, 2.76% by Zhongjin Qizhi and 2.76% by Senran Investment. Pointsea Holdings is owned as to 80% by Treasure Ease and as to 20% by Easylink. Treasure Ease is owned as to 50.1% by the Company, 30% by Fin-Tech and 19.9% by Chance Talent. The Board considers that PCL is a subsidiary of the Company through its power to control the board of directors of PCL. CIH, being a substantial shareholder of the Company, holds the entire issued share capital of Fin-Tech. PCL is therefore a connected subsidiary of the Company under Rule 14A.16 of the Listing Rules and the grant of the 2021 Revolving Loan Facility constitutes a continuing connected transaction of the Company under Chapter 14A of the Listing Rules.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

II. THE INDEPENDENT BOARD COMMITTEE

The Board currently comprises Mr. Cheng Jerome and Mr. Yuan Weitao as executive Directors; Mrs. Guo Yan as non-executive Director and Mr. Wong Chi Keung, Mr. Liu Jialin and Mr. Chan Chi Keung Alan as independent non-executive Directors.

The Independent Board Committee, comprising all the aforementioned independent non-executive Directors, has been established to advise the Independent Shareholders as to (i) whether the terms of the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) how the Independent Shareholders should vote on the 2021 Facility Agreement and the proposed Annual Caps.

We, Red Sun Capital Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in these respects and to give our opinion in relation to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder for the Independent Board Committee’s consideration when making their recommendation to the Independent Shareholders.

III. OUR INDEPENDENCE

As at the Latest Practicable Date, we were independent from and not connected with the Company, PCL or their respective core connected persons or close associates (each as defined in the Listing Rules) and accordingly, are qualified to give independent advice to the Independent Board Committee and the Independent Shareholders regarding the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder. Save for our appointment as the Independent Financial Adviser, we did not act as an independent financial adviser to the Company under the Listing Rules in the past two years.

Apart from the normal advisory fee payable to us in connection with this appointment, no arrangement exists whereby we shall receive any other fees or benefits from the Company or any other parties that could reasonably be regarded as relevant to our independence. Accordingly, we consider that we are independent pursuant to Rule 13.84 of the Listing Rules.

IV. BASIS OF OUR ADVICE

In formulating our advice, we have relied on the statements, information, opinions and representations contained or referred to in the Circular and the information and representations provided to us by the Group and/or the Directors and/or senior management

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

of the Company (the “ Management ”). We have assumed that all information, representations and opinions contained or referred to in the Circular or made, given or provided to us by the Company, the Directors and the Management and for which they are solely and wholly responsible, were true and accurate and complete in all material respects at the time when they were made and continue to be so as at the Latest Practicable Date. We have assumed that all the opinions and representations made by the Directors in the Circular have been reasonably made after due and careful enquiry. We have also sought and obtained confirmation from the Directors and/or the Management that no material facts have been omitted from the information provided and referred to in the Circular.

We have not, however, carried out any independent verification of the information provided, nor have we conducted any independent investigation into the financial position, business and affairs of the Group, PCL or their respective future prospects.

We consider that we have been provided with sufficient information to enable us to reach an informed view and to provide a reasonable basis for our advice. We have no reason to doubt the truth, accuracy and completeness of the statements, information, opinions and representations provided to us by the Group and/or the Directors and/or the Management and their respective advisers or to believe that material information has been withheld or omitted from the information provided to us or referred to in the aforesaid documents. Shareholders should also note valuation involves various basis and assumptions and the appraised value may change if those basis and assumptions are modified.

This letter is issued to the Independent Board Committee and the Independent Shareholders solely for their consideration of the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder, and, except for its inclusion in the Circular, is not to be quoted or referred to, in whole or in part, nor shall this letter be used for any other purposes, without our prior written consent.

V. PRINCIPAL FACTORS AND REASONS CONSIDERED

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

1. Information on the Company and the Group

1.1. Background of the Company and the Group

The Company is an investment holding company incorporated in the Cayman Islands with limited liability.

The Group is principally engaged in the development and operation of an electronic trading platform, “Changyou”, to promote and 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 and other trading business.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1.2. Financial information on the Group

Set out below is a summary of the financial results of the Group, as extracted and summarised from the published annual report of the Group for the year ended 31 December 2020 (the “ 2020 Annual Report ”) and the published annual report of the Group for the year ended 31 December 2019 (the “ 2019 Annual Report ”):

	For the year	ended 31	December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Revenue	50,977	204,112	268,841
Gross (loss)/profit	(8,091)	808	1,045
Loss attributable to equity
shareholders of the Company	(69,167)	(78,295)	(1,652)

For the year ended 31 December 2020

Based on the 2020 Annual Report, the Group’s revenue for the year ended 31 December 2019 and 2020 was approximately RMB204.1 million and RMB268.8 million, respectively, representing an increase of approximately 31.7%. Such increase was mainly attributable to the continuing development and significant expansion of the digital point business, including the increase in the consumption scenarios of the digital points business and an increase in the number of registered users from approximately 37.6 million users in December 2019 to approximately 59.0 million users in December 2020.

The gross profit of the Group for the year ended 31 December 2019 and 2020 was approximately RMB0.8 million and RMB1.0 million, respectively, representing an increase of approximately 25.0%. Such increase was mainly attributable to the increase in diversified products and services and the introduction of more clear delineation of business segments to improve operational efficiency.

The loss attributable to equity holders of the Company for the year ended 31 December 2019 and 2020 was approximately RMB78.3 million and RMB1.7 million, respectively. Such change was mainly attributable to (i) impairment gain of trade and other receivables of approximately RMB29.7 million for the year ended 31 December 2020, as compared to the impairment loss of trade and other receivables of approximately RMB36.8 million for the year ended 31 December 2019; (ii) the decrease in administrative expenses of approximately 30.7 million or 40.6%.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For the year ended 31 December 2019

Based on the 2019 Annual Report, the Group’s revenue for the year ended 31 December 2018 and 2019 was approximately RMB51.0 million and RMB204.1 million, respectively, representing an increase of approximately three times. Such increase was mainly attributable to the continuing development and significant expansion of the digital point business of the Group for the year ended 31 December 2019.

The gross loss of the Group for the year ended 31 December 2018 was approximately RMB8.1 million and the gross profit of the Group for the year ended 31 December 2019 was approximately RMB0.8 million. The turnaround position from gross loss to gross profit was mainly due to the reduction of promotional campaigns that use most favourable product price to attract users to maintain loyalty to the Changyou platform, the increase in diversified products and services and the introduction of more clear delineation of business segments to improve operational efficiency.

The loss attributable to equity holders of the Company for the year ended 31 December 2018 and 2019 was approximately RMB69.2 million and RMB78.3 million, respectively, representing an increase of approximately 13.2%.

Set out below is a summary of the consolidated financial position of the Group, as extracted and summarised from the 2019 Annual Report and 2020 Annual Report:

	As at 31 December	As at 31 December	As at 31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Total assets	177,425	271,065	289,939
Total liabilities	87,913	181,903	227,678
Equity attributable to equity
shareholders of the Company	345,983	307,434	361,075

As at 31 December 2020, the Group recorded total assets of approximately RMB289.9 million, which mainly comprised (i) cash and cash equivalents of approximately RMB152.3 million; and (ii) trade and other receivables of approximately RMB122.2 million.

As at 31 December 2020, the Group recorded total liabilities of approximately RMB227.7 million, which mainly comprised (i) trade and other payables of approximately RMB133.7 million; and (ii) convertible bonds of approximately RMB50.5 million.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As at 31 December 2020, the Group recorded equity attributable to equity shareholders of the Company of approximately RMB361.1 million.

2. Information of PCL

3. Reasons for and benefits of the 2021 Revolving Loan Facility

As disclosed in the Letter from the Board, the day-to-day operations of the “Changyou” business are capital intensive, 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 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.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

products’ operational capabilities. Based on the needs of the customers, “Changyou” develops cross-channel supply chain products for different user scenarios, in order to provide support and help channel business partners to achieve their digital point conversion. In 2021, the Group will focus on (i) the operation of the main site mobile application and public account, with an aim to build a high-quality supply chain and provide operational solutions to its business partners; and (ii) the cooperation and channel development of the “Changyou” business partners such as China Mobile (Hong Kong) Group Limited, China UnionPay Merchant Services Company Limited, banks and insurance companies, as well as the retail platforms for key account merchants and chain O2O merchants. It is expected that working capital of the “Changyou” business of the Group for the upcoming twelve months will require approximately HK$108 million (the “ 1Y Working Capital ”).

In this connection, we have reviewed and discussed with the Management the calculation of the 1Y Working Capital and noted that the 1Y Working Capital of approximately HK$108 million is in line with the proposed Annual Caps. We have also discussed with the Management and noted that the “Changyou” business is the sole operating segment of the Group and accordingly, the majority of the Group’s cash used in operating activities represents the cash used in operation of the “Changyou” business. We further noted that as set out in the 2020 Annual Report, net cash used in operating activities of the Group amounted to approximately RMB104.2 million for the year ended 31 December 2020, which is in line with the 1Y Working Capital. Based on the above, we concur with the Management that the proposed Annual Caps is fair and reasonable.

Moreover, as set out in the 2020 Annual Report, the Group had recorded (i) cash and cash equivalents of approximately RMB152.3 million as at 31 December 2020; and (ii) net cash generated from investing and financing activities of approximately RMB125.1 million. We have discussed with the Management and noted that the Group’s operation excluding the “Changyou” business is rather minimal and thus does not required a high working capital level and that the balance of cash and cash equivalents is expected to be sufficient. In this connection, we are of the view that the Group will have sufficient working capital to finance its operation after the provision of the 2021 Facility Agreement.

The “Changyou” business is the sole operating segment of the Group which is conducted through PCL and its subsidiaries (the “ PCL Group ”). As at the Latest Practicable Date, the 2019 Revolving Loan Facility had been fully utilized. Further, as at 31 March 2021, the cash balance held by the PCL Group amounted to approximately HK$25.7 million. Considering PCL Group’s current monthly net cash outflow of approximately HK$9.0 million, it is expected that the PCL Group will deplete all their cash from operations in around June 2021. Therefore, PCL has an urgent need for funding to avoid the risk of discontinuance of its operations and to, among other things, retain its employees. Furthermore, as discussed above, the 2019 Annual Caps have been fully utilized, there is no room for the Company to further inject working capital to the PCL Group to further develop the “Changyou” platform if the 2021 Facility Agreement and the Annual Caps are not approved by the Shareholders.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As disclosed in the 2020 Annual Report, the Company has resolved to change part of the net proceeds from the issuance of the convertible bonds issued by the Company to CIH on 19 October 2020 to fund the operation of the existing “Changyou” platform in China. It is intended by the Company to utilise such proceeds to finance the 2021 Revolving Loan Facility. Given (i) the “Changyou” business is the sole operating segment of the Group which is conducted through the PCL Group; and (ii) PCL’s urgent need for funding its operations as described above, we concur with the Management that the aforementioned change in use of proceeds is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

PCL has explored other financing opportunities in order to meet its financing needs. As advised by the Management, PCL has considered the feasibility of debt financing from banks and/or non-banking financial institutions both in the short term, as well as attempted to seek other sources of fundraising activities for the development and expansion of the “Changyou” business of the Group in the long term. PCL had approached and negotiated with two banks and/or financial institutions to obtain loan facilities. However, due to PCL’s loss-making performance for the year ended 31 December 2020, no principal terms (such as interest rate and requirements for the provision of charges and/or other security) was able to be quoted or offered during the negotiations. On the other hand, PCL has also considered the feasibility of equity financing from private equity firms. However, due to the uncertainties associated with the COVID-19 pandemic outbreak, most private equity firms have been cautious in making investment decisions, impeded the equity fund raising exercises by PCL.

In comparison, the Management considers and we concur with the Management that the provision of the 2021 Revolving Loan Facility will not create any additional external financing cost to be incurred by the Group.

It is considered by the Management that the 2021 Revolving Loan Facility to be a flexible, viable and preferred option for PCL as and when it has to obtain finance for its working capital requirements during the Facility Period. The Management considers the grant of the 2021 Revolving Loan Facility to PCL to be efficient, beneficial and in the interest of PCL and its shareholders as a whole, having considered the time and costs that may be incurred by PCL for other means of fund raising.

In determining the interest rate of the 2021 Revolving Loan Facility, the Management has primarily made reference to (i) the prime lending rates for Hong Kong dollar from major banks in Hong Kong, which is currently 5% per annum; and (ii) the interest rate of the 2019 Revolving Loan Facility of 6.5% per annum, which is the same as the interest rate of the 2021 Revolving Loan Facility. Having considered the above, and it is the mutual intention of the parties to the 2021 Facility Agreement to maintain the same interest rate as the 2019 Revolving Loan Facility, the Management considers that the interest rate of the 2021 Revolving Loan Facility is fair and reasonable and on normal commercial terms.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

With the above structure of the board of directors of PCL, the Company can actively monitor the operation and management decision of PCL. The Company has control power over PCL so as to monitor and secure the usage of any capital of the PCL Group, including but not limited to, the 2019 Revolving Loan Facility and 2021 Revolving Loan Facility. The release of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of the PCL Group. As such, the Company can assess the default risk of PCL from time to time before releasing any 2021 Revolving Loan Facility. Having considered (i) the Company’s control power over PCL as aforementioned; (ii) the release of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of the PCL Group; and (iii) the “Changyou” business is the sole operating segment of the Group which is conducted through PCL and its subsidiaries, the Management is of the view that (i) the default risk of PCL is justifiable; and (ii) the provision of the 2021 Revolving Loan Facility without collateral or guarantee is fair and reasonable.

(i) the senior management of the Company will conduct continuous monitoring of the operations of the PCL Group through fostering and maintaining regular communication and active interaction between the parties;
(ii) the designated staff of the accounting department of the Company will closely monitor the aggregated outstanding Loan balances and report the latest status to the chief financial officer of the Company on a monthly basis to ensure that it does not exceed the Annual Caps;
(iii) the chief financial officer of the Company will report to the Board on half yearly basis in relation to the transaction status;
(iv) the Company will set an alert alarm when the aggregated outstanding Loan balances is about to reach the Annual Caps. In case that the aggregated principal amount of the Loans is expected to exceed the Annual Caps, the Company could timely re-comply with the requirements under Chapter 14A of the Listing Rules; and
(v) the internal control department and relevant personnel of the Company will monitor and ensure all transactions contemplated under the 2021 Facility Agreement are carried out pursuant to the terms of the 2021 Facility Agreement.

In relation to the internal control measures mentioned above, we have obtained and reviewed the internal control policy provided by the Company and discussed with the Management and noted that, amongst others, (i) more than half of the directors of PCL are appointed and nominated by the Company and accordingly the Company has

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

control power over PCL; (ii) the releasing of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction on the assessment of the then and expected financial performance and position of PCL; (iii) the Group will continuously monitor the operation of PCL Group; (iv) the Group will assign designated staff of accounting department to monitor the Loan; and (v) the relevant staff will observe the proposed Annual caps to ensure that, whenever necessary, the Company could timely re-comply with the requirements under Chapter 14A of the Listing Rules by revising the proposed Annual Caps. Accordingly, we concur with the Management that these internal control measures could safeguard the Company’s assets in light of the absence of a security and at the same time ensuring the amount of 2021 Revolving Loan Facility would not exceed the proposed Annual Caps.

Having considered that (i) it is important for PCL 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; (ii) the 2019 Revolving Loan Facility has been fully utilised; (iii) the provision of the 2021 Revolving Loan Facility will not create any additional external financing cost to be incurred by the Group; (iv) the provision of the 2021 Revolving Loan Facility will generate a stable amount of interest income to the Group; (v) PCL has exhausted other means to raise capital for its operating needs; and (vi) our Market Comparables analysis as set out under the section headed “4. Major terms of the 2021 Facility Agreement” in this letter below, we concur with the Management that the entering into the 2021 Facility Agreement is fair and reasonable and in the interests of the Company and its Shareholders as a whole.

4. Major terms of the 2021 Facility Agreement

Set out below is a summary of the major terms of the 2021 Facility Agreement. For further details, please refer to the Letter from the Board.

Date : 20 April 2021 (after trading hours) Parties : (i) the Company, as lender; (ii) and PCL, as borrower Amount of 2021 : Up to HK$100 million Revolving Loan Facility Purpose of 2021 : For developing the digital point business of PCL’s Revolving Loan group of companies and for capital expenditure and Facility general working capital of PCL’s group of companies.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Facility Period : The 3-year period from and including the date on which the Company is satisfied that all the conditions precedent of the 2021 Facility Agreement have been fulfilled or specifically waived in writing by the Company.
Drawdown : During the Facility Period, PCL may draw the Available Facility, in a single amount or in multiple amounts, from time to time on a Business Day after all conditions precedent of the 2021 Facility Agreement are satisfied, provided that PCL gives the Company at least two Business Days’ prior written notice (or a shorter notice as the Company may agree) prior to the date on which PCL wants to draw the Available Facility.

Conditions precedent : The drawing of the Available Facility is conditional upon (i) the Independent Shareholders having approved the 2021 Facility Agreement and the transactions contemplated thereunder at the EGM; and (ii) the Company having received all the documents and evidence required in the 2021 Facility Agreement.

If these conditions have not been fulfilled on or before the Long Stop Date, then the 2021 Facility Agreement shall automatically terminate in accordance with its terms.

Security : None Interest : (i) PCL shall pay interest on the outstanding principal amount of each Loan at the rate of 6.5% per annum (on the basis of a 365-day year); and (ii) interest shall accrue daily, calculated on the basis of the actual number of days elapsed from (and including) the Drawdown Date and shall be payable on each Interest Payment Date.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Repayment Date : The date falling on the expiry of the Facility Period, or such later date as may be agreed between PCL and the Company in writing, being the date for the repayment of all Loan(s) (together with all interest accrued thereon) in full.
Voluntary : PCL may, at any time after a Loan has been prepayment advanced and prior to the Repayment Date, prepay such Loan in whole or in part (together with all interest accrued thereon), without any penalty.
Reborrowing : PCL may reborrow any part of the 2021 Revolving Loan Facility which has been prepaid or repaid in accordance with the terms of the 2021 Facility Agreement, provided that (i) no event of default as set out in the 2021 Facility Agreement has occurred; and (ii) the aggregate outstanding principal amount of all Loan(s) shall not exceed HK$100 million at any time during the Facility Period.

As disclosed in the Letter from the Board, the proposed Annual Caps in respect of the 2021 Revolving Loan Facility under the 2021 Facility Agreement for each financial year during the Facility Period shall not exceed HK$100 million. The proposed Annual Caps were determined with reference to (i) the maximum principal amount of the Loan(s) to be granted by the Company to PCL pursuant to the 2021 Facility Agreement; (ii) the principal amounts of the loans granted under the 2019 Facility Agreement which has been fully utilized; (iii) the annual caps for the 2019 Facility Agreement; and (iv) the operations and developments of the “Changyou” business of the Group.

As disclosed in the Letter from the Board, as at the Latest Practicable Date, the outstanding loan balance granted to PCL was HK$100 million and the aggregate interest received by the Company under the 2019 Facility Agreement was approximately HK$3.9 million. Up to the Latest Practicable Date, the actual loan amount granted to PCL by the Company in any point of time had not exceeded the approved annual caps (the “ 2019 Annual Caps ”) under the 2019 Facility Agreement. In assessing the credit risk and default risk on the 2021 Revolving Loan Facility, we have relied on PCL’s historical repayment record under the 2019 Facility Agreement. As confirmed by the Management, PCL was able to fulfill its repayment of interest to the Group in a timely manner.

Having considered that (i) the benefits for entering into the 2021 Facility Agreement as discussed in section “3. Reasons for and benefits of the 2021 Revolving Loan Facility” above; (ii) the rapid development of “Changyou” business, being the sole operating segment of the Group; (iii) there is no additional external financing cost to be incurred to the Group in relation to the grant of the 2021 Revolving Loan Facility; and (iv) the interest income to be generated from the 2021 Facility Agreement can provide an additional and stable source of income to the Group, we concur with

– 29 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the Management’s view that the proposed Annual Caps under the 2021 Facility Agreement are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and Shareholders as a whole.

In assessing the fairness and reasonableness of the terms of the 2021 Facility Agreement, in view that the 2021 Revolving Loan Facility is provided by the Company to its connected subsidiary, we therefore have reviewed similar transactions involving the provision of loan to a connected person with a fixed interest rate by companies listed in Hong Kong during the period from 1 January 2021 to and up to the date of the Announcement (the “ Review Period ”), being approximately a three-month period prior to the date of the 2021 Facility Agreement, which was considered to be sufficient for the purpose of our analysis set out hereunder as we are of the view that the transactions to be representative of similar historical transactions. On a best effort basis and to the best of our knowledge, nine transactions (the “ Market Comparables ”) which meet the aforementioned criteria have been found and they are exhaustive as far as we are aware of. Set out below are the details of the Market Comparables:

	Date of	Company (stock	Size of	Interest rate	Term to	Collateral /
No	announcement	code)	the loan	of the loan	maturity	Guarantee
			(Note 1)
1	13/4/2021	Minshang Creative	Approximately	8.0%	5 months	No
		Technology	HK$6.0
		Holdings Limited	million
		(1632)	(RMB5.0
			million)
2	25/3/2021	China Wood	Approximately	10.0%	48 months	No
		Optimization	HK$60.0
		(Holding) Limited	million
		(1885)	(RMB50.0
			million)
3	24/3/2021	Beijing Enterprises	Approximately	4.9%	144 months	Yes
		Water Group	HK$30.5	(Note 2)
		Limited (371)	million
			(RMB25.38
			million)
4	9/3/2021	Shanghai Jin Jiang	Approximately	3.9%	12 months	No
		Capital Company	HK$105.0
		Limited (2006)	million
			(RMB87.5
			million)

– 30 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

	Date of	Company (stock	Size of	Interest rate	Term to	Collateral /
No	announcement	code)	the loan	of the loan	maturity	Guarantee
			(Note 1)
5	23/2/2021	Summit Ascent	Approximately	6.0%	3 months	No
		Holdings Limited	HK$931.2
		(102)	million
			(USD120.0
			million)
6	9/2/2021	China Chentong	Approximately	6.0%	18 months	No
		Development	HK$12.0
		Limited (217)	million
			(RMB10.0
			million)
7	29/1/2021	Sany Heavy	Approximately	4.15%	6 months	Yes
		Equipment Int’l	HK$360.0
		Holdings Co Ltd.	million
		(631)	(RMB300.0
			million)
8	22/1/2021	Kader Holdings	Approximately	12.0%	36 months	No
		Company Limited	HK$17.0
		(180)	million
9	15/1/2021	Baiying Holdings	Approximately	5.0%	Not disclosed	No
		Group Limited	HK$10.0
		(8525)	million
			(RMB8.3
			million)
		Maximum	Approximately	12.0%	144 months
			HK$931.2		(Note 3)
			million
		Minimum	Approximately	3.9%	3 months
			HK$6.0		(Note 3)
			million
		Average	Approximately	6.6%	34 months
			HK$170.2		(Note 3)
			million
		Median	Approximately	6.0%	15 months
			HK$30.5		(Note 3)
			million6
		The Company	Up to	6.5%	36 months
			HK$100
			million

– 31 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Source: website of the Stock Exchange

Note 1: For the purpose of illustration only, amounts denominated in RMB have been translated into HKD at the rate of RMB1 = HKD1.20; amounts denominated in USD have been translated into HKD at the rate of USD1 = HKD7.76.
Note 2: According to the announcement, interest rate is a floating interest rate equal to the relevant loan prime rate for a period longer than 5 years (currently 4.65% per annum) announced by the National Interbank Funding Centre on the date immediately preceding the drawdown date plus 0.25%. Therefore, 4.9% (4.65%+0.25%) is used for the purpose of our analysis.
Note 3: Excluded Market Comparables no. 9 which did not disclose the term of the loan or is repayable on demand.

4.1. Size of the loan

As illustrated by the above table, the loan size of the Market Comparables ranges from approximately HK$6.0 million to approximately HK$931.2 million, with an average of approximately HK$170.2 million and a median of approximately HK$30.5 million. We note the loan size of up to HK$100 million under the 2021 Facility Agreement is lower than the average and falls within the range of the loan size of the Market Comparables. In addition, it is noted that there is not a direct relationship between the loan size and interest rate.

4.2. Interest rate

As illustrated by the above table, the interest rate of the Market Comparables ranges from 3.9% to 12.0%, with an average of approximately 6.6% and a median of approximately 6.0%. We note the interest rate of 6.5% under the 2021 Facility Agreement is slightly lower than the average and in line with the median, and falls within the range of the interest rate of the Market Comparables. Accordingly, we consider that the interest rate of the 2021 Revolving Loan Facility is fair and reasonable.

4.3. Term to maturity

As illustrated by the above table, the term of maturity of the Market Comparables ranges from 3 months year to 12 years with an average of 34 months. The duration of the Facility Agreement of three years is in line with the aforesaid range of Market Comparables. Accordingly, we consider the term of maturity of the Facility Agreement to be fair and reasonable.

4.4. Collateral / Guarantee

As illustrated by the above table, seven out of nine Market Comparables were not secured by collateral or guarantee. As such, it is not uncommon in the market for provision of a loan to a connected person by the listed companies in Hong Kong without collateral or guarantee.

– 32 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As disclosed in the Letter from the Board, the 2021 Revolving Loan Facility to PCL is unsecured. Although PCL is a non-wholly owned subsidiary of the Company, as advised by the Management, more than half of the directors of PCL are appointed and nominated by the Company. With the above structure of the board of directors of PCL, the Company is capable of monitoring the operation and management decision of PCL, and as such, we consider that the Company has control power over PCL so as to monitor and secure the usage of the 2021 Revolving Loan Facility.

As advised by the Management, it is expected that the releasing of the 2021 Revolving Loan Facility will be in multiple tranches depending on the development of PCL’s business. It is the mutual understanding between the Company and PCL that the drawdown of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of PCL. As such, the Company can assess the default risk of PCL from time to time before any part of the 2021 Revolving Loan Facility is drawn down. As such, we concur with the Management’s view that the default risk of PCL will be relatively low. As from the Letter from the Board, having considered (i) the Company’s control power over PCL as aforementioned; (ii) the releasing of any tranches of the 2021 Revolving Loan Facility is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of PCL; and (iii) the “Changyou” business is the sole operating segment of the Group which is conducted through PCL and its subsidiaries, the Management is of the view that (i) the default risk of PCL is justifiable; and (ii) the provision of the 2021 Revolving Loan Facility without collateral or guarantee is fair and reasonable.

Considering that (i) it is not uncommon in the market for provision of loan without collateral or guarantee; (ii) the Company has control power over PCL which allows the Company to monitor the operation and management decision of PCL and secure the usage of the 2021 Revolving Loan Facility; (iii) the drawdown of any tranches of the 2021 Revolving Loan Facility by PCL is subject to the Company’s satisfaction of the assessment of the then and expected financial performance and position of PCL; (iv) and the “Changyou” business is the sole operating segment of the Group; (v) the internal control policies adopted by the Group; and (vi) the repayment history of PCL, we consider that the provision of the 2021 Revolving Loan Facility without collateral or guarantee is fair and reasonable.

– 33 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

VI. OPINION AND RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we consider that the entering into the 2021 Facility Agreement is not in the ordinary and usual course of business of the Company but on normal commercial terms and is fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution(s) to be proposed at the EGM to approve the 2021 Facility Agreement, the proposed Annual Caps and the transaction contemplated thereunder.

Yours faithfully, for and on behalf of Red Sun Capital Limited Robert Siu Managing Director

Mr. Robert Siu is a licensed person registered with the SFC and a responsible officer of Red Sun Capital Limited to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and has over 22 years of experience in the corporate finance industry.

– 34 –

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. INTERESTS AND SHORT POSITIONS OF DIRECTORS AND CHIEF EXECUTIVES PURSUANT TO THE SFO

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	Approximate
		underlying Shares	percentage
		comprised in	of the Shares in
Name	of Director	options	issue (Note 2)
Cheng	Jerome	72,000,000_(Note1)_	3.98%
Notes:

This represents the interest in the underlying Shares of the share option scheme adopted by the Company on 28 June 2010 (the “ 2010 Share Option Scheme ”) to be allotted and issued upon the exercise of the options granted on 4 May 2018 under the 2010 Share Option Scheme.
The approximate percentage is based on a total of 1,810,953,272 issued Shares as at the Latest Practicable Date.

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 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)

– I-1 –

GENERAL INFORMATION

APPENDIX

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 THE SHAREHOLDERS PURSUANT TO THE SFO

As at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, the following persons 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 and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provision of the SFO), or who were, directly or indirectly, interested in 5% 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
			percentage of
Name of Shareholder	Nature of interest	Interest in Shares	interest (Note 7)
CIH (Note 1)	Beneficial interest	1,196,885,818 (L)	66.09%
		220,000,000 (S)	12.15%
Greater Bay Area	Interest of controlled	271,673,000 (L)	15.00%
Homeland	corporation
Investments Limited
(Note 2)
Starr International	Interest of controlled	224,710,691 (L)	12.41%
Foundation (Note 3)	corporation
Beijing Enterprises Real	Beneficial interest	151,515,000 (L)	8.37%
Estate (HK) Limited
(Note 4)
Yang Liu (Note 5)	Interest of controlled	148,400,000 (L)	8.19%
	corporation
Taiping Trustees	Beneficial interest	138,888,000 (L)	7.67%
Limited (Note 6)

L = Long position; S = Short position

– I-2 –

GENERAL INFORMATION

APPENDIX

Notes:

Long position

CIH is wholly-owned by Ms. Pun Tang. As at the Latest Practicable Date, CIH held 1,196,885,818 Shares, which comprised (i) a direct holding of 598,885,818 Shares (being approximately 33.07% of the total shareholding of the Company as at the Latest Practicable Date); (ii) 298,000,000 Shares upon the exercise in full of the warrants issued by the Company to CIH on 18 September 2018; and (iii) 300,000,000 new Shares that may be issued upon conversion in full of the convertible bonds issued by the Company to CIH on 19 October 2020.

Short position

On 18 April 2019, a subscription agreement (the “ Exchangeable Bonds Subscription Agreement ”) was entered into between CIH and Mega Prime Development Limited (“ Mega Prime ”), pursuant to which CIH issued exchangeable bonds (the “ Exchangeable Bonds ”) to Mega Prime, which are exchangeable into 220,000,000 Shares. Such underlying Shares are currently owned by CIH. Mega Prime is wholly-owned by Greater Bay Area Homeland Investments Limited.

Subsequently, on 30 July 2019, a novation deed was entered into between Mega Prime as outgoing party, Poly Platinum Enterprises Ltd (“ Poly Platinum ”) as incoming party and CIH as continuing party, pursuant to which all rights, obligations and liabilities of Mega Prime under the Exchangeable Bonds Subscription Agreement was novated to Poly Platinum.

As at the Latest Practicable Date, Poly Platinum held 51,673,000 Shares and was the beneficial owner of the Exchangeable Bonds, which are exchangeable into 220,000,000 Shares. Poly Platinum is wholly-owned by Greater Bay Area Homeland Development Fund LP (“ GBAHD Fund ”). Greater Bay Area Homeland Development Fund (GP) Limited (“ GBAHD GP ”) is the general partner of GBAHD Fund. Greater Bay Area Development Fund Management Limited (“ GBAD Fund Management ”) is the fund manager of GBAHD Fund. Both GBAHD GP and GBAD Fund Management are wholly-owned by Greater Bay Area Homeland Investments Limited.
As at the Latest Practicable Date, Starr Investments Cayman II, Inc. and Starr Investments Cayman V, Inc. were the beneficial owners of 114,801,600 Shares and 109,909,091 Shares, respectively (being approximately 6.34% and 6.07% of the total shareholding of the Company, 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.
Atlantis Investment Management (Ireland) Limited and Atlantis Investment Management (Hong Kong) Limited are the beneficial owners of 148,400,000 Shares, and 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 138,888,000 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 1,810,953,272 issued Shares as at the Latest Practicable Date.

– I-3 –

GENERAL INFORMATION

APPENDIX

Save as disclosed above, as at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, no other persons 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 and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provision of the SFO), or who were, directly or indirectly, interested in 5% 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.

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 2020 (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.

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 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 any member of the Group which is not determinable by the Company within one year without payment of compensation (other than statutory compensation).

– I-4 –

GENERAL INFORMATION

APPENDIX

8. EXPERT’S QUALIFICATION AND CONSENT

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

Name Qualification

Red Sun 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

Red Sun 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, Red Sun Capital Limited did not have 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, Red Sun Capital Limited did not have any direct or indirect interests in any assets which have been, since 31 December 2020 (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 2020 (being the date to which the latest published audited consolidated financial statements of the Group have been made up).

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 Rooms 1908-1916, 19/ F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong from the date of this circular up to and including 31 May 2021:

(a) the 2019 Facility Agreement;
(b) the 2021 Facility Agreement;

– I-5 –

GENERAL INFORMATION

APPENDIX

(c) the letter from the Independent Board Committee to the Independent Shareholders, the text of which is set out on pages 16 to 17 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 18 to 34 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-6 –

NOTICE OF EGM

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this notice, 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 notice.

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

(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 Changyou Alliance Group Limited (“ Company ”) will be held at Rooms 1908-1916, 19/F, Sun Hung Kai Centre, 30 Harbour Road, Wan Chai, Hong Kong on Monday, 31 May 2021 at 10:00 a.m. or at any adjournment thereof, to consider and, if thought fit, pass the following resolution, with or without amendments, as ordinary resolution of the Company:

ORDINARY RESOLUTION

” THAT :

(a) the facility agreement dated 20 April 2021 (the “ 2021 Facility Agreement ”) and entered into between the Company and PCL (as defined in the circular of the Company dated 12 May 2021 (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 has conditionally agreed to advance an unsecured revolving loan facility of a principal amount not exceeding HK$100 million to PCL, the proposed Annual Caps (as defined in the Circular) and the transactions contemplated thereunder, be and are hereby considered, approved, confirmed and ratified; and
(b) any one director of the Company be and is hereby authorised to do all such further acts and things and to sign and execute all such documents and to take all such steps which in his/her opinion may be necessary, appropriate, desirable or expedient for the purpose of, or in connection with, implementing and/or giving effect to the 2021 Facility Agreement, the proposed Annual Caps and the transactions contemplated thereunder.”

By order of the Board Changyou Alliance Group Limited Mr. Cheng Jerome Chairman

Hong Kong, 12 May 2021

– EGM-1 –

NOTICE OF EGM

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. 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 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.
Please refer to the section headed “Precautionary Measures for the EGM” of the Circular for precautionary measures implemented by the Company in order to safeguard the health and safety of the shareholders of the Company and all the attendees at the EGM and to prevent the spread of COVID-19, including: (i) compulsory body temperature checks; (ii) compulsory wearing[#] of surgical face masks for every attendee; (iii) appropriate social distancing and seating arrangements in line with the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation (Chapter 599G of the Laws of Hong Kong); and (iv) no refreshment or drinks will be served at the EGM.

Any person who does not comply with the precautionary measures or is subject to any Hong Kong Government prescribed quarantine may be denied entry into the EGM venue. The Company would like to encourage Shareholders to appoint the chairman of the EGM as their proxy to vote on the relevant resolution at the EGM, instead of attending the EGM in person.

# A reference to a person wearing a mask is a reference to the person wearing a mask over and covering the person’s nose and mouth, with the mask touching the person’s nose, chin and cheeks.

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 2021

49641_rns_2021-05-12_1d6e5fb9-0dfa-4b5d-9eea-83339a66c43e.pdf

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

(1) CONTINUING CONNECTED TRANSACTION IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY

AND

(2) NOTICE OF EXTRAORDINARY GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

(1) CONTINUING CONNECTED TRANSACTION IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY AND (2) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

2021 FACILITY AGREEMENT

LETTER FROM THE BOARD

PROPOSED ANNUAL CAPS OF THE 2021 FACILITY AGREEMENT

LETTER FROM THE BOARD

INFORMATION ON THE COMPANY AND THE GROUP

INFORMATION ON PCL

REASONS FOR AND BENEFITS OF THE 2021 REVOLVING LOAN FACILITY

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LISTING RULES IMPLICATION

APPROVAL BY THE BOARD

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

EGM

LETTER FROM THE BOARD

RECOMMENDATION

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

CONTINUING CONNECTED TRANSACTION IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY

CONTINUING CONNECTED TRANSACTIONS IN RELATION TO THE GRANT OF REVOLVING LOAN FACILITY

I. INTRODUCTION

II. THE INDEPENDENT BOARD COMMITTEE

III. OUR INDEPENDENCE

IV. BASIS OF OUR ADVICE

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

V. PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Information on the Company and the Group

1.1. Background of the Company and the Group

1.2. Financial information on the Group

For the year ended 31 December 2020

For the year ended 31 December 2019

2. Information of PCL

3. Reasons for and benefits of the 2021 Revolving Loan Facility

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. Major terms of the 2021 Facility Agreement

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4.1. Size of the loan

4.2. Interest rate

4.3. Term to maturity

4.4. Collateral / Guarantee

VI. OPINION AND RECOMMENDATION

1. RESPONSIBILITY STATEMENT

2. INTERESTS AND SHORT POSITIONS OF DIRECTORS AND CHIEF EXECUTIVES PURSUANT TO THE SFO

Long position in the Shares

3. INTERESTS AND SHORT POSITIONS OF THE SHAREHOLDERS PURSUANT TO THE SFO

Short position

APPENDIX

4. DIRECTORS’ INTERESTS IN CONTRACTS AND ASSETS

5. DIRECTOR’S INTERESTS IN COMPETING BUSINESS

6. LITIGATION

7. SERVICE CONTRACTS

8. EXPERT’S QUALIFICATION AND CONSENT

Name Qualification

9. MATERIAL ADVERSE CHANGE

10. DOCUMENTS AVAILABLE FOR INSPECTION

APPENDIX

11. GENERAL

CHANGYOU ALLIANCE GROUP LIMITED 暢由聯盟集團有限公司

NOTICE OF EXTRAORDINARY GENERAL MEETING

ORDINARY RESOLUTION

” THAT :

NOTICE OF EGM

Changyou International Group Limited Proxy Solicitation & Information Statement 2021