China Qinfa Group Limited — Proxy Solicitation & Information Statement 2012

Dec 11, 2012

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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.

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Qinfa Group Limited（中國秦發集團有限公司）, you should at once hand this circular together with the accompanying form of proxy to the purchaser or other transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.

This circular is for information purpose only and does not constitute an offer or invitation to subscribe for, acquire or purchase any securities of China Qinfa Group Limited（中國秦發集團有限公司）, nor is it calculated to invite any such offer or invitation.

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CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00866)

CONNECTED TRANSACTION

ISSUE OF PERPETUAL SUBORDINATED CONVERTIBLE SECURITIES

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

Grand Vinco Capital Limited

Wholly owned subsidiary of Vinco Financial Group Limited

A letter from the Board is set out on pages 4 to 13 of this circular. A letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 14 to 15 of this circular. A letter from Vinco Capital containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 16 to 29 of this circular.

A notice dated 11 December 2012 convening an EGM to be held on 31 December 2012 at 11:00 a.m. at Room 2, 10/F., United Centre, 95 Queensway, Admiralty, Hong Kong is set out on pages 33 to 34 of this circular. Whether or not you are able to attend the EGM, please complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar and transfer office in Hong Kong, Union Registrars Limited, 18/F, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for the holding of the EGM or any adjourned meeting thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or at any adjourned meeting thereof and, in such event, the relevant form of proxy shall be deemed to be revoked.

11 December 2012

CONTENTS

		Page
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
**LETTER FROM **	THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
**LETTER FROM **	THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . .	14
**LETTER FROM **	VINCO CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
APPENDIX –	GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
NOTICE OF EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		33

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions shall have the meanings set out below:

• “associates” has the meaning ascribed thereto in the Listing Rules “Board” board of Directors “Company” China Qinfa Group Limited （中國秦發集團有限公司）, a company incorporated under the laws of the Cayman Islands with limited liability, the Shares of which are listed on the Stock Exchange

• “Conditions” the terms and conditions of the PSCS “connected person(s)” has the meaning ascribed to it in the Listing Rules “Conversion” the exercise of the conversion rights attached to the PSCS and the issuance of the Conversion Shares accordingly

• “Conversion Price” the price at which each Conversion Share(s) will be issued upon Conversion, being HK$1.65 per Conversion Share initially, and subject to adjustment which may be made pursuant to the Conditions

• “Conversion Share(s)” the new Share(s) to be issued upon Conversion “Director(s)” director(s) of the Company “EGM” the extraordinary general meeting of the Company to be held at Room 2, 10/F., United Centre, 95 Queensway, Admiralty, Hong Kong on Monday, 31 December 2012 at 11:00 a.m. or any adjournment thereof

• “Group” the Company and its subsidiaries “Hong Kong” the Hong Kong Special Administrative Region of the PRC

• “Independent Board Committee” an independent committee of the Board comprising all the independent non-executive Directors, established to advise the Independent Shareholders in respect of the Subscription Agreement and the transactions contemplated thereunder

– 1 –

DEFINITIONS

“Independent Financial Adviser” Grand Vinco Capital Limited, a wholly-owned or “Vinco Capital” subsidiary of Vinco Financial Group Limited (stock code: 8340), a corporation licensed to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities as defined under the SFO and the independent financial adviser appointed by the Company to advise the Independent Board Committee and the Independent Shareholders in respect of the Subscription Agreement and the transactions contemplated thereunder

• “Independent Shareholders” Shareholders other than the Subscriber and its associates

• “Last Trading Date”

• 28 November 2012, being the last full trading day in the Shares immediately before the entering into of the Subscription Agreement

• “Latest Practicable Date” means 7 December 2012, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular

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

• “Long Stop Date” 31 January 2013 or such other date as may be agreed in writing between the Company and the Subscriber

• “Mr. Xu”

• Mr. Xu Jihua, the Chairman of the Group and an executive Director

• “PRC” The People’s Republic of China

• “PSCS”

• the perpetual subordinated convertible securities in the principal amount of HK$194,700,000 to be issued by the Company to the Subscriber

• “Parity Securities” any instrument or security (including preference shares) issued, entered into or guaranteed by the Company which ranks or is expressed to rank pari passu with the PSCS

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

• “Share(s)” ordinary share(s) of HK$0.10 each in the share capital of the Company

– 2 –

DEFINITIONS

“Shareholder(s)”

holder(s) of the Share(s)

• “Stock Exchange” The Stock Exchange of Hong Kong Limited

“Subscriber” Fortune Pearl International Limited, a company incorporated under the laws of the British Virgin Islands, being a controlling shareholder of the Company holding approximately 57.81% of the existing issued share capital of the Company as at the Latest Practicable Date

“Subscription” the subscription of the PSCS by the Subscriber pursuant to the terms of the Subscription Agreement “Subscription Agreement” the subscription agreement dated 28 November 2012 entered into between the Company and the Subscriber in relation to the Subscription

• “HK$” Hong Kong dollar, the lawful currency of Hong Kong

• “RMB” Renminbi, the lawful currency of the PRC

• “US$” United States dollar, the lawful currency of the United States of America

• “%” percent

Unless otherwise specified, translation of RMB into HK$ in this circular is based on the rate of RMB1.00=HK$1.2432 for illustration purpose only.

– 3 –

LETTER FROM THE BOARD

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CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00866)

Executive Directors:

Mr. Xu Jihua (Chairman) Ms. Wang Jianfei Mr. Weng Li Ms. Liu Xiaomei

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

Independent non-executive Directors:

Mr. Huang Guosheng Mr. Lau Sik Yuen Dr. Qian Pingfan

Principal place of business in Hong Kong: Room 1303, 13th Floor MassMutual Tower No. 38 Gloucester Road Wanchai Hong Kong

11 December 2012

To the Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION ISSUE OF PERPETUAL SUBORDINATED CONVERTIBLE SECURITIES

INTRODUCTION

Reference is made to the announcement of the Company dated 28 November 2012 in relation to the Subscription by the Subscriber (being a connected person) of the PSCS in the principal amount of HK$194,700,000 convertible into 118,000,000 Conversion Shares at the initial Conversion Price of HK$1.65 per Conversion Share (subject to adjustment).

The purpose of this circular is to provide you with, among other things, (i) further information regarding the Subscription; (ii) a letter from the Independent Board Committee to the Independent Shareholders regarding the Subscription Agreement and the transactions contemplated thereunder; (iii) a letter from Vinco Capital containing its advice to the Independent Board Committee and Independent Shareholders regarding the Subscription Agreement and the transactions contemplated thereunder; and (iv) the notice of the EGM.

– 4 –

LETTER FROM THE BOARD

THE SUBSCRIPTION AGREEMENT

Date

28 November 2012

Parties

Issuer : the Company Subscriber : Fortune Pearl International Limited

The Subscriber is the controlling shareholder of the Company holding approximately 57.81% of the existing issued share capital of the Company as at the Latest Practicable Date.

The Subscriber is a company incorporated under the laws of the British Virgin Islands. It is an investment holding company, the sole investment of which is its interest in the Company. The sole ultimate beneficial owner of the Subscriber is Mr. Xu, who is a Director.

Subscription

Subject to the fulfillment of the conditions set out below in the section headed “Conditions Precedent”, the Company has agreed to issue, and the Subscriber has agreed to subscribe for, the PSCS in the principal amount of HK$194,700,000 convertible into Conversion Shares at the initial Conversion Price of HK$1.65 per Conversion Share (subject to adjustment). For the avoidance of doubt, the Distribution shall not lead to any adjustment of the Conversion Price.

The Conversion Price was arrived at after arm’s length negotiations between the Company and the Subscriber taking into account the average closing price of the Shares for the 5 trading days, 10 trading days, 30 trading days, 60 trading days and 90 trading days prior to the date of the Subscription Agreement. The Conversion Price represents:

• (i) a premium of approximately 51.38% to the closing price of HK$1.09 per Share as quoted on the Stock Exchange on the Last Trading Day;

• (ii) a premium of approximately 47.06% to the average of the closing prices of approximately HK$1.12 per Share for the 5 trading days of the Shares up to and including the Last Trading Day;

• (iii) a premium of approximately 49.19% to the average of the closing prices of approximately HK$1.11 per Share for the 10 trading days of the Shares up to and including the Last Trading Day;

• (iv) a premium of approximately 45.80% to the average of the closing prices of approximately HK$1.13 per Share for the 30 trading days of the Shares up to and including the Last Trading Day;

– 5 –

LETTER FROM THE BOARD

• (v) a premium of approximately 61.11% to the average of the closing prices of approximately HK$1.02 per Share for the 60 trading days of the Shares up to and including the Last Trading Day;

• (vi) a premium of approximately 68.37% to the average of the closing prices of approximately HK$0.98 per Share for the 90 trading days of the Shares up to and including the Last Trading Day;

• (vii) A premium of approximately 48.65% to the closing price of HK$1.11 per share as quoted on the Stock Exchange on the Latest Practicable Date;

• (viii) A premium of approximately 22.63% to the audited net asset value per Share of approximately HK$1.35, which is calculated based on the audited net asset value of the Company of approximately RMB2,245,666,000 (equivalent to approximately HK$2,791,811,971) as at 31 December 2011 as stated in its 2011 annual report divided by its total number of 2,075,120,000 issued Shares as at 31 December 2011.

Assuming the exercise in full of the conversion rights attached to the PSCS at the initial Conversion Price, a total of 118,000,000 Conversion Shares may be issued, representing approximately 5.69% of the existing issued share capital of the Company and approximately 5.38% of the issued share capital of the Company as enlarged by the Conversion.

The Conversion Shares will be allotted and issued under the general mandate granted to the Directors by a resolution of the Shareholders passed at the Company’s annual general meeting held on 30 May 2012 pursuant to which the Directors were allowed to allot and issue up to 415,024,000 Shares. As at the Latest Practicable Date, no Shares have been issued and allotted pursuant to such general mandate.

Conditions Precedent

Completion of the Subscription is conditional upon the fulfillment of the following conditions before the Long Stop Date:

• (a) the Independent Shareholders having approved the Subscription Agreement and the transactions contemplated thereunder in the EGM; and

• (b) the Listing Committee of the Stock Exchange having granted the listing of and permission to deal in the Conversion Shares.

If any of the above conditions precedent is not fulfilled on or before the Long Stop Date, the Subscription Agreement shall be terminated and become null and void and none of the parties shall have any claim against the other for any costs or losses (save for any antecedent breaches).

– 6 –

LETTER FROM THE BOARD

Completion of the Subscription shall take place within 3 months after fulfillment of all the above conditions precedent (or such other date as may be agreed in writing between the Company and the Subscriber). The Subscriber shall pay the principal amount of the PSCS on completion.

Warranties and Undertakings

The Company has given customary warranties and undertakings to the Subscriber under the Subscription Agreement, which include but not limited to:

• (a) the Company will observe and comply with the terms and conditions of PSCS;

• (b) the Company will use its best endeavours to maintain a listing of the Shares on the Stock Exchange; and

• (c) the Company will reserve out of its authorized but unissued ordinary share capital sufficient number of Shares available for the issue of the Conversion Shares.

Termination

The Subscription Agreement shall terminate:

• (a) if any of the conditions precedent has not been fulfilled by the Long Stop Date; or

• (b) by agreement between the Company and the Subscriber prior to completion.

PRINCIPAL TERMS OF THE PSCS

Issue price : 100% of the principal amount of the PSCS Form : The PSCS will be issued in registered form Maturity date : There is no maturity date

– 7 –

LETTER FROM THE BOARD

• Status and : The PSCS constitutes direct, unsecured and subordinated Subordination obligations of the Company and rank pari passu without any preference or priority among themselves.

In the event of the winding-up of the Company, the rights and claims of the holder(s) of the PSCS shall:

• (a) rank ahead of those persons whose claims are in respect of any class of share capital of the Company;

• (b) be subordinated in right of payment to the claims of all other present and future senior and subordinated creditors of the Company; and

• (c) pari passu with each other and with the claims of holders of Parity Securities

• Distribution : The PSCS confer a right to receive distribution(s) (the “ Distribution ”) from and including the date of issue of the PSCS at the rate of distribution payable quarterly in arrears on 31 March, 30 June, 30 September and 31 December each year (the “ Distribution Payment Date ”), subject to the terms of the PSCS. For the avoidance of doubt, no part of the Distribution shall be converted into Conversion Shares in lieu of payment

• Rate of : 3% per annum of any outstanding principal amount of PSCS Distribution (the “ Rate of Distribution ”)

• Optional : The Company may, at its sole discretion, elect to defer a deferral of Distribution pursuant to the terms of the PSCS. The deferred Distributions Distribution shall be non-interest bearing. The number of times of optional deferral of Distribution by the Company is not restricted

The Company will exercise its discretion to elect the deferral of Distributions with reference to the then financial position of the Company and market condition. The Directors who have material interest in the PSCS will abstain from voting in future Board resolutions regarding the PSCS.

– 8 –

LETTER FROM THE BOARD

Conversion : Initially HK$1.65 per Conversion Share, subject to adjustment Price as provided for in the terms of the PSCS, including but not limited to an alteration to the nominal amount of the Shares as a result of consolidation, subdivision or reclassification, capitalization of profits or reserves, capital distributions, rights issues or issue of options, warrants or other rights to subscribe for, purchase or otherwise acquire any Shares and other dilutive events (such as issue of Shares at less than the current market price, modification of rights of conversion, etc)

In the event of consolidation and subdivision of Shares, the Conversion Price will be adjusted in proportion to the ratio of the issued share capital of the Company before the consolidation and subdivision of Shares to the issued share capital of the Company after the consolidation and subdivision of Shares. In the event of any issue of new Shares or exercise of options over Shares, the Conversion Price will be adjusted in proportion to the ratio of the Conversion Price to the issue price per Share of such new issue of Shares (or for option over Shares, the exercise price per Share underlying the options). Therefore, the Conversion Price will be adjusted upwards or downwards depending on whether the issue price per Share (or for options over Shares, the exercise price per Share underlying the options) is at a premium or discount to the Conversion Price.

Further, if the Company determines that an adjustment should be made to the Conversion Price as a result of one or more events or circumstances, the Company may consult a financial adviser, approved by the Company and a majority of the holders of PSCS, to determine as soon as practicable (a) what adjustment (if any) to the Conversion Price is fair and reasonable; and (b) the date on which adjustment of Conversion Price should take effect; and upon such determination, such adjustment (if any) shall be made and shall take effect in accordance with such determination.

If any adjustment is required to be made to the Conversion Price, an announcement will be made by the Company in compliance with the Listing Rules.

• Conversion : 118,000,000 Conversion Shares will be allotted and issued by Shares the Company upon full conversion of the PSCS at the initial Conversion Price

• Conversion : Conversion of the PSCS into Conversion Shares may take period place at any time after the date of issue of the PSCS, subject to the relevant terms as provided in the terms of the PSCS

– 9 –

LETTER FROM THE BOARD

• Restrictions on : No conversion right shall be exercised by the holder of the Conversion PSCS (or when it is exercised by virtue of a conversion notice having been given, the Company shall not be obliged to issue any Conversion Shares but may treat that conversion notice as invalid) if the Company will be in breach of the Listing Rules or The Codes on Takeovers and Mergers and Share Repurchases immediately following such Conversion

• Fractional : Fractions of Shares will not be issued on Conversion and no Shares cash adjustment will be made in respect thereof. Notwithstanding the foregoing, in the event of a consolidation or re-classification of Shares by operation of law or otherwise occurring after the date of constitution of the PSCS, the Company will upon Conversion pay in cash a sum equal to such portion of the principal amount of the PSCS, represented by the certificate deposited in connection with the exercise of conversion rights as corresponds to any fraction of a Share not issued as aforesaid, if such sum exceeds US$10 (equivalent to HK$77.5 at the exchange rate of US$1.00=HK$7.751 as fixed under the constitutional document of the PSCS)

• Voting : The holder(s) of PSCS will not be entitled to receive notice of, attend or vote at general meetings of the Company by reason only of it being a PSCS holder

• Transferability : Subject to the terms of the PSCS, the PSCS may be transferred by delivery of the certificate issued in respect of those PSCS, with the form of transfer in the agreed form as set out in the terms of the PSCS duly completed and signed, to the registered office of the Company. No transfer of the PSCS will be valid unless and until (a) the Company has provided its written consent to the transfer (such consent shall not be unreasonably withheld); and (b) such transfer has been entered on the register of PSCS holder(s)

• If the holder of PSCS requests for the transfer of PSCS to a connected person, the Company will ensure the relevant Listing Rules are complied with before giving the written consent to the transfer

• Redemption : The PSCS may be redeemed at the option of the Company at rights 100% or 50% of the principal amount of the PSCS each time, on any Distribution Payment Date at the face value of the outstanding principal amount of the PSCS to be redeemed plus 100% or 50% (as the case may be) of Distributions accrued to such date

– 10 –

LETTER FROM THE BOARD

Listing : No application will be made for the listing of the PSCS on the Stock Exchange. An application will be made by the Company to the Listing Committee for the listing of, and permission to deal in, the Conversion Shares.

EFFECT ON THE SHAREHOLDING STRUCTURE

Assuming that there is no change in the issued share capital of the Company prior to the Conversion, the shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) upon full Conversion by the Subscriber will be as follows:

Shareholders The Subscriber (Note 1) Mr. Xu Da (Note 2) Directors Ms. Wang Jianfei Mr. Weng Li Public Shareholders Total	Shareholding as at the Latest Practicable Date Number of Shares % (approx.) 1,199,696,000 57.81% 160,000,000 7.71% 100,000,000 4.82% 6,000,000 0.29% 609,424,000 29.37% 2,075,120,000 100.00%	Shareholding upon full Conversion by the Subscriber Number of Shares % (approx.) 1,317,696,000 60.08% 160,000,000 7.30% 100,000,000 4.56% 6,000,000 0.27% 609,424,000 27.79% 2,193,120,000 100.00%	Shareholding upon full Conversion by the Subscriber Number of Shares % (approx.) 1,317,696,000 60.08% 160,000,000 7.30% 100,000,000 4.56% 6,000,000 0.27% 609,424,000 27.79% 2,193,120,000 100.00%
			100.00%

Note 1: 1,186,000,000 Shares are held by the Subscriber directly and 13,696,000 Shares are held by the Subscriber’s sole ultimate beneficial owner, Mr. Xu (who is also a Director), on its behalf

Note 2: Mr. Xu Da is the son of Mr. Xu

USE OF PROCEEDS AND REASONS FOR THE SUBSCRIPTION

The Group is principally engaged in the coal operation business involving coal mining, purchases and sales, filtering, storage, blending, shipping and transportation of coal.

The Group has solid financial position with sufficient financial resources for the operation of the Group. The net proceeds from the issue of the PSCS (after deduction of all related expenses) will be approximately HK$193,500,000, which is intended to be applied to refinance a portion of the Group’s existing bank borrowings that are of interest rate higher than the Rate of Distribution.

The Board is of the view that the issue of PSCS provides additional financial resources without an immediate dilution effect on the shareholding of the existing Shareholders. Also, the issue of PSCS is a cost efficient means to raise funds as the Rate of Distribution is relatively lower than the prevailing interest rate of bank financing.

– 11 –

LETTER FROM THE BOARD

The Directors (including the independent non-executive Directors) consider that the terms and conditions of the Subscription Agreement were negotiated on an arm’s length basis, agreed on normal commercial terms between the Company and the Subscriber and the terms were fair and reasonable. The Subscription Agreement was entered into in the interests of the Company and the Shareholders as a whole.

FUND RAISING ACTIVITY BY THE COMPANY IN THE LAST 12 MONTHS

The Company has not conducted any fund raising activities in the past twelve months immediately before the Latest Practicable Date.

LISTING RULES IMPLICATION

The Subscriber is the controlling shareholder of the Company holding approximately 57.81% of the existing issued share capital of the Company and the sole ultimate beneficial owner of the Subscriber is Mr. Xu, who is a Director. The Subscriber is therefore a connected person of the Company and the Subscription constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules, which is subject to the reporting, announcement and Independent Shareholders’ approval requirements.

An Independent Board Committee has been formed to advise the Independent Shareholders and Vinco Capital has been appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the Subscription Agreement and the transactions contemplated thereunder.

EGM

An EGM will be held on 31 December 2012 at 11:00 a.m. at Room 2, 10/F., United Centre, 95 Queensway, Admiralty, Hong Kong, during which ordinary resolution will be proposed to approve the Subscription Agreement and the transactions contemplated thereunder.

The Subscriber, Mr. Xu and Mr. Xu Da, being shareholders with material interest in the PSCS who together hold 65.52% of shareholding interest of the Company, will abstain from voting on the ordinary resolution regarding the Subscription. Mr. Xu, who is a Director and the sole ultimate beneficial owner of the Subscriber, abstained from voting on the relevant Board resolutions of the Company passed on 28 November 2012.

The resolution put to vote at the EGM will be taken by way of poll. An announcement on the poll results will be made by the Company after the EGM on the websites of the Stock Exchange and of the Company respectively.

– 12 –

LETTER FROM THE BOARD

RECOMMENDATION

Your attention is drawn to the recommendation of the Independent Board Committee and the letter of advice from Vinco Capital, both contained in this circular regarding their respective advice on the Subscription Agreement and the transactions contemplated thereunder. The Independent Shareholders are advised to read these letters before deciding how to vote on the resolution in the EGM.

The Board (excluding Mr. Xu who has material interest in the Subscription) considers that the proposed ordinary resolution in relation to the Subscription is in the interests of the Company and the Shareholders as a whole and accordingly recommends the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM.

By order of the Board China Qinfa Group Limited Xu Jihua Chairman of the Board

– 13 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter from the Independent Board Committee setting out its recommendation to the Independent Shareholders in relation to the Subscription Agreement and the transactions contemplated thereunder.

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CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00866)

11 December 2012

To the Independent Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION ISSUE OF PERPETUAL SUBORDINATED CONVERTIBLE SECURITIES

We refer to the circular (the “Circular”) dated 11 December 2012 issued by the Company to its shareholders of which this letter forms part. Terms defined in the Circular shall have the same meanings when used in this letter, unless the context otherwise requires.

We have been appointed as members of the Independent Board Committee to consider the Subscription Agreement and the transactions contemplated thereunder (including but not limited to the issue of the PSCS to the Subscriber and the allotment and issue of the Conversion Shares upon the exercise of the conversion rights attached to the PSCS), to advise the Independent Shareholders as to the fairness and reasonableness of the terms of the Subscription Agreement and the transactions contemplated thereunder, and to recommend how the Independent Shareholders should vote at the EGM. Vinco Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

The terms of the Subscription Agreement and reasons for entering into the Subscription Agreement are summarised in the Letter from the Board set out on pages 4 to 13 of the Circular.

We also draw your attention to the letter from Vinco Capital in the Circular containing the advice of Vinco Capital in respect of the Subscription Agreement and the transactions contemplated thereunder.

Having taken into account the advice of Vinco Capital and the terms of the Subscription Agreement, we are of the view that the terms of the Subscription Agreement are on normal commercial terms, fair and reasonable and the transactions contemplated

– 14 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

thereunder is in the interests of the Company and the Independent Shareholders as a whole. We therefore recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to approve the Subscription Agreement and the transactions contemplated thereunder.

Yours faithfully,

For and on behalf of the Independent Board Committee of China Qinfa Group Limited

Mr. Huang Guosheng Mr. Lau Sik Yuen Dr. Qian Pingfan Independent Non-executive Independent Non-executive Independent Non-executive Director Director Director

– 15 –

LETTER FROM VINCO CAPITAL

The following is the text of a letter of advice from Vinco Capital to the Independent Board Committee and the Independent Shareholders in connection with the Subscription Agreement and the transactions contemplated thereunder which has been prepared for the purpose of incorporation in this circular:

Grand Vinco Capital Limited Units 4909-4910, 49/F., The Center 99 Queen’s Road Central, Hong Kong

11 December 2012

To the Independent Board Committee and the Independent Shareholders of China Qinfa Group Limited

Dear Sirs,

CONNECTED TRANSACTION ISSUE OF PERPETUAL SUBORDINATED CONVERTIBLE SECURITIES

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee and Independent Shareholders in respect of the terms of the Subscription Agreement and the transactions contemplated thereunder, details of which are set out in the section headed “Letter from the Board” in the circular issued by the Company to the Shareholders dated 11 December 2012 (the “Circular”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

Subscription Agreement

Reference is made to the announcement of the Company dated 28 November 2012. On 28 November 2012, the Company entered into the Subscription Agreement with the Subscriber pursuant to which the Company has conditionally agreed to issue, and the Subscriber has conditionally agreed to subscribe for, the PSCS in the principal amount of HK$194,700,000 convertible into Conversion Shares at initial Conversion Price of HK$1.65 per Conversion Share (subject to adjustment).

Assuming the exercise in full of the conversion rights attached to the PSCS at the initial Conversion Price, a total of 118,000,000 Conversion Shares will be issued, representing approximately 5.69% of the existing issued share capital of the Company and approximately 5.38% of the issued share capital of the Company as enlarged by the Conversion.

– 16 –

LETTER FROM VINCO CAPITAL

Completion of the Subscription is conditional upon, among other things, the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Conversion Shares.

The Subscriber is the controlling shareholder of the Company holding approximately 57.81% of the existing issued share capital of the Company and the sole ultimate beneficial owner of the Subscriber is Mr. Xu, who is a Director. The Subscriber is therefore a connected person of the Company and the Subscription constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules, which is subject to reporting, announcement and Independent Shareholders’ approval requirements. An EGM will be held to consider and if thought fit, to approve the Subscription Agreement and the transactions contemplated thereunder. The Subscriber and its associates are required to abstain from voting on the resolution to be proposed at the EGM.

The Independent Board Committee, comprising Mr. Huang Guosheng, Mr. Lau Sik Yuen and Dr. Qian Pingfan, all being the independent non-executive Directors, has been formed to advise the Independent Shareholders in respect of the Subscription Agreement and the transactions contemplated thereunder. We have been appointed, and approved by the Independent Board Committee, as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Subscription Agreement and the transactions contemplated thereunder.

BASIS OF OUR OPINION AND RECOMMENDATION

In forming our opinion and recommendation, we have relied on the information, facts and representations contained or referred to in the Circular and the information, facts and representations provided by, and the opinions expressed by the Directors, management of the Company and its subsidiaries. We have assumed that all information, facts, opinions and representations made or referred to in the Circular were true, accurate and complete at the time they were made and continued to be true, accurate and complete as at the date of the Circular despatch and that all expectations and intentions of the Directors, management of the Company and its subsidiaries, will be met or carried out as the case may be. We have no reason to doubt the truth, accuracy and completeness of the information, facts, opinions and representations provided to us by the Directors, management of the Company and its subsidiaries. The Directors have confirmed to us that no material facts have been withheld or omitted from the information supplied and opinions expressed. We have no reason to doubt that any relevant material facts have been withheld or omitted from the information provided and referred to in the Circular or the reasonableness of the opinions and representations provided to us by the Directors, management of the Company and its subsidiaries.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts not contained in the Circular, the omission of which would make any statement in the Circular misleading.

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LETTER FROM VINCO CAPITAL

We have relied on such information and opinions and have not, however, conducted any independent verification of the information provided, nor have we carried out any independent investigation into the business, financial conditions and affairs of the Group or its future prospects.

Based on the foregoing, we confirm that we have taken all reasonable steps, which are applicable to the Subscription Agreement and the transactions contemplated thereunder, as referred to in Rule 13.80 of the Listing Rules (including the notes thereto).

This letter is issued for the information to the Independent Board Committee and the Independent Shareholders solely in connection with their consideration of the Subscription Agreement and the transactions contemplated thereunder, and except for its inclusion and reference to it in the Circular and any relevant announcements to the Shareholders and at the EGM, is not to be quoted or referred to, in whole or in part, nor shall this letter be used for any other purposes, without our prior written consent.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee and Independent Shareholders in relation to the Subscription Agreement and the transactions contemplated thereunder, we have considered the principal factors and reasons set out below:

The Subscription Agreement

Principal terms of the Subscription Agreement

Date

28 November 2012

Parties

Issuer : the Company Subscriber : Fortune Pearl International Limited

The Subscriber is the controlling shareholder of the Company holding approximately 57.81% of the existing issued share capital of the Company as at Latest Practicable Date.

The Subscriber is a company incorporated under the laws of the British Virgin Islands. It is an investment holding company, the sole investment of which is its interest in the Company. The sole ultimate beneficial owner of the Subscriber is Mr. Xu, who is a Director.

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LETTER FROM VINCO CAPITAL

Conditions Precedent

Completion of the Subscription is conditional upon the fulfillment of the following conditions before the Long Stop Date:

• (a) the Independent Shareholders having approved the Subscription Agreement and the transaction contemplated thereunder in the EGM; and

• (b) the Listing Committee of the Stock Exchange having granted the listing of and permission to deal in the Conversion Shares.

If any of the above conditions precedent is not fulfilled on or before the Long Stop Date, the Subscription Agreement shall be terminated and become null and void and none of the parties shall have any claim against the other for any costs or losses (save for any antecedent breaches).

Termination

The Subscription Agreement shall terminate:

• (a) if any of the conditions precedent has not been fulfilled by the Long Stop Date; or

• (b) by agreement between the Company and the Subscriber prior to completion.

Principal terms of the PSCS

Pursuant to the Subscription Agreement, the Company has agreed to issue, and the Subscriber has agreed to subscribe for, the PSCS in principal amount of HK$194,700,000 convertible into Conversion Shares at the initial Conversion Price of HK$1.65 per Conversion Share (subject to adjustment). As extracted from the Letter from the Board in the Circular, the principal terms of PSCS are summarised as follows:

Issue price	:	100% of the principal amount of the PSCS
Form	:	The PSCS will be issued in registered form
Maturity date	:	There is no maturity date
Distribution	:	The PSCS confer a right to receive distribution(s) from
		and including the date of issue of the PSCS at the rate of
		distribution payable quarterly in arrears on 31 March, 30
		June, 30 September and 31 December each year, subject
		to the terms of the PSCS. For avoidance of doubt, no
		part of Distribution shall be converted into Conversion
		Shares in lieu of payment

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LETTER FROM VINCO CAPITAL

• Rate of Distribution : 3% per annum of any outstanding principal amount of PSCS

• Optional deferral of : The Company may, at its sole discretion, elect to defer a Distributions Distribution pursuant to the terms of the PSCS. The deferred Distribution shall be non-interest bearing. The number of times of optional deferral of Distribution by the Company is not restricted

The Company will exercise its discretion to elect the deferral of Distributions with reference to the then financial position of the Company and market condition. The Directors who have material interest in the PSCS will abstain from voting in future board resolutions regarding the PSCS.

• Conversion Price : Initially HK$1.65 per Conversion Share, subject to adjustment as provided for in the terms of the PSCS, including but not limited to an alteration to the nominal amount of the Shares as a result of consolidation, subdivision or reclassification, capitalization of profits or reserves, capital distributions, rights issues or issue of options, warrants or other rights to subscribe for, purchase or otherwise acquire any Shares and other dilutive events (such as issue of Shares at less than the current market price, modification of rights of conversion, etc)

• Restrictions on : No conversion right shall be exercised by the holder of Conversion the PSCS (or when it is exercised by virtue of a conversion notice having been given, the Company shall not be obliged to issue any Conversion Shares but may treat that conversion notice as invalid) if the Company will be in breach of the Listing Rules or The Codes on Takeovers and Mergers and Share Repurchases immediately following such Conversion

• Transferability : Subject to the terms of the PSCS, the PSCS may be transferred by delivery of the certificate issued in respect of those PSCS, with the form of transfer in the agreed form as set out in the terms of the PSCS duly completed and signed, to the registered office of the Company. No transfer of the PSCS will be valid unless and until (a) the Company has provided its written consent to the transfer (such consent shall not be unreasonably withheld); and (b) such transfer has been entered on the register of PSCS holder(s)

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LETTER FROM VINCO CAPITAL

If the holder of PSCS requests for the transfer of PSCS to a connected person, the Company will ensure the relevant Listing Rules are complied with before giving the written consent to the transfer

• Redemption rights : The PSCS may be redeemed at the option of the Company, at 100% or 50% of the principal amount of the PSCS each time, on any Distribution Payment Date at the face value of the outstanding principal amount of the PSCS to be redeemed plus 100% or 50% (as the case may be) of Distributions accrued to such date

In assessing the reasonableness of the terms of the PSCS, we have considered applying a comparable analysis through comparing a number of parameters such as conversion price, distribution rate, maturity, optional deferral of distributions, restriction on conversion and redemption rights to companies listed on Main Board of the Stock Exchange with similar line of business of the Group, namely engaged in the coal operation business involving coal mining, purchases and sales, filtering, storage, blending, shipping and transportation of coal. However, we have not been able to identify suitable comparable companies with similar business nature with the Group due to the limited number of recent issuance of PSCS. Instead, we have reviewed and identified, on a best effort basis, six companies listed on the Stock Exchange that announced to issue or already issued PSCS (“PSCS Comparables”) from 3 December 2010 to 28 November 2012 (the “Last Trading Day”), being approximately 24 months before the date of entering into the Subscription Agreement, which is considered to be exhaustive, for the purpose of our analysis. However, Shareholders should note that business, operations and prospects of the Company are not the same as the PSCS Comparables and we have not conducted any in-depth investigation into the business and operations of the PSCS Comparables. Nevertheless, we are of the view that such comparison analysis can still provide a general reference for the common market practice of companies listed on the Stock Exchange in transactions which involved the issue of PSCS. The table below summarizes our findings:

			Premium/
			(discount) of the
			conversion price
			to the closing			Optional	Restriction
Comparables	Date of	Conversion price	price on the last	Distribution rate		deferral of	on	Redemption
(stock code)	announcement	(per share)	trading date	per annum	Maturity	distributions	conversion	rights
			(%)	(%)
Guangdong Nan	23-Sep-12	RMB2.74	155.07	1.00	No maturity date	Yes	Yes	No
Yue Logistics
Company
Limited (3399)
Greentown China	8-Jun-12	HK$7.40	38.30	9.00note 1	No maturity date	Yes	No	No
Holdings
Limited (3900)
Hop Hing Group	1-Dec-11	HK$0.37	(15.90)	3.50	No maturity date	Yes	Yes	No
Holdings
Limited (47)

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LETTER FROM VINCO CAPITAL

			Premium/	Premium/
			**(discount) **	of the
			conversion price
			to the closing				Optional	Restriction
Comparables	Date of	Conversion price	price on the last		Distribution rate		deferral of	on	Redemption
(stock code)	announcement	(per share)	trading date		per annum	Maturity	distributions	conversion	rights
				(%)	(%)
CATIC Shenzhen	21-Nov-11	RMB3.56		10.00	1.00	No maturity date	Yes	Yes	No
Holdings
Limited (161)
L.K. Technology	26-Jan-11	HK$2.50		(9.42)	N/Anote 2	No maturity date	No	No	No
Holdings
Limited (558)
CATIC Shenzhen	3-Dec-10	RMB3.47		6.33	1	No maturity date	Yes	Yes	No
Holdings
Limited (161)
		Max	155.07		9.00
		Mean		30.73	3.10
		Min		(15.90)	1.00
The Company	28-Nov-12	HK$1.65		51.38	3.00	No maturity date	Yes	Yes	Yes

• Note 1: as stated from the announcement of this comparable, the distribution rate was 9% per annum in the first five years, and it would be adjusted in every five years. Details of which please refer to the announcement of this comparable.

• Note 2: the distribution of the PSCS would be the equivalent amount of the aggregated dividend or distribution, whether of cash, assets or other property, paid to the shareholders for the relevant financial year.

Source: HKEx News

Analysis on the principal terms of the PSCS

• (i) Conversion Price

The initial Conversion Price at HK$1.65 per Conversion Share represents:

• (a) a premium of approximately 51.38% over the closing price of approximately HK$1.09 per Share as quoted on the Stock exchange on the Last Trading Day;

• (b) a premium of approximately 47.06% over the average closing price of approximately HK$1.12 per Share as quoted on the Stock exchange for the 5 consecutive trading days up to and including the Last Trading Day;

• (c) a premium of approximately 49.19% over the average closing price of approximately HK$1.11 per Share as quoted on the Stock exchange for the 10 consecutive trading days up to and including the Last Trading Day;

• (d) a premium of approximately 45.80% over the average closing price of approximately HK$1.13 per Share as quoted on the Stock exchange for the 30 consecutive trading days up to and including the Last Trading Day;

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LETTER FROM VINCO CAPITAL

• (e) a premium of approximately 61.11% over the average closing price of approximately HK$1.02 per Share as quoted on the Stock exchange for the 60 consecutive trading days up to and including the Last Trading Day;

• (f) a premium of approximately 68.37% over the average closing price of approximately HK$0.98 per Share as quoted on the Stock exchange for the 90 consecutive trading days up to and including the Last Trading Day;

• (g) a premium of approximately 48.65% over the closing price of HK$1.11 per Share as quoted on the Stock exchange on the Latest Practicable Date; and

• (h) a premium of approximately 17.04% over the net asset value per Share of HK$1.41 based on the unaudited net asset value of the Company as at 30 June 2012.

• (i) a premium of approximately 22.63% over the net asset value per Share of HK$1.35 based on the audited net asset value of the Company as at 31 December 2011.

As disclosed in the table above, the conversion prices of the PSCS Comparables range from a discount of approximately 15.90% to a premium of approximately 155.07% to the respective closing price as at the last trading day prior to the release of the relevant announcements. The Conversion Price for the Conversion Shares, which represented a premium of approximately 51.38% over the closing price of the Last Trading Day, falls within the range and higher than the mean of those of the PSCS Comparables.

The chart below shows the movement of the daily closing prices of the Shares during a period starting from 28 November 2011, being one year prior to the signing of the Subscription Agreement, up to and including the Latest Practicable Date (the “ Review Period ”). We consider that a one year period of the daily closing prices of the Shares is appropriate as it can demonstrate to the Independent Shareholders that the market’s reflection to development of the Company in a full year basis prior to signing of the Subscription Agreement and the Director’s expectation as when they were determining the terms of the Subscription Agreement. Therefore, we determine to set one year period prior to the date of the Subscription Agreement as the starting date of the Review Period.

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LETTER FROM VINCO CAPITAL

==> picture [388 x 246] intentionally omitted <==

Source: Hong Kong Stock Exchange

As shown in the chart above, there were 256 trading days during the Review Period, and the Conversion Price is above the closing price of the Shares in 174 trading days. During the Review Period, the closing prices of the Shares ranged from HK$0.76 per Share to HK$2.14 per share. The average closing price during the Review Period was approximately HK$1.33 per share, which is lower than the initial Conversion Price by approximately 23.95%. Given that the fewer the Conversion Shares can be converted with higher conversion price and hence the lesser extent that public Shareholders will be diluted, we consider that the Conversion Price which is at a premium over the average closing price of the Shares is fair and reasonable to the Company and Independent Shareholders.

Pursuant to the terms of the PSCS, the Conversion Price will be subject to adjustment, including but not limited to alteration to the nominal amount of the Shares as a result of consolidation, subdivision or reclassification, capitalization of profits or reserves, capital distributions, rights issues or issue of options, warrants or other rights to subscribe for, purchase or otherwise acquire any Shares and other dilutive events (such as issue of Shares at less than the current market price, modification of rights of conversion, etc). The list of the adjustments to the Conversion Price is exhaustive and we consider that such adjustments to the Conversion Price can ensure that Conversion Shares held by the PSCS holders and ordinary shares holders would not be diluted, ensuring that the PSCS holders and the ordinary shares holders of the Company would retain the same interest and proportion of shareholding interest.

Based on the above, we consider the Conversion Price, which (i) shows a premium over the prevailing average closing price of Shares during the Review Period and the equity per Share; (ii) are in line with other market comparables which shows no material irregularities or variance in term of premium of conversion price; and (iii) is subject to

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LETTER FROM VINCO CAPITAL

adjustment to ensure ordinary shares holders of the Company would retain the same interest and proportion of shareholding interest, is fair and reasonable and in the interest of the Company and the Shareholders as a whole.

(ii) Distribution Rate

The PSCS confer a right for the PSCS holders to receive distribution(s) from and including the date of issue of the PSCS at the Rate of Distribution of 3% per annum of any outstanding principal amount of the PSCS, payable quarterly in arrears on 31 March, 30 June, 30 September and 31 December each year, subject to the terms of the PSCS.

As discussed with the Directors, the distribution rate of the PSCS was determined based on, among other things, (i) the current borrowing rate of the Group; (ii) the repayment capability of the Group; and (iii) the quasi capital nature of the PSCS.

As set out in the table above, the distribution rate of the PSCS Comparables ranges from 1% to 9% per annum. The PSCS bears the Distribution Rate of 3% per annum, which falls within the range of the PSCS Comparables and is slightly lower than the average distribution rate of approximately 3.10% per annum of the PSCS Comparables.

Given that (i) the similarities between interest paid periodically from bank borrowings and the Distribution paid periodically from the PSCS before Conversion and (ii) the net proceeds from the issuance of the PSCS are to be used to refinance a portion of the Group’s existing bank borrowings that are of interest rate higher than the Rate of Distribution, we therefore consider that the Company’s cost of bank borrowing would be a good comparison to the Rate of Distribution. Based on our review of the Company’s borrowing costs, we noted that the Rate of Distribution is lower than the best rates it can borrow from the banks or financial intermediaries. As at 30 June 2012, the Group’s total bank loans and borrowings of approximately RMB6,821 million with annual short term and long term interest rates ranging from 4.86% to 8.60% respectively. As at 31 December 2011, the Group had total bank loans and borrowings of approximately RMB3,348 million with annual short term and long term interest rate of 3.47% to 11.50% respectively. Besides, we have also reviewed the loan quotation from bank to the Group, and we realized that the terms of the long term bank borrowings thereunder are less favorable than the Rate of Distribution.

The annual distribution of the maximum principal amount of the PSCS is approximately HK$5.84 million (equivalent to approximately RMB4.70 million). Such distribution amount only represents approximately 0.82% of net profit attributable to the owners of the Group for the year ended 31 December 2011 and approximately 0.50% of the net cash flows generated from operating activities of the Group based on the results for the year ended 31 December 2011.

Based on the above discussion and there are no material variance after reviewing the distribution rates of other market comparables, we consider that the Group will not suffer from excessive financial burden in relation to the payment of the fixed distribution of the PSCS. We are therefore of the view that the Rate of Distribution of 3% per annum is fair and reasonable.

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LETTER FROM VINCO CAPITAL

(iii) Maturity

We note that the maturity of the PSCS is similar to the PSCS Comparables’ issuance of perpetual subordinated convertible securities with no maturity date. As discussed with the Directors, this term shall provide the Group with adequate time to consolidate and develop its businesses in PRC and there is no instant material cash outflow pressure on the Group before the repayment of the PSCS.

(iv) Optional deferral of Distributions

The Company may at its sole discretion elect to defer a Distribution pursuant to the terms of the PSCS. As the Company may, at its sole discretion, have the right to defer payment of the non interest bearing Distribution with unrestricted number of times, we are of the view that this right gives more flexibility to the Company on the timing of payment. Given that vast majority of the PSCS Comparables also had the right to defer the distributions in their respective terms of the perpetual subordinated convertible securities, we therefore consider that such right is not uncommon. In addition, we are given to understand that the Company has adequate internal control measures to avoid conflict of interest arised in relation to the voting in future board resolutions for the deferral of Distributions. Therefore, we are of the view that this right is in the interest of the Company and Independent Shareholders as a whole.

(v) Restriction on conversion

No conversion right shall be exercised by the holder of the PSCS (or when it is exercised by virtue of a conversion notice having been given, the Company shall not be obliged to issue any Conversion Shares but may treat that conversion notice as invalid) if the Company will be in breach of the Listing Rules or The Codes on Takeovers and Mergers and Share Repurchases immediately following such Conversion. Given that vast majority of the PSCS Comparables also had imposed such restriction on conversion in their respective terms of the perpetual subordinated convertible securities, we therefore consider that such right is not uncommon.

(vi) Redemption rights

Since the Company has the option, but not obligation, to redeem at 100% or 50% of the principal amount of the PSCS each time, on any Distribution Payment Date at the face value of the outstanding principal amount of the PSCS to be redeemed plus 100% or 50% (as the case may be) of Distributions accrued to such date, therefore, there is no instant material cash outflow impact on the Group as a result of repayment of the principal amount, we are of the view that the rights are favourable to the Company. From the table above, there are no such rights for the respective terms of all PSCS Comparables. However, we consider that such right is fair and reasonable to the Company and Independent Shareholders as the redemption rights can be exercised on any Distribution Payment Date, such that no Conversion Shares will be converted from the PSCS and hence diluting public Shareholders’ shareholdings.

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LETTER FROM VINCO CAPITAL

We have also reviewed the other terms of the PSCS and are not aware of any terms which are uncommon when comparing with the PSCS Comparables. Accordingly, we are thus of the opinion that the terms of the PSCS are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

Use of proceeds and reasons for the Subscription

The Group is principally engaged in the coal operation business involving coal mining, purchases and sales, filtering, storage, blending, shipping and transportation of coal.

After deducting all related expenses, the net proceeds from the issue of the PSCS will be approximately HK$193.5 million, which is intended to be applied to refinance a portion of the Group’s existing bank borrowings that are of interest rate higher than the Rate of Distribution. If the net proceeds are used as intended, the Directors foresee that the interest expense of the Group will decrease which will have positive impact to the operation and profits of the Group. In addition, after reviewing the loan quotation from bank to the Group, we realized that the terms thereunder are less favorable than the Rate of Distribution. Therefore, we are of the view that the reasons for the Subscription and the intended use of proceeds are in the interests of the Company and the Independent Shareholders as a whole.

Other alternative financing method

Regarding the suitability of the issuance of the PSCS, we understand from the Company that apart from the PSCS, the Company has also considered other financing methods such as bank borrowing or issue of new Shares. However, bank borrowing will generate higher finance cost. In addition, the Group may not get favourable terms in bank loan under the current difficult market conditions. For equity financing, placement of new Shares will cause immediate dilution to the shareholding of existing shareholders. With respect to pro rata equity financing method such as rights issue and open offer, the Directors consider that such pro rata equity financing would generally be more time-consuming. The Company may also not be able procure favourable terms in commercial underwriting. Based on the aforesaid, the Company considers and we are of the view that the issuance of the PSCS is more suitable.

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LETTER FROM VINCO CAPITAL

Effect of the PSCS on the shareholding structure

Assuming that there is no change in the issued share capital of the Company prior to the Conversion, the shareholding structure of the Company (i) as at the Latest Practicable Date; and (ii) upon full Conversion by the Subscriber at initial Conversion Price will be as follows:

Shareholders The Subscriber (Note 1) Mr. Xu Da (Note 2) Directors Ms. Wang Jianfei Mr. Weng Li Public Shareholders Total	Shareholding as at the Latest Practicable Date Number of Shares % (approx.) 1,199,696,000 57.81% 160,000,000 7.71% 100,000,000 4.82% 6,000,000 0.29% 609,424,000 29.37% 2,075,120,000 100.00%	Shareholding upon full Conversion by the Subscriber at initial Conversion Price (i.e.HK$1.65) Number of Shares % (approx.) 1,317,696,000 60.08% 160,000,000 7.30% 100,000,000 4.56% 6,000,000 0.27% 609,424,000 27.79% 2,193,120,000 100.00%	Shareholding upon full Conversion by the Subscriber at initial Conversion Price (i.e.HK$1.65) Number of Shares % (approx.) 1,317,696,000 60.08% 160,000,000 7.30% 100,000,000 4.56% 6,000,000 0.27% 609,424,000 27.79% 2,193,120,000 100.00%
			100.00%

Note 1: 1,186,000,000 Shares are held by the Subscriber directly and 13,696,000 Shares are held by the Subscriber’s sole ultimate beneficial owner, Mr. Xu (who is also a Director) on its behalf

Note 2: Mr. Xu Da is the son of Mr. Xu

As illustrated in the table above, the aggregate shareholdings of the existing public Shareholders would decrease from approximately 29.37% as at the Latest Practicable Date to approximately 27.79% immediately after full Conversion by the Subscriber at Conversion Price i.e. HK$1.65, indicating a potential maximum dilution of approximately 1.58 percentage points. Taking into account that (i) the net proceeds are intended be applied to refinance a portion of the Group’s existing bank borrowings that are of interest rate higher than the Rate of Distribution which will have positive impact on finance costs and (ii) the terms and conditions of the PSCS are fair and reasonable and are in the interests of the Company and the Independent Shareholders as a whole, we consider such potential maximum dilution to shareholdings of the Independent Shareholders to be justifiable.

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LETTER FROM VINCO CAPITAL

RECOMMENDATION

Having taken into consideration the above principal factors and reasons, we are of the opinion that the terms of the Subscription Agreement and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Independent Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the Subscription Agreement and the transactions contemplated thereunder.

Yours faithfully For and on behalf of Grand Vinco Capital Limited Alister Chung Managing Director

– 29 –

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

Interests of Directors

As of the Latest Practicable Date, the interests of the Directors in the share capital of the Company 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 which they were taken or deemed to have under such provisions of the SFO), or were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein, or were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set forth in Appendix 10 to the Listing Rules (the “ Model Code ”), to be notified to the Company and the Stock Exchange were as follows:–

(1) Interest in the Company

				Approximate percentage	Approximate percentage
				of issued share capital
		Number of Shares		of the Company (%)
Name of	Nature of	Long	Short	Long	Short
Director	Interest	positions	positions	positions	positions
Mr. Xu	Corporate	1,199,696,000	Nil	57.81	Nil
		(Note 1)
Ms. Wang	Beneficial	100,000,000	Nil	4.82	Nil
Jianfei	Owner
Mr. Weng Li	Beneficial	6,000,000	Nil	0.29	Nil
	Owner
Ms. Liu	Beneficial	600,000	Nil	0.03	Nil
Xiaomei	Owner	(Note 2)

Notes:

1. 1,186,000,000 Shares are held directly by the Subscriber, which is wholly owned by Mr. Xu. By virtue of the SFO, Mr. Xu is deemed to have interests in the 1,186,000,000 Shares. The remaining 13,696,000 Shares are held by Mr. Xu on behalf of the Subscriber.

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APPENDIX

GENERAL INFORMATION

1. The beneficial interest represents Shares that may be issued pursuant to the full exercise of the options granted under the Pre-IPO Share Option Scheme adopted by the Company on 12 June 2009.

(2) Interests in associated corporations

	Name of			Percentage
Name of	associated		Number	of issued
Director	corporations	Capacity	of shares	shares
				(%)
Mr. Xu	the Subscriber	Beneficial owner	1	100

Save as disclosed above, as of the Latest Practicable Date, none of the Directors or chief executive of the Company had interests or short positions in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required (a) 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 each of them had taken or deemed to have taken under the provisions of the SFO); or (b) to be recorded in the register required to be kept by the Company pursuant to section 352 of the SFO; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code.

Interests in contract or arrangement

None of the Directors had any material interests in contract or arrangement subsisting at the Latest Practicable Date which is significant in relation to the business of the Group taken as a whole, save for the Structure Contracts as defined in the prospectus of the Company dated 19 June 2009 in which Mr. Xu is interested.

Interests in assets

None of the Directors has any direct or indirect interest in any assets which had since 31 December 2011 (being the date to which the latest published audited consolidated financial statements of the Group were made up) been 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.

Service contracts

As at the Latest Practicable Date, there is no existing or proposed service contract between any member of the Group and any Director or proposed Director (excluding contracts expiring or determinable by the Group within one year without payment of compensation (other than statutory compensations)).

– 31 –

GENERAL INFORMATION

APPENDIX

3. COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors has any interest in any business which competes or is likely to compete, either directly or indirectly, with the Group’s business.

4. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2011, being the date to which the latest published audited financial statements of the Group were made up.

5. QUALIFICATION AND CONSENT OF EXPERT

The following are the qualifications of the expert who has given opinion or advice which are contained in this circular:–

Name				Qualification
Grand	Vinco	Capital	Limited	a corporation licensed to carry out type 1 (dealing
				in securities) and type 6 (advising on corporate
				finance) regulated activities as defined under the
				SFO

As of the Latest Practicable Date, Vinco Capital was not beneficially interested in the share capital of any member of the Group nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

Vinco Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter and opinion and references to its name included in the form and context in which it is included.

As of the Latest Practicable Date, Vinco Capital did not, directly or indirectly, have any interest in any assets which had since 31 December 2011 (being the date to which the latest published audited financial statements of the Group were made up) been 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.

6. DOCUMENTS AVAILABLE FOR INSPECTION IN HONG KONG

Copies of the following documents will be available for inspection at the principal place of business of the Company in Hong Kong at Room 1303, 13th Floor, MassMutual Tower, No. 38 Gloucester Road, Wanchai, Hong Kong during normal business hours for a period of 14 days from the date of this circular:–

• (a) the Subscription Agreement; and

• (b) this circular

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NOTICE OF EGM

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CHINA QINFA GROUP LIMITED 中國秦發集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 00866)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of China Qinfa Group Limited (the “ Company ”) will be held at Room 2, 10/F., United Centre, 95 Queensway, Admiralty, Hong Kong on 31 December 2012 at 11:00 a.m. for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT

• (a) the subscription agreement dated 28 November 2012 (the “ Subscription Agreement ”) entered into between the Company and Fortune Pearl International Limited (the “ Subscriber ”) in relation to the issue of the perpetual subordinated convertible securities in the principal amount of HK$194,700,000 convertible into 118,000,000 ordinary shares of HK$0.10 each in the share capital of the Company at the initial conversion price of HK$1.65 per share (subject to adjustment) by the Company to the Subscriber (a copy of the Subscription Agreement which marked “A” is produced to the meeting and signed by the chairman of the meeting for identification purpose) and the transactions contemplated thereunder be and are hereby confirmed and approved;

• (b) any one director of the Company be and is hereby authorized to execute on behalf of the Company all such documents (to affix the common seal thereon, if necessary), take such actions and do such things he deems necessary, desirable or expedient for the implementation of, giving effect to or otherwise in connection with the Subscription Agreement and the transactions contemplated thereunder.”

By Order of the Board WONG CHI KIN Company Secretary

Hong Kong, 11 December 2012

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NOTICE OF EGM

Notes:

1. Any member of the Company entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person (who must be an individual) as his/her proxy to attend and vote instead of him/her. On a poll, votes may be given either personally or by proxy. A proxy need not be a member of the Company. A member who is holder of more than one share may appoint more than one proxy to attend in his/her stead.

2. The enclosed form of proxy and the power of attorney or other authority (where relevant), under which it is signed, or a certified copy of such power or authority shall be delivered at the Company’s branch share registrar and transfer office, Union Registrars Limited, 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the above meeting or adjourned meeting at which the person named in the enclosed form of proxy proposes to vote, or, in the case of a poll taken subsequent to the date of the above meeting or adjourned meeting, not less than 48 hours before the time appointed for the taking of the poll, and in default the enclosed form of proxy shall not be treated as valid provided always that the chairman of the meeting may at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited upon receipt of telex or cable or facsimile confirmation from the appointor that the instrument of proxy duly signed is in the course of transmission to the Company. Delivery of any instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned and, in such event, the instrument appointing a proxy shall be deemed to be revoked.

3. 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/she were solely entitled thereto; but if more than one of such joint holders be present at any meeting personally or by proxy, that one of the said persons so present whose name stands first on the register of members in respect of such shares 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 order in which the names of the joint holders stand on the register in respect of the relevant joint holding.

4. The enclosed form of proxy must be signed by the appointor or by his attorney authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person duly authorised to sign the same.

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