China ITS (Holdings) Co., Ltd. — Proxy Solicitation & Information Statement 2018

Sep 6, 2018

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about 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 China ITS (Holdings) Co., Ltd., you should at once hand this circular with the enclosed form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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.

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China ITS (Holdings) Co., Ltd. 中 国 智 能 交 通 系 统（ 控 股 ）有 限 公 司 (incorporated in the Cayman Islands with limited liability) (Stock code: 1900)

VARIATION OF TERMS IN RELATION TO A VERY SUBSTANTIAL DISPOSAL AND CONNECTED TRANSACTIONS

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

SOMERLEY CAPITAL LIMITED

A letter from the Board is set out on pages 8 to 30 of this circular. A letter from the Independent Board Committee containing its advice and recommendation to the Independent Shareholders is set out on pages 31 to 32 of this circular. A letter from Somerley Capital Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, containing its advice to the Independent Board Committee and the Independent Shareholders, is set out on pages 33 to 54 of this circular.

A notice convening the EGM to be held on Friday, 21 September 2018 at 1:30 p.m. at Room VI, 6/F Building 204, No. A10 Jiuxianqiao North Road, Chaoyang District, Beijing, is set out on pages EGM-1 to EGM-2 of this circular. A form of proxy for use by the Shareholders at the EGM is enclosed herein.

Whether or not you are able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar in Hong Kong, Union Registrars Limited at Suites 3301–04, 33/F., Two Chinachem Exchange Square, 338 King’s Road, North Point, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for the holding of such meeting or any adjournment thereof.

Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

6 September 2018

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . .	31
LETTER FROM SOMERLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
APPENDIX I — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
NOTICE OF EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

In this circular, the following expressions have the following meanings unless the context requires otherwise:

• ‘‘2016 Circular’’

the circular of the Company dated 24 March 2016

• ‘‘2018 Circular’’ or ‘‘this this circular Circular’’

• ‘‘Aproud Technology’’

• 北京亞邦偉業技術有限公司 (Beijing Aproud Technology Co., Ltd.)*, a Sino-foreign equity joint venture incorporated in the PRC on 15 February 2001 and an indirect wholly-owned subsidiary of the Company

• ‘‘Beijing RHY’’

• 北京瑞華贏科技發展有限公司 (Beijing RHY Technology Development Co., Ltd.)*, a company established in the PRC with limited liability on 16 February 2001 and an indirect wholly-owned subsidiary of the Purchaser Group

• ‘‘Beijing RHY Dividend’ the dividends declared by Beijing RHY to Beijing Zhongzhi in the sum of RMB37,500,000 on 31 December 2015

• ‘‘Beijing RHY Standstill Agreement’’

• a standstill agreement entered into by and among Beijing Zhongzhi, Beijing RHY, Mr. Jiang Hailin and Mr. Liao Jie dated 2 July 2018 in relation to the Beijing RHY Undertaking

• ‘‘Beijing RHY Undertaking’’

• the undertaking executed by Beijing RHY, Mr. Jiang Hailin and Mr. Liao Jie in favour of Beijing Zhongzhi dated 17 February 2016 in relation to the Beijing RHY Dividend

• ‘‘Beijing Wancheng’’

• 北京萬城互聯投資有限公司 (Beijing Wancheng Internet Investment Co., Ltd.)*, a company incorporated in the PRC on 4 December 2015 and a direct wholly-owned subsidiary of Beijing RHY

• ‘‘Beijing Wuzhouzhitong’’

• 北京五洲智通交通科技有限公司 (Beijing Wuzhouzhitong Traffic Technology Co., Ltd.)*, a wholly-foreign-owned enterprise incorporated in the PRC on 28 August 2008 and a direct wholly-owned subsidiary of China Traffic

• ‘‘Beijing Zhongzhi’’

• 北京中智潤邦科技有限公司 (Beijing Zhongzhi Runbang Technology Co., Ltd.*), a company incorporated in the PRC on 3 September 2004 and an indirect wholly-owned subsidiary of the Company

• ‘‘Board’’

• the board of Directors

– 1 –

DEFINITIONS

‘‘BVI’’

• ‘‘Changzhou RHY’’

• ‘‘China Expressway’’

• ‘‘China Expressway Dividend’’

• ‘‘China Expressway Standstill Agreement’’

• ‘‘China Expressway Undertaking’’

• ‘‘China Toprise’’

• ‘‘China Traffic’’

• ‘‘Company’’

• ‘‘connected person’’

• ‘‘Consideration’’

the British Virgin Islands

• 常州瑞華贏數字技術有限公司 (Changzhou RHY Digital Technology Co., Ltd.)*, a company established under the laws of the PRC with limited liability and ultimately owned by the Purchaser Group

• China Expressway Intelligent Transportation Technology Group Ltd., a company incorporated in the BVI and a direct wholly-owned subsidiary of the Purchaser

• the dividends declared by China Expressway to the Company in the sum of RMB101,250,000 on 31 December 2015

• a standstill agreement entered into by and among the Company, China Expressway, Mr. Jiang Hailin and Mr. Liao Jie dated 2 July 2018 in relation to the China Expressway Undertaking

• the deed of undertaking executed by China Expressway, Mr. Jiang Hailin and Mr. Liao Jie in favour of the Company dated 17 February 2016 in relation to the China Expressway Dividend

• China Toprise Limited, a company incorporated in BVI and a direct wholly-owned subsidiary of China Expressway

• China Traffic Holding Limited, a company incorporated in the Cayman Islands and a direct wholly-owned subsidiary of the Purchaser

• China ITS (Holdings) Co., Ltd. (中国智能交通系统(控股) 有限公司), a company incorporated in the Cayman Islands with limited liability whose shares are listed on the Main Board of the Stock Exchange

• has the same meaning ascribed to it under the Listing Rules

• the consideration payable under the Master Sale and Purchase Agreement, comprising (i) the sum of the Offshore Consideration and the Onshore Consideration for the purchase of the entire equity interests of the Target Companies by the Purchaser from the Company; and (ii) the Receivables Consideration for the assignment of the Receivables to the Purchaser by the Company, in the sum of RMB785,715,000 (after adjustment)

– 2 –

DEFINITIONS

• ‘‘controlling shareholder’’ has the same meaning ascribed to it under the Listing Rules

• ‘‘Director(s)’’ the director(s) of the Company

• ‘‘Disposal’’ the disposal of the Target Companies by the Company to the Purchaser and the assignment of the Receivables to the Purchaser under the Master Sale and Purchase Agreement

• ‘‘EGM’’

• the extraordinary general meeting of the Company to be convened to, among others, considering and if thought fit, approving the Supplemental Agreements and the transactions contemplated thereunder

• ‘‘Group’’ the Company and its subsidiaries

• ‘‘HaotianHaotian Jiajie’’’’ 北京昊天 佳捷科技有限公司 (Beijing Haotian Jiajie Technology Co., Ltd.)*, a Sino-foreign equity joint venture incorporated in the PRC on 30 March 2007 and an indirect wholly-owned subsidiary of the Company

• ‘‘HK$’’HK$’’’’ Hong Kong dollar, the lawful currency of Hong Kong ‘‘Holdco’’ China ITS Co., Ltd. (中国智能交通系统有限公司), a company incorporated in the Cayman Islands and the controlling shareholder of the Company

• ‘‘HaotianHaotian Jiajie’’’’

• ‘‘HK$’’HK$’’’’ Hong Kong dollar, the lawful currency of Hong Kong

• ‘‘Hong Kong’’ the Hong Kong Special Administrative of the PRC

• ‘‘Hugecom’’

• Hugecom Limited, a company incorporated in the BVI and a direct wholly-owned subsidiary of the Purchaser

• ‘‘Independent Board Committee’’

• an independent board committee of the Board comprising all the independent non-executive Directors, who have no material interest in the Supplemental Agreements, namely, Mr. Choi Onward, Mr. Ye Zhou and Mr. Wang Dong

• ‘‘Independent Financial Adviser’’ or ‘‘Somerley’’

• Somerley Capital Limited, a corporation licensed under the Securities and Futures Commission to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Supplemental Agreements

• ‘‘Independent Shareholders’’

• the Shareholders who are not interested in or involved in the Supplemental Agreements and the transactions contemplated thereunder

– 3 –

DEFINITIONS

• ‘‘Jiangsu Zhongzhi’’

• ‘‘Latest Practicable Date’’

• ‘‘Listing Rules’’

• ‘‘Master Sale and Purchase Agreement’’

• ‘‘Master SPA Supplemental Agreement’’

• ‘‘Offshore Closing’’

• ‘‘Offshore Closing Date’’

• ‘‘Offshore Consideration’’

• ‘‘Offshore Target Shares’’

• ‘‘Onshore Closing’’

• ‘‘Onshore Closing Date’’

• 江蘇中智交通科技有限公司 (Jiangsu Zhongzhi Traffic Technology Co., Ltd.)*, a wholly-foreign-owned enterprise incorporated in the PRC on 15 December 2011 and an indirect wholly-owned subsidiary of the Company

• 31 August 2018, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular

• the Rules Governing the Listing of Securities on the Stock Exchange

• a master sale and purchase agreement dated 17 February 2016 entered into between the Purchaser and the Company in relation to the proposed disposal of the entire equity interests in the Target Companies and the assignment of the Receivables

• the supplemental agreement dated 2 July 2018 entered into between the Company and the Purchaser in relation to the Master Sale and Purchase Agreement

• the carrying out by the Company and the Purchaser of their obligations regarding the transfer of the Offshore Target Shares under the Master Sale and Purchase Agreement

• 31 December 2016, the date of the Offshore Closing

• the consideration for the purchase of the shares of Hugecom, China Traffic and China Expressway, by the Purchaser from the Company pursuant to the Master Sale and Purchase Agreement and as part of the Disposal

• ordinary shares in the capital of Hugecom, China Traffic and China Expressway representing the entire issued share capital of Hugecom, China Traffic and China Expressway, respectively

• the completion of the transfer of the Onshore Target Equity pursuant to the PRC Sale and Purchase Agreement and the Onshore Supplemental Agreements

• 5 April 2017, the date when the Onshore Target Equity has been registered under Changzhou RHY at the relevant governmental authorities

– 4 –

DEFINITIONS

• ‘‘Onshore Consideration’’

• the consideration for the purchase of the Onshore Target Equity by Beijing Wuzhouzhitong from Beijing Zhongzhi pursuant to the PRC Sale and Purchase Agreement

• ‘‘Onshore Supplemental Agreements’’

• the two supplemental agreements dated 29 December 2016 and 1 April 2017, respectively, entered into between Beijing Zhongzhi and Beijing Wuzhouzhitong, pursuant to which the parties agreed to designate Changzhou RHY, a company ultimately owned by the Purchaser Group, as the transferee of the Onshore Target Equity

• ‘‘Onshore Target Equity’’

• the 25% equity interest of Beijing RHY transferred pursuant to the PRC Sale and Purchase Agreement and the Onshore Supplemental Agreements

• ‘‘Outstanding Amounts’’

• collectively, the Outstanding Offshore Consideration, the Outstanding Onshore Consideration, the Outstanding Receivable Consideration, the Outstanding China Expressway Dividend, the Outstanding Beijing RHY Dividend, the Outstanding Traffic Information Consideration and the Outstanding Wuhan Optics Consideration, each has the meaning ascribed to it under the paragraph headed ‘‘Letter from the Board — THE SUPPLEMENTAL AGREEMENTS — The Outstanding Amounts’’ in this circular

• ‘‘Pledged Equity’’ 75% of the equity interests in Beijing RHY

• ‘‘PRC’’

• the People’s Republic of China

• ‘‘PRC Sale and Purchase Agreement’’

• being part of the Disposal, the sale and purchase agreement dated 17 December 2016 entered into between Beijing Zhongzhi and Beijing Wuzhouzhitong in relation to the disposal of the Onshore Target Equity owned by Beijing Zhongzhi

• ‘‘PRC SPA Supplemental Agreement’’

• the supplemental agreement dated 2 July 2018 entered into between Beijing Zhongzhi and Beijing Wuzhouzhitong in relation to the PRC Sale and Purchase Agreement

– 5 –

DEFINITIONS

• ‘‘Pre-disposal Restructuring’’

the restructuring of the Group prior to the Disposal which comprised transfers of equity interests in six onshore companies, including Traffic information and Wuhan Optics Valley, and the completions of which were conditions precedent of the Master Sale and Purchase Agreement, details of each of the transfers were disclosed under item (j) of the paragraph headed ‘‘Letter from the Board — The Master Sale and Purchase Agreement — conditions precedent’’ in the 2016 Circular

• ‘‘Purchaser’’

• King Victory Holdings Limited, a company incorporated under the laws of the BVI on 18 January 2016

• ‘‘Purchaser Group’’ the Purchaser, Purchaser Shareholders and other associates

• ‘‘Purchaser Shareholders’’

• shareholders of the Purchaser

• ‘‘Receivables’’

• means the amounts receivable by the Company from China Toprise and China Traffic as at the date of the Master Sale and Purchase Agreement, being HK$127,976,350.29 and US$2,000,000

• ‘‘Receivables Consideration’’ the consideration for the assignment of the Receivables payable by the Purchaser to the Company, being approximately RMB121,170,039.64

• ‘‘RMB’’

• Renminbi, the lawful currency of the PRC

• ‘‘SFO’’

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

• ‘‘Shareholders(s)’’ the holder(s) of the shares of the Company

• ‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited

• ‘‘subsidiary’’ has the meaning ascribed to it in section 15 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong)

• ‘‘Supplemental Agreements’’

• collectively, the Master SPA Supplemental Agreement, the PRC SPA Supplemental Agreement, the Beijing RHY Standstill Agreement, the China Expressway Standstill Agreement, the Traffic Information Supplemental Agreement and the Wuhan Optics Supplemental Agreement

• ‘‘Target Companies’’ Hugecom, China Traffic, China Expressway and Beijing RHY

– 6 –

DEFINITIONS

• ‘‘Target Group’’

• the Target Companies, their subsidiaries, joint ventures and associates immediately after the Pre-disposal Restructuring

• ‘‘Traffic Information’’

• 廣 州 交 通 信 息 化 建 設 投 資 營 運 有 限 公 司 (Guangzhou Traffic Information Construction Investment and Operation Co., Ltd.)*, a company incorporated in the PRC on 8 August 2003 and an associated company of Beijing RHY

• ‘‘Traffic Information Supplemental Agreement’’

• the supplemental agreement dated 2 July 2018 entered into between Haotian Jiajie and Beijing Wancheng in relation to the Outstanding Traffic Information Consideration

• ‘‘Wuhan Optics Supplemental Agreement’’

• the supplemental agreement dated 2 July 2018 entered into between Jiangsu Zhongzhi and Beijing Wancheng in relation to the Outstanding Wuhan Optics Consideration

• ‘‘Wuhan Optics Valley’’

• 武漢光谷智能交通科技有限公司 (Wuhan Optics Valley Intelligent Traffic Technology Co., Ltd.)*, a company incorporated in the PRC on 12 July 2012 and an associated company of Beijing RHY

• ‘‘%’’ per cent

• The English names of the PRC entities referred to in this circular are transliterations from their Chinese names and are for identification purposes only, and should not be regarded as the official English name(s) of such Chinese name(s). If there is any inconsistency, the Chinese name shall prevail.

– 7 –

LETTER FROM THE BOARD

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China ITS (Holdings) Co., Ltd. 中 国 智 能 交 通 系 统（ 控 股 ）有 限 公 司 (incorporated in the Cayman Islands with limited liability) (Stock code: 1900)

Executive Directors:

Mr. Liao Jie (Chairman of the Board) Mr. Jiang Hailin (Chief Executive Officer)

Non-executive Director:

Mr. Tim Tianwei Zhang

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

Independent Non-executive Directors: Mr. Choi Onward (FCCA, HKICPA) Mr. Ye Zhou Mr. Wang Dong

Place of Business in Hong Kong: Room 1004 Tung Wah Mansion 199–203 Hennessy Road Wanchai, Hong Kong

6 September 2018

To the Shareholders

Dear Sir or Madam,

VARIATION OF TERMS IN RELATION TO A VERY SUBSTANTIAL DISPOSAL AND CONNECTED TRANSACTIONS

INTRODUCTION

References are made to (i) the announcement of the Company dated 17 February 2016 and the 2016 Circular in respect of the Master Sale and Purchase Agreement relating to the sale of the entire issued share capital of each of the Target Companies and the Receivables by the Company to the Purchaser, (ii) the announcements of the Company dated 9 April 2018 and 3 May 2018 in relation to certain outstanding payment of the Consideration and other amounts in connection with the Master Sale and Purchase Agreement by the Purchaser Group and the provision of pledged equity by the Purchaser Group to secure the Purchaser Group’s payment obligations of such outstanding sums, and (iii) the announcement of the Company dated 2 July 2018 in respect of the Supplemental Agreements relating to the settlement of the Outstanding Amounts.

– 8 –

LETTER FROM THE BOARD

The purpose of this circular is to (1) provide you with information regarding the Supplemental Agreements; (2) a letter of recommendation from the Independent Board Committee to the Independent Shareholders; (3) a letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the terms of the Supplemental Agreements; and (4) give you the notice of the EGM.

THE SUPPLEMENTAL AGREEMENTS

On 17 February 2016, the Company and the Purchaser entered into the Master Sale and Purchase Agreement, pursuant to which the Company sold the entire issued share capital of each of the Target Companies and the Receivables to the Purchaser. The transfers of equity interests in the six onshore companies, being the Pre-disposal Restructuring and one of the conditions precedent of the Master Sale and Purchase Agreement, had been completed before the Offshore Closing Date. As contemplated under the Master Sale and Purchase Agreement, on 17 December 2016, Beijing Zhongzhi and Beijing Wuzhouzhitong entered into the PRC Sale and Purchase Agreement, pursuant to which Beijing Zhongzhi sold the Onshore Target Equity to Beijing Wuzhouzhitong. Pursuant to Onshore Supplemental Agreements, Changzhou RHY was designated as the transferee of the Onshore Target Equity.

As all the conditions precedent of the Master Sale and Purchase Agreement had been fulfilled, the Target Companies had been transferred to the Purchaser Group and the Receivables had been assigned to the Purchaser accordingly on the Offshore Closing Date on 31 December 2016 and the Onshore Closing Date on 5 April 2017.

Despite the Offshore Closing and Onshore Closing, as disclosed in the announcement of the Company dated 9 April 2018, certain Consideration and other amounts in connection with the Master Sale and Purchase Agreement had not been fully settled.

The Consideration

The initial total Consideration under the Master Sale and Purchase Agreement was RMB979,840,000, comprising (i) the aggregate sum of the Offshore Consideration and the Onshore Consideration of approximately RMB858.67 million for the purchase of the entire equity interests of the Target Companies by the Purchaser from the Company (representing the aggregate combined net asset of the Target Companies based on the unaudited combined statement of financial position of the Target Companies as at 30 September 2015 (the ‘‘Preliminary Net Asset’’); and (ii) the Receivables Consideration.

Under the Master Sale and Purchase Agreement, the initial total Consideration is subject to the following adjustment:

• (a) if the Preliminary Net Asset is greater than the aggregate combined net asset of the Target Companies as at 31 December 2015 (the ‘‘Final Net Asset’’) based on the unaudited pro forma combined statement of financial position of the Target Companies as at 31 December 2015 reflecting the financial effect of the Pre-

– 9 –

LETTER FROM THE BOARD

disposal Restructuring (the ‘‘Pro Forma Balance Sheet’’), the Consideration shall be reduced by such amount of the Preliminary Net Asset that exceeds the Final Net Asset; and

• (b) if the Preliminary Net Asset is less than the Final Net Asset, the Consideration shall be increased by such amount of the Final Net Asset that exceeds the Preliminary Net Asset.

Also, as disclosed under the paragraph headed ‘‘Letter from the Board — THE MASTER SALE AND PURCHASE AGREEMENT — Consideration’’ in the 2016 Circular, the Final Net Asset shall reflect the reduction in aggregate combined net asset of the Target Companies as a result of the declaration of Beijing RHY Dividend and China Expressway Dividend on 31 December 2015.

The Preliminary Net Asset amounted to approximately RMB858.67 million and the Final Net Asset amounted to approximately RMB664.54 million. Since the Preliminary Net Asset exceeds the Final Net Asset by approximately RMB194.13 million, the initial total Consideration was adjusted accordingly. Such difference represents (i) a decrease in the aggregate combined net asset of the Target Companies due to payments of the aggregate amounts of RMB55.54 million from the Target Group to the Group as consideration for the transfers of equity interests in all six onshore companies by the Group under the Pre-disposal Restructuring (the ‘‘Pre-disposal Restructuring Consideration’’); (ii) a decrease in the aggregate combined net asset of the Target Companies due to payable of Beijing RHY Dividend in the sum of RMB37.5 million and China Expressway Dividend in the sum of RMB101.25 million; (iii) an increase in the aggregate combined net asset of the Target Companies due to converted difference in foreign currency statements of certain offshore companies in the Target Group; and (iv) the slight loss in operations of the Target Companies during the period from 30 September 2015 to 31 December 2015.

The Final Net Asset and the Consideration after adjustment, i.e., RMB785,715,000, were arrived at after following the adjustment mechanism provided under the Master Sale and Purchase Agreement. At the time when the Master Sale and Purchase Agreement was entered into, it was expected by the parties that all of the Pre-Disposal Restructuring Consideration would be settled prior to the Offshore Closing, and the Consideration together with the price adjustment mechanism were formulated and agreed on such basis.

Falling out of the expectation of the parties, the Group was only able to settle approximately RMB35.54 million of the Pre-disposal Restructuring Consideration prior to the Offshore Closing and there was an outstanding payment of RMB20 million, namely the Outstanding Traffic Information Consideration and the Outstanding Wuhan Optics Consideration, payable by the Target Group to the Group upon the Offshore Closing.

Accordingly, the relevant parties (which were members of the Group then) entered into the Original Traffic Information Agreement and the Original Wuhan Optics Agreement, which, as consented by the Purchaser Group, provided that 50% of the consideration under each of them would be settled on or before 31 December 2016 and the other 50% in December 2017. As the Offshore Closing took place on 31 December 2016, such settlement arrangement essentially increased the amount payable by the Purchaser Group by the amount

– 10 –

LETTER FROM THE BOARD

of the Outstanding Traffic Information Consideration and the Outstanding Wuhan Optics Consideration, offsetting the negative adjustment to the Consideration under the price adjustment mechanism provided by the Master Sale and Purchase Agreement due to the relevant amounts payable in respect of the Pre-disposal Restructuring as set out in the Pro Forma Balance Sheet.

The Pledged Equity

As disclosed in the announcement of the Company dated 3 May 2018, the Purchaser Group pledged 75% of the equity interests in Beijing RHY to Aproud Technology on 16 April 2018, to secure the Purchaser Group’s payment obligations of the outstanding sums. Beijing RHY was one of the Target Companies in the Disposal.

The pledged equity is valued at approximately RMB641.7 million as at 31 December 2017 by a qualified independent valuer in the PRC engaged by the Group, namely, China Alliance Appraisal Co., Ltd. (中同華資產評估有限公司), based on asset-based approach. Asset-based approach was chosen over income approach after due consideration by the valuer, taking into account the difference in appraised value using these two approaches. As the purpose of the valuation is to set out a reference for market price of the Pledged Equity at the valuation date and the adoption of asset-based approach involves valuation over the assets and liabilities of Beijing RHY, including its current assets, non-current assets, current liabilities and non-current liabilities, the Board is of the view that the adoption of asset-based approach is fair and reasonable, having considered the interests of the Company as a pledgee of such securities. As stated in the valuation report, the conclusion arrived at in valuation report shall be valid for 1 year after the valuation date.

The valuation is based on certain customary assumptions including that there are willing buyer and willing seller in an arm’s-length transaction after proper marketing and the parties has each acted knowledgeably and prudently, and special assumptions including that the management of Beijing RHY will continue to exercise diligence and maintain the existing management of operation, business scope and business direction of Beijing RHY and there is no unforeseeable event which will create material adverse impact to the business and operation of Beijing RHY. As advised by the independent valuer, the said ‘‘customary assumptions’’ are assumptions which apply to every valuation they conduct, and ‘‘special assumptions’’ include all other assumptions which are not ‘‘customary assumptions’’. The independent valuer further confirmed that all assumptions underlying their valuation of Beijing RHY as at 31 December 2017 are consistent with the relevant professional and market practices for similar valuations and they are not aware of any matters which may cast doubt on the validity of such assumptions. The Directors are also not aware of any matters which indicate that such assumptions are not valid. As of the Latest Practicable Date, the Company is not aware of any material adverse change in the business or operation of Beijing RHY.

– 11 –

LETTER FROM THE BOARD

In order to preserve the Pledged Equity, the Purchaser Group agreed with the Company that the following matters shall not be carried out without the prior written consent of the Company:

• (i) transfer or otherwise dispose of, or intend to transfer or otherwise dispose of, the interests under the Pledged Equity, or directly or indirectly create or allow the creation of other security interests over the Pledged Equity;

• (ii) approve the profit or asset distribution plan or loss compensation plan of Beijing RHY, declaration or payment of dividends. If the profit or asset distribution plan of Beijing RHY is approved, or the dividends of Beijing RHY is declared or paid, the Purchaser Group shall use the profit or the allocated asset or dividend corresponding to the Pledged Equity to repay the Outstanding Amounts;

• (iii) approve the disposal plan of material assets (over RMB10 million or more) of Beijing RHY;

• (iv) approve the sale or transfer of all or substantial part of the assets or business (over RMB10 million or more) of Beijing RHY; and

• (v) any changes that the Purchaser Group may make that may result in a reduction in the value of the Pledged Equity.

In addition, the Group has obtained possession of the land use right certificates and property ownership certificates in respect of all of the properties owned by Beijing RHY, with an aggregate book value of approximately RMB100 million as at 31 December 2017, from the Purchaser Group. Such original documents are to be kept in the Group’s custody until the Outstanding Amount are fully settled.

The Board is of the view that the above measures are sufficient to preserve the value of the Pledged Equity as any act of dissipating any material assets or business of Beijing RHY is restricted.

The Outstanding Amounts

The Company had received the 1st instalment and part of the 2nd instalment of the Offshore Consideration and the 1st instalment of the Onshore Consideration and certain Receivables Consideration in accordance with the payment terms contemplated under the Master Sale and Purchase Agreement. Under the Master Sale and Purchase Agreement, the Receivables Consideration shall be payable in full by the Purchaser within six months from the Offshore Closing Date with interest accrued at the rate of six-month HIBOR as at the Offshore Closing Date. As at the Latest Practicable Date, certain consideration for the Disposal, certain amount of dividend receivables in relation to the Beijing RHY Dividend and China Expressway Dividend and certain consideration for the transfers of equity interests in onshore companies which formed part of the Pre-disposal Restructuring had not been fully settled.

– 12 –

LETTER FROM THE BOARD

The particulars of the Outstanding Amounts are set out below:

Nature	Nature		Due date	Due date
	Nature	Amount due (RMB)	Due date
	The outstanding second instalment of the Offshore Consideration under the Master Sale and Purchase Agreement with accrued interest due from the Purchaser to the Company (the ‘‘Outstanding Offshore Consideration’’)	231,352,939	31 December 2017
	The outstanding Receivable Consideration with accrued interest due from the Purchaser to the Company (the ‘‘Outstanding Receivable Consideration’’)	54,476,924	30 June 2017
	The second instalment of the Onshore Consideration with accrued interest due from Beijing Wuzhouzhitong to Beijing Zhongzhi (the ‘‘Outstanding Onshore Consideration’’)	108,822,832	5 April 2018
	The outstanding China Expressway Dividend due from China Expressway to the Company (the ‘‘Outstanding China Expressway Dividend’’)	60,591,757	30 June 2017
	The outstanding Beijing RHY Dividend due from Beijing RHY to Beijing Zhongzhi (the ‘‘Outstanding Beijing RHY Dividend’’)	34,500,000	5 October 2017
	The second instalment of the consideration in relation to the disposal of 33% equity interest in Traffic Information by Haotian Jiajie to Beijing Wancheng as part of the Pre- Disposal Restructuring, due from Beijing Wancheng to Haotian Jiajie (the ‘‘Outstanding Traffic Information Consideration’’)	13,500,000	9 December 2017
The second instalment of the consideration in relation to the disposal of 25% equity interest in Wuhan Optics Valley by Jiangsu Zhongzhi to Beijing Wancheng as part of the Pre-Disposal Restructuring, due from Beijing Wancheng to Jiangsu Zhongzhi (the ‘‘Outstanding Wuhan Optics Consideration’’)	The second instalment of the consideration in relation to the disposal of 25% equity interest in Wuhan Optics Valley by Jiangsu Zhongzhi to Beijing Wancheng as part of the Pre-Disposal Restructuring, due from Beijing Wancheng to Jiangsu Zhongzhi (the ‘‘Outstanding Wuhan Optics Consideration’’)	6,500,000	4 December 2017

The Supplemental Agreements

As disclosed in the announcement of the Company dated 2 July 2018, the Group entered into the Supplemental Agreements on 2 July 2018 in relation to the terms and conditions for the settlement of the Outstanding Amounts.

The principal terms of the Supplemental Agreements are as follows.

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LETTER FROM THE BOARD

The Master SPA Supplemental Agreement

• Date: 2 July 2018 Parties: (1) the Company (2) the Purchaser

• Subject Matter: Pursuant to the Master SPA Supplemental Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the Master Sale and Purchase Agreement shall be amended and supplemented to the effect that: (a) the due date for the Outstanding Offshore Consideration shall be extended to 30 June 2019;

• (b) interest on the Outstanding Offshore Consideration shall be accrued at 3.487% per annum from 31 December 2017 until 31 December 2018 or when the Outstanding Offshore Consideration has been settled in full, whichever is the earlier;

• (c) interest on any Outstanding Offshore Consideration shall be accrued at 3.804% per annum from 1 January 2019 until the Outstanding Offshore Consideration has been settled in full;

• (d) the due date for the Outstanding Receivable Consideration shall be extended to 30 June 2019;

• (e) interest on the Outstanding Receivable Consideration shall be accrued at 3.487% per annum from 30 June 2017 until 31 December 2018, or when the Outstanding Receivable Consideration has been settled in full, whichever is the earlier; and

• (f) interest on the Outstanding Receivable Consideration shall be accrued at 3.804% per annum from 1 January 2019 until the Outstanding Receivable Consideration has been settled in full.

• Save as disclosed above, all other terms of the Master Sale and Purchase Agreement remain unchanged.

• Conditions precedent: The supplement and amendment to the Master Sale and Purchase Agreement pursuant to the Master SPA Supplemental Agreement are subject to satisfaction of the following conditions:

• (a) approval of the Master SPA Supplemental Agreement by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules;

• (b) approval of the Master SPA Supplemental Agreement by the board of directors and shareholder(s) of the Purchaser.

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LETTER FROM THE BOARD

The PRC SPA Supplemental Agreement

Date:	Date:	2 July 2018	2 July 2018
	Date:	2 July 2018
	Parties:	(1) Beijing Zhongzhi (2) Beijing Wuzhouzhitong
	Subject Matter:	Pursuant to the PRC SPA Supplemental Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the PRC Sale and Purchase Agreement shall be amended and supplemented to the effect that: (a) the due date for the Outstanding Onshore Consideration shall be extended to 30 June 2019; (b) interest on the Outstanding Onshore Consideration shall be accrued at the 6.479% per annum from 5 April 2018 until 31 December 2018 or when the Outstanding Onshore Consideration has been settled in full, whichever is the earlier; (c) interest on the Outstanding Onshore Consideration shall be accrued at the 7.068% per annum from 1 January 2019 until the Outstanding Onshore Consideration has been settled in full. Save as disclosed above, all other terms of the PRC Sale and Purchase Agreement (as amended and supplemented by the Onshore Supplemental Agreements) remain unchanged.
	Conditions precedent:	The supplement and amendment to the PRC Sale and Purchase Agreement pursuant to the PRC SPA Supplemental Agreement are subject to satisfaction of the following conditions: (a) approval of the PRC SPA Supplemental Agreement by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules; (b) approval of the PRC SPA Supplemental Agreement by the board of directors and shareholder(s) of Beijing Zhongzhi; (c) approval of the PRC SPA Supplemental Agreement by the board of directors and shareholder(s) of Beijing Wuzhouzhitong.

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LETTER FROM THE BOARD

The China Expressway Standstill Agreement

On 17 February 2016, China Expressway, Mr. Jiang Hailin, Mr. Liao Jie entered into the China Expressway Undertaking in favour of the Company in relation to the China Expressway Dividend.

Pursuant to the China Expressway Undertaking, China Expressway irrevocably and unconditionally undertook to the Company to pay or procure payment of the China Expressway Dividend in full to the Company no later than the date falling six (6) calendar months after the Offshore Closing. Mr. Jiang Hailin and Mr. Liao Jie guaranteed in favour of the Company the due and punctual performance and observance by China Expressway of its obligations under the China Expressway Undertaking.

Date:	Date:	2 July 2018	2 July 2018
	Date:	2 July 2018
	Parties:	(1) the Company (2) China Expressway (3) Mr. Jiang Hailin (4) Mr. Liao Jie
Subject Matter:	Subject Matter:	From April 2017 to June 2017, the Group had received RMB40,658,243 in total as part of the China Expressway Dividend. Pursuant to the China Expressway Standstill Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the Company agrees not to enforce its rights under the China Expressway Undertaking against China Expressway, Mr. Jiang Hailin and Mr. Liao Jie regarding the settlement of the Outstanding China Expressway Dividend from the date of satisfaction of the conditions precedent until 30 June 2019. As consideration of the Company’s agreement not to enforce its right under the China Expressway Undertaking, China Expressway shall settle the Outstanding China Expressway Dividend no later than 30 June 2019 with interest accrued at the 3.487% per annum from 30 June 2017 until 31 December 2018, or when the China Expressway Dividend is paid in full, whichever is the earlier, and at the 3.804% per annum, from 1 January 2019 until the China Expressway Dividend is paid in full.
Conditions precedent:		The China Expressway Standstill Agreement is subject to approval by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules.

Conditions precedent: The China Expressway Standstill Agreement is subject to approval by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules.

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LETTER FROM THE BOARD

The Beijing RHY Standstill Agreement

On 17 February 2016, Beijing RHY, Mr. Jiang Hailin, Mr. Liao Jie entered into the Beijing RHY Undertaking in favour of Beijing Zhongzhi in relation to the Beijing RHY Dividend.

Pursuant to the Beijing RHY Undertaking, Beijing RHY irrevocably and unconditionally undertook to Beijing Zhongzhi to pay or procure payment of the Beijing RHY Dividend in full to Beijing Zhongzhi no later than the date falling six (6) calendar months after the Onshore Closing. Mr. Jiang Hailin and Mr. Liao Jie guaranteed in favour of Beijing Zhongzhi the due and punctual performance and observance by Beijing RHY of its obligations under the Beijing RHY Undertaking.

RHY Undertaking.	RHY Undertaking.
Date:		2 July 2018
	Date:	2 July 2018
	Parties:	(1) Beijing Zhongzhi (2) Beijing RHY (3) Mr. Jiang Hailin (4) Mr. Liao Jie
Subject Matter:	Subject Matter:	From April 2017 to July 2017, the Group had received RMB3,000,000 in total as part of the Beijing RHY Dividend. Pursuant to the Beijing RHY Standstill Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, Beijing Zhongzhi agrees not to enforce its rights under the Beijing RHY Undertaking against Beijing RHY, Mr. Jiang Hailin and Mr. Liaojie regarding the settlement of the Outstanding Beijing RHY Dividend from the date of satisfaction of the conditions precedent until 30 June 2019. As consideration of Beijing Zhongzhi’s agreement not to enforce its right under the Beijing RHY Undertaking, Beijing RHY shall settle the Outstanding Beijing RHY Dividend no later than 30 June 2019 with interest accrued at the 6.479% per annum from 5 October 2017 until 31 December 2018, or when the Beijing RHY Dividend is paid in full, whichever is earlier, and at the 7.068% per annum from 1 January 2019 until the Beijing RHY Dividend is paid in full.
Conditions precedent:		The Beijing RHY Standstill Agreement is subject to approval by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules.

Conditions precedent: The Beijing RHY Standstill Agreement is subject to approval by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules.

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LETTER FROM THE BOARD

The Traffic Information Supplemental Agreement

The transfer of 33% equity interest in Traffic Information was part of the Pre-disposal Restructuring prior to the Disposal. Subsequent to the execution of the Master Sale and Purchase Agreement, on 28 November 2016, Haotian Jiajie and Beijing Wancheng entered into an equity transfer agreement, pursuant to which Haotian Jiajie agreed to transfer 33% equity interest in Traffic Information to Beijing Wancheng at a total consideration of RMB27,000,000, out of which RMB13,500,000 should be paid within 30 days after the completion of the registration of the transfer of the equity interest and the remaining RMB13,500,000 should be paid within 360 days after the completion of the registration of the transfer of the equity interest. No default interest rate was agreed and no undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation.

Pursuant to an equity transfer agreement dated 28 November 2016 between Haotian Jiajie and Beijing Wancheng as amended by a supplemental agreement between the same parties dated 9 December 2016 (the ‘‘Original Traffic Information Agreement’’), Haotian Jiajie transferred 33% equity interest in Traffic Information to Beijing Wancheng at a total consideration of RMB27,000,000, out of which RMB13,500,000 should be paid on or before 31 December 2016, and the remaining RMB13,500,000 should be paid within 360 days after the completion of the registration of the transfer of the equity interest (i.e. 9 December 2017). No default interest rate was agreed and no undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation.

On 2 July 2018, Haotian Jiajie and Beijing Wancheng entered into the Traffic Information Supplemental Agreement to agree upon the payment of the Outstanding Traffic Information Consideration.

Date:	2 July 2018
Parties:	(1) Haotian Jiajie (2) Beijing Wancheng

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LETTER FROM THE BOARD

Subject Matter:	Subject Matter:	Pursuant to the Traffic Information Supplemental Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the Original Traffic Information Agreement shall be amended and supplemented to the effect that: (a) the due date for the Outstanding Traffic Information Consideration shall be extended to 30 June 2019; (b) interest on the Outstanding Traffic Information Consideration shall be accrued at the 6.479% per annum from 9 December 2017 until 31 December 2018, or when the Outstanding Traffic Information Consideration has been settled in full, whichever is the earlier; (c) interest on the Outstanding Traffic Information Consideration shall be accrued at the 7.068% per annum from 1 January 2019 until the Outstanding Traffic Information Consideration has been settled in full. Save as disclosed above, all other terms of the Original Traffic Information Agreement remain unchanged. No undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation of the Outstanding Traffic Information Consideration.	Pursuant to the Traffic Information Supplemental Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the Original Traffic Information Agreement shall be amended and supplemented to the effect that: (a) the due date for the Outstanding Traffic Information Consideration shall be extended to 30 June 2019; (b) interest on the Outstanding Traffic Information Consideration shall be accrued at the 6.479% per annum from 9 December 2017 until 31 December 2018, or when the Outstanding Traffic Information Consideration has been settled in full, whichever is the earlier; (c) interest on the Outstanding Traffic Information Consideration shall be accrued at the 7.068% per annum from 1 January 2019 until the Outstanding Traffic Information Consideration has been settled in full. Save as disclosed above, all other terms of the Original Traffic Information Agreement remain unchanged. No undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation of the Outstanding Traffic Information Consideration.
	Subject Matter:	Pursuant to the Traffic Information Supplemental Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the Original Traffic Information Agreement shall be amended and supplemented to the effect that: (a) the due date for the Outstanding Traffic Information Consideration shall be extended to 30 June 2019; (b) interest on the Outstanding Traffic Information Consideration shall be accrued at the 6.479% per annum from 9 December 2017 until 31 December 2018, or when the Outstanding Traffic Information Consideration has been settled in full, whichever is the earlier; (c) interest on the Outstanding Traffic Information Consideration shall be accrued at the 7.068% per annum from 1 January 2019 until the Outstanding Traffic Information Consideration has been settled in full. Save as disclosed above, all other terms of the Original Traffic Information Agreement remain unchanged. No undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation of the Outstanding Traffic Information Consideration.
	Conditions precedent:	The supplement and amendment to the Original Traffic Information Agreement pursuant to the Traffic Information Supplemental Agreement are subject to satisfaction of the following conditions:
		(a) approval of the Traffic Information Supplemental Agreement by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules;
		(b) approval of the Traffic Information Supplemental Agreement by the board of directors and shareholder(s) of Haotian Jiajie.

The Wuhan Optics Supplemental Agreement

The transfer of 25% equity interest in Wuhan Optics Valley was part of the Pre-disposal Restructuring prior to the Disposal. Subsequent to the execution of the Master Sale and Purchase Agreement, on 4 November 2016, Jiangsu Zhongzhi and Beijing Wancheng entered into an equity transfer agreement, pursuant to which Jiangsu Zhongzhi agreed to transfer 25% equity interest in Wuhan Optics Valley to Beijing Wancheng at a total consideration of RMB7,500,000. No default interest rate was agreed and no undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation.

Pursuant to an equity transfer agreement dated 4 November 2016 between Jiangsu Zhongzhi and Beijing Wancheng as amended by a supplemental agreement between the same parties dated 9 December 2016 (the ‘‘Original Wuhan Optics Agreement’’), Jiangsu

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LETTER FROM THE BOARD

Zhongzhi transferred 25% equity interest in Wuhan Optics Valley to Beijing Wancheng at a total consideration of RMB13,000,000, out of which RMB6,500,000 should be paid on or before 31 December 2016, and the remaining RMB6,500,000 should be paid within 360 days after 9 December 2016 (i.e. 4 December 2017). No default interest rate was agreed and no undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation.

On 2 July 2018, Jiangsu Zhongzhi and Beijing Wancheng entered into the Wuhan Optics Supplemental Agreement to agree upon the payment of the Outstanding Wuhan Optics Consideration.

Consideration.	Consideration.
Date:		2 July 2018
	Date:
	Parties:	(1) Jiangsu Zhongzhi (2) Beijing Wancheng
	Subject Matter:	Pursuant to the Wuhan Optics Supplemental Agreement, subject to the satisfaction of the conditions precedent as set out in the paragraph ‘‘Conditions precedent’’ below, the Original Wuhan Optics Agreement shall be amended and supplemented to the effect that: (a) the due date for the Outstanding Wuhan Optics Consideration shall be extended to 30 June 2019; (b) interest on the Outstanding Wuhan Optics Consideration shall be accrued at the 6.479% per annum from 4 December 2017 until 31 December 2018, or when the Outstanding Wuhan Optics Consideration has been settled in full, whichever is the earlier; (c) interest on the Outstanding Wuhan Optics Consideration shall be accrued at the 7.068% per annum from 1 January 2019 until the Outstanding Wuhan Optics Consideration has been settled in full. Save as disclosed above, all other terms of the Original Wuhan Optics Agreement remain unchanged. No undertaking nor guarantee was given by the Purchaser or its related parties in relation to its payment obligation of the Outstanding Wuhan Optics Consideration.
	Conditions precedent:	The supplement and amendment to the Original Wuhan Optics Agreement pursuant to the Wuhan Optics Supplemental Agreement are subject to satisfaction of the following conditions: (a) approval of the Wuhan Optics Supplemental Agreement by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules; (b) approval of the Wuhan Optics Supplemental Agreement by the board of directors and shareholder(s) of Jiangsu Zhongzhi.

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LETTER FROM THE BOARD

RISK FACTORS

There are certain risks involved in relation to the Supplemental Agreements. Shareholders should carefully consider all of the information set out in this circular, including the risks and uncertainties described below before making a decision on how to vote on the resolution relating to the Supplemental Agreements at the EGM.

The Company may not be able to obtain the financing required to cover the shortfall of cash resulted from the delay in the settlement of the Outstanding Amounts on commercially acceptable terms or at all

A large portion of the Outstanding Amounts was originally intended to be utilized for payment of the Group’s bank loans. As a result of the delay in the payment of the Outstanding Amounts under the Supplemental Agreements, the Group would need to secure additional bank loans to re-finance the relevant loans which it had intended to repay had the Outstanding Amounts been paid on time. There is no assurance that the Group will be able to re-finance such additional loans when they become due before the Purchaser Group pays the Outstanding Amounts on commercially reasonable terms, or at all. In the event that the Group fails to refinance any such additional loans, the financial position and results of the Group’s operations will be adversely and materially affected.

The Supplemental Agreements may not be duly performed by the Purchaser Group

Although the Purchaser Group agrees to pay the Outstanding Amounts pursuant to the Supplemental Agreements by the relevant extended due dates as set out in the relevant agreements, there is no assurance that the Purchaser Group will pay the Outstanding Amounts together with the interests accrued in full, on time, or at all. In the event that the Purchaser Group does not duly perform their payment obligations under the Supplemental Agreements, the Group may need to take further actions to recover the Outstanding Amounts, and the financial position and results of operations of the Group may be adversely and materially affected as a result.

The Company may not possess sufficient financial resources to make investments during the extended term for payment of the Outstanding Amounts which it would otherwise have the resources to make

As a result of the delay of the settlement of the Outstanding Amounts pursuant to the Supplemental Agreements, the Group would have less cash or be at a higher level of borrowing than it would otherwise have or be had the Outstanding Amounts been settled on time in accordance with the original terms of the Master Sale and Purchase Agreement, which in turn may limit the Group’s ability to make further investments. In the event that the Group is not able to make the necessary or desirable investments due to the delay in the settlement of the Outstanding Amounts and the Group was not able to finance such investments from banks and financial institutions, the Group’s financial position and results of its operations may be adversely and materially affected.

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LETTER FROM THE BOARD

REASONS FOR ENTERING INTO THE SUPPLEMENTAL AGREEMENTS

As advised by the Purchaser, it originally intended to utilize an offshore loan equivalent to RMB580,000,000 from a PRC financial institution to satisfy the offshore consideration under the Disposal. Since December 2016, the PRC government has tightened capital outflow and implemented the related foreign exchange control. The Purchaser together with the PRC financial institution had initiated several rounds of communications with the local foreign exchange regulatory authority in order to get better understanding of the effects of such government policy. Due to the lack of official guidance from the PRC government in 2017, the assessment by the Purchaser and the PRC financial institution at that time was that the loan payment approval process of the Purchaser’s offshore loan would be prolonged and the release of such loan might be delayed. As the Purchaser was not aware of any impediment in the release of such loan at the time of its loan application, the Purchaser had not arranged for an alternative channel of financing for such payment.

The Company is of the view that delay in payment by the Purchaser was mainly due to the change in the relevant financial institution’s lending policy under PRC’s foreign exchange control, as a result of the aforementioned policy background, which is beyond control of either the Purchaser or the Company.

The Company has demanded the Purchaser for repayment of the Outstanding Amounts. The Company has also inquired about the reasons for the delays and required the Purchaser Group to provide updates on the progress of their financing arrangements and their financial conditions from time to time. As it became apparent to the Company that the Purchaser Group would need more time to arrange for the necessary financing to pay the Outstanding Amounts, the Company demanded the Purchaser Group to provide security to secure their payment obligations under the relevant agreements in the Disposal, which resulted in the pledge of the Pledged Equity by the Purchaser Group in favor of the Group. The Company is of the view that it is commercially reasonable not to terminate the transaction due to such delay and accordingly, to enter into the Supplemental Agreements, after taking into account, among other things, (i) that the capital received from the Disposal would enable the Company to invest in, or reallocate its resources to focus and develop, other business segments with higher growth potential; (ii) Company’s view that the delay in payment is due to factors unforeseeable by the Purchaser and the Outstanding Amounts will be recoverable from the Purchaser Group; (iii) the pursuit of legal proceedings against the Purchaser Group as a result of termination of the transaction would result in significant legal and other costs, and a significant degree of uncertainty as to the outcome and timing of the resolution of the disputes; (iv) the Pledged Equity to secure the Purchaser Group’s payment obligations; (v) the Purchaser Group’s agreement to pay additional interests to the Group for the delayed payment; and (vi) the equity interests in the Target Companies have been duly transferred to the Purchaser Group in accordance with the terms of the relevant agreements in the Disposal and the termination of the Disposal, the transactions in which have been partially performed, at this stage will not automatically invalidate or reverse the said transfer. In addition, the Group currently has no plans to engage in the Target Companies’ business.

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LETTER FROM THE BOARD

Under the Master Sale and Purchase Agreement, the interest rate for the 2nd instalment of the Offshore Consideration payable on or before the first anniversary of the Offshore Closing was one-year HIBOR as at the Offshore Closing Date. As such interest rate was not available on 31 December 2016, the rate of the one-year HIBOR was calculated by the average rate of 30 December 2016 and 3 January 2017, which equals to approximately 1.579%. The interest rate for the 2nd instalment of the Onshore Consideration payable on or before the first anniversary of the Onshore Closing was PBOC one-year lending rate as at the Onshore Closing Date. Such rate as at 5 April 2017 was 4.350%. The interest rate for payment of the Receivables Consideration within six months from the Offshore Closing Date was sixmonth HIBOR as at the Offshore Closing Date. As such interest rate was not available on 31 December 2016, the rate of six-month HIBOR was calculated by the average rate of 30 December 2016 and 3 January 2017, which equals to approximately 1.267%.

The 3.487% per annum interest rate, being the offshore interest rate for the period before 31 December 2018 agreed in the Supplemental Agreements, represents 110% of the current average interest rate of the Group’s loans outside of the PRC, which is 3.17%. The 3.804% per annum interest rate, being the offshore interest rate for the period from 1 January 2019 agreed in the Supplemental Agreements, represents 120% of the average current interest rate of the Group’s loans outside of the PRC.

The 6.479% per annum interest rate, being the onshore interest rate for the period before 31 December 2018 agreed in the Supplemental Agreements, represents 110% of the current average interest rate of the Group’s loans in the PRC, which is 5.89%. The 7.068% per annum interest rate, being the onshore interest rate for the period from 1 January 2019 agreed in the Supplemental Agreements, represents 120% of the average current interest rate of the Group’s loans in the PRC.

The above interest rates were determined by the parties through arm’s length negotiation, by reference to the Group’s finance costs in relation to its loans in the PRC and outside of the PRC and after taking into account the upward fluctuation to provide for reasonable buffer in case interest rates of the Group’s loan may increase in future. In order to assess the reasonableness of the interest rates, the Company considers that it is appropriate to use the higher of (i) the prevailing market rate and (ii) the relevant interest rates for outstanding payment as agreed in the Master Sale and Purchase Agreement and applicable laws as the benchmark. Since the prevailing market rates are higher than the interest rates as agreed under the Master Sale and Purchase Agreement and applicable laws, being approximately 1.579% for Offshore Consideration, approximately 4.350% for Onshore Consideration and approximately 1.267% for Receivable Consideration, the prevailing market rates have been referred to for the purpose of assessing the reasonableness of the interest rates under the Supplemental Agreements.

The due dates for the Outstanding Amounts were extended to 30 June 2019 under the Supplemental Agreements because the Purchaser Group would procure the disposal of part of the business and/or shares of the Target Companies to raise funds for repayment of the Outstanding Amounts. The Purchaser Group had engaged professional parties to perform the audit of such sale assets. The audit work is expected to be completed by end of October this year, major terms of the disposal of such sale assets are expected to be discussed and recorded

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LETTER FROM THE BOARD

in the form of a term sheet in November this year, due diligence work is expected to be carried out by potential buyer in December 2018, and it is therefore anticipated by the Purchaser Group that the terms of disposal will be agreed upon in the first quarter of 2019 and the potential disposal will be completed in the first half of 2019 and repayment will accordingly take place by 30 June 2019. The Purchaser Group will keep close monitor over the progress of the potential disposal and the pricing of such disposal to ensure the Outstanding Amounts will be repaid according to schedule. The Company was informed by the Purchaser Group that the equity interests in Beijing RHY, being the subject company of the Pledged Equity, will form part of the sale assets. The Company will not provide prior written consent to the Purchaser Group for such disposal if (i) the Purchaser Group intends to dispose any equity interests in Beijing RHY at a price not agreeable by the Company or at a price lower than its appraised value; or (ii) the Company is not satisfied that the proceeds of the disposal will be used for repayment of the Outstanding Amounts. The Company can enforce the Pledged Equity if the Outstanding Amounts are not settled. Notwithstanding the provision of Pledged Equity, the Company reserved the right to claim the Purchaser Group and related parties for payment of outstanding monies.

In the event that the Supplemental Agreements are voted down by the Shareholders, the Company would take the appropriate legal actions to recover the Outstanding Amounts and any damages the Group may be entitled under applicable laws, including but not limited to enforcement of the Equity Pledge, demanding payment from the guarantor under the China Expressway Undertaking, the Beijing RHY Undertaking, filing lawsuits against the Purchaser Group for breach of contract or other relevant cause of actions available to the Group, or a combination of the above. As enforcement of security and legal actions will involve a significant degree of uncertainty in terms of the outcome and cost, the Directors are not able to estimate the net amount which would be recouped by the Group by taking legal actions against the Purchaser Group for the Outstanding Amounts, which may be less than the amount receivable by the Group pursuant to the terms of the Supplemental Agreements. In addition, it is expected that in the event that the Group endeavors to resolve the delay in the settlement of the Outstanding Amounts through court proceedings, such court proceedings may last for an extended period of time and there is no certainty as to the timing of the final resolution of the relevant disputes and the amount to which the Group would be adjudicated to be entitled. In addition, the Supplemental Agreements will not deprive the Group from taking legal actions against the Purchaser Group if the Purchaser Group breaches the terms of the Supplemental Agreement. Accordingly, the Directors (including the independent non-executive Directors whose views are more fully set out in the section headed ‘‘Letter from the Independent Board Committee’’ in this circular) are of the view that it is more desirable at this stage for the Company to resolve the delay in the settlement of the Outstanding Amounts through the Supplemental Agreements, while keeping its right to take legal actions against the Purchaser Group after the extended due dates as a last resort should the Purchaser Group fail to comply with the payment terms under the Supplemental Agreements.

In view of the commercial rationale not to terminate the transaction and to enter into the Supplemental Agreements, the differences between the interest rates agreed in the Supplemental Agreements and the prevailing market rates/the interest rates for outstanding payment agreed under the Master Sale and Purchase Agreement and the uncertainties involved in legal actions and other factors elaborated above, the Directors (including the independent

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LETTER FROM THE BOARD

non-executive Directors who have taken advice from the Independent Financial Adviser) are of the view that the terms of Supplemental Agreements are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

USE OF PROCEEDS

The original plan for use of proceeds from the Disposal and the effect of delay in payment by the Purchaser on the plan are set out below. For the purpose of setting out the use of proceeds, on the assumption that all the Outstanding Amounts will be settled in full on 30 June 2019, the interests which will be accrued pursuant to the Supplemental Agreements up to 30 June 2019 will amount to approximately RMB36 million. Aggregating the Consideration after adjustment and deduction of expenses with the interests which will be accrued up to 30 June 2019, the proceeds will amount to RMB784 million (the ‘‘Proceeds’’).

Original plan for use of proceeds

Percentage			Use of remaining proceeds
(approximate amounts			under the Disposal together	Revised plan for
based on the		Actual amount used for	with interests to be accrued	use of proceeds
Consideration after		the purpose as of the	up to 30 June 2019	(approximate
adjustment and		Latest Practicable Date	pursuant to the	amounts based on
deduction of expenses)	Use	(approximate)	Supplemental Agreements	the Proceeds)
50% (RMB374 million)	Repayment of	RMB200 million	RMB100 million	38.27% (RMB300
	bank loan			million)
			The delay in payment by the
			Purchaser caused the late
			payment of the remaining
			bank loan by the Group
			which increased the Group’s
			finance costs
28% (RMB209 million)	Railway segment	RMB46 million	RMB160 million	26.28% (RMB206
				million)
			The remaining intended
			amount of proceeds has not
			been incurred because
			suitable investment target
			had not been identified
8% (RMB60 million)	Civil aviation	RMB50 million	—	6.38% (RMB50
	segment			million)
4% (RMB30 million)	Building	RMB30 million	—	3.83% (RMB30
	decoration			million)

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LETTER FROM THE BOARD

Original plan for use of proceeds

Percentage			Use of remaining proceeds
(approximate amounts			under the Disposal together	Revised plan for
based on the		Actual amount used for	with interests to be accrued	use of proceeds
Consideration after		the purpose as of the	up to 30 June 2019	(approximate
adjustment and		Latest Practicable Date	pursuant to the	amounts based on
deduction of expenses)	Use	(approximate)	Supplemental Agreements	the Proceeds)
10% (RMB75 million)	General working	RMB48 million	—	6.12% (RMB48
	capital of the			million)
	Group
—	Investment in	—	RMB150 million	19.13% (RMB150
	other business			million)
			The Group intended to
			utilize RMB150 million to
			invest in other businesses.
			As of the Latest Practicable
			Date, the Group had not
			identified any suitable
			investment target

The Group had disposed the Target Group under the Disposal, which was principally engaged in the provision of intelligent transportation system solutions and services to expressway and urban traffic segments in the PRC, because the growth of the expressway industry was slowing down and the investment in urban traffic from local governments was decreasing at the material time, resulting in deteriorating financial performance of expressway and urban traffic segments of the Group over 2012 to 2014.

Subsequent to the completion of the Disposal, the Group has focused on its attention and resources at developing its specialised solutions (‘‘SS’’) and value-added operation and services (‘‘VAOS’’) businesses for railways and in addition, the Group has been committed to exploring other overseas markets, especially Southeast Asian markets, to diversify operating risks and lay a solid foundation for its long term development. The Company is of the view that the national investment fixed assets within the railway industry is expected to pick up, on the basis that infrastructure investment was mentioned once again in the recent meetings of the State Council of the PRC and the Central Political Bureau of the Communist Party of China, and representatives of China Railway also expect that the investment amount would exceed RMB800 billion in 2018.

As disclosed in the table above, as of the Latest Practicable Date, approximately RMB46 million received from the Disposal was used in the railway segment. The Company plans to invest an additional RMB160 million received from the Disposal and pursuant to the Supplemental Agreements in the railway segment. As of the Latest Practicable Date, the Company had not identified any suitable investment target.

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LETTER FROM THE BOARD

INFORMATION ON THE GROUP AND OTHER PARTIES TO THE SUPPLEMENTAL AGREEMENTS

The Group

The Group is primarily engaged in the provision of communications, surveillance specialized solutions and value-added operation and services.

The Purchaser, Mr. Jiang Hailin and Mr. Liao Jie

The Purchaser is a company incorporated in the BVI with limited liability and is principally engaged in investment holding. The shareholding of the Purchaser as at the Latest Practicable Date was as follows:

Name Mr. Jiang Hailin Mr. Liao Jie Mr. Liao Daoxun Ms. Wu Yurui Others1 Total Note:	Percentage of shareholding 33.48% 15.00% 17.86% 17.36% 16.30%
	100%

1. Each of the other shareholders of the Purchaser holds less than 10% of the issued share capital of the Purchaser.

Among the Purchaser Shareholders, (i) each of Mr. Jiang Hailin and Mr. Liao Jie is an executive Director; (ii) Mr. Liao Daoxun, Ms. Wu Yurui, Mr. Liang Shiping, and Ms. Wu Chunhong are beneficiaries of a trust which controls more than 30% of the issued share capital of Holdco. Since the Purchaser is an associate of Mr. Jiang Hailin, Mr. Liao Jie and Holdco pursuant to Rules 14A.12 and 14A.13 of the Listing Rules, each of which being a connected person of the Company, the Purchaser is a connected person of the Company pursuant to Rule 14A.07(4) of the Listing Rules.

China Expressway

China Expressway is a company incorporated in the BVI with limited liability. It is an investment holding company and a wholly-owned subsidiary of the Purchaser.

Beijing RHY

Beijing RHY is a company established under the laws of the PRC with limited liability on 16 February 2001. It is an indirect wholly-owned subsidiary of the Purchaser Group. Beijing RHY is principally engaged in the technology development and training of mechatronics engineering, technology consultation of mechatronics engineering and application solutions of computer and security system.

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LETTER FROM THE BOARD

Beijing Wancheng

Beijing Wancheng is a company established under the laws of the PRC on 4 December 2015 and a direct wholly-owned subsidiary of Beijing RHY.

Beijing Wuzhouzhitong

Beijing Wuzhouzhitong is a wholly-foreign-owned enterprise incorporated in the PRC on 28 August 2008 and a direct wholly-owned subsidiary of China Traffic, which is whollyowned by the Purchaser.

FINANCIAL EFFECTS OF ENTERING INTO THE SUPPLEMENTAL AGREEMENTS

As disclosed in the 2016 Circular, approximately RMB374.05 million (after adjustment of consideration) from the proceeds of the Disposal was to be utilized to repay certain bank loans of the Group. As a result of the delay in the receipt of the Outstanding Amounts, the Group estimated that bank loans of approximately RMB174.05 million, representing remaining the amount of the Consideration which would have been utilized by the Group to repay its bank loans as contemplated in the 2016 Circular, were borrowed since the relevant original due dates of Outstanding Amounts in order to refinance its pre-existing bank loans which were originally intended to be repaid. Assuming that the Group would have utilized the proceeds from the Disposal to repay its loans in the PRC (which generally require a higher interest rate) first at the average interest rate of 5.89%, the interests accrued on such additional loans were approximately RMB10.80 million in aggregate as at the Latest Practicable Date. If the Outstanding Amounts had been settled according to the original terms of the Disposal, such interest expense would not have been incurred by the Group. Assuming that the settlement of the other portion of the Outstanding Amounts was not delayed, such proceeds from the Disposal could have been deposited into bank accounts and generated interest of approximately RMB0.68 million in aggregate as at the Latest Practicable Date.

Assuming that the Supplemental Agreements would not take effect and there were no other agreements between the Company and the Purchaser Group in relation to the Outstanding Amounts, the Company estimated that the interest accrued on the Outstanding Amounts from their respective due dates up to the Latest Practicable Date would have been approximately RMB5.16 million.

By entering into the Supplemental Agreements, subject to approval by the Shareholders, the Group will be entitled to interest on the Outstanding Amounts at the rates of 6.479% and 3.487% on amounts payable in the PRC and outside of the PRC, respectively, accruing from the respective original due dates of the Outstanding Amounts. Based on the Company’s calculation, assuming that the Supplemental Agreements will take effect, the interests accrued from the original due dates of the Outstanding Amounts from their respective original due dates up to the Latest Practicable Date would be approximately RMB15.89 million.

Accordingly, by entering in the Supplemental Agreements, subject to the approval by the Shareholders, the Company would be able to earn interest from the Outstanding Amounts which would exceed the interest expense incurred on the Onshore Additional Loans and the Offshore Additional Loans, resulting in a net interest income to the Group, which would result in an increase in the net asset of the Group.

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LETTER FROM THE BOARD

Save as disclosed above, the entering into the Supplemental Agreements will have no material impact on the consolidated income statement or financial position of the Group.

LISTING RULES IMPLICATION

The entering into the Supplemental Agreements constitutes a variation of the terms of the Disposal previously approved by Shareholders on 27 April 2016. As the amendments set out in the Supplemental Agreements constitute material changes to the terms of the Disposal, accordingly, pursuant to Rules 14.36 and 14.49 of the Listing Rules, the Supplemental Agreements are subject to Shareholders’ approval.

In addition, each of Mr. Jiang Hailin and Mr. Liao Jie, as a Director, is a connected person of the Company pursuant to Rule 14A.07(1). Pursuant to Rule 14A.12 and 14A.13 of the Listing Rules, the Purchaser and its subsidiaries are associates of Mr. Jiang Hailin and Mr. Liao Jie. Accordingly, each of the Supplemental Agreements constitutes a connected transaction of the Company. Since the highest applicable percentage ratio of the transactions contemplated under the Supplemental Agreements exceeds 5%, the Supplemental Agreements are subject to reporting and announcement requirements under the Listing Rules and will be subject to the approval of the Independent Shareholders taken by poll at the EGM in accordance with the Listing Rules. As required under Rule 14A.36 of the Listing Rules, the Purchaser Group, their associates and parties acting in concert with them, including Holdco, Pride Spirit Company Limited, Sea Best Investments Limited, Joy Bright Success Limited, Gouver Investments Limited, Kang Yang Holdings Limited, Huaxin Investments Limited, Rockyjing Investment Limited, Key Trade Holdings Limited, Speedy Fast Investments Limited, Best Partners Development Limited, Joyful Business Holdings Limited, Mr. Liao Jie, Mr. Lu Xiao, Mr. Liao Daoxun, Ms. Wu Yurui, Mr. Jiang Hailin, Mr. Wang Jing, Mr. Liang Shiping, Ms. Wu Chunhong, Mr. Zhao Lisen, Mr. Yuan Chuang, Mr. Zhang Qian, Mr. Guan Xiong, Mr. Zheng Hui, Mr. Lv Xilin, Ms. Wang Li, Mr. Dang Kulun, Mr. Pan Jianguo and Mr. Jing Yang shall abstain from voting at the EGM for approving the Supplemental Agreements and the transactions contemplated thereunder. As at the Latest Practicable Date, pursuant to certain shareholders voting agreements entered into by and among the Holdco, Mr. Jiang Hailin, Mr. Liao Jie and parties acting in concert with them, Mr. Jiang Hailin and Mr. Liao Jie were entitled to control the exercise of the voting rights of a total of 629,462,777 Shares, representing approximately 38.06% of the total issued share capital of the Company, including 18,853,876 Shares directly and beneficially owned by Mr. Jiang Hailin and 89,308,203 owned by Joyful Business, a company wholly-owned by Mr. Liao Jie. Please refer to the subsection headed ‘‘Appendix I — General Information — 2. Disclosure of Interests’’ for further information.

EGM

A notice convening the EGM is set out on pages EGM-1 to EGM-2 of this circular. The EGM will be convened for the Shareholders to consider, and if thought fit, to approve the Supplemental Agreements and the transactions contemplated thereunder.

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LETTER FROM THE BOARD

Each of Mr. Liao Jie and Mr. Jiang Hailin has a material interest in the Supplemental Agreements and the transactions contemplated thereunder and had abstained from voting on the board resolutions for approving the Supplemental Agreements. Other than Mr. Liao Jie and Mr. Jiang Hailin, none of the Directors has a material interest in the Supplemental Agreements.

The Independent Board Committee has been established to advise the Independent Shareholders on the terms of the Supplemental Agreements. The Company has appointed the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not the Shareholders are able to attend the EGM, the Shareholders are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for the EGM or adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjourned meeting thereof should the Shareholders so wish.

Pursuant to Rule 13.39(4) of the Listing Rule, any vote of the Shareholders at the EGM must be taken by poll. An announcement will be made by the Company after the EGM regarding the results of the EGM pursuant to the requirements of the Listing Rules.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on pages 31 and 32 of this circular and the letter of the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders set out on pages 33 to 54 of this circular in connection with the Supplemental Agreements and the transactions contemplated thereunder and the principal factors and reasons considered by the Independent Financial Adviser in arriving at such advice.

The Directors (including the independent non-executive Directors after taking into account the advice of the Independent Financial Adviser) consider that the transactions under the Supplemental Agreements are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM.

By order of the Board China ITS (Holdings) Co., Ltd. Mr. Liao Jie Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [153 x 53] intentionally omitted <==

China ITS (Holdings) Co., Ltd. 中 国 智 能 交 通 系 统（ 控 股 ）有 限 公 司 (incorporated in the Cayman Islands with limited liability)

(Stock code: 1900)

6 September 2018

To the Independent Shareholders

VARIATION OF TERMS IN RELATION TO A VERY SUBSTANTIAL DISPOSAL AND CONNECTED TRANSACTIONS

Dear Sir or Madam,

We refer to the circular of the Company dated 6 September 2018 (the ‘‘Circular’’) to the Shareholders, of which this letter forms part. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings when used in this letter.

We have been appointed as members of the Independent Board Committee to advise you as to whether, in our opinion, the terms of the Supplemental Agreements are fair and reasonable so far as the Independent Shareholders are concerned. Somerley Capital Limited has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Supplemental Agreements.

Your attention is drawn to the ‘‘Letter from the Board’’ set out on pages 8 to 30 of the Circular which contains, inter alia, information about the terms of the Supplemental Agreements, and the ‘‘Letter from Somerley’’ set out on pages 33 to 54 of the Circular which contains its advice in respect of the Supplemental Agreements and the principal factors taken into consideration in arriving at such.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having considered the terms of the Supplemental Agreements and having taken into account the factors and reasons considered by and the advice of the independent financial adviser as stated in their letter dated 6 September 2018, we consider that (i) the entering into of Supplemental Agreements is on normal commercial terms; (ii) the terms of Supplemental Agreements are fair and reasonable so far as the interests of the Independent Shareholders are concerned; and (iii) the entering into of the Supplemental Agreements is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the relevant Resolution to be proposed at the EGM to ratify and approve the Supplemental Agreements and the transactions contemplated thereunder.

Yours faithfully, For and on behalf of Independent Board Committee Mr. Choi Onward Mr. Ye Zhou Mr. Wang Dong Independent non-executive Directors

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LETTER FROM SOMERLEY

The following is the letter of advice from Somerley Capital Limited to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

SOMERLEY CAPITAL LIMITED

20th Floor China Building 29 Queen’s Road Central Hong Kong

6 September 2018

• To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

VARIATION OF TERMS IN RELATION TO A VERY SUBSTANTIAL DISPOSAL AND CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with a variation of the terms of the Disposal previously approved by the Shareholders on 27 April 2016 pursuant to the Supplemental Agreements entered into between the Group and the Purchaser Group. Details of the Supplemental Agreements are set out in the 2018 Circular, of which this letter forms part. Unless otherwise defined, capitalised terms used in this letter shall have the same meanings as those defined in the 2018 Circular and the 2016 Circular in relation to the Disposal.

On 17 February 2016, the Company and the Purchaser entered into the Master Sale and Purchase Agreement, pursuant to which the Company sold the entire issued share capital of each of the Target Companies and the Receivables to the Purchaser. As contemplated under the Master Sale and Purchase Agreement, on 17 December 2016, Beijing Zhongzhi and Beijing Wuzhouzhitong entered into the PRC Sale and Purchase Agreement, pursuant to which Beijing Zhongzhi sold the Onshore Target Equity to Beijing Wuzhouzhitong. Pursuant to two supplemental agreements dated 29 December 2016 and 1 April 2017, respectively, entered into between Beijing Zhongzhi and Beijing Wuzhouzhitong, the parties agreed to designate Changzhou RHY, a company ultimately owned by the Purchaser Group, as the transferee of the Onshore Target Equity. As all the conditions precedent of the Master Sale and Purchase Agreement had been fulfilled, the Target Companies had been transferred to the Purchaser Group and the Receivables had been assigned to the Purchaser accordingly on the Offshore Closing Date on 31 December 2016 and the Onshore Closing Date on 5 April 2017.

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LETTER FROM SOMERLEY

As at the Latest Practicable Date, certain consideration for the Disposal, certain amount of dividend receivables in relation to the Beijing RHY Dividend and the China Expressway Dividend and certain consideration for the transfers of equity interests in onshore companies which formed part of the Pre-disposal Restructuring had not been fully settled. The Outstanding Amounts are approximately RMB509.7 million in total.

On 2 July 2018, the Group entered into the Supplemental Agreements with the relevant parties in relation to the terms and conditions for the settlement of the Outstanding Amounts, which constituted a variation of the terms of the Disposal previously approved by the Shareholders on 27 April 2016. As the amendments set out in the Supplemental Agreements constitute material changes to the terms of the Disposal, accordingly, pursuant to Rules 14.36 and 14.49 of the Listing Rules, the Supplemental Agreements are subject to the Shareholders’ approval.

In addition, each of Mr. Jiang Hailin and Mr. Liao Jie, as a Director, is a connected person of the Company pursuant to Rule 14A.07(1). Pursuant to Rule 14A.12 and 14A.13 of the Listing Rules, the Purchaser and its subsidiaries are associates of Mr. Jiang Hailin and Mr. Liao Jie. Accordingly, each of the Supplemental Agreements constitutes a connected transaction of the Company. Since the highest applicable percentage ratio of the transactions contemplated under the Supplemental Agreements exceeds 5%, the Supplemental Agreements are subject to reporting and announcement requirements under the Listing Rules and will be subject to the approval of the Independent Shareholders taken by poll at the EGM in accordance with the Listing Rules.

As required under Rule 14A.36 of the Listing Rules, the Purchaser Group, their associates and parties acting in concert with them, including Holdco, Pride Spirit Company Limited, Sea Best Investments Limited, Joy Bright Success Limited, Gouver Investments Limited, Kang Yang Holdings Limited, Huaxin Investments Limited, Rockyjing Investment Limited, Key Trade Holdings Limited, Speedy Fast Investments Limited, Best Partners Development Limited, Joyful Business Holdings Limited, Mr. Liao Jie, Mr. Lu Xiao, Mr. Liao Daoxun, Ms. Wu Yurui, Mr. Jiang Hailin, Mr. Wang Jing, Mr. Liang Shiping, Ms. Wu Chunhong, Mr. Zhao Lisen, Mr. Yuan Chuang, Mr. Zhang Qian, Mr. Guan Xiong, Mr. Zheng Hui, Mr. Lv Xilin, Ms. Wang Li, Mr. Dang Kulun, Mr. Pan Jianguo and Mr. Jing Yang shall abstain from voting at the EGM for approving the Supplemental Agreements and the transactions contemplated thereunder.

The Independent Board Committee, comprising all of the independent non-executive Directors, has been established to advise the Independent Shareholders in respect of terms of the Supplemental Agreements and the transactions contemplated thereunder. We, Somerley Capital Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

In formulating our advice, we have reviewed, among other things, the Supplemental Agreements, the annual reports of the Company for each of the four financial years ended 31 December 2017 (the ‘‘Annual Reports’’), the interim results announcement of the Company for the six months ended 30 June 2018 (the ‘‘Interim Results Announcement’’), and the information contained in the 2018 Circular and the 2016 Circular. We have relied on the

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LETTER FROM SOMERLEY

information and facts supplied, and the opinions expressed, by the Directors and the management of the Group, and have assumed that they were true, accurate and complete in all material aspects at the time they were supplied or expressed and will remain so up to the time of the EGM. We have also sought and received confirmation from the Directors that all material relevant information has been supplied to us and that no material facts have been omitted or withheld from the information supplied and opinions expressed to us. We have no reason to doubt the truth or accuracy of the information provided to us or to believe that any material information has been omitted or withheld. We consider that the information we have received is sufficient for us to reach our opinion and recommendation as set out in this letter. However, we have not conducted any independent investigation into the business and affairs of the Group, the Purchaser Group and the Target Companies.

As at the Latest Practicable Date, Somerley Capital Limited does not have any relationships or interests with the Company that could reasonably be regarded as relevant to the independence of Somerley Capital Limited. In the last two years, there has been no engagement between the Company and Somerley Capital Limited. Apart from normal professional fees paid or payable to us in connection with this appointment as independent financial adviser, no arrangement exists whereby we will receive any fees or benefits from the Company.

PRINCIPAL FACTORS AND REASONS CONSIDERED

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

1. Background and financial information of the Group

The Group is mainly engaged in provision of intelligent transportation systems and transportation infrastructure technology solutions and services to railway segment in China. As disclosed in the 2017 annual report, the Group is currently engaged in the following principal activities, (a) specialised solution business — providing solutions to discrete problems occurring in clients’ existing or planned transportation infrastructure through the design, development and implementation of hardware-based and softwarebased systems; and (b) value-added operation and services — engaging in the provision of operation outsourcing and value-added services, via intelligent transport system platforms, to transportation operators and participants.

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LETTER FROM SOMERLEY

(i) Financial performance of the Group

Set out below is certain audited financial information of the Group for the year ended 31 December 2014, 2015, 2016 and 2017 as extracted from the Annual Reports, and certain unaudited financial information of the Group for the six months ended 30 June 2017 and 30 June 2018 as extracted from the Interim Results Announcement.

For the six months ended

Revenue — Railway segment — Other segments Total Gross profit Gross profit margin Profit/(loss) attributable to owners of the parent	30 June 2018 2017 RMB’000 RMB’000 (unaudited) (unaudited) 382,842 523,562 — — 382,842 523,562 62,278 128,420 16.3% 24.5% (69,739) 25,783	For the year ended 31 December After the Disposal Before the Disposal 2017 2016 2015 2014 RMB’000 RMB’000 RMB’000 RMB’000 (audited) (audited and restated) (audited) (audited) 1,164,838 1,551,844 1,363,250 1,012,853 — — 954,291 1,253,843 1,164,838 1,551,844 2,317,541 2,266,696 259,338 279,108 393,063 349,259 22.3% 18.0% 17.0% 15.4% 24,490 75,506 (278,476) (194,657)

The Group had three major operating segments in 2014 and 2015, including expressway, railway and urban traffic. The financial information and segment information for the year ended 31 December 2016 has been restated due to the change of operating segments in 2017 after the Disposal in 2016. The Target Group operated in the expressway and urban traffic segments in the PRC. In 2017, the Group changed its reportable operating segments to (i) specialised solutions; and (ii) value-added operation and services for management purposes as a result of the Disposal. Therefore, restated 2016 figures are stated above which are directly comparable to those of 2017 for the purpose of our analysis. Revenue figures of railway segment can be used as a reference to compare the performance of the segments before and after the Disposal.

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LETTER FROM SOMERLEY

Revenue

As demonstrated in the table above, there was an increasing trend in the revenue from railway segment from 2014 to 2016. As disclosed in the 2015 annual report, the increase in revenue for the year was mainly due to increasing investment in railway construction in the PRC during 2014 and 2015, leading to new contracts signed and more orders secured. Revenue from other segments decreased as compared to 2014, it is primarily attributable to the flat growth within the expressway segment since 2014 and the cutting back of investment from the PRC local governments on urban traffic projects to different extents since late 2013.

As set out in the 2016 annual report, the Group’s revenue for the year ended 31 December 2016 was approximately RMB1,551.8 million, representing an increase of 13.8% as compared to approximately RMB1,363.3 million derived from railway segment in 2015. The increase in revenue was primarily due to release of ‘‘The 13th Five-Year Plan for Economic and Social Development of the People’s Republic of China’’ introduced by the PRC government during the year. The policy encouraged development of high-speed railways, resulting in receiving more new orders during the year.

The Group’s revenue for the year ended 31 December 2017 amounted to approximately RMB1,164.8 million, representing a decrease of approximately 24.9% as compared to 2016. As disclosed in the 2017 annual report, the decline was mainly attributable to (i) the overall environment of China’s railway investment as affected by the railway investment policies in previous years, the investment was concentrated on railway track construction, while railway communication construction generally takes place after completion of track construction; (ii) the PRC government issued a risk alert in May 2017 and required stepping up financial risk prevention and control accompanied by a slightly tightened monetary policy, leading to local governments’ railway construction projects experiencing a capital crunch and resulted in the railway investment deceleration; and (iii) the cyclical nature in the railway communication product market with an upgrade of network every approximately five years in general, as the peak of railway communication network upgrade projects was basically completed in 2016, the cycle reached its trough in 2017. Despite the revenue decreased in 2017, as stated in the 2017 annual report, the Group achieved a significant increase in market share in segments such as transmission, wireless and data communication.

For the six months ended 30 June 2018, revenue decreased by approximately 26.9% as compared to the corresponding period in 2017. As disclosed in the Interim Results Announcement, the decrease in revenue was mainly attributable to the overall environment of the China’s railway investment where budgeted amount of national railway fixed assets investment by the PRC government in 2018 was planned to be approximately RMB732.0 billion, which is the lowest since 2014. As advised by the management of the

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LETTER FROM SOMERLEY

Company, it is believed that such situation is temporary given that the national investment fixed assets within the railway industry is expected to pick up, on the basis that infrastructure investment was mentioned once again in the recent meetings of the State Council of the PRC and the Central Political Bureau of the Communist Party of China, and representatives of China Railway also expect that the investment amount would exceed RMB800 billion in 2018.

Gross profit margin

The gross profit margin was approximately 15.4%, 17.0% and 18.0% for each of the year ended 31 December 2014, 2015 and 2016 respectively. The gross profit margin further increased to approximately 22.3% for the year ended 31 December 2017, mainly attributable to the increase in gross profit recognised from the Group’s value-added operation and services business. For the six months ended 30 June 2018, the gross profit margin was approximately 16.3%, which was similar to the level of gross profit margin from 2014 to 2016, ranging from approximately 15% to 18%.

Profit or loss attributable to owners of the parent

The Group had been loss-making in each of the two years ended 31 December 2015. After the Disposal in which the loss-making business was disposed of, profit attributable to owners of the parent was recorded for the Remaining Group for the year ended 31 December 2016.

The Group made a profit of approximately RMB24.5 million for the year ended 31 December 2017, representing a decrease of approximately 67.6% as compared to that of 2016. The decrease in profit was mainly attributable to decrease in gross profit while other expenses remained at similar levels to that in 2016.

The Group recorded a loss of approximately RMB69.7 million for the six months ended 30 June 2018, as compared to a profit of approximately RMB25.8 million in the corresponding period in 2017. The loss was primarily attributable to (i) the decrease in gross profit of approximately RMB66.1 million; and (ii) the increase in other expenses of approximately RMB42.9 million, which was mainly due to changes in fair value of financial assets through profit or loss as a result of the adoption of new accounting standard during the period, leading to a recognition of loss in the income statement. The fair value loss was mainly related to an equity investment held by the Group in a company which is traded on the National Entities Exchange and Quotations, the significant market fluctuations during the period has led to the fair value loss recorded.

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LETTER FROM SOMERLEY

(ii) Financial position of the Group

The following is a summary of the audited consolidated financial position of the Group as at 31 December 2015, 2016 and 2017 as extracted from the Annual Reports, and the unaudited consolidated financial position of the Group as at 30 June 2018 as extracted from the Interim Results Announcement.

Total non-current assets Total current assets TOTAL ASSETS Total current liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT Net asset value (‘‘NAV’’) per share (RMB) Extracts: Cash and cash equivalents Interest-bearing bank borrowings	As at 30 June 2018 RMB’000 (unaudited) 1,002,324 3,306,647 4,308,971 1,902,890 319,604 2,222,494 2,086,477 2,086,477 1.26 82,399 805,226	As at 31 December 2017 RMB’000 (audited) 820,826 3,512,368 4,333,194 1,959,397 171,307 2,130,704 2,202,490 2,202,490 1.33 179,654 760,829	As at 31 December 2016 RMB’000 (audited) 756,379 4,590,632 5,347,011 3,091,945 90,308 3,182,253 2,164,758 2,164,787 1.31 604,843 1,020,063	As at 31 December 2015 RMB’000 (audited) 886,823 5,498,170
				6,384,993 3,957,273 301,580
				4,258,853 2,126,140 2,137,144 1.29 736,107 1,185,901

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LETTER FROM SOMERLEY

As at 30 June 2018, total assets of the Group mainly comprised contract assets, trade and bills receivables, amounts due from related parties and prepayments, deposits and other receivables.

Total assets of the Group decreased from approximately RMB6,385.0 million as at 31 December 2015 to approximately RMB5,347.0 million as at 31 December 2016, which was a combined effect of (i) a decrease in balance of trade and bills receivables from approximately RMB1,703.2 million to approximately RMB1,274.8 million; (ii) a decrease in balance of construction contracts from approximately RMB1,494.2 million to approximately RMB586.4 million; and (iii) an increase in amounts due from related parties from approximately RMB113.4 million to approximately RMB1,083.4 million which was primarily due to consideration incurred for the Disposal completed in 2016. The balance further decreased to approximately RMB4,333.2 million as at 31 December 2017 which was mainly due to (i) a decrease in amounts due from related parties of approximately RMB444.9 million primarily contributed by partial settlement of the consideration in relation to the Disposal by the Purchaser Group; and (ii) a decrease in cash and cash equivalents of approximately RMB425.2 million. The balance decreased slightly to approximately RMB4,309.0 million as at 30 June 2018, mainly due to a decrease in balance of approximately RMB19.9 million in financial assets at fair value through profit or loss under current assets.

Cash and cash equivalents decreased significantly from approximately RMB604.8 million as at 31 December 2016 to approximately RMB179.7 million as at 31 December 2017 and further to approximately RMB82.4 million as at 30 June 2018, which was mainly due to repayment of bank loans during 2017 and the increase in pledged deposits as at 30 June 2018. The interest-bearing bank borrowings decreased from approximately RMB1,020.1 million as at 31 December 2016 to approximately RMB760.8 million as at 31 December 2017, and subsequently increased to approximately RMB805.2 million as at 30 June 2018. The loan balance of the Group as at 31 December 2016 represented approximately 1.7 times of cash and cash equivalents and increased to approximately 4.2 times as at 31 December 2017 and further to approximately 9.8 times as at 30 June 2018. In addition, the Group’s cash ratio, being the Group’s total cash and cash equivalents to its current liabilities, deteriorated from approximately 0.20 as at 31 December 2016 to approximately 0.09 as at 31 December 2017 and further to approximately 0.04 as at 30 June 2018. The above demonstrates that the Group’s cash position has deteriorated and it needs more cash to repay its debts and to fund future expansion in its existing business segments.

Total liabilities of the Group as at 30 June 2018 mainly comprised contract liabilities, interest-bearing bank borrowings and trade and bills payables.

Total liabilities of the Group decreased from approximately RMB4,258.9 million as at 31 December 2015 to approximately RMB3,182.3 million as at 31 December 2016, which was primarily attributable to a decrease in trade and bills payables by approximately RMB551.6 million and a decrease in construction

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contracts by approximately RMB358.9 million. The balance further decreased to approximately RMB2,130.7 million as at 31 December 2017, which was mainly due to a decrease in borrowings by approximately RMB259.2 million and a decrease in trade and bills payables by approximately RMB349.5 million. The Group’s total liabilities increased to approximately RMB2,222.5 million as at 30 June 2018, which was mainly due to an increase in liabilities in relation to construction contracts of approximately RMB167.1 million and interest-bearing bank borrowings of approximately RMB44.4 million, offset by the decrease in other payables and accruals of approximately RMB131.1 million

The Group’s equity attributable to owners of the parent increased slightly from approximately RMB2,137.1 million as at 31 December 2015 to approximately RMB2,164.8 million as at 31 December 2016, and further increased to approximately RMB2,202.5 million as at 31 December 2017. As at 30 June 2018, the Group’s equity attributable to owners of the parent amounted to approximately RMB2,086.5 million. The NAV per share as at 30 June 2018, calculated by dividing the NAV of the Group attributable to the Shareholders of approximately RMB2,086.5 million by the 1,654,024,868 shares in issue as at 30 June 2018, was approximately RMB1.26.

2. Background of the Disposal

As disclosed in the 2016 Circular, in 2016, in view of the deteriorating financial performance and the lack of growth momentum as well as the unfavourable macroenvironmental industry factors, the Group disposed the Target Group, which was principally engaged in the provision of intelligent transportation system solutions and services to expressway and urban traffic segments in the PRC, in order to improve the financial performance of the Group. As discussed in the section headed ‘‘1. Background and financial information of the Group’’ in this letter, growth of the expressway industry was slowing down and the investment in urban traffic from local governments was decreasing, resulting in deteriorating financial performance of expressway and urban traffic segments of the Group over 2012 to 2014.

On the other hand, the PRC government issued certain guidelines and policies in 2015 and 2016 to encourage the development of the railway industry, therefore the Group decided to focus its resources on the businesses with higher growth potential and the Disposal provided the Group with capital to invest in these businesses. As disclosed in the 2016 Circular, the railway segment of the Group has benefited from the favourable industry environment with huge demand of reforming and upgrading existing local railway network. As such, the Group was planning to seize business opportunities arising from such industry development with capital received from the Disposal.

As disclosed in the 2016 Circular, the Company intended to use approximately 50% of the proceeds from the Disposal for the repayment of bank loan. Approximately 28% of the proceeds was expected to be used for the railway segment for purchasing equipment

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and research and development. The remaining amount of the proceeds was intended to be used for development of other business segment, building decoration and general working capital.

In view of the above, on 17 February 2016, the Company and the Purchaser entered into the Master Sale and Purchase Agreement, pursuant to which subject to, among others, the completion of the Pre-disposal Restructuring, the Company conditionally agreed to sell and the Purchaser conditionally agreed to purchase the entire issued share capital of each of the Target Companies and the Receivables at the total consideration of approximately RMB979.8 million.

In addition, pursuant to the Master Sale and Purchase Agreement and as part of the Disposal, Beijing Zhongzhi and Beijing Wuzhouzhitong entered into the PRC Sale and Purchase Agreement in the form as prescribed under the Master Sale and Purchase Agreement before the Offshore Closing. The transfer of the Onshore Target Equity to the Purchaser was effected through the transfer of the Onshore Target Equity from Beijing Zhongzhi to Beijing Wuzhouzhitong pursuant to the PRC Sale and Purchase Agreement. The completion of the Onshore Disposal was conditional on completion of the Offshore Disposal. Upon completion of the Onshore Disposal, the Company ceased to hold any equity interest in Beijing RHY. The Disposal was completed on 5 April 2017.

As at the Latest Practicable Date, certain consideration for the Disposal, certain amount of dividend receivables in relation to the Beijing RHY Dividend and the China Expressway Dividend and certain consideration for the transfers of equity interests in onshore companies, which formed part of the Pre-disposal Restructuring, had not been fully settled. Set out below are details of the Outstanding Amounts.

			Interests
			accrued on
	Original amount	Amount	amount due as
	of consideration	received from	stipulated in the
	receivable by	the Purchaser	relevant	Outstanding
Relevant agreements	the Group	Group	agreements	Amounts
	RMB’000	RMB’000	RMB’000	RMB’000
	A	B	C	D=A-B+C
Master Sale and Purchase
Agreement	577,140	295,265	3,954	285,829
PRC Sale and Purchase
Agreement	208,573	104,286	4,536	108,823
Original Traffic Information
Agreement	27,000	13,500	—	13,500

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Relevant agreements Original Wuhan Optics Agreement China Expressway Undertaking Beijing RHY Undertaking Total	Original amount of consideration receivable by the Group RMB’000 13,000 101,250 37,500 964,463	Amount received from the Purchaser Group RMB’000 6,500 40,658 3,000 463,209	Interests accrued on amount due as stipulated in the relevant agreements RMB’000 — — — 8,490	Outstanding Amounts RMB’000 6,500 60,592 34,500
				509,744

As set out in the table above, the Outstanding Amounts include interests accrued on the amounts due as at the due date of the relevant agreements, if applicable, calculated by the Company based on the interest rates, which are mainly based on the benchmark lending rates in the respective regions, and are lower than the interest rates stated in the Supplemental Agreements (the ‘‘Offshore and Onshore Interest Rates’’), as stipulated in the relevant agreements.

As disclosed in the 2018 Circular and stipulated in the original agreements, (i) the rate of one-year Hong Kong interbank offered rate (‘‘HIBOR’’) as at the Offshore Closing Date, i.e. approximately 1.579%, shall be applied for the balance of the Offshore Consideration within the one-year period before the first anniversary of the Offshore Closing; (ii) the rate of People’s Bank of China one-year lending rate as at the Onshore Closing Date, i.e. approximately 4.350%, shall be applied for the balance of the Onshore Consideration within the one-year period before the first anniversary of the Onshore Closing; and (iii) the rate of six-month HIBOR as at the Offshore Closing Date, i.e. approximately 1.267%, shall be applied for the balance of the Receivables Consideration within the six-month period from the Offshore Closing Date. Based on the respective original agreements and as confirmed by the management of the Company, (i) no default rates applied for outstanding amount; (ii) no interests shall be accrued on the dividend receivables in relation to the Beijing RHY Dividend and the China Expressway Dividend; and (iii) no interests shall be accrued on the Outstanding Traffic Information Consideration and the Outstanding Wuhan Optics Consideration.

3. Background to and reasons for entering into the Supplemental Agreements

As set out in the ‘‘Letter from the Board’’ contained in the 2018 Circular, the Purchaser originally intended to utilise an offshore loan equivalent to approximately RMB580 million borrowed from a PRC financial institution to satisfy the offshore

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consideration under the Disposal. The Purchaser advised the Company that it had not arranged for an alternative channel of financing for such payment obligations as it was not aware of any impediment in the release of such loan at the time of its loan application. As disclosed in the ‘‘Letter from the Board’’ contained in the 2018 Circular, since December 2016, the PRC government has tightened capital outflow and implemented the related foreign exchange control, which affected the loan payment approval process of such financial institution.

The Company has demanded the Purchaser for repayment of the Outstanding Amounts. The Company has also inquired about the reasons for the delays and required the Purchaser Group to provide updates on the progress of their financing arrangements and their financial conditions from time to time. As it became apparent to the Company that the Purchaser Group would need more time to arrange for the necessary financing to pay the Outstanding Amounts, the Company demanded the Purchaser Group to provide security to secure their payment obligations under the relevant agreements in the Disposal, which resulted in the pledge of the Pledged Equity by the Purchaser Group in favour of the Group.

The Directors consider that it is commercially reasonable not to terminate the transaction due to such delay and accordingly, to enter into the Supplemental Agreements, after taking into account, among other things, (i) that the capital received from the Disposal would enable the Company to invest in, or reallocate its resources to focus and develop, other business segments with higher growth potential; (ii) the Company is of the view that the delay in payment is due to factors unforeseeable by the Purchaser and the Outstanding Amounts will be recoverable from the Purchaser Group; (iii) the pursuit of legal proceedings against the Purchaser Group as a result of termination of the transaction would result in significant legal and other costs, and a significant degree of uncertainty as to the outcome and timing of the resolution of the disputes; (iv) the Pledged Equity, the value of which is higher than the Outstanding Amounts as valued by a qualified independent valuer in the PRC, to secure the Purchaser Group’s payment obligations; (v) the Purchaser Group’s agreement to pay additional interests to the Group for the Outstanding Amounts based on the Offshore and Onshore Interest Rates; and (vi) the equity interests in the Target Companies have been duly transferred to the Purchaser Group in accordance with the terms of the relevant agreements in the Disposal and the termination of the Disposal, the transactions in which have been partially performed, at this stage will not automatically invalidate or reverse the said transfer. In addition, the Group currently has no plans to engage in the Target Companies’ business.

As disclosed in the ‘‘Letter from the Board’’ contained in the 2018 Circular, the due dates for the Outstanding Amounts were extended to 30 June 2019 under the Supplemental Agreements as the Purchaser Group would procure the disposal of part of the business and/or shares of the Target Companies to raise funds for repayment of the Outstanding Amounts. The Purchaser Group had engaged professional parties to perform the audit of such sale assets. Relevant work is expected to be completed by end of October this year, major terms of the disposal of such sale assets are expected to be discussed and recorded in the form of a term sheet in November this year, due diligence

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work is expected to be carried out by the potential buyer in December 2018, and it is therefore anticipated by the Purchaser Group that the terms of disposal will be agreed upon in the first quarter of 2019 and the potential disposal will be completed in the first half of 2019 and repayment will accordingly take place by 30 June 2019. The Purchaser Group will keep close monitor over the progress of the potential disposal and the pricing of such disposal to ensure the Outstanding Amounts will be repaid according to schedule. The Company was informed by the Purchaser Group that the equity interests in Beijing RHY, being the subject company of the Pledge Equity, will form part of the sale assets. The Company will not provide prior written consent to the Purchaser Group for such disposal if (i) the Purchaser Group intends to dispose any equity interests in Beijing RHY at a price not agreeable by the Company or at a price lower than its appraised value; or (ii) the Company is not satisfied that the proceeds of the disposal will be used for repayment of the Outstanding Amounts. The Company can enforce the Pledge Equity if the Outstanding Amounts are not settled. Notwithstanding the provision of the Pledged Equity, the Company reserved the right to claim the Purchaser Group and related parties for payment of outstanding monies.

Assessment

• Reasons for the Disposal and the extension of due dates of the Outstanding Amounts

As discussed in the section headed ‘‘1. Background and financial information of the Group’’, despite a decrease in revenue in the first half of 2018, taking into account of (i) the development of the railway industry with the support and initiatives on promoting its development from the PRC government; (ii) the topic of infrastructure investment was brought up again in recent meetings of the PRC government authorities; and (iii) the expectation of the representatives of China Railway that the national railway investment during the remaining period in 2018 would pick up, the Company remains its view on focusing in its existing businesses. The Directors consider that the Group’s future development would be more efficient with sufficient funds. As disclosed in the 2017 annual report and the Interim Results Announcement, the Group has been determined to commit itself to exploring other overseas markets, especially Southeast Asian markets, to diversify operating risks and lay a solid foundation for its long-term development. Hence, capital is needed for its business diversification in the future and the entering into of the Supplemental Agreements enables the Group to ascertain the time of repayment of the Outstanding Amounts.

As disclosed in the ‘‘Letter from Board’’ contained in the 2018 Circular, we note that there are reasons for the Purchaser to require more time to settle the Outstanding Amounts, including but not limited to, the availability of loans due to the tightening of relevant policy on capital flow and foreign exchange control in the PRC. It is noted that, on 6 December 2016, the National Development and Reform Commission, Ministry of Commerce, the People’s Bank of China and the State Administration of Foreign Exchange jointly held a press release responding to the media inquiries regarding outbound investment administration. Based on the official

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responses during the press release, going forward, the Chinese authorities would pay particular attention to certain outbound investment transactions, including but not limited to (i) investment in offshore targets that have asset values larger than the Chinese acquirers; and (ii) the investing entity involved in the investment is a newly established vehicle, meaning such investments would be subject to greater administrative scrutiny as compared to others.

As a result of the above, the Purchaser could not obtain adequate funding timely to settle the Outstanding Amounts, leading to delay in payment of the considerations of the Disposal. As advised by the Company, they are of the view that such delay in payment of considerations was mainly due to the change in the relevant bank’s lending policy under the tightening of the PRC foreign exchange control, because the aforementioned policy background, which is considered to be beyond control of either the Purchaser or the Company and the Purchaser had no intention to default payment.

In addition, the Company is also given the information that the Purchaser Group is obtaining financing through disposal of certain assets/shares of the Target Companies to raise funds for repayment of the Outstanding Amounts, instead of obtaining bank loans. Therefore, it is expected that the availability of funds would not be once again affected by the relevant PRC foreign exchange control.

As disclosed in the 2018 Circular, the usage of proceeds from the Disposal on the railway segment as at the Latest Practicable Date was less than the estimated amount planned to be used for such purpose as suitable investment target had not been identified. The outstanding payment from the Purchaser has mainly affected the Group’s repayment on certain bank borrowings which led to the incurrence of additional interests by the Group, it is expected that such additional interests can be compensated by the interests receivable through entering into the Supplemental Agreements.

As such, by entering into the Supplemental Agreements, not only allows the Group to receive additional interests on the Outstanding Amounts, but also reduces the uncertainties on the timing of collection of the Outstanding Amounts as the due dates are fixed to the latest on 30 June 2019, which are considered to be beneficial to the Group.

• Alternatives available to the Group and the Pledged Equity

We understand that the Group is allowed to take legal actions against the Purchaser Group, pursuant to the Master Sale and Purchase Agreement, the PRC Sale and Purchase Agreement, the China Expressway Undertaking, the Beijing RHY Undertaking, the Original Traffic Information Agreement and the Original Wuhan Optics Agreement, in respect of the Outstanding Amounts. Such actions would incur legal costs to the Group and there would be uncertainties on the outcome and on the period of time to be involved in the court proceedings. Such actions may even result in the Group gaining control of the Target Companies once again, in this case, the

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Group would have to continue its operations of the Target Companies, which is not in line with the purpose of disposing the equity interests of the Target Companies in the first place back in 2016.

Furthermore, if necessary, the Group has the option to dispose its relevant interests in the Target Companies to make up the Outstanding Amounts. In these circumstances, it is expected that the Group would incur additional time and costs as compared with those incurred by the Purchaser Group as the Purchaser Group is now in the progress of disposal of certain assets/shares of the Target Companies already for raising funds for repayment of the Outstanding Amounts. As advised by the Company, they are of the view that realising the relevant equity interests in the Target Companies or Beijing RHY, i.e. the Pledged Equity, again by the Group in order to offset the Outstanding Amounts is not in the best interests of the Group, taking into consideration that it is uncertain whether appropriate acquirer can be identified, given that the Group has not been engaging in the relevant business segment for a while after the Disposal. Even if an appropriate acquirer can be identified by the Company, it also takes substantial time in negotiation of terms and completing the transaction. The Group would also incur additional costs in the process, including but not limited to, legal documentation and professional fees.

Moreover, the Company is of the view that, in case the amount of consideration received from the disposal of the Target Companies, which include Pledged Equity, is lower than the Outstanding Amounts, the Group would still need to collect the shortfall pursuant to the relevant agreements. As a result, legal and professional fees are expected to be incurred as well during the process of pursuing payments from the Purchaser Group. As disclosed in the 2018 Circular, the Supplemental Agreements will not deprive the Group from taking legal actions against the Purchaser Group pursuant to the original agreements if the Purchaser Group breaches the terms of the Supplemental Agreement.

As advised by the management of the Company and as disclosed in the 2018 Circular, it is anticipated by the Purchaser Group that the terms of disposal of the Target Companies, which include the Pledged Equity, will be agreed upon in the first quarter of 2019 and the potential disposal will be completed in the first half of 2019 and repayment will accordingly take place by 30 June 2019. As further advised by the management of the Company, the Group will perform its assessment before providing prior written consent to the Purchaser Group for the disposal to (i) ensure the consideration of the disposal is reasonable from their point of view; and (ii) ensure the proceeds will be used for repayment of the Outstanding Amounts.

In view of the above, and given the fact that the Purchaser Group has already started the disposal process, it is considered that the entering into of the Supplemental Agreements is a preferred option to the Group at this point in time as it allows the Group to ascertain the time of repayment of the Outstanding Amounts and it is relatively less costly to the Group in collection of the Outstanding Amounts. The risk of the Group is also lowered with the existence of the Pledged Equity. It is noted that the Pledged Equity is valued at RMB641.7 million and the

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book value of the Pledged Equity is approximately RMB563.1 million, both of which are higher than the Outstanding Amounts. The Pledged Equity serves as collateral against the Purchaser Group’s default of settlement and offers a certain degree of protection to the Group in entering into the Supplemental Agreements.

Conclusion

Given that (i) the Supplemental Agreements enable the Group to ascertain the timing of repayment of the Outstanding Amounts and to receive additional interests during the relevant period; (ii) the entering into of the Supplemental Agreements represents a better option available for the Group to collect the Outstanding Amounts and to focus its resources on existing businesses without having to incur additional time and costs on potential legal actions and disposals; and (iii) the Group can keep its right to take legal actions against the Purchaser Group after the extended due dates as a last resort should the Purchaser Group fail to comply with the payment terms under the Supplemental Agreements, we concur with the Directors that the entering into of the Supplemental Agreements is in the interests of the Company and the Shareholders as a whole to resolve the delay in settlement of the Outstanding Amounts at this stage.

4. Principal terms of the Supplemental Agreements

Set out below is a summary of the principal terms of the Supplemental Agreements dated 2 July 2018. Further details of the Supplemental Agreements are set out in the ‘‘Letter from the Board’’ contained in the 2018 Circular. Saved as supplements to and amendments of terms disclosed below, all other terms of the Master Sale and Purchase Agreement, the PRC Sale and Purchase Agreement (as amended and supplemented by the Onshore Supplemental Agreements), Original Traffic Information Agreement and Original Wuhan Optics Agreement remain unchanged. The Supplemental Agreements are subject to the respective conditions precedent stated in the respective agreement which are also summarised below.

A. The Master SPA Supplemental Agreement

Parties: The Company and the Purchaser

Pursuant to the Master SPA Supplemental Agreement, the Master Sale and Purchase Agreement shall be amended and supplemented mainly to the effect that:

• (a) the due dates for the Outstanding Offshore Consideration and the Outstanding Receivable Consideration shall be extended to 30 June 2019; and

• (b) interest on the Outstanding Offshore Consideration and Outstanding Receivable Consideration shall be accrued at 3.487% per annum (the ‘‘Offshore Interest Rate I’’) from 31 December 2017 and 30 June 2017 respectively until 31 December 2018 or earlier when the

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Outstanding Offshore Consideration and/or Outstanding Receivable Consideration has been settled in full, and at 3.804% per annum (the ‘‘Offshore Interest Rate II’’) from 1 January 2019 until the Outstanding Offshore Consideration and/or the Outstanding Receivable Consideration has been settled in full.

B. The PRC SPA Supplemental Agreement

Parties: Beijing Zhongzhi and Beijing Wuzhouzhitong

Pursuant to the PRC SPA Supplemental Agreement, the PRC Sale and Purchase Agreement shall be amended and supplemented mainly to the effect that:

• (a) the due date for the Outstanding Onshore Consideration shall be extended to 30 June 2019; and

• (b) interest on the Outstanding Onshore Consideration shall be accrued at 6.479% per annum (the ‘‘Onshore Interest Rate I’’) from 5 April 2018 until 31 December 2018 or earlier when such has been settled in full, and at 7.068% per annum (the ‘‘Onshore Interest Rate II’’) from 1 January 2019 until the Outstanding Onshore Consideration has been settled in full.

C. The China Expressway Standstill Agreement

Parties: The Company, China Expressway, Mr. Jiang Hailin and Mr. Liao Jie

Pursuant to the China Expressway Standstill Agreement, the Company agrees not to enforce its rights under the China Expressway Undertaking against China Expressway, Mr. Jiang Hailin and Mr. Liao Jie regarding the settlement of the Outstanding China Expressway Dividend from the date of satisfaction of the conditions precedent until 30 June 2019. As consideration, China Expressway shall settle the Outstanding China Expressway Dividend no later than 30 June 2019 with interest accrued at the Offshore Interest Rate I from 30 June 2017 until 31 December 2018 or earlier when the China Expressway Dividend is paid in full, and at the Offshore Interest Rate II, from 1 January 2019 until the China Expressway Dividend is paid in full.

D. The Beijing RHY Standstill Agreement

Parties: Beijing Zhongzhi, Beijing RHY, Mr. Jiang Hailin and Mr. Liao Jie

Pursuant to the Beijing RHY Standstill Agreement, Beijing Zhongzhi agrees not to enforce its rights under the Beijing RHY Undertaking against Beijing RHY, Mr. Jiang Hailin and Mr. Liaojie regarding the settlement of the Outstanding Beijing RHY Dividend from the date of satisfaction of the conditions precedent until 30 June 2019. As consideration, Beijing RHY shall

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settle the Outstanding Beijing RHY Dividend no later than 30 June 2019 with interest accrued at the Onshore Interest Rate I from 5 October 2017 until 31 December 2018 or earlier when the Beijing RHY Dividend is paid in full, and at the Onshore Interest Rate II from 1 January 2019 until the Beijing RHY Dividend is paid in full.

E. The Traffic Information Supplemental Agreement

Parties: Haotian Jiajie and Beijing Wancheng

As disclosed in the ‘‘Letter from the Board’’ contained in the 2018 Circular, the transfer of 33% equity interest in Traffic Information was part of the Pre-Disposal Restructuring prior to the Disposal. Pursuant to the Traffic Information Supplemental Agreement, the Original Traffic Information Agreement shall be amended and supplemented mainly to the effect that:

• (a) the due date for the Outstanding Traffic Information Consideration shall be extended to 30 June 2019; and

• (b) interest on the Outstanding Traffic Information Consideration shall be accrued at the Onshore Interest Rate I from 9 December 2017 until 31 December 2018 or earlier when the Outstanding Traffic Information Consideration has been settled in full, and interest on the Outstanding Traffic Information Consideration shall be accrued at the Onshore Interest Rate II from 1 January 2019 until the Outstanding Traffic Information Consideration has been settled in full.

F. The Wuhan Optics Supplemental Agreement

Parties: Jiangsu Zhongzhi and Beijing Wancheng

As disclosed in the ‘‘Letter from the Board’’ contained in the 2018 Circular, the transfer of 25% equity interest in Wuhan Optics Valley was part of the Pre-Disposal Restructuring prior to the Disposal. Pursuant to the Wuhan Optics Supplemental Agreement, the Original Wuhan Optics Agreement shall be amended and supplemented mainly to the effect that:

• (a) the due date for the Outstanding Wuhan Optics Consideration shall be extended to 30 June 2019; and

• (b) interest on the Outstanding Wuhan Optics Consideration shall be accrued at the Onshore Interest Rate I from 4 December 2017 until 31 December 2018 or earlier when the Outstanding Wuhan Optics Consideration has been settled in full, and interest on the Outstanding Wuhan Optics Consideration shall be accrued at the Onshore Interest Rate II from 1 January 2019 until the Outstanding Wuhan Optics Consideration has been settled in full.

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Conditions precedent to each of the Supplemental Agreements

The supplements and amendments pursuant to each of the Supplemental Agreements are subject to satisfaction of the following conditions:

  - (a) approval of the relevant Supplemental Agreement by the Board and the Independent Shareholders in accordance with the requirements under the Listing Rules; and

  - (b) approval of the relevant Supplemental Agreement by the board of directors and shareholder(s) of the parties to the relevant Supplemental Agreement, if applicable.

1. Assessment of terms of the Supplemental Agreements

Offshore and Onshore Interest Rates

The Purchaser Group will pay onshore interest for outstanding onshore amount while offshore interest for outstanding offshore amount. As set out in the ‘‘Letter from the Board’’ contained in the 2018 Circular, the Offshore Interest Rate I represents 110% of the current average interest rate of the Group’s loans outside of the PRC, which is 3.17%. The Offshore Interest Rate II represents 120% of the current average interest rate of the Group’s loans outside of the PRC. The Onshore Interest Rate I represents 110% of the current average interest rate of the Group’s loans in the PRC, which is 5.89%. The Onshore Interest Rate II represents 120% of the current average interest rate of the Group’s loans in the PRC. The Offshore and Onshore Interest Rates were determined by the parties through arm’s length negotiation, by reference to the Group’s finance costs in relation to its loans in the PRC and outside of the PRC.

We note that, based on the summary of terms of the Group’s borrowings provided by the Company, the then average interest rate of the Group’s borrowings in the PRC and outside the PRC was a weighted average interest rate of a group of bank borrowings. We have reviewed the summary and noted that the weighted average interest rates were calculated based on (i) relevant interest rate of the respective loan; (ii) the amount of the respective loan; and (iii) the total onshore or offshore loan balance.

Considering that the Outstanding Amounts may limit the funding of the Group, the Group may have to obtain alternative financing, such as bank loans, for its operation or investment needs. To allow delay of payment by the Purchaser Group, the Offshore and Onshore Interest Rates should be sufficient to cover the Group’s financing costs expected to be incurred as a result of the Outstanding Amounts remaining unpaid. As such, it is considered to be reasonable for the Group to determine the Offshore and Onshore Interest Rates with reference to the Group’s finance costs in the respective regions.

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The then average interest rates of the Group’s borrowings used to determine the Offshore and Onshore Interest Rates comprised average of interest rates of both short-term and long-term borrowings with the soonest due dates being September 2018. The Group may renew the borrowings with different interest rates offered by the financial institutions in the future. Taking into account the uncertainty of forthcoming borrowing costs, it is reasonable for the Group to set higher interest rates than its then average interest rates. In order to encourage the Purchaser Group to settle the Outstanding Amounts as soon as possible, higher interest rates will be applied for outstanding considerations which cannot be settled by 31 December 2018 by the Purchaser Group. By setting the Onshore Interest Rate II and the Offshore Interest Rate II, the Group takes the initiative in encouraging early settlement of the Outstanding Amounts by the Purchaser Group.

To supplement the analysis on the Offshore and Onshore Interest Rates, we also compared them to the benchmark lending rates in the respective regions. As set out in the Supplemental Agreements, interests shall be accrued at (i) the Onshore Interest Rate I or Offshore Interest Rate I during the period with starting date falling between 30 June 2017 and 5 April 2018, and ending on 31 December 2018; and (ii) the Onshore Interest Rate II and Offshore Interest Rate II during the period starting from 1 January 2019 and ending on 30 June 2019. As such, it is considered that comparing the Offshore and Onshore Interest Rates to the corresponding benchmark lending rates for a period falling between one to two years is justified.

The Onshore Interest Rate I and Onshore Interest Rate II are compared to the benchmark lending rate determined by the People’s Bank of China, which is the fundamental basis of determining interest rates on loans offered by the financial institutions in the PRC. As at the Latest Practicable Date, the benchmark lending rate for one to five years was approximately 4.75%, which was lower than the Group’s then existing borrowing costs of approximately 5.89% in the PRC, Onshore Interest Rate I and Onshore Interest Rate II.

As for the Offshore Interest Rate I and Offshore Interest Rate II, these are compared to the HIBOR determined by the Hong Kong Association of Banks, which serves as a benchmark reference rate in Hong Kong financial market for debt instruments. As at the Latest Practicable Date, the 1-year HIBOR, which is the longest maturity period available for HIBOR, is approximately 2.53%, which was lower than the Group’s then existing borrowing costs of approximately 3.17% outside the PRC, Offshore Interest Rate I and Offshore Interest Rate II.

In view of the above, it is considered that determining the Offshore and Onshore Interest Rates with reference to the Group’s then existing borrowing costs is justified. As advised by the management of the Company, the existence of the Pledged Equity has also been considered when determining the Offshore and Onshore Interest Rates as it reduces the risk of loss to the Group, which is further elaborated in the sub-section below.

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— Pledged Equity

In order to secure the Purchaser Group’s payment obligations of the outstanding sums, 75% of the equity interests in Beijing RHY have been pledged to Aproud Technology, a wholly-owned subsidiary of the Company, on 16 April 2018. Beijing RHY was one of the Target Companies in the Disposal. As set out in the ‘‘Letter from the Board’’ contained in the 2018 Circular, the Pledged Equity was valued at approximately RMB641.7 million as at 31 December 2017 by a qualified independent valuer in the PRC engaged by the Group based on asset-based approach. As disclosed in the ‘‘Letter from the Board’’ contained in the Circular, the Purchaser Group has agreed to preserve the Pledged Equity and shall not carry out certain matters, including any changes that the Purchaser Group may make that may result in a reduction in the value of the Pledged Equity, without the prior written consent of the Company.

According to the credentials of the valuers who signed the valuation report, they possess (i) required professional qualification, i.e. public valuer, with which a person could undertake appraisal of assets in the PRC; and (ii) at least four years of experience in the industry.

We relied on the assessments performed by the valuer on the valuation of the Pledged Equity, and hence we reviewed the terms of the engagement of valuer. We also conducted an interview with the valuer as regards the methodologies adopted and assumptions involved in the valuation report of the Pledged Equity; and whether the valuer is independent of the Group and the Purchaser Group. We were advised that they have performed assessments based on requirements as set out in the engagement letter. We were also advised that the valuer performed the required procedures in accordance with ‘‘The code of ethics for asset appraisal’’ 《( 資產評估 職業道德準則》) issued by China Appraisal Society in September 2017 to confirm its independence with each of the Group and the Purchaser Group before accepting this valuation engagement. During the interview, the valuer confirmed, among other things, that it is independent of the Group and the Purchaser Group.

We were further advised that, the valuer has adopted the asset-based valuation method as stipulated in the ‘‘The basic rules for asset appraisal’’ 《( 資產評估基本準 則》) issued by Ministry of Finance of the PRC in August 2017, which is commonly adopted in valuing the equity values of assets similar to the Pledged Equity in similar circumstances.

The existence and value of the Pledged Equity reduces the risk of the Group of extending the due dates of the Outstanding Amounts. It is therefore reasonable for the Group to determine the Offshore and Onshore Interest Rates with reference to its borrowing costs, which are higher than the onshore and offshore benchmark lending rates, given that the Pledged Equity serves as collateral against the Purchaser Group’s default.

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LETTER FROM SOMERLEY

Conclusion

Given that the Offshore and Onshore Interest Rates are determined with reference to the Group’s existing borrowing rates which are higher than the benchmark lending rates, with higher interest rates charged for later payments made by the Purchaser Group, and the value of the Pledged Equity which serves as collateral against default, we are of the view that the terms of the Supplemental Agreements are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

6. Financial effects of entering into the Supplemental Agreements

As set out in the ‘‘Letter from the Board’’ contained in the 2018 Circular, by entering into the Supplemental Agreements, subject to the approval by the Independent Shareholders, the Group would be able to earn interest from the Outstanding Amounts, which would exceed the interest expense incurred on the additional loans obtained onshore and offshore since the relevant original due dates of the Outstanding Amounts in order to refinance its pre-existing bank loans that were originally intended to be repaid using the proceeds of the Disposal, resulting in a net interest income to the Group, which in turn increase the net assets of the Group upon settlement by the Purchaser Group. Save as disclosed, the entering into of the Supplemental Agreements will have no material impact on the consolidated income statement or financial position of the Group.

OPINION AND RECOMMENDATION

Having taken into account the above principal factors, we consider that the terms of the Supplemental Agreements are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, and the entering into of the Supplemental Agreements, while not in the ordinary and usual course of business of the Group, is in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the relevant ordinary resolution to be proposed at the EGM.

Yours faithfully, for and on behalf of SOMERLEY CAPITAL LIMITED David Ching Director

Mr. David Ching is a licensed person registered with the Securities and Futures Commission and a responsible officer of Somerley Capital Limited, which is licensed under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities. He has over fifteen years of experience in the corporate finance industry.

– 54 –

GENERAL INFORMATION

APPENDIX I

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 document 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 document misleading.

2. DISCLOSURE OF INTERESTS

Directors’ and Chief Executive’s Interests and Short Positions in Shares, Underlying Shares and Debentures

As at the Latest Practicable Date, the Directors and the chief executive of the Company and their respective associates had the following interests or short positions in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which have been notified to the Company and the Stock Exchange pursuant to Division 7 and 8 of Part XV of the SFO, including interests and short positions which the Directors and the chief executive of the Company are taken and deemed to have under such provisions of the SFO, or which are required to be and are recorded in the register required to be kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed issuers of the Listing Rules (the ‘‘Model Code’’):

			Approximate
			percentage of
			shareholdings
			as at Latest
			Practicable
Name of Director	Nature of interest	Securities(4)	Date(4)
Mr. Liao Jie(1)	Beneficial owner/Interest of a	130,044,077 (L)	7.86% (L)
	controlled corporation
Mr. Jiang Hailin(2)	Beneficial owner/Beneficiary	631,318,625 (L)	38.17% (L)
	of Fino Trust
Mr. Choi Onward(3)	Beneficial owner	98,824 (L)	0.01% (L)

Notes:

• (1) 40,735,874 of these Shares are underlying Shares subject to the exercise of share options granted to Mr. Liao Jie on 18 January 2012 under the share option scheme of the Company (the ‘‘Share Option Scheme’’). Mr. Liao Jie is also deemed to be interested in the 89,308,203 Shares held by Joyful Business Holdings Limited, which is wholly-owned by Mr. Liao Jie.

– I-1 –

GENERAL INFORMATION

APPENDIX I

• (2) 1,855,848 of these Shares are underlying Shares subject to the exercise of share options granted to Mr. Jiang Hailin on 18 January 2012 under the Share Option Scheme. Mr. Jiang Hailin was also interested in all the Shares in which Fino Trust was interested as a beneficiary of Fino Trust. As the beneficial owner of Fino Investments Limited, Fino Trust is deemed to be interested in all the Shares in which Fino Investments Limited is interested. Mr. Jiang Hailin beneficially and directly owns 18,853,876 Shares, which are part of the 629,462,777 Shares in which Fino Trust is deemed to be interested.

• (3) These Shares are underlying Shares subject to the exercise of share options granted to Mr. Choi Onward on 18 January 2012 under the Share Option Scheme.

• (4) (L) denotes long positions.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executives of the Company had any interest or short positions in any shares or underlying shares or interest in debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO), or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange.

Save for Mr. Liao Jie and Mr. Jiang Hailin, none of the Directors is a director or employee of the Holdco or other company which has an interest or short position in shares or underlying shares of the Company (that would fall to be disclosed under Divisions 2 and 3 of Part XV of the SFO).

3. FURTHER INFORMATION CONCERNING DIRECTORS

(a) Directors’ service contracts

As at the Latest Practicable Date, none of the Directors had entered, or was proposing to enter, into any service contract with any member of the Group (excluding contracts expiring or determinable by such member of the Group within one year without payment of compensation (other than statutory compensation)).

(b) Directors’ interest in competing business

As at the Latest Practicable Date, none of the Directors or their respective associate is or was interested in any business, apart from the Group’s business, that competes or competed or is or was likely to compete, either directly or indirectly, with the Group’s business.

– I-2 –

GENERAL INFORMATION

APPENDIX I

(c) Directors’ interests in assets

None of the Directors had any direct or indirect interest in any assets which had been acquired or disposed of or leased to any member of the Group or proposed to be so acquired, disposed of or leased since 31 December 2017, being the date to which the latest published audited accounts of the Company were made up, and up to the Latest Practicable Date.

(d) Directors’ interests in contracts

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

4. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, save in relation to the disclosure in the interim results announcement of the Company dated 27 August 2018, the Directors were not aware of any material adverse change in the financial or trading position of the Company since 31 December 2017, the date to which the latest audited financial statements of the Company were made up.

5. INDEBTEDNESS STATEMENT

Borrowings

As at the close of business on 31 July 2018, being the latest practicable date for the purpose of the indebtedness statement, the Group had outstanding interest-bearing bank loans and other borrowings of approximately RMB810,634,000 as follows:

Interest-bearing bank loans — guaranteed (note a) Interest-bearing bank loans — secured (note b) Notes receivable discounted, but not expired (note c) Total	As at 31 July 2018 RMB’000 220,000 548,834 41,800
	810,634

As at 31 July 2018, the Group had total available bank facilities of approximately RMB1,037,835,000, of which approximately RMB754,584,000 had been utilized.

– I-3 –

GENERAL INFORMATION

APPENDIX I

Notes:

• (a) As at 31 July 2018, the Group’s bank loans of approximately RMB60million were guaranteed by the Company, certain subsidiaries within the Group, and certain directors of the Company. As at 31 July 2018, the Group’s bank loans of approximately RMB160million were guaranteed by Beijing RHY, a connected person of the Company.

• (b) As at 31 July 2018, the Group’s bank loans of approximately RMB549 million were secured by the pledge of the following:

Investment properties and Equity interests in a subsidiary Pledged deposit Total	Carrying amount as at 31 July 2018 RMB’000 285,020 346,500
	631,520

• (c) The amount represents notes receivable which have been discounted but have not been expired as at 31 July 2018.

Contingent liabilities

As at the close of business on 31 July 2018, the Group had no material contingent liabilities.

Save as aforesaid and apart from intra-group liabilities and normal trade and other payables, as at the close of business on 31 July 2018, the Group did not have any outstanding mortgages, charges, debentures, loan capital, debt securities, loans, bank overdrafts or other similar indebtedness, finance lease or hire purchase commitments, liabilities under acceptance or acceptance credits, guarantees or debt securities or other material contingent liabilities.

The directors confirmed that there has been no material change in the indebtedness and contingent liabilities of the Group since 31 July 2018 up to and including the Latest Practicable Date.

For the purpose of the above statement of indebtedness, foreign currency amounts denominated in US dollars and Hong Kong dollars have been translated into RMB at the rates of exchange prevailing at the close of business on 31 July 2018.

6. FINANCIAL AND TRADING PROSPECTS

Subsequent to the completion of the Disposal, the Group has focused on its attention and resources at developing its specialised solutions (‘‘SS’’) and value-added operation and services (‘‘VAOS’’) businesses for railways.

The SS business is the Group’s core business, which comprises a strong portfolio of communication products supplemented by video surveillance and communication power supply and engine room professional AC products.

– I-4 –

GENERAL INFORMATION

APPENDIX I

The VAOS business, as a maintenance and follow-up service following the provision of specialised solutions, provides operators with a full range of subsequent services, including maintenance and emergency response. This business complements the Group’s SS business by providing value-added services to operators to ensure the normal operation of their network.

In early 2018, the national railway fixed assets investment budget was planned to be RMB732.0 billion, of which the national railway was RMB702.0 billion, which is the lowest planned investment since 2014. Due to the overall environment of China’s railway investment, in the first half of 2018 the Group’s revenue from specialised solutions was lower than the same period of 2017. With infrastructure investment being mentioned again at recent State Council executive and CPC Central Committee Political Bureau meetings, railway infrastructure projects are expected to pick up speed. With the acceleration of national infrastructure investment and increasing demand of railway rolling stock, in 2018 the national railway fixed assets investment is expected to exceed RMB800.0 billion. Therefore the Group’s revenue from specialised solutions is expected to improve to some extend in the second half of 2018. On the other hand, significant market share growth has been achieved in such segments as transmission, wireless and data communication.

Since 2017 the Group has been committed to exploring other overseas markets, especially Southeast Asian markets, to diversify operating risks and lay a solid foundation for its longterm development. Based on its good reputation in the industry, the Group has achieved significant business growth in overseas markets after a year of development. In early 2018, the Group signed the equipment purchasing contract for Malaysia’s East Coast Rail Link camp network and video engineering project; in April 2018, the Group signed the AC system equipment purchasing contract for the Astana Light Metro project in Kazakhstan; in June 2018, Gtech-CIC Joint Venture signed the wireless communication system maintenance contract for the Hong Kong section of the Guangzhou–Shenzhen–Hong Kong Express Rail Link. In 2018 the overseas market performance is expected to be much better than 2017.

7. WORKING CAPITAL

The Director are of the opinion that, after taking into account of the Group’s internal resources, cash flow from operations, the present facilities available and the consideration related to the disposal collected from the connected person, the Group will have sufficient working capital to satisfy its present requirements, that is, for at least the next 12 months from the date of this Circular in the absence of unforeseen circumstances.

8. LITIGATION

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

9. GENERAL

• (a) The registered office in the Cayman Islands of the Company is at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.

– I-5 –

GENERAL INFORMATION

APPENDIX I

• (b) The principal place of business of the Company in Hong Kong is at Room 1004, Tung Wah Mansion, 199–203 Hennessy Road, Wanchai, Hong Kong.

• (c) The head office of the Company in the PRC is at Building 204, No. A10 Jiuxianqiao North Road, Chaoyang District, Beijing.

• (d) The Company’s Hong Kong branch share registrar and transfer office is Union Registrars Limited at Suites 3301–04, 33/F., Two Chinachem Exchange Square, 338 King’s Road, North Point, Hong Kong and the Company’s principal share registrar and transfer office is SMP Partners (Cayman) Limited at 3rd Floor, Royal Bank House, 24 Shedden Road, George Town, Grand Cayman KY1-1100, the Cayman Islands.

• (e) The company secretary of the Company is Mr. Leung Ming Shu who is a Fellow Member of the Association of Chartered Certified Accountants (FCCA) and a Fellow Member of the Hong Kong Institute of Certified Public Accountants (FCPA).

• (f) The English text of this circular and the accompanying form of proxy shall prevail over their respective Chinese text for the purpose of interpretation.

10. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) were entered into by the Group within the two years preceding the Latest Practicable Date and are or may be material:

• (1) the Supplemental Agreements;

• (2) An equity transfer agreement dated 24 March 2017 and entered into between Jiangsu Zhongzhi Transportation Technology Co., Ltd. (江蘇中智交通科技有限公司), Beijing Zhixun Tiancheng Technology Co., Ltd. (北京智訊天成技術有限公司), Beijing Guangwei Xingye Technology Co., Ltd. (北京廣緯興業科技有限公司), Chengdu Zhongzhi Runbang Transportation Technology Co., Ltd (成都中智潤邦交 通技術有限公司) and Xue Yintong and Zhao Yongjiu in relation to acquisition of 100% equity interest in the Chengdu Zhongzhi Runbang Transportation Technology Co., Ltd* ( 成 都 中 智 潤 邦 交 通 技 術 有 限 公 司 ) for a consideration of RMB92,000,000;

• (3) a share subscription agreement dated 15 July 2017 and entered into between Aproud Technology and Forever Opensource Co., Ltd. (恒拓開源信息科技股份有限公司) in relation to subscription of 8,445,945 shares in Forever Opensource Co., Ltd. (恒拓 開源信息科技股份有限公司) by Aproud Technology at a consideration of RMB49,999,994.40 and a loan agreement dated 15 July 2017 and entered into between Haotian Jiajie as lender and Ma Yue (馬越) as borrower in relation to a loan in the principal amount of RMB30,000,000 at an interest rate of 8% per annum for a period of 6 years; and

– I-6 –

GENERAL INFORMATION

APPENDIX I

• (4) an asset purchase agreement dated 16 October 2017 and entered into between Forever Opensource Co., Ltd. (恒拓開源信息科技股份有限公司) and Tibet Intelligent Aviation Transportation Technology Co., Ltd. (西藏智航交通科技有限 公司) in relation to disposal of 50% equity interest in Tibet Intelligent Aviation Transportation Technology Co., Ltd. (西藏智航交通科技有限公司), for a total consideration of RMB37,740,000, which is to be satisfied by the issuance of 6,290,000 consideration shares by Forever Opensource at the issue price of RMB6.0 per consideration share.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the below documents will be available for inspection during normal business hours at the office of Luk & Partners in association with Morgan, Lewis Bockius, the legal adviser of the Company, at Suites 1902–09, 19th Floor, Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Hong Kong from the date of this circular up to and including the EGM date:

• (a) the Master Sale and Purchase Agreement;

• (b) the Supplemental Agreements;

• (c) the Memorandum and the Articles of Association of the Company;

• (d) the annual reports of the Company for the two years ended 31 December 2017;

• (e) this circular;

• (f) the Letter from the Board;

• (g) the letter from the Independent Board Committee to the Independent Shareholders;

• (h) the Letter from Somerley;

• (i) the material contracts referred in the paragraph headed ‘‘MATERIAL CONTRACTS’’ in this appendix;

• (j) the valuation report dated 17 April 2018 and issued by China Alliance Appraisal Co., Ltd. in relation to the valuation of Beijing RHY as at 31 December 2017;

• (k) the written consents referred to in the paragraph headed ‘‘EXPERTS’’ in this appendix.

– I-7 –

GENERAL INFORMATION

APPENDIX I

12. EXPERTS

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

Name

Qualifications

Somerley Capital Limited

• a corporation licensed to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the Securities and Futures Ordinance, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Supplemental Agreements

China Alliance Appraisal Co., Ltd. Independent Valuer

Each of Somerley and China Alliance Appraisal Co., Ltd. has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter(s) or opinion(s) (as the case may be) and references to its name or its letter(s) or opinion(s) (as the case may be) included in this circular in the form and context in which they respectively appear.

As at the Latest Practicable Date, each of Somerley and China Alliance Appraisal Co., Ltd.:

• (i) did not have any shareholding, direct or indirect, in any member of the Group or any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group; and

• (ii) did not have any direct or indirect interest in any assets which have been, since 31 December 2017 (being the date to which the latest published audited consolidated financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

– I-8 –

NOTICE OF EGM

==> picture [153 x 53] intentionally omitted <==

China ITS (Holdings) Co., Ltd. 中 国 智 能 交 通 系 统（ 控 股 ）有 限 公 司

(incorporated in the Cayman Islands with limited liability)

(Stock code: 1900)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the ‘‘Meeting’’) of China ITS (Holdings) Co., Ltd. (the ‘‘Company’’) will be held on Friday, 21 September 2018 at 1:30 p.m. at Room VI, 6/F Building 204, No. A10 Jiuxianqiao North Road, Chaoyang District, Beijing, for the purpose of considering and, if though fit, to pass with or without amendments the following ordinary resolution (the ‘‘Resolution’’):

ORDINARY RESOLUTION

‘‘THAT the Supplemental Agreements (as defined in the circular of the Company dated 6 September 2018 (the ‘‘Circular’’)) and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified; and the directors of the Company be and are hereby authorised to perform all such acts, deeds and things and execute all documents as they consider necessary or expedient to effect and implement the Supplemental Agreements (as defined in the Circular) and the transactions contemplated thereunder and the amendments thereto which are not material in the context of the Disposal as a whole and of administrative nature.’’

By order of the Board China ITS (Holdings) Co., Ltd Mr. Liao Jie Chairman

Hong Kong, 6 September 2018

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

Principal place of business in Hong Kong: Room 1004 Tung Wah Mansion 199–203 Hennessy Road Wanchai Hong Kong

– EGM-1 –

NOTICE OF EGM

Notes:

• (1) Any member entitled to attend and vote at the EGM convened by the above notice is entitled to appoint one or more proxies to attend and vote instead of him. A proxy needs not be a member of the Company. All proxies, together with powers of attorney or other authorities, if any, under which they are signed or notarially certified copies thereof, must be deposited with the Company’s branch share registrar in Hong Kong, Union Registrars Limited at Suites 3301–04, 33/F., Two Chinachem Exchange Square, 338 King’s Road, North Point, Hong Kong not less than 48 hours before the time appointed for the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude a member from attending and voting in person at the EGM or any adjournment thereof should she/he so wishes.

• (2) Where there are joint registered holders of any share, any one of such persons may vote at any meeting, either personally or by proxy, in respect of such share as if he were solely entitled thereto; but if more than one of such joint holders are present at any meeting personally or by proxy, that one of the said persons so present being the most or, as the case may be, the more senior shall alone be entitled to vote in respect of the relevant joint holding and, for this purpose, seniority shall be determined by reference to the other in which the names of the joint holders stand on the register of the relevant joint holding.

• (3) Shareholders who have a material interest in the Supplemental Agreements (as defined in the circular of the Company dated 6 September 2018), including the Purchaser Group (as defined in the circular of the Company dated 6 September 2018), their associates and parties acting in concert with them are required to abstain from voting on the Resolution at the EGM.

As at the date of this notice, the executive Directors are Mr. Liao Jie, and Mr. Jiang Hailin, the non-executive Director is Mr. Tim Tianwei Zhang, and the independent nonexecutive Directors are Mr. Choi Onward, Mr. Ye Zhou and Mr. Wang Dong.

– EGM-2 –