China Literature Limited — Proxy Solicitation & Information Statement 2002

Aug 20, 2002

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a 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 Gas Holdings Limited, you should at once hand this circular 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 transferee.

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

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司 [*]

(Incorporated in Bermuda with limited liability)

DISCLOSEABLE AND SHARE TRANSACTION

20th August, 2002

* For identification purpose only

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
LETTER FROM THE BOARD
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2
INFORMATION ON STANDARD PETROCHEMICAL HK AND
ZHENG ZHOU STANDARD PETROCHEMICAL . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
REASONS FOR THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
APPLICATION FOR LISTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
APPENDIX – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7

– i –

DEFINITIONS

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

“Acquisition”	The acquisition by Energy Valley from the Vendors of the
	Sale Shares pursuant to the Acquisition Agreement
“Acquisition Agreement”	The agreement dated 26th July, 2002 entered into between
	Energy Valley as purchaser and the Vendors as vendors in
	relation to the sale and purchase of the Sale Shares
“associates”	Has the meaning ascribed to it in the Listing Rules
“Board”	The board of Directors of the Company
“Business Day”	A day (other than a Saturday) on which licensed banks in
	Hong Kong are open throughout their usual business hours
“BVI”	The British Virgin Islands
“Company”	China Gas Holdings Limited, a company incorporated in
	Bermuda with limited liability with its ordinary shares listed
	on the Stock Exchange
“Completion”	The completion of the sale and purchase of the Sale Shares
	pursuant to the Acquisition Agreement
“Completion Date”	30th November, 2002 or such other date as mutually agreed
	by Energy Valley and the Vendors in writing
“Consideration”	The total consideration payable by Energy Valley to the
	Vendors for the Acquisition
“Consideration Shares”	52,391,042 new Shares of par value of HK$0.01 each, to
	be allotted and issued by the Company to the Vendors at
	the Issue Price per Share pursuant to the Acquisition
	Agreement in satisfaction of the Consideration
“Director(s)”	The director(s) of the Company
“Energy Valley”	Energy Valley Investment Limited, a company incorporated
	in the BVI with limited liability and a wholly owned
	subsidiary of the Company
“Group”	The Company and its subsidiaries
“Hong Kong”	Hong Kong Special Administrative Region of the People’s
	Republic of China
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“Issue Price”	HK$1.25 per Consideration Share

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DEFINITIONS

“Latest Practicable Date”	16th August, 2002, being the latest practicable date for
	ascertaining certain information for inclusion in this circular
“Listing Rules”	Rules Governing The Listing of Securities on the Stock
	Exchange
“Mr. Jia”	The controlling shareholder of Standard Petrochemical BVI
	which is one of the two shareholders of Standard
	Petrochemical HK
“PRC”	The People’s Republic of China
“RMB”	Renminbi yuan, the lawful currency of the PRC
“Sale Shares”	The entire issued share capital of Standard Petrochemical
	HK, to be sold to Energy Valley by the Vendors pursuant to
	the Acquisition Agreement
“Shares”	Ordinary shares of HK$0.01 each in the share capital of
	the Company
“Standard Petrochemical BVI”	Standard Petrochemical Holdings Limited, a company
	incorporated in the BVI with limited liability
“Standard Petrochemical HK”	Standard Petrochemical Hong Kong Holdings Limited, a
	company incorporated in Hong Kong with limited liability
“Standard Petrochemical	Standard Petrochemical HK and its subsidiaries
HK Group”
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Vendors”	Standard Petrochemical BVI and Wang Wen Liang
“Warranted Profit”	the audited net profits after taxation (based on the
	accounting principle generally accepted in Hong Kong) of
	Standard Petrochemical HK Group for each of the three
	years ending 31st December, 2004 shall not be less than
	RMB15,000,000, RMB16,000,000 and RMB17,000,000,
	respectively, as warranted by the Vendors and Mr. Jia in
	the Acquisition Agreement
“Zheng Zhou Standard	Zheng Zhou Standard Petrochemical Company Limited
Petrochemical”	(鄭州標準石化有限公司), a company incorporated in the
	PRC with limited liability company

In this circular, the exchange rate of HK$1 to RMB1.06 have been used for reference only

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LETTER FROM THE BOARD

CHINA GAS HOLDINGS LIMITED 中國燃氣控股有限公司 [*]

(Incorporated in Bermuda with limited liability)

Directors: Mr. Li Xiaoyun (Co-Chairman) Mr. Chan Heng Fai (Executive Chairman) Mr. Liu Ming Hui (Managing Director) Mr. Xu Ying

Registered Office: Clarendon House Church Street Hamilton HM 11 Bermuda

Independent Non-executive Directors: Mr. Lee Ka Leung, Daniel Mr. Wong Dor Luk, Peter Mr. Da Roza Joao Paulo

Principal Place of Business: 326 Kwun Tong Road Kwun Tong Kowloon Hong Kong

20th August, 2002

To the Shareholders and, for information only, the holders of convertible preference shares of the Company

Dear Sir or Madam,

DISCLOSEABLE AND SHARE TRANSACTION

INTRODUCTION

The Directors announced on 30th July, 2002 that Energy Valley, a wholly owned subsidiary of the Company, entered into the Acquisition Agreement with the Vendors on 26th July, 2002, pursuant to which the Vendors have agreed to sell and Energy Valley has conditionally agreed to acquire the Sale Shares at a total consideration of HK$65,488,803.00.

As the consideration is to be satisfied by the issue and allotment of the Consideration Shares, the Acquisition constitutes a share transaction for the Company under the Listing Rules.

The Acquisition also constitutes a discloseable transaction for the Company under the Listing Rules.

The purpose of this circular is to give you further information in relation to the Acquisition.

* For identification purpose only

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LETTER FROM THE BOARD

THE ACQUISITION

Date of the Acquisition Agreement:

26th July, 2002

Parties to the Acquisition Agreement:

Energy Valley as purchaser, the Vendors as vendors and Mr. Jia as covenantor

Energy Valley is a company incorporated in the BVI and is a wholly owned subsidiary of the Company. Wang Wen Liang is the holder of 6,700 shares, representing 67% of the issued share capital of Sino-Finance Asset Management Limited which in turn holds 2.94% of the issued share capital of the Company. Wang Wen Liang is also the holder of 28% of the issued share capital of Standard Petrochemical BVI. Mr. Jia, as covenantor and being the controlling shareholder of Standard Petrochemical BVI holding 72% of its issued share capital, has given certain warranties, representations and undertakings in the Acquisition Agreement. Standard Petrochemical BVI, Wang Wen Liang and Mr. Jia are independent third parties not connected with any of the directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates.

The Vendors have agreed to sell and Energy Valley has conditionally agreed to purchase from the Vendors the Sale Shares pursuant to the terms and conditions of the Acquisition Agreement.

Assets Acquired

The entire issued share capital of Standard Petrochemical HK.

Consideration

The Consideration for the acquisition of Sale Shares is HK$65,488,803.00, which will be satisfied by the issue of the Consideration Shares at the Issue Price by the Company pursuant to the Acquisition Agreement.

The Directors consider the Consideration for the sale and purchase of the Sale Shares is fair and reasonable. The Consideration was arrived at after arm’s length negotiations, taking into account the following factors:– (a) the Warranted Profits guaranteed by the Vendors and Mr. Jia to Energy Valley; and

• (b) the price earnings multiple of approximately 7.89 times of the Warranted Profits.

Upon Completion, Energy Valley shall be entitled to 55% of the Warranted Profits. Given that 55% equity interest of Zheng Zhou Standard Petrochemical will be the sole asset owned by Standard Petrochemical HK upon Completion, the profits made by Zheng Zhou Standard Petrochemical are therefore used as the reference in calculating the Warranted Profits. If the Warranted Profits could not be met, Mr. Jia has undertaken to Energy Valley in the Acquisition Agreement to compensate Energy Valley for any shortfall in respect thereof. Any shortfall in the Warranted Profits will be calculated with reference to the audited financial statements of Zheng Zhou Standard Petrochemical (adjusted by the accounting principle generally accepted in Hong

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LETTER FROM THE BOARD

Kong) on a dollar-to-dollar basis, which will be payable by Mr. Jia to Energy Valley as soon as possible upon release of the audited financial results of Zheng Zhou Standard Petrochemical. Given that Mr. Jia has been engaged in the petrochemical business in the PRC for years, he has sufficient financial resources to honour his undertakings given in the Acquisition Agreement.

Consideration Shares

On the Completion Date and upon satisfaction of all the conditions as stated in the Acquisition Agreement, the Company shall allot and issue the Consideration Shares to the Vendors or their nominees in full satisfaction of the Consideration.

The Consideration Shares represent approximately 2.97% of the existing issued share capital (taking into account the issued preference share capital) of the Company and approximately 2.89% of the issued share capital (taking into account the issued preference share capital) of the Company as enlarged by the Consideration Shares.–Taking into account the Shares to be issued following completion of the transactions mentioned under the section headed “share capital” in the appendix of this circular and the issued preference share capital, the Consideration Shares represent approximately 2.84% of the then issued share capital of the Company as enlarged by the new Shares and the Consideration Shares.

The Consideration Shares upon allotment and issue will rank pari passu in all respects with the issued shares of the Company, including rights as to dividends and voting. The Directors will allot and issue the Consideration Shares in the share capital of the Company pursuant to a general mandate duly granted in a special general meeting of the Company held on 18th July, 2002.

The Issue Price of the Consideration Shares is determined with reference to the average of the closing prices for the Shares of the Company as quoted on the Stock Exchange for the 10 trading days ended on the day immediately before the date of the Acquisition Agreement, but in any event not exceeding HK$1.25 per Share. The Issue Price of HK$1.25 per Share represents a discount of approximately 0.79% to the closing price of HK$1.26 for the Shares as quoted on the Stock Exchange on the day immediately before the date of the Acquisition Agreement, and a discount of approximately 1.65% to the 10-day average closing price of HK$1.271 for the Shares as quoted on the Stock Exchange on the day immediately before the date of the Acquisition Agreement.

The value of the Consideration Shares, based on the market price of HK$1.26 per Share (being the closing price for the Shares as quoted on the Stock Exchange on the day immediately before the date of the Acquisition Agreement), amounted to HK$66,012,712.92.

Conditions

Completion of the Acquisition contemplated under the Acquisition Agreement is conditional, among other things, upon the following:

1. compliance with all rules and regulations applicable to the Company, including without limitation, the Listing Rules;

2. the Listing Committee of the Stock Exchange granting the listing of and permission to deal in the Consideration Shares;

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LETTER FROM THE BOARD

1. Energy Valley being satisfied with the results of the due diligence exercise to be conducted on Standard Petrochemical HK and Zheng Zhou Standard Petrochemical and in particular on issues relating to the change of Zheng Zhou Standard Petrochemical’s status from a local PRC enterprise to a foreign investment enterprise and the holding of 55% thereof by Standard Petrochemical HK;

2. Standard Petrochemical HK beneficially owns 55% equity interest of Zheng Zhou Standard Petrochemical on the Completion Date, which is confirmed to be valid and legal in the legal opinion issued by PRC lawyers and the scope of business stated in the business licence of Zheng Zhou Standard Petrochemical remains unchanged;

3. the board of Standard Petrochemical HK has passed the following resolutions:

4. (i) approving the transfer of the Sale Shares to Energy Valley or its nominees; and

5. (ii) the appointment of those nominees proposed by Energy Valley to the board of Standard Petrochemical HK to replace all its existing directors;

6. the appointment of those nominees proposed by Energy Valley to the board of Zheng Zhou Standard Petrochemical, representing the majority votes; and

7. Completion of the sale and purchase of the Sale Shares by each of the Vendors pursuant to the Acquisition Agreement shall take place simultaneously on the date of Completion.

Completion

Subject to the satisfaction of the conditions stated in the Acquisition Agreement, completion of the Acquisition is expected to take place on 30th November, 2002 or such other date as mutually agreed by the Vendors and Energy Valley.

Restrictions on the sale of the Consideration Shares

The Vendors have undertaken, and shall procure its respective nominees to undertake, in the Acquisition Agreement that sale of the Consideration Shares is subject to the following restrictions:–

• (a) during the first year after the Completion Date, any sale of the Consideration Shares is limited to an aggregate of one quarter of the total number of the Consideration Shares;

• (b) during the second year after the Completion Date, any sale of the Consideration Shares is limited to an aggregate of one half of the total number of the Consideration Shares;

• (c) the Consideration Shares or any part thereof are not subject to any restriction on sale upon expiry of the two years’ period after the Completion Date.

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LETTER FROM THE BOARD

INFORMATION ON STANDARD PETROCHEMICAL HK AND ZHENG ZHOU STANDARD PETROCHEMICAL

Standard Petrochemical HK is owned as to 99% by Standard Petrochemical BVI and as to 1% thereof by Wang Wen Liang who holds the one share (representing 1% of the issued share capital of Standard Petrochemical HK) in trust for Standard Petrochemical BVI. Standard Petrochemical HK, a wholly owned subsidiary of Standard Petrochemical BVI, is an investment holding company incorporated in Hong Kong and has not conducted any business since its incorporation. In pursuance of the Acquisition Agreement and as one of the conditions for Completion, the Vendors and Mr. Jia shall procure that Standard Petrochemical HK shall acquire 55% equity interest in Zheng Zhou Standard Petrochemical. The consideration which Standard Petrochemical HK will pay for acquiring 55% equity interest of Zheng Zhou Standard Petrochemical is approximately RMB8,250,000.00.

Zheng Zhou Standard Petrochemical is a company incorporated in the PRC with limited liability in 1999 with registered capital of RMB15,000,000. It is principally engaged in the wholesale of refined petroleum including household liquefied petroleum gas. Zheng Zhou Standard Petrochemical was rewarded a Grade AA Standard by Credit Rating System of Industrial and Commercial Bank of China （中國工商銀行系統信用等級）in 2002.

The existing shareholders of Zheng Zhou Standard Petrochemical and their respective associates are independent of and not connected with any of the directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates.

The unaudited pro forma net asset value (based on the accounting principle generally accepted in Hong Kong) of Standard Petrochemical HK Group as at 31st May, 2002 was approximately HK$66,024,862.00 which includes the results of operations of companies comprising Standard Petrochemical HK Group as if the current group structure had been in existence and remained unchanged throughout the entire relevant period.

According to the financial statements prepared by qualified PRC accountants, the profit before and after taxation of Zheng Zhou Standard Petrochemical for the two financial years ended 31st December, 2001 is set out below:

	For the year ended	For the year ended
	31st December, 2000	31st December, 2001
	RMB	RMB
Profit before taxation	6,225,501.73	12,658,423.11
Profit after taxation	4,171,086.16	8,481,143.48

REASONS FOR THE ACQUISITION

The Group is principally engaged in investing in natural gas/energy projects, the retailing of fashion apparel and accessories, property investment and financial, securities and investments. As announced in the Company’s announcements dated 9th May, 2002, 16th May, 2002 and 14th June, 2002, respectively, the Group has already engaged in natural gas projects in Beijing, Changsha, Zhuzhou, Xiangtan in Hunan Province and Suizhou, Yichang and Shiyan in Hubei Province, respectively. The Directors consider that the Acquisition represents a good opportunity for the Company to further invest in the natural gas business in the PRC which is in line with the Company’s strategy to expand into natural gas industries in the PRC whereupon Zheng Zhou Standard Petrochemical will be treated as a subsidiary of the Company upon Completion.

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LETTER FROM THE BOARD

APPLICATION FOR LISTING

The Company has made an application to the Stock Exchange for the grant of the listing of, and permission to deal in, the Consideration Shares.

GENERAL

Your attention is drawn to the appendix of this circular.

By Order of the Board Li Xiaoyun Co-Chairman

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular, and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

2. SHARE CAPITAL

The authorized and issued share capital of the Company as at the Latest Practicable Date and following completion of the Acquisition, are as follows:

Shares:

Authorised: 9,000,000,000 Shares as at the Latest Practicable Date Issued and fully paid: 1,133,690,245 Shares in issue as at the Latest Practicable Date 10,000,000 new Shares to be issued_(Note 1) 16,325,829 new Shares to be issued(Note 2)_ 52,391,042 new Shares to be issued pursuant to the Acquisition Shares in issue following completion of the transactions stated in Notes 1 and 2 and 1,212,407,116 the Acquisition	HK$ 90,000,000.00
	11,336,902.45 100,000.00 163,258.29 523,910.42
	12,124,071.16

• Note 1: The Company announced on 9th May, 2002 that the Group had entered into three agreements to acquire an aggregate of 60% interest in JV Co by way of purchase of existing equity interests and injection of new capital for an aggregate consideration of approximately HK$28,691,589, which would be satisfied as to HK$18,691,589 in cash and the remainder of HK$10 million by the issue of 10,000,000 New Shares at a price of HK$1.00 per New Share (capitalized terms shall have the same meanings as defined in the Company’s announcement dated 9th May, 2002).

• Note 2: The Company announced on 15th July, 2002 that the Group had entered into the Agreement to acquire from the Vendors the Sale Shares and the Shareholder’s Loan at a total consideration of HK$19 million, which would be satisfied by the Company by way of issuing 16,325,829 Consideration Shares at the issue price of HK$1.1638 per Consideration Share on Completion (capitalized terms shall have the same meanings as defined in the Company’s announcement dated 15th July, 2002).

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GENERAL INFORMATION

APPENDIX

Convertible preference shares:

HK$

Authorised:

124,902,477 of which 118,603,906 convertible preference shares had been converted into Shares_(Note) _Issued and fully paid: 6,298,571 convertible preference shares remain unconverted as at the Latest Practicable Date	124,902,477.00
	6,298,571.00

Note: The convertible preference shares are not listed and have no voting rights. The shares falling to be issued upon exercise of the conversion rights attaching to the preference shares will, when issued, rank pari passu in all respects with the Shares of the Company.

The Shares are listed on the Stock Exchange. No part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

3. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests of the Directors in the share capital of the Company or its associated corporations (within the meaning of the Securities (Disclosure of Interest) Ordinance (Chapter 396 of the laws of Hong Kong) (the “SDI Ordinance”)) which require notification to the Company and the Stock Exchange pursuant to Section 28 of that Ordinance (including interests which any such Director is deemed or taken to have under Section 31 of or Part I of the Schedule to the SDI Ordinance) or which are required to be entered into the register maintained by the Company under Section 29 of the SDI Ordinance or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange were as follows:

Name of Director	Personal interests (Shares)	Family interests (Shares)
Chan Heng Fai	3,136,000	3,136,000_(Note)_
Note: These Shares are owned by the spouse of Mr. Chan Heng Fai.

Save for the above, as at the Latest Practicable Date, no Directors had or deemed to have any interests in the ordinary share capital of the Company or its associated corporation (within the meaning of the SDI Ordinance) which require notification to the Company and the Stock Exchange pursuant to Section 28 of that Ordinance (including interests which any such Director is deemed or taken to have under Section 31 of or Part I of the Schedule to the SDI Ordinance) or which are required to be entered into the register maintained by the Company under Section 29 of the SDI Ordinance or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange.

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GENERAL INFORMATION

APPENDIX

4. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, according to the register maintained pursuant to Section 16(1) of the SDI Ordinance, the following Shareholders were interested in 10% or more of the Company’s issued share capital:

Name	Direct interest	Deemed interest
	(Shares)	(Shares)
Sure World Capital Limited_(Note)_	101,557,700	–
Rasa Sayang Limited_(Note)_	10,104,000	–
Heng Fung Capital Company Limited_(Note)_	3,388,000	–
Heng Fung Underwriter Limited_(Note)_	200,000	–
Heng Fung Holdings Limited	204,935,457	320,185,157

Note: These companies are wholly-owned subsidiaries of Heng Fung Holdings Limited.

Save as disclosed above and other than the interests of the Directors as set out above, the Directors and the chief executive of the Company are not aware that there is any person who, as at the Latest Practicable Date, was directly or indirectly interested in 10% or more of the issued share capital of the Company or in any interests which was required to be recorded under Section 16(1) of the SDI Ordinance.

5. LITIGATION

Two former staff issued writs against the Company on 4th May, 1998 and 13th May, 1998, respectively, claiming for wrongful dismissal and compensation of approximately HK$1,862,000 plus interest and related costs. As at the Latest Practicable Date, no witness statements have been filed and no trial date has yet been fixed. The Directors are advised by the legal counsel of the Company that it is unlikely that the former staff will succeed in their claims. Save as aforesaid, neither the Company nor any of its subsidiaries is engaged in litigation or arbitration of material importance and so far as the Directors are aware, no litigation or claims of material importance are pending or threatened by or against the Company or any of its subsidiaries.

6. MISCELLANEOUS

• (a) None of the Directors has any existing or proposed service contract with any member of the Group which does not expire or is not terminable by the Group within one year without payment of compensation (other than statutory compensation).

• (b) The registered office of the Company is at Clarendon House, Church Street, Hamilton HM 11, Bermuda. The principal share registrar and transfer office of the Company is Butterfield Corporate Services Limited at Rosebank Centre, 14 Bermudiana Road, Pembroke, Bermuda. The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited at 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

• (c) The secretary of the Company is Mr. Yuen Ping Man, FCIS, FCS, MHKSI, MIHRM, MIPS (HK) .

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