China XLX Fertiliser Ltd. — Proxy Solicitation & Information Statement 2012

May 31, 2012

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

This Circular is issued by China XLX Fertiliser Ltd.. If you are in any doubt as to the action you should take, you should consult your stockbroker, registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser immediately.

If you have sold or transferred all your shares in the capital of China XLX Fertiliser Ltd., you should at once hand this Circular, the Notice of Extraordinary General Meeting and attached Proxy Form to the purchaser or to the stockbroker or to the bank or to the agent through whom you effected the sale for onward transmission to the purchaser or transferee.

The Singapore Exchange Securities Trading Limited assumes no responsibility for the correctness of any of the statements made, reports contained or opinions expressed in this Circular.

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

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(A limited liability company incorporated in the Republic of Singapore) (Company Registration No. 200610384G) Singapore Stock Code: B9R.SI Hong Kong Stock Code: 01866

CIRCULAR TO SHAREHOLDERS

IN RELATION TO

THE PROPOSED CONSTRUCTION OF A FIFTH PRODUCTION PLANT AND EXPANSION OF PRODUCTION CAPACITY

IMPORTANT DATES AND TIMES

Last date and time for lodgement of	:	24 June 2012 at 9 a.m.
Proxy Form
Date and time of Extraordinary	:	26 June 2012 at 9 a.m.
General Meeting
Place of Extraordinary General Meeting	:	Amara Singapore Hotel, 165 Tanjong Pagar
		Road, Singapore 088539

* For identification purpose only

31 May 2012

TABLE OF CONTENTS

		Page
CORPORATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		2
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS . . . . . . . . . . .		7
LETTERS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		8
1.	INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
2.	THE PROPOSED EXPANSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
3.	FINANCIAL EFFECTS OF THE PROPOSED EXPANSION . . . . . . . . . . .	19
4.	FINANCIAL INFORMATION OF THE GROUP . . . . . . . . . . . . . . . . . . . .	20
5.	RISK FACTORS OF THE PROPOSED EXPANSION . . . . . . . . . . . . . . . .	20
6.	BUSINESS OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
7.	INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
8.	SHAREHOLDING INTERESTS OF DIRECTORS AND
	SUBSTANTIAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
9.	IRREVOCABLE UNDERTAKINGS BY THE CONTROLLING
	SHAREHOLDERS TO VOTE IN FAVOUR OF
	THE PROPOSED EXPANSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	35
10.	DIRECTORS’ RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
11.	EXTRAORDINARY GENERAL MEETING. . . . . . . . . . . . . . . . . . . . . . . .	36
12.	ACTION TO BE TAKEN BY SHAREHOLDERS . . . . . . . . . . . . . . . . . . .	36
13.	DIRECTORS’ RESPONSIBILITY STATEMENT . . . . . . . . . . . . . . . . . . . .	36
14.	GENERAL AND STATUTORY INFORMATION . . . . . . . . . . . . . . . . . . . .	37
15.	MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
NOTICE OF EXTRAORDINARY GENERAL MEETING. . . . . . . . . . . . . . . . . . .		39
PROXY FORM

– i –

CORPORATE INFORMATION

Board of Directors	:	Liu Xingxu (Chairman, Executive Director and
		Chief Executive Officer)
		Yan Yunhua (Executive Director and
		Chief Financial Officer)
		Li Buwen (Executive Director)
		Ong Kian Guan (Lead Independent Director and
		Non-Executive Director)
		Ong Wei Jin (Independent and
		Non-Executive Director)
		Li Shengxiao (Independent and
		Non-Executive Director)
		Lian Jie (Non-Executive Director)
Joint Company Secretaries	:	Cheah Soon Ann Jeremy, CPA (Singapore)
		Foo Soon Soo, LLB (Hons)(London), FCIS,
		FCPA (Singapore), FCPA (Australia)
		Lee Wai Fun Betty, LLB (Hons)(Hong Kong)
Registered Office	:	333 North Bridge Road
		#08-00 KH KEA Building
		Singapore 188721
Principal Place of Business of	:	Xinxiang High Technology Development Zone
the Company in the PRC		Henan Province
		The PRC 453731
Place of business in Hong Kong	:	20th Floor Alexandra House
		18 Chater Road
		Central, Hong Kong
Legal Adviser to the Company	:	Shook Lin & Bok LLP
on Singapore Law		1 Robinson Road
		#18-00, AIA Tower
		Singapore 048542
Legal Adviser to the Company	:	ReedSmith
on Hong Kong Law		Richards Butler
		20th Floor, Alexandra House
		18 Chater Road
		Central, Hong Kong
Legal Adviser to the Company	:	Haihua Yongtai Law Firm
on the PRC Law		701-704, Eton Place,
		No. 69, Dong Fang Road, Shanghai
		The PRC 200120

– 1 –

DEFINITIONS

In this Circular, the following definitions apply throughout unless otherwise stated:

“Act”	:	The Companies Act (Chapter 50) of Singapore, as
		amended, supplemented or modified from time to
		time
“Articles”	:	The articles of association of the Company, as
		amended, supplemented or modified from time to
		time
“Audit Committee”	:	The audit committee of the Company for the time
		being
“Board”	:	The board of directors of the Company
“Buildings”	:	The production and office buildings to be
		constructed pursuant to the Proposed Expansion
“CDP”	:	The Central Depository (Pte) Limited
“Company”	:	China XLX Fertiliser Ltd., a company
		incorporated in Singapore with limited liability
		and the Shares of which are listed on the Main
		Board of SGX-ST and SEHK
“connected person(s)”	:	Has the meaning as defined under the Hong Kong
		Listing Rules
“Consultant Company”	:	Henan Province Engineering Consultant Co., Ltd.
		(河南省工程咨詢公司), an independent
		professional consultant company providing
		feasibility report services
“Depositors”	:	The term “Depositors” shall have the meaning
		ascribed to it by section 130A of the Act
“Director(s)”	:	The director(s) for the time being of the
		Company

– 2 –

DEFINITIONS

“EGM”	:	The extraordinary general meeting of the
		Company to be held at Amara Singapore Hotel,
		165 Tanjong Pagar Road, Singapore 088539 on
		26 June 2012 at 9 a.m., for the Shareholders to
		consider and, if thought fit, approve, amongst
		other things, the Proposed Expansion, notice of
		which is set out on page 39 of this Circular
“EPS”	:	Earnings per Share
“Equipment”	:	The equipment to be acquired and/or installed by
		the Company for the Proposed Expansion
“Estimated Expenses”	:	The estimated expenses for the Proposed
		Expansion, being approximately RMB2.7 billion
“Feasibility Report”	:	The feasibility report issued by the Consultant
		Company for the Proposed Expansion in March
		2011
“Fourth Plant”	:	The production plant under construction located
		at the Northern and Eastern Side of Qinglong
		Road, Xinxiang Economic and Technology
		Development Zone, Xinxiang City, Henan
		Province, the PRC (中國河南省新鄉市新鄉經濟
		開發區青龍路以北以東)
“FY” or “Financial Year”	:	Financial year ended or, as the case may be,
		ending 31 December
“Go Power”	:	Go Power Investments Limited
“Group”	:	The Company and its subsidiaries
“HK$”	:	Hong Kong dollars, the lawful currency of Hong
		Kong
“Hong Kong Listing Rules”	:	The Rules Governing the Listing of Securities on
		the SEHK
“Land”	:	The land located at the Plain Farm, Manas
		County, Xinjiang, the PRC (中國新疆維吾爾族自
		治區瑪納斯縣平原林場)

– 3 –

DEFINITIONS

“Latest Practicable Date”	:	18 May 2012, being the latest practicable date
		prior to the printing of this Circular
“M&A”	:	The Memorandum and Articles of the Company
“Main Board”	:	The Main Board of the SGX-ST
“Memorandum”	:	The memorandum of association of the Company,
		as amended, supplemented or modified from time
		to time
“methanol”	:	A chemical compound with chemical formula
		CH3OH. It is the simplest form of alcohol, and is
		a light, volatile, colourless, flammable,
		poisonous liquid with a distinctive odour
“Model Code”	:	The Model Code for Securities Transactions by
		Directors of Listed Companies contained in the
		Hong Kong Listing Rules
“NDRC”	:	National Development and Reform Commission
		of the PRC (中華人民共和國國家發展和改革委
		員會)
“NTA”	:	Net tangible assets
“percentage ratio(s)”	:	Has the meaning as defined under the Hong Kong
		Listing Rules
“Pioneer Top”	:	Pioneer Top Holdings Limited
“PRC”	:	The People’s Republic of China, for the purpose
		of this Circular and for geographical reference
		only, excluding Hong Kong, Macau and Taiwan
“Proposed Expansion”	:	The proposed construction of a fifth production
		plant and expansion of production capacity of the
		Group, which comprises of three major parts: (i)
		the proposed acquisition of the Land; (ii) the
		construction of the Buildings; and (iii) the
		acquisition and installation of the Equipment
“RMB”	:	Renminbi, the lawful currency of the PRC

– 4 –

DEFINITIONS

“S$”, “SGD” or “$” and “cents”	:	Singapore dollars and cents respectively
“Securities Accounts”	:	The securities account maintained with CDP, but
		not including the securities accounts maintained
		with a Depository Agent (as defined in Section
		130A of the Act)
“SEHK”	:	The Stock Exchange of Hong Kong Limited
“SFO”	:	The Securities and Futures Ordinance (Chapter
		571) of the Laws of Hong Kong
“SGX-ST”	:	Singapore Exchange Securities Trading Limited
“Shareholders”	:	Registered holders of Shares except that where
		the registered holder is CDP, the term
		“Shareholders” in relation to Shares held by CDP
		shall mean the persons named as Depositors in
		the Depository Register maintained by CDP and
		to whose Securities Accounts such Shares are
		credited
“Shares”	:	Ordinary shares in the capital of the Company
“Singapore Listing Manual”	:	Rules of the listing manual of the SGX-ST, as
		amended, supplemented or modified from time to
		time
“sq m”	:	Square metres
“Substantial Shareholder”	:	Shall have the respective meanings as ascribed to
		it under the Act, the Hong Kong Listing Rules
		and the SFO, as the context may require
“Tianli”	:	Manas Tianli Coal Co., Ltd. (瑪納斯天利煤業有
		限責任公司)
“urea”	:	A high concentration nitrogen fertiliser with
		chemical formula H2N-CO-NH2, formed by
		reacting ammonia with carbon dioxide at high
		pressure; an organic compound of carbon,
		nitrogen, oxygen and hydrogen

– 5 –

DEFINITIONS

“Xinjiang”	:	Xinjiang Uygur Autonomous Region (新疆維吾
		爾族自治區)
“Xinjiang XLX”	:	Xinjiang Xinlianxin Energy Chemical Co., Ltd.
““Zhongyang Sannong” policies”	:	Policies promulgated by the PRC government to
		address the issues relating to the agricultural
		industry, the rural areas and the farmers
“%”	:	Percentage and per centum

The terms “Depository” and “Depository Register” shall have the meanings ascribed to them respectively in Section 130A of the Act.

Any reference in this Circular to any enactment is a reference to that enactment as for the time being amended or re-enacted. Any word defined under the Act, the Singapore Listing Manual, the Hong Kong Listing Rules, the SFO or any modification thereof and used in this Circular shall, where applicable, have the meaning assigned to it under the Act, the Singapore Listing Manual, the Hong Kong Listing Rules, the SFO or any modification thereof, as the case may be.

Words importing the singular number shall include the plural number where the context admits and vice versa . Words importing the masculine gender shall include the feminine gender where the context admits. Reference to persons shall, where applicable, include corporations.

Any reference to a time of a day in this Circular is a reference to Singapore time.

Any discrepancy with the tables in this Circular between the listed amounts and the totals thereof is due to rounding.

Unless otherwise stated, the following exchange rates which are used in this Circular are for information only:

RMB1.00 = HK$1.227 S$1.00 = HK$6.096 RMB1.00 = S$0.201

– 6 –

CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS

All statements contained in this Circular, statements made in the press releases and oral statements that may be made by the Company, or each of our or their respective directors, key executives or employees acting, that are not statements of historical fact constitute “ forwardlooking statements ”. Some of these statements can be identified by words that are biased or by forward-looking terms such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “if”, “intend”, “may”, “plan”, “possible”, “probable”, “project”, “will”, “would” and “should” or similar words. However, these words are not the exclusive means of identifying forward-looking statements. All statements regarding the Group’s expected financial position, business strategy, plans and prospects are forward-looking statements.

These forward-looking statements and other matters discussed in this Circular, including but not limited to:

• expected fertiliser industry trends;

• our revenue and profitability; and

• other matters discussed in this Circular regarding matters that are not historical fact.

are only predictions. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Group’s actual results, performance or achievements to be materially different from any future results, performance or achievements expected, expressed or implied by such forward-looking statements. These risks, uncertainties and other factors are discussed in more detail in this Circular.

Given the risks and uncertainties that may cause the Group’s actual future results, performance or achievements to be materially different than expected, expressed or implied by the forward-looking statements in this Circular, you are advised not to place undue reliance on those statements.

None of the Company or any other person represents or warrants to you that the Company and the Group’s actual future results, performance or achievements will be as discussed in those statements. The Company’s and the Group’s actual results may differ materially from those anticipated in these forward-looking statements. Further, the Company and the Group disclaim any responsibility to update any of those forward-looking statements or publicly announce any revisions to those forward-looking statements to reflect future developments, events or circumstances for any reason, even if new information becomes available or other events occur in the future, subject to compliance with all applicable laws and regulations and/or rules of the SGX-ST and/or any regulatory or supervisory body or agency.

– 7 –

LETTERS TO SHAREHOLDERS

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(A limited liability company incorporated in the Republic of Singapore) (Company Registration No. 200610384G) Singapore Stock Code: B9R.SI Hong Kong Stock Code: 01866

Directors:

Liu Xingxu (Chairman, Executive Director and Chief Executive Officer) Yan Yunhua (Executive Director and Chief Financial Officer) Li Buwen (Executive Director) Ong Kian Guan (Lead Independent Director and Non-Executive Director) Ong Wei Jin (Independent and Non-Executive Director) Li Shengxiao (Independent and Non-Executive Director) Lian Jie (Non-Executive Director)

Registered Office:

333 North Bridge Road #08-00 KH KEA Building Singapore 188721

Principal Office in Hong Kong: 20th Floor Alexandra House 18 Chater Road Central, Hong Kong

31 May 2012

To the Shareholders of China XLX Fertiliser Ltd.

Dear Sir/Madam,

THE PROPOSED CONSTRUCTION OF A FIFTH PRODUCTION PLANT AND EXPANSION OF PRODUCTION CAPACITY

1. INTRODUCTION

The Board had on 25 May 2012 announced the Company’s intention to expand its production capacity through the construction of a fifth production plant located at the Plain Farm, Manas County, Xinjiang, the PRC (中國新疆維吾爾族自治區瑪納斯縣平原林場). The total estimated expenses in relation to the Proposed Expansion will be approximately RMB2.7 billion (equivalent to approximately S$543 million or HK$3.3 billion), including but not limited to the consideration for the land use right of the Land, estimated expenses for acquisition and installation of the Equipment, and the estimated construction costs of the Buildings located at the Plain Farm, Manas County, Xinjiang, the PRC (中國新疆維吾爾族自 治區瑪納斯縣平原林場).

* For identification purpose only

– 8 –

LETTERS TO SHAREHOLDERS

The purpose of this Circular is to provide the Shareholders with (i) information relating to the Proposed Expansion, inter alia , information on the assets to be acquired by the Company, the rationale for the Proposed Expansion, and the financial effects on the Group; and (ii) a notice of the EGM to be convened for the Shareholders to consider and, if thought fit, approve, amongst other things, the Proposed Expansion.

2. THE PROPOSED EXPANSION

2.1 Overview of the Proposed Expansion

Over the past few years, the PRC government has dedicated its efforts towards consolidating the fertiliser industry and encouraging more producers in the fertiliser industry to use a new technology involving sand coal as one of the key raw materials for the production of fertiliser products.

On 3 February 2012, the Ministry of Industry and Information Technology of the PRC released the “Twelfth Five-Year Plan for the Development of Fertiliser Industry” (化肥工業 “十 二五” 發展規劃), in which it emphasised, amongst others, that (i) the PRC government will continue to consolidate the fertiliser industry and targets to significantly reduce the number of fertiliser producers in the PRC by 2015 such that 80% of the nitrogenous fertiliser shall be produced by mid or large-scale producers; and (ii) as one of the main challenges faced by the nitrogenous fertiliser producers is the shortage of energy resources and the resulted high production costs, the PRC government encourages the basic fertiliser producers (including nitrogenous fertiliser producers) to congregate to the area with abundant raw materials.

In view of the above, the Company intends to take advantage of the industry consolidation to expand its current production capacity, as well as to optimise its cost structure to reduce production costs through the construction of a fifth new plant located at in Xinjiang, a region with abundant and relatively cheap coal resources. This will enable the Group to obtain a stable supply of coal for its production process and reduce the effects of any volatility in coal prices against the production costs of the Group.

The Proposed Expansion shall comprise three major parts: (i) acquisition of the land use right in respect of the Land for an aggregate consideration of approximately RMB58 million (equivalent to approximately S$12 million or HK$71 million)[1] ; (ii) construction of the Buildings, at a price of approximately RMB0.3 billion (equivalent to approximately S$60 million or HK$0.4 billion); and (iii) the purchase and installation of the Equipment from various suppliers to be determined by the Company, at a price of approximately RMB1.9 billion (equivalent to approximately S$391 million or HK$2.4 billion). Other costs and expenses for the Proposed Expansion will be approximately RMB0.4 billion (equivalent to approximately S$80 million or HK$0.5 billion). The Proposed Expansion is expected to be fully completed by FY2016.

1 For the avoidance of doubt, the estimated consideration of RMB58 million for the acquisition of the land use right in respect of the Land includes the RMB17,430,000 deposit required for the purpose of participating in the public auction of the Land, as described under paragraph 2.4(a).

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LETTERS TO SHAREHOLDERS

2.2 Application of Rule 1006 of the Singapore Listing Manual

The relative figures for the Proposed Expansion computed on the applicable bases set out in Rule 1006 of the Singapore Listing Manual are set out as below. These figures are provided for illustrative purposes only, as (i) the exact cost to be incurred by the Group for the Proposed Expansion cannot be ascertained as at the date of this Circular; and (ii) the Proposed Expansion will be conducted in stages, and save as the two design contracts disclosed under paragraph 2.4(c), no formal agreement for the proposed construction of Buildings, and purchase and installation of the Equipment has been entered into by the Group as at the date of this Circular.

The total consideration of approximately RMB58 million (equivalent to approximately S$12 million or HK$71 million) for the acquisition of the land use right in respect of the Land accounted for 4.49% of the Company’s market capitalisation of S$260 million as at the Latest Practicable Date. This is based on the weighted average share price of S$0.26 on the Main Board of the SGX-ST on the Latest Practicable Date, 1,000,000,000 issued shares and exchange rate of S$1: RMB4.967 on the Latest Practicable Date, published by the Business Times.

Given that there is no single sale and purchase agreement underlying the Proposed Expansion, the Company has used the Latest Practicable Date for the purpose of calculating its market capitalisation. As at the Latest Practicable Date, the relative percentage details under Rule 1006 are as follows:

**Rule **	1006	Bases	Relative Figures
			(%)
(a)		Net asset value of the assets to be disposed of,	Not applicable
		compared with the Group’s net asset value
(b)		Net profits attributable to the assets acquired	Not applicable(1)
		compared with the Group’s net profits
(c)		Estimated Expenses of RMB2.7 billion	209%
		compared to the Company’s market
		capitalisation of RMB1.3 billion(2)
(d)		Number of equity securities issued as	Not applicable
		consideration for the acquisition, compared
		with the number of equity securities previously
		issued

Notes:

• (1) There is no past profit and loss contribution for the Land and Equipment to be acquired and Buildings to be constructed.

(2) The market capitalisation of S$260 million (equivalent to approximately RMB1.3 billion) is based on the weighted average share price of S$0.26 on Latest Practicable Date, 1,000,000,000 issued shares and exchange rate of S$1: RMB4.967 on the close of Latest Practicable Date, published by the Business Times.

– 10 –

LETTERS TO SHAREHOLDERS

The Estimated Expenses are based on estimates and subject to the final construction cost of the Buildings and final acquisition and installation fees of the Equipment. In the event that the Company needs to construct the Building or acquire and/or install the Equipment at a higher cost than the Estimated Expenses, the Audit Committee will, after taking into account the Group’s internal sources of funds, the effects of the Proposed Expansion and the Group’s present bank borrowings, give its opinion on whether the Proposed Expansion is in the interests of the Group and is not prejudicial to Shareholders as a whole, and the Company will make appropriate announcements on SGXNET in relation to (i) the final costs of the Proposed Expansion as compared to the Estimated Expenses; and (ii) the results of the Audit Committee’s review and opinion on whether the Proposed Expansion is in the interests of the Group and is not prejudicial to Shareholders as a whole.

The Company had on 25 May 2012 made an announcement in relation to the Proposed Expansion. Based on the Estimated Expenses, the relative figures computed on the base set out in Rule 1006(c) of the Singapore Listing Manual exceed 20% when the Estimated Expenses are used for the purpose of such computation and constitute a major transaction under the Singapore Listing Manual.

Since the Proposed Expansion is classified as a major transaction according to the Singapore Listing Manual, the EGM is required to be convened for the Shareholders to consider and, if thought fit, approve, amongst other things, the Proposed Expansion.

2.3 Hong Kong Listing Rules Implications

The Proposed Expansion is classified as a major transaction as mentioned above in accordance with the Singapore Listing Manual. However, since the land use right of the Land to be acquired, the Building to be constructed and the Equipment to be acquired and installed are all for the Company’s own use in its ordinary and usual course of business, according to Rule 14.23A of the Hong Kong Listing Rules, the transactions contemplated under the agreements to be entered into by the Company for the Proposed Expansion may not be required to be aggregated and treated as one transaction. The Proposed Expansion will be conducted in stages, each stage with its sale and purchase agreement(s). Save for the Land Transfer Agreement (as defined under paragraph 2.4 (a)), the agreements for the Proposed Expansion have not yet been entered into as at the Latest Practicable Date. For each agreement to be entered into for the Proposed Expansion, the Company will calculate its relevant percentage ratios, determine its classification and made further disclosure, as and when appropriate, in accordance with the Hong Kong Listing Rules.

As the relevant percentage ratios are less than 5%, the transaction contemplated under the Land Transfer Agreement (as defined under paragraph 2.4 (a)) in respect of the Land is exempted from the reporting, announcement and shareholders’ approval requirements under Chapter 14 of the Hong Kong Listing Rules. The disclosure herein in respect thereof is made on a voluntary basis.

– 11 –

LETTERS TO SHAREHOLDERS

2.4 Information on the Land and Equipment to be acquired and the Buildings to be constructed by the Company

(a) Acquisition of the Land

On 22 March 2012, Xinjiang XLX, a wholly-owned subsidiary of Henan Xinlianxin Fertiliser Co., Ltd., which in turn is a wholly-owned subsidiary of the Company, received a notice (the “ Notice ”) from Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局), pursuant to which the Company was required to pay a deposit of RMB17,430,000 for the purpose of attending the public auction of the Land.

On 28 April 2012, Xinjiang XLX entered into a land use rights transfer agreement (the “ Land Transfer Agreement ”) with Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局), pursuant to which the Company proposed to acquire the land use right of the Land for a cash consideration of approximately RMB58 million (equivalent to approximately S$12 million or HK$71 million), which, less the RMB17,430,000 deposit required for the purpose of participating in the public auction of the Land, as described under paragraph 2.4(a), shall be paid by the Company in cash within ten (10) days from the 28 April 2012.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, Manas County Ministry of Lands and Resources of the PRC (中國 瑪納斯縣國土資源局) and its ultimate beneficial owner are third parties independent of the Company and its connected persons.

The particulars of the Land to be acquired are set out in the table below:

		Date of
		Expiration	Land Use
	Approximate	of Land Use	Right	Use/
Description and Location	Land Area	Right	Certificate	Activities
	(sq m)
The land located at the Plain Farm,	644,214	6 May 2062	N.A.(1)	Industrial
Manas County, Xinjiang, the PRC
(中國新疆維吾爾族自治區瑪納斯
縣平原林場)

Note:

• (1) Pursuant to the Land Transfer Agreement, upon fulfilment of the payment of the consideration, Xinjiang XLX will proceed with the application for the land use right certificate and expects to obtain the land use right certificates by end of August 2012.

The Group chose the above location (i) in view of the rich deposits of natural resources, in particular, natural coal, in Xinjiang; (ii) to expand the Group’s geographical coverage; and (iii) because it will be more cost efficient for the new fifth production plant to recruit labour and to use water and electricity resources in Xinjiang as Xinjiang is a region that has not been fully developed and also due to the favourable government policies to encourage the development of Xinjiang.

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LETTERS TO SHAREHOLDERS

The consideration for the acquisition of the land use right of the Land was determined after arm’s length negotiations between Xinjiang XLX and Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局) with reference to, amongst others, the location of the Land, the average market price of lands in the proximity as well as the appraised value of RMB58,101,661 of the Land appraised by Xinjiang Hongchang Real Estate Appraisal Co., Ltd. (新疆宏昌房地產評估有限責任事務 所), an independent professional valuer. Based on the information currently available, the Directors consider that the consideration for the Land is fair and reasonable and in the interests of the Company and Shareholders as a whole.

Pursuant to the Land Transfer Agreement, it is agreed between the parties that the total investment amount on the Land shall be no less than RMB780 per sq m, and basic construction work on the Land shall commence on or before 17 May 2012 and the Proposed Expansion should be completed on or before 6 May 2015, subject to any extension as may be mutually agreed between the parties, provided always that such extension shall not exceed a period of one (1) year. Furthermore, it is agreed between the parties that the usage and volume fraction of the Land shall not be changed without official authorisation from Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局).

As at the Latest Practicable Date, the Company has paid the aggregate consideration for the proposed acquisition of the land use right in respect of the Land to Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局).

(b) Acquisition of the Equipment

The Company intends to acquire and install the Equipment for its fifth production plant including but not limited to gasifier (氣化爐), water scrubbing tower (水洗塔), coal pulverizer (磨煤機), urea synthesizer (尿素合成塔), melamine reactor (三聚氰胺反應器), inhaler (空氣過濾器), and ammonia washer tower (洗氨塔). It is expected that the above major Equipment will be acquired and installed from August 2013.

The Company intends to invite public tenders and take into account the prevailing market rate before choosing the relevant contractor for the acquisition and installation of the Equipment. The Company expects that the suppliers for the Equipment and its ultimate beneficial owner shall be third parties independent of the Company and its connected persons. In case the suppliers are connected persons of the Company, the Company will make disclosure, as and when appropriate, in accordance with the Hong Kong Listing Rules and the Singapore Listing Manual.

It is expected that the acquisition and installation fees of the Equipment will be approximately RMB1.9 billion (equivalent to approximately S$391 million or HK$2.4 billion).

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LETTERS TO SHAREHOLDERS

(c) Construction of the Buildings

The Company intends to construct the production and office buildings for its fifth production plant. Based on the Company’s internal study, it intends to invest in the construction of office buildings and raw water treatment plant (原水處理廠) in July 2012 and start the construction of the main production building for urea, synthetic ammonia and melamine, store and transport building for coal (煤儲運裝置廠房), power station plant (動力站裝置廠房) and other production buildings from August 2012.

The Company also intends to invite public tenders and take into account the prevailing market rate before choosing the relevant contractor for the construction of the Buildings. The Company expects that the contractors for the Buildings and its ultimate beneficial owner shall be third parties independent of the Company and its connected persons. As at the Latest Practicable Date, the Company has entered into design contracts with (i) Wison (China) Limited for the entire design of the fifth plant; (ii) Wuhan Lvzhihuan Science and Technology Co., Ltd. (武漢綠之寰科技有限公司) for the design of the main production building for urea; and (iii) Shenzhen City Tongneng Technology Co., Ltd. (深圳市通能科技有限公司) for the design of power station plant.

It is expected the construction cost for the Buildings will be approximately RMB0.3 billion (equivalent to approximately S$60 million or HK$0.4 billion).

2.5 Conditions Precedent for the Proposed Expansion

The Proposed Expansion is conditional upon the approval of the Shareholders as required under Chapter 10 of the Singapore Listing Manual.

2.6 Completion

The Proposed Expansion is expected to be completed by the financial year ending 31 December 2016.

2.7 Total Consideration and Funding for the Proposed Expansion

The Estimated Expenses for the Proposed Expansion is approximately RMB2.7 billion (equivalent to approximately S$543 million or HK$3.3 billion), which is based on estimates and subject to the final construction cost of the Buildings and final acquisition and installation fees of the Equipment. In the event that the Company needs to construct the Buildings or acquire and/or install the Equipment at a higher cost than the Estimated Expenses, the Audit Committee will, after taking into account the Group’s internal sources of funds, the effects of the Proposed Expansion and the Group’s present bank borrowings, give its opinion on whether the Proposed Expansion is in the interests of the Group and is not prejudicial to Shareholders as a whole.

Furthermore, during the construction of the new fifth plant, the Board will monitor closely the financial conditions of the Group to ensure that it will have adequate working capital and the overall gearing ratio of the Group is under control.

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LETTERS TO SHAREHOLDERS

The Proposed Expansion will be financed by the Company’s internal funds and external bank borrowings. While the Group’s current gearing ratio is 44% as at the Latest Practicable Date, the Company intends to continually maintain the Group’s gearing ratio below 65% in line with the Group’s policy on gearing for the purpose of financing, amongst others, the Proposed Expansion. The Directors will take into account, inter alia , (i) the financial effects on the Group’s gearing, (ii) costs and expenses required for the construction of the Fourth Plant, (iii) cash being generated from the Group’s operating activities, and (iv) the Group’s working capital requirements, at the relevant point in time in determining the proportion of external bank borrowings obtained for the Proposed Expansion. Where appropriate, fund raising from the capital markets will be carried out. The Directors have confirmed that as at the Latest Practicable Date, after taking into account the Group’s internal and external sources of funds, and the effects of the Proposed Expansion, the Group has adequate working capital to meet its present operating requirements.

2.8 Information on the Group and Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局)

The Group is principally engaged in manufacturing, sales and trading of urea, compound fertiliser, methanol, liquid ammonia and ammonia solution.

Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局) is a governmental authority of the People’s Government of Manas County and is principally in charge of the administration of land resources in Manas County. To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, Manas County Ministry of Lands and Resources of the PRC (中國瑪納斯縣國土資源局) and its ultimate beneficial owner are third parties independent of the Company and its connected persons.

2.9 Rationale for the Proposed Expansion

The Directors are of the view that the Proposed Expansion is beneficial to the Group for the following reasons:

(i) The Group will retain its leading position in the fertiliser industry in the PRC and benefit from the integrated secured coal supply

According to NDRC, the estimated coal resource in Xinjiang is as much as 2.2 trillion tonnes, representing approximately 40% of the total coal resource in the PRC, and most of them are premium clean coal with high calorific value and low sulphur content. As coal accounts for approximately 70% of the Group’s urea production cost and is one of the Group’s main raw materials, the Board believes that the Proposed Expansion creates a platform for the Group to develop its business and exploit coal resources in Xinjiang, and will also enable the Group to obtain a stable supply of coal for its production process and reduce the effects of any volatility in coal prices against the production costs of the Group.

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LETTERS TO SHAREHOLDERS

Pursuant to the Proposed Expansion, it is expected that the Group will remain as a leading fertiliser producer in the PRC in terms of production capacity. This leading position with an annual production capacity of approximately 2.58 million tons of urea (among which approximately 0.30 million tons of urea will be used to produce 100,000 tons of melamine, and 50,000 tons of urea will be used to produce 150,000 tons of compound fertiliser), 100,000 tons of melamine, 900,000 tons compound fertiliser and 200,000 tons of methanol (on the assumption that the Fourth Plant has commenced operation) will give the Group a significant competitive edge in the industry. The Directors believe that, with the significant increase in scale and range of products, the Group will be able to attract new and larger customers, maintain customer confidence, increase its customer base, and enjoy cost saving attributed by lower raw material costs.

(ii) Favourable government policies in the PRC expected to support the development and economic growth of Xinjiang

Xinjiang is a region with vast natural resources and land which has not been exploited due to its remote geographical locations. In order to enhance the development of the western area of the PRC, in particular, Xinjiang and Tibet Autonomous Region (西 藏自治區), the PRC government has promulgated and intends to continue to promulgate a series of favourable policies, including but not limited to lowering the electricity costs and taxes. Pursuant to the notice issued by State Grid Corporation of China (中國國家電 網公司), the basic electricity fee applicable to the new fifth production plant would be RMB0.172, which is 60% lower than the basic electricity fee of RMB0.43 applicable to the Group’s existing three production plants in Henan Province. In addition, pursuant to the Notice of Tax Policies in relation to the Implementation of Strategies for the Development of the Western Area of the PRC (《關於深入實施西部大開發戰略有關稅收 政策問題的通知》) promulgated by the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs of the PRC on 27 July 2011, (i) for project in line with the “Western Area Guiding Category of Encouraged Projects Established by Local Enterprises in the PRC” (西部地區內資鼓勵類產業), any imported equipments for self-used is exempt from customs duty within the scope as stipulated under the relevant rules and regulations of the PRC, provided that the value of such imported equipments shall not exceed the total investment amount of the respective project; (ii) for the period between 1 January 2011 to 31 December 2020, for enterprises within the scope of “Western Area Guiding Category of Encouraged Industries” (《西部 地區鼓勵類產品目錄》), instead of the normal 25% income tax rate, a preferential income tax rate of 15% is applicable. Xinjiang XLX may be entitled to enjoy the abovementioned favourable tax policies for the Proposed Expansion. As such, the Directors are of the view that this is an excellent opportunity for the Group to expand its business in view of the strong support from the state and local governments.

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LETTERS TO SHAREHOLDERS

(iii) Excellent opportunity to optimise the Group’s cost structure

As illustrated under paragraph 2.1 above, in the “Twelfth Five-Year Plan for the Development of Fertiliser Industry” (化肥工業 “十二五” 發展規劃) announced by the Ministry of Industry and Information Technology of the PRC on 3 February 2012, the PRC government emphasised, inter alia , that one of the main challenges faced by the nitrogenous fertiliser producers is the shortage of energy resources and resulted high production costs. Accordingly, the PRC government encourages the basic fertiliser producers (including nitrogenous fertiliser producers) to congregate to the area with abundant raw materials.

In addition, the Group acquired Manas Tianli Coal Co., Ltd. (瑪納斯天利煤業有限 責任公司) (“ Tanli ”), a private company incorporated in the PRC in 2004 with limited liability, in 2011. Tianli is principally engaged in coal mining in Xinjiang and the sales of coal, and holds a coal mining license for an approved mining area of 1.343 square kilometres and an annual production capacity of approximately 90,000 tons. As Tianli is also located in Manas County, Xinjiang, the PRC and is near to the Land, it would be easier and more cost efficient for Tanli to supply coal to the new fifth production plant.

As coal accounts for approximately 70% of the Group’s urea production cost and is one of the Group’s main raw materials, the Proposed Expansion presents an excellent opportunity for the Group to expand its current business efficiently and optimise its cost structure attributed by lower raw material costs.

Furthermore, based on the Company’s in-house study, the estimate electricity cost of the new fifth production plant is expected to be substantially lower as compared to the Group’s electricity costs for the financial year ended 31 December 2011.

In view of the above, the Directors consider that the Proposed Expansion is in the interests of the Company and the Shareholders as a whole.

2.10 Reasons for conducting the Proposed Expansion while the Construction of the Fourth Plant has not completed

On 16 November 2010, the Company obtained Shareholders’ approval for the proposed construction of a fourth production plant located at Northern and Eastern Side of Qinglong Road, Xinxiang Economic and Technology Development Zone, Xinxiang City, Henan Province, the PRC (中國河南省新鄉市新鄉經濟開發區青龍路以北以東) (the “ Fourth Plant ”) to increase its annual production capacity of urea from 1.25 million tons to approximately 2 million tons. The Fourth Plant is currently under construction and expected to start operation in FY2013.

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LETTERS TO SHAREHOLDERS

Notwithstanding the Fourth Plant is still under construction, the Company intends to proceed with the Proposed Expansion due to the benefits as illustrated under paragraph 2.9 above, and taking into consideration the following factors:

(i) It is in line with the industry development policies and more cost effective for the Group to gain access to coal resources

As illustrated under paragraph 2.9 (iii) above, the PRC government encourages the basic fertiliser producers (including nitrogenous fertiliser producers) to congregate to the area with abundant raw materials. In addition, pursuant to the Twelfth Five-Year Plan for the Development of Coal Industry” (煤炭工業 “十二五” 發展規劃) announced by NDRC on 18 March 2012, the PRC government will mainly focus on the exploration of coal resources in the western area of the PRC in the next five years, while restricting and stabilising the exploration of coal resources in the eastern and central part of the PRC, respectively. In view of the above, and taking into consideration the recent acquisition of Tianli by the Group, the Proposed Expansion will provide the Group with better and easier access to integrated coal resources.

Furthermore, there are railway capacity constraints in Xinjiang. Accordingly, it will incur additional costs and create instability for the Group to transfer the coal resources from Xinjiang to its current production plants. It will be more economical to utilise the cheaper coal resources to produce products and sell the same in Xinjiang and other provinces which are located in the vicinity. In this regard, the Group also proposes to produce melamine, a downstream product of urea with higher margin per tonne, in the new fifth production plant.

(ii) The Group will expand its geographical coverage in the PRC

Currently, together with the Fourth Plant which is under construction and expected to start operation in FY2013, the Group owns four production plants which are located in Xinxiang County, Henan Province, the PRC. With the Proposed Expansion, the Group will be able to extend its geographical coverage to Xinjiang and Gansu Province. This will not only allow the Group to distribute its products to Xinjiang and Gansu Province with lower costs, but will also allow the Group to benefit from the economic growth of Xinjiang and Gansu Province.

(iii) It is an excellent opportunity to optimise the Group’s portfolio

The Company maintains its long-term confidence on the coal-based fertiliser industry. It believes that the Proposed Expansion will be a successful strategy for the Group’s business and an attractive investment opportunity for the Group in view of, amongst others, strong support from both the central government of the PRC and the local government of Xinjiang.

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LETTERS TO SHAREHOLDERS

In view of the rich nature resources and government’s supports on enhancing the development of the western area of the PRC, there are a few major fertiliser producers in the PRC (i.e. Yunnan Yuntianhua Co., Ltd. (雲南雲天化股份有限公司), a company listed on Shanghai Stock Exchange, Hubei Yihua Chemical Industry Co., Ltd. (湖北宜化化工股 份有限公司), a company listed on the Shenzhen Stock Exchange, and Anhui Linquan Chemical Co., Ltd. (安徽臨泉化工股份有限公司)) have set up their own production plants in Xinjiang with good operational results.

With more and more companies seeing the great development potential in Xinjiang, the land, coal and other resources might become more expensive and limited, and the Group may not be able to obtain an ideal location for further development. The current Proposed Expansion will not only allow the Group to obtain better land, coal and other resources, but will also allow the Group to enjoy the favourable policies enhancing the development of Xinjiang and benefit from the economic growth of Xinjiang.

2.11 Details of Directors (if any) to be appointed in connection with the Proposed Expansion

As at the Latest Practicable Date, the Company does not intend to appoint any new director to the Company in connection with the Proposed Expansion.

3. FINANCIAL EFFECTS OF THE PROPOSED EXPANSION

3.1 Financial Effects on NTA and EPS

Assuming the Proposed Expansion had been effected as at 31 December 2011 and was funded from internal resources of the Group and bank borrowings, there is no effect on the net tangible assets per share of the Group.

Assuming the Proposed Expansion had been effected as at 1 January 2011 and was funded from internal resources of the Group and bank borrowings, there is no effect on the net earnings per share of the Group since the Proposed Expansion is not an acquisition of a business or existing production plant, there is no past profit and loss contribution to the Land and Equipment to be acquired and the Buildings to be constructed pursuant to the Proposed Expansion.

As the borrowing costs, including the interest incurred on the borrowings, will be capitalised during the construction phase, they have been included in the Estimated Expenses. Thus, the borrowing costs and interest incurred in relation thereto will not be reflected in the profit and loss statement of the Group and accordingly, will not affect the EPS and NTA of the Group.

The above proforma financial effects of the Proposed Expansion is for illustrative purposes only and may not reflect the actual future financial situation of the Group after the completion of the Proposed Expansion.

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LETTERS TO SHAREHOLDERS

4. FINANCIAL INFORMATION OF THE GROUP

4.1 Capitalisation and indebtedness of the Group

The following table shows the cash and cash equivalents, indebtedness and capitalisation of the Group as at 31 December 2011 and the Latest Practicable Date (being a date no earlier than 14 days prior to the date of this Circular):

		As at		As at Latest
		31 December		Practicable
		2011		Date
		RMB’000		RMB’000
Cash and cash equivalents		514,098		600,000
Short term borrowings		541,000		625,000
Long term borrowings		1,067,091		1,158,909
Total indebtedness		1,608,091		1,783,909
Shareholders’ equity		2,061,677		2,153,605
Total capitalisation and indebtedness		3,669,768		3,937,514

5. RISK FACTORS OF THE PROPOSED EXPANSION

The key risk factors relating to the business and operations of the Group in relation to the Proposed Expansion are set out below:

The Group may face cost overrun for the Proposed Expansion

The Estimated Expenses were calculated based on the results of the Group’s internal evaluation after taking into consideration current market conditions.

There is no assurance that the Estimated Expenses will be sufficient for the completion of the Proposed Expansion. Factors such as fluctuations in labour costs, raw materials, equipment, contracting services cost not previously factored into the Estimated Expenses may lead to cost overrun.

In the event that there is cost overrun and the Estimated Expenses is not sufficient for the completion of the Proposed Expansion, the Group may need to seek alternative options for raising additional funding. This could delay the Proposed Expansion and/or disrupt the Group’s existing business operations, thereby adversely affecting the Group’s business operation and financial results.

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LETTERS TO SHAREHOLDERS

The Group may fail to successfully implement and complete its expansion strategy

The Group must obtain all necessary environmental protection approvals and/or licenses required for its production from the relevant PRC environmental protection authorities. There is no assurance that such approval will be granted to be Group on a timely basis. In the event that the Group unable to get such approvals from the relevant environmental protection authorities or such approval is granted after a long delay, the Group’s business operation and financial results may be adversely affected.

In addition, for the increase in production capacity of urea, the Group may face challenges in terms of sales, production and procurement, personnel and research. For instance, the Group may face challenges in its ability to generate sales from existing and new customers sufficient to ensure its increased production capacity is appropriate utilised, the usage of new technology and equipment and provision of consistent product quality and effective management of significant increase in the number of new personnel. It may also face challenges in its ability to enhance its research to meet new customers’ requirements.

In the event that its expansion is not commercially viable or successful, or the demand for its product diminishes, the Group’s business operation and financial results may be adversely affected.

There are railway capacity constraints in Xinjiang

Currently, there are railway capacity constraints in Xinjiang. Only approximately 70 million tons of products/materials can be transferred from Xinjiang to other areas of the PRC per annum. Although the Group intends to produce products with higher margin and is mainly target to sell the products in Xinjiang and other provinces located in the vicinity, there is no assurance that the Group will have sufficient access to the railway networks and any delays in transporting of the Group’s products to any area outside Xinjiang as a result of insufficient railway capacity could have a material adverse effect on its results of operations.

The fluctuations in market demand for and supply of our products may adversely affect our financial performance

Currently, save for the Fourth Plant which is under construction and expected to start operation in FY2013, the Group owns three production plants which are located in Xinxiang County, Henan Province, the PRC, and have an aggregate annual production capacity of 1.25 million tons for urea, 750,000 tons of compound fertiliser and 200,000 tons for methanol. After commencement of operation of the Fourth Plant in FY2013, the Group’s aggregate production capacity of urea will increase to over 2 million tons. After the Proposed Expansion, the Group’s aggregate annual production capital for urea will increase from approximately 2.1 million tons to 2.58 million tons (among which approximately 0.30 million tons of urea will be used to produce 100,000 tons of

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LETTERS TO SHAREHOLDERS

melamine, and 50,000 tons of urea will be used to produce 150,000 tons of compound fertiliser), and its aggregate annual production capacity for compound fertiliser will increase from 750,000 tons to 900,000 tons.

However, during the normal course of business, the Group is exposed to fluctuations in supply and demand, which have historically had and could in the future have significant effects on the process of the Group’s products, and in turn, the Group’s operating results and financial conditions. Market demand for urea, compound fertiliser or other fertiliser products depends largely on key factors such as general economic conditions, cyclical trends in end-consumer market, agricultural requirements for fertiliser, government policies for the agricultural industry and weather conditions in the PRC. Accordingly, significant fluctuation in the market demand for urea or other fertiliser products may result in a decline in the prices of the Group’s products, and hence the Group’s business and financial performance may be materially and adversely affected.

Cessation of favourable government policies relating to the Group’s industry and products will have an adverse impact on its net profit

Agriculture is the main form of livelihood for a large part of the population in the PRC. As fertilisers constitute a major cost component in the PRC’s agricultural industry, and to help the farmers and consumers, the PRC government has been subsidising and regulating the chemical fertiliser industry through a series of government policies, including the “Zhongyang Sannong” policies which were promulgated since 2003.

Currently, there are two main preferential policies provided to the PRC chemical fertiliser industry which benefit the Group:

(i) Preferential VAT policy

Between 1 January 2006 and up till the Latest Practicable Date, sales of nitrogenous fertiliser and ammonia solution were exempt from VAT, as part of the “Zhongyang Sannong” policies promulgated by the PRC government. Methanol and liquid ammonia were subject to VAT of 17.0%.

(ii) Electricity subsidy

The Group requires large amounts of electricity for its production processes. Its current production facilities consumed in excess of 100 million kilowatts per hour of electricity per annum. As such, electricity costs constitute a substantial part of the Group’s cost of sales. As part of the policies implemented by the PRC government to assist fertiliser products, the Group is able to enjoy a reduced average rate of approximately RMB0.40 per kilowatts per hour of electricity, compared to the national average rate of approximately RMB0.59 per kilowatts per hour of electricity for industrial power usage during FY2011.

Accordingly, the Group’s business, results of operations and profitability will be adversely affected in the event of total or partial removal of such tax exemptions, subsidies and discounts and/or adverse changes to the prevailing favourable government policies and regulations.

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LETTERS TO SHAREHOLDERS

Operation of coal mines are subject to policies, laws and regulations in the PRC

The Group acquired Manas Tianli Coal Co., Ltd. (瑪納斯天利煤業有限責任公司) (“ Tianli ”), a private company incorporated in the PRC in 2004 with limited liability, in 2011. Tianli is principally engaged in coal mining in Xinjiang and the sales of coal, and holds a coal mining license for an approved mining area of 1.343 square kilometres and an annual production capacity of approximately 90,000 tons.

Exploration and mining of the coal resources in the PRC are subject to a range of PRC laws, regulations, policies, standards and requirements in relation to, amongst other things, mine exploration, development, production, taxation, labour standards, occupational health and safety, waste treatment and environmental protection and operation management. Any changes to these laws, regulations, policies, standards and requirements or to the interpretation or enforcement thereof may increase the Group’s operating costs and thus adversely affect the results of operations.

There is no assurance that the Group will be able to comply with any new PRC laws, regulations, policies, standards and requirements applicable to the exploration and mining industry or any changes in existing laws, regulations, policies, standards and requirements economically or at all. Further, any laws, regulations, policies, standards and requirements may also constrain the future development of the Group and may adversely affect its profitability.

The Group may not have suitable personnel for operations of Tianli

In order to manage Tanli and further develop the exploration and operation of the coal mine currently operated by Tanli in future, the Group may be required to appoint additional personnel who are suitable and have adequate qualification in mining and exploration industry. In the event that the Group cannot recruit suitable personnel or retain suitable personnel who current work in Tianli, the future operations and development of the Group may be adversely affected.

The Group may require additional funding for its business operation

In view of the significantly increased business scale, the Group may need to raise additional funds as its working capital and to service its increased debts. If the Group requires additional funding, it may have to raise capital by issuing equity or debt securities or by borrowing from banks or other sources. However, it cannot assure that any additional financing it may need will be available on terms favourable to the Group. In addition, any additional capital raised through the sale of equity may dilute your equity interest in the Group, while an issue of shares or other securities in the case of rights issue requires additional investment by shareholders. In the event that the Group cannot secure additional fund when required to meet its business requirement, its business and financial performance may be adversely affected.

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LETTERS TO SHAREHOLDERS

The production process may be disrupted by various factors

The Group’s business may be affected by disruptions to the production plants due to causes such as fires, floods, natural calamities, or power failures, resulting in significant damage to the production facilities and our inventory. In the event that the Group is unable to resume production on a timely basis or obtain timely replacement of damaged equipment or inventory, this will have a significant adverse effect on its operations and financial results. Further, the Group’s production activities involve significant flammable processes, and one of its main products, methanol, is susceptible to explosion. In the event of a major fire or explosion, the Group may not be adequately insured for all losses. Accordingly, the occurrence of a major fire or explosion could adversely affect the Group’s financial performance.

The Group’s business is subject to environmental protection laws and regulations

The Group is required to comply with the environmental protection laws and regulations promulgated by the state and local governments of the PRC and the prescribed standards relating to the discharge of waste water, solid wastes, effluent and gases. These regulations empower local governments to impose penalties on those companies which do not comply with these laws and regulations. The nature of the Group’s business is such that waste water, waste gas and coal slags are regularly discharged as a result of its production processes. The production plants are installed with waste treatment facilities to treat such discharges. Notwithstanding the above, there can be no assurance that the Group will at all times be in full compliance with the laws and regulations promulgated by the state and local governments of the PRC. Any failure by the Group to discharge the waste generated from its production processes in accordance with the relevant laws and regulations could subject the Group to warnings, fines or other penalties imposed by the environmental protection administration or the relevant government department with power to conduct environmental supervision and management in the PRC. Should the fines or penalties be severe, the Group’s business or profitability may be adversely affected. If the Group’s business operations result in environmental pollution, it will also be obliged to rectify the harm caused to the environment and pay compensation to the entity or individual that suffered direct losses as a result of the pollution. Further, should the production plants fail to meet other applicable environmental protection requirements from time to time, the Group may be subject to fines and be required to take remedial measures. Accordingly, its business and profitability may be adversely affected.

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LETTERS TO SHAREHOLDERS

The Group may not have sufficient insurance coverage

The Group has maintained insurance coverage for certain fixed assets and inventories owned by our Group. Nevertheless, many of its raw materials, production processes and certain finished products are potentially destructive and dangerous in unexpected, uncontrolled or catastrophic situations, including fires, explosions, operating hazards, natural disasters and major equipment failures where the Group is unable to obtain insurance coverage at a reasonable cost or at all. In the event an accident or natural disaster occurs in the future, it may cause substantial property damage and disruption to the Group’s operations and personal injuries, and our insurance coverage may be insufficient to cover such loss. Any uninsured loss or loss in excess of insured limits may render the Group suffering from damage to its production capacity and any future revenues which could materially and adversely affect its business and financial performance.

In addition, the Group currently does not maintain any insurance policies against loss of key personnel and product liability claims. If such events were to occur, the Group’s business and financial performance may be materially and adversely affected.

The production plants may be affected by power shortages

The production plants consume substantial amounts of electricity. The Group may experience occasional temporary power shortages that are beyond its control due to thunderstorms and other natural events. Further, the production activities may be severely affected if there are any restrictions imposed by the PRC authorities due to shortages of power in the PRC which result in any disruption to the supply of electricity to the production plants; or the production costs may increase if there are increases in the price of electricity. Accordingly, these factors may have an impact on the Group’s production and thus adversely affect its business and financial performance.

Removal of incentives for the agricultural industry may adversely affect the Group’s business

Currently, the PRC government provides a number of incentives, such as free schooling and tax rebates, to farmers in the PRC and this allows them to have a higher disposable income which can be spent on purchasing fertilisers for their crops. If such incentives are reduced or removed, this could affect the average farmer’s financial ability to purchase fertilisers and correspondingly, the Group’s business results of operations and profitability may be adversely affected.

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LETTERS TO SHAREHOLDERS

A significant or prolonged economic downturn, in particular, a slowdown in the agricultural industry in the PRC could have a material adverse effect on the Group’s business and financial results

The Group’s core business is the production and sale of fertilisers to the agricultural industry and its financial results are affected by the level of business activity of the Group’s customers, which in turn is affected by the level of economic activity in the industries and markets that they serve. A decline in the level of business activity of the Group’s customers could have a material adverse effect on our revenues and profit. Whilst the Group will manage its expenses as a percentage of revenues, it may not be able to successfully manage the increase in costs in a timely manner or control its costs to maintain the profitability. Currently, all of our sales are made within the PRC. Accordingly, a prolonged economic downturn or any significant slowdown in the economy of the PRC, in particular, a slowdown in activity of the agricultural sector in the PRC may lead to a slowdown in the Group’s customers’ business operations and consequently, may result in its customers terminating their orders with the Group or requiring less of our products. The decrease in demand for fertilisers and increased competition would also result in a fall in the price of the Group products. This will have a material adverse effect on the Group’s business, financial condition and results of operations.

Changes in the PRC government’s rules and regulations will have a significant impact on the Group’s business

Currently, the Group’s business and operations in the PRC entail the procurement of licences and permits from the relevant authorities. Thus, its business and operations in the PRC are subject to the PRC government’s rules and regulations. From time to time, changes in the rules and regulations or the implementation thereof may require the Group to obtain additional approvals and licences from the PRC authorities for the conduct of the Group’s operations in the PRC, or it may be required to renew our existing approvals and licences. In the event of such an occurrence, the Group may need to incur additional expenses in order to comply with such requirements. This will in turn affect its financial performance as its business costs will increase. Further, there can be no assurance that such approvals or licences will be granted to the Group promptly or at all. If the Group experiences delay in or is unable to obtain such required approvals or licences, the Group’s operations and business in the PRC, and hence its overall financial performance, will be adversely affected.

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LETTERS TO SHAREHOLDERS

The Group’s operating results and financial conditions are highly susceptible to changes in the PRC’s political, economic and social conditions as its revenue is currently wholly derived from the Group’s operations in the PRC

Since 1978, the PRC government has undertaken various reforms in its economic framework. Such reforms have resulted in economic growth for the PRC in the last two decades. However, many of the reforms are unprecedented or experimental, and are expected to be refined and modified from time to time. Other political, economic and social factors may also lead to further reforms. This refinement and adjustment process may consequently have a material impact on the Group’s operations in the PRC or a material adverse impact on its financial performance. The Group’s results and financial condition may be adversely affected by changes in the PRC’s political, economic and social conditions and by changes in policies of the PRC government or changes in laws, regulations or the interpretation or implementation thereof.

6. BUSINESS OVERVIEW

The Group is one of the leading coal-based urea and compound fertiliser producers in the PRC. The Group’s existing annual processing capacity is approximately 1.25 million tons for urea and 750,000 tons of compound fertiliser. Upon commencement of operation of the Fourth Plant, the Group’s annual production capacity of urea will increase to approximately 2.1 million tons. The expansion of production capacity for the two major products will effectively turn the Group into a large chemical fertiliser production base with an annual production capacity of approximately 3 million tons.

The upgrade of technology (i.e. “gasification of coal power” (replacing the expensive anthracite coal with the cheaper coal power)) will also enhance the Group’s competitive edge. A dedicated railway built by the Group also commenced operation in 2011, and has started to contribute in lowering the transportation cost of the Group.

Furthermore, the current production hub of the Group is situated at Xinxiang Economic and Technology Development Zone, Henan Province of the PRC, which is bolstered by a comprehensive network of railway lines and highways. This offers the Group close proximity to the majority of its customers, as well as to coal-rich Shanxi Province where most of its coal suppliers are based. With the Proposed Expansion, the Group will be able to develop its business and exploit coal resources in Xinjiang, and obtain a stable supply of coal for its production process and reduce the effects of any volatility in coal prices against the production costs of the Group.

Due to the recent PRC government’s policies, which are favourable to the agricultural related industries, and the deregulation of the chemical fertiliser industry, the Directors believe that the chemical fertiliser industry would continuously experience a steady growth and a consolidation process in the coming future. In addition, due to excessive demands for natural gas in the PRC, the PRC government has implemented limitations on the use of natural gas to produce synthetic ammonia, one of the materials for the production of urea. As the Group is one of the largest coal-based manufacturers of urea in the PRC, the Directors believe that the Group could capitalise on the upside trend of the industry and benefit from the potential consolidation.

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LETTERS TO SHAREHOLDERS

After the Proposed Expansion, and with the commencement of operation of the Fourth Plant, the Group will have an annual production capacity of over 2.58 million tons for urea among which approximately 0.30 million tons of urea will be used to produce 100,000 tons of melamine, and 50,000 tons of urea will be used to produce 150,000 tons of compound fertiliser), 900,000 tons of compound fertiliser, 200,000 tons of methanol and 100,000 tons of melamine. The Company believes that, with the significant increase in scale and range of products, the Group will be able to attract new and larger customers, maintain customer confidence, increase its customer base, and enjoy cost saving attributed by lower raw material costs.

7. INDUSTRY OVERVIEW

Information under this section is principally extracted from the Feasibility Report for the purposes of incorporation in this Circular and issued to the Company in March 2011. The Feasibility Report contains certain statements that are “forward-looking” and are based on underlying assumptions containing variables that may have changed since the date of issue. As such, these forward-looking statements speak only as of the date of the Feasibility Report and the Company does not guarantee that the information contained herein is still correct as of the date of this Circular. Please refer to paragraph 15.1 of this Circular for details of the consent obtained from the Consultant Company. The Consultant Company was set up in 1991 by the Development and Reform Commission of Henan Province. It is the only consultant company holding level-A qualification and providing comprehensive consultation services in Henan Province, and a member of International Federation of Consulting Engineers and China Consulting Engineers ( 中國工程咨詢協會 ). It has also obtained the Comprehensive Level-A Qualification ( 綜合甲級咨詢資格證書 ) issued by the NDRC. The Consultant Company has been engaged in analysing the development trends, industrial movements and technological advancement in various industries, and providing feasibility report for different projects.

General overview

As a leading agriculture country, the PRC government has been dedicated to enhancing and supporting the development of the agricultural industry. As chemical compounds which contain plant nutrients, the application of fertiliser can promote plant and fruit growth and to achieve optimal yield and quality, and the government’s support on agriculture industry in turn boost the development of fertiliser industry.

Over the past few years, the PRC government has realised the existing problems arising from the composition structure of raw materials for nitrogenous fertiliser industry. Currently, most of the major production facilities of nitrogenous fertiliser in the PRC are using residual oil and naphtha as the main raw materials, and most of the small to mid sized nitrogenous fertiliser producers are using anthracite rock coal as their main raw material. Compared to sand coal, these raw materials are restricted by their limited resources, price fluctuations, and are comparably not as cost effective and environmental friendly.

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LETTERS TO SHAREHOLDERS

Pursuant to the Feasibility Report, Manas County is located at the economic centre of Tianshan North Slope, Xinjiang. It has a proved coal reserve of approximately 15.8 billion tons and a proved natural gas reserve of approximately 12.8 billion cubic metres. In addition, the biggest power station in the western area in the PRC, Manas Electronic Branch, Xinjiang Tianshan Electronic Corporation Limited (新疆天山電力股份有限公司瑪納斯發電分公司), is located in the west industrial park in Manas County, which can provide sustainable electricity supply to the new fifth plant.

Urea Industry Outlook

Urea is a neutral fertiliser that can be used for all types of soil and for any crops as a major fertiliser. It can also be used for base fertiliser or additional fertilisers and applied in dry farmlands and paddy fields, as well as for compound fertiliser and melamine production. Urea is widely applied in agricultural and industrial sectors. In China, approximately 90% of the urea is used as fertiliser in agricultural sector. With the government’s support and development of the agriculture industry, the consumption rate of urea increased by 2.4% year-by-year, and the demand for urea applied in industrial sector increased by 8% to 10% year-by-year over the past few years. With the continual development of the agricultural industry and the increase in demand of melamine, a downstream product of urea, it is expected that the demand for urea in China will continue to increase in the next few years.

According to the Feasibility Report, the PRC government has commenced the restructuring of nitrogenous fertiliser industry by (i) relocating or expanding the production plant of nitrogenous fertiliser area with abundant raw materials (i.e. Inner Mongolia, Yunnan Province, Xinjiang, and Guizhou Province); (ii) utilising the tail gas and waste water arising from the production of urea for the production of melamine (this is to enhance the utilisation rate of the raw materials and is also environmental friendly); and (iii) continually consolidating the fertiliser industry.

Compound Fertiliser Industry Outlook

Compound fertiliser comprises at least two of the three primary ingredients, namely nitrogen, phosphorous and potassium. It contains a higher lever of nutrients with balanced supply of nutrient components as compared to single element fertilisers. Accordingly, more and more compound fertilisers are produced to fulfil the demands in agricultural and industrial sectors. Currently, approximately 70% to 80% fertilisers are compound fertilisers in the developed countries. The PRC compound fertiliser industry has also developed rapidly over the past few years.

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LETTERS TO SHAREHOLDERS

Melamine Industry Outlook

Melamine is an important basic chemical organic material. It is a downstream product of urea and is widely used in paint, plyboard (層壓板), decoration board (裝飾板), bond (粘合劑) and moulding products (模塑製品) industries. Save for the abovementioned industries, new technologies were introduced to the melamine industry to use it in construction of railways and airports, which may cost approximately 10,000 to 20,000 tons melamine per annum.

Currently, the demand for melamine has increased by 6% year-by-year. In 2010, the demand for melamine was 1.75 million tons, out of which 0.83 million tons was from Asia, Africa and Middle-East area. According to the Feasibility Report, the demand for melamine will continue to increase in the next four years, and is expected to reach approximately 2 million tons in 2015.

In China, the melamine industry has also developed rapidly since 2005. Pursuant to the Feasibility Report, the average production capacity, production volume and the export volume of melamine industry increased by more than 10% per annum over the past few years. In 2010, China produced approximately 0.62 million tons of melamine and it was anticipated that the aggregate production volume of melamine in the PRC will be approximately 1.4 million tons by end of 2011. Currently, there are approximately 30 melamine producers in the PRC, among which 14 of the producers have an annual production capacity of more than 30,000 tons. The PRC government is also dedicated to consolidating the melamine industry to increase the average annual production capacity of a single producer to more than 50,000 tons. It is expected that Sichuan Province, Henan Province, Shanxi and Shandong Provinces and Xinjiang will become the major production bases in China after 2010.

Melamine is a product with high profit margin. Pursuant to the Feasibility Report, the profit of melamine is approximately RMB2,000 per ton, 10 to 13 times of the profit of urea. Furthermore, urea and melamine co-production can reduce the costs of production and is environmentally friendly as the waste water and tail gas arising from the production of urea can be utilised for the production of melamine.

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LETTERS TO SHAREHOLDERS

8. SHAREHOLDING INTERESTS OF DIRECTORS AND SUBSTANTIAL SHAREHOLDERS

8.1 (i) Directors’ Interests

The interests of the Directors in the Shares as recorded in the Register of Directors’ Shareholdings as at the Latest Practicable Date are set out below:

	Direct Interest		Deemed Interest
	Number of		Number of
	Shares	%	Shares	%
Directors
Liu Xingxu(1)	600,000	0.06	343,376,000	34.34
Yan Yunhua(2)	300,000	0.03	297,734,000	29.77
Li Buwen(1)	–	–	54,940,000	5.49
Ong Kian Guan	100,000	0.01	–	–
Li Shengxiao	–	–	–	–
Ong Wei Jin	–	–	–	–
Lian Jie	–	–	–	–

Notes:

• (1) Liu Xingxu is deemed or taken to be, interested in 343,376,000 Shares (approximately 34.34% of the issued share capital of the Company) all of which are held by Pioneer Top. Pioneer Top is an investment holding company established in the British Virgin Islands, of which Mr. Liu is the registered owner of 100% shareholding in Pioneer Top. Mr. Liu beneficially owns approximately 42% of the equity interest in Pioneer Top, and holds approximately 58% of the equity interest in Pioneer Top on trust for 7 beneficiaries, including approximately 16% for Li Buwen, an executive Director, and approximately 7% for Li Yushun, 7% for Ru Zhengtao, 7% for Wang Nairen and 7% for Zhang Qingjin, the Group’s senior management, and approximately 7% for Zhu Xingye and 7% for Shang Dewei, the employees of the Group. Mr. Liu has the absolute discretion to exercise the voting rights held by Pioneer Top in the Company in accordance with a trust agreement dated 26 July 2006.

• (2) Ms. Yan is deemed or taken to be, interested in 297,734,000 Shares (approximately 29.77% of the issued share capital of the Company) all of which are held by Go Power. Go Power is an investment holding company established in British Virgin Islands, of which Ms. Yan is the registered owner of 100% shareholding in Go Power. Ms. Yan beneficially owns approximately 12.74% of the equity interest in Go Power, and holds approximately 87.26% of the equity interest in Go Power on trust for 1,463 beneficiaries. Ms. Yan has the absolute discretion to exercise the voting rights held by Go Power in the Company in accordance with the trust agreement dated 26 July 2006 and the trust confirmation dated 16 June 2009.

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LETTERS TO SHAREHOLDERS

(ii) Directors’ and chief executive’s interests pursuant to the SFO

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company and their respective associates in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO which have been notified to the Company and the SEHK pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which any such Director or chief executive was taken or deemed to have under such provisions of the SFO), the Model Code of the Hong Kong Listing Rules and which have been recorded in the register maintained by the Company pursuant to Section 352 of the SFO were as follows:

				Number of	Approximate
				Shares directly	percentage
Name of	Name of			or indirectly	of issued share
Director	Corporation	Capacity/nature of interests		held	capital
					(%)
Liu Xingxu(1)	The Company	Deemed interest and interest		343,376,000	34.34
			of controlled company
Liu Xingxu	The Company	Registered and beneficial		600,000	0.06
			owner
Yan Yunhua(2)	The Company	Deemed interest and interest		297,734,000	29.77
			of controlled company
Yan Yunhua	The Company	Registered and beneficial		300,000	0.03
			owner
Li Buwen(1)	The Company	Deemed interest and interest		54,940,000	5.49
			of controlled company
Ong Kian Guan	The Company	Registered and beneficial		100,000	0.01
			owner
Li Shengxiao	–	–		–	–
Ong Wei Jin	–	–		–	–
Lian Jie	–	–		–	–

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LETTERS TO SHAREHOLDERS

Notes:

• (1) Liu Xingxu is deemed or taken to be, interested in 343,376,000 Shares (approximately 34.34% of the issued share capital of the Company) all of which are held by Pioneer Top. Mr. Liu is the registered owner of 100% shareholding in Pioneer Top of which beneficially owns approximately 42% of the equity interest in Pioneer Top and holds approximately 58% of the equity interest in Pioneer Top on trust for 7 beneficiaries, including approximately 16% for Li Buwen under a trust agreement dated 26 July 2006.

• (2) Yan Yunhua is deemed or taken to be, interested in 297,734,000 Shares (approximately 29.77% of the issued share capital of the Company) all of which are held by Go Power. Ms. Yan is the registered owner of 100% shareholding in Go Power, of which Ms. Yan beneficially owns approximately 12.74% of the equity interest in Go Power, and holds approximately 87.26% of the equity interest in Go Power on trust for 1,463 beneficiaries. Ms. Yan has the absolute discretion to exercise the voting rights held by Go Power in the Company in accordance with the trust agreement dated 26 July 2006 and the trust confirmation dated 16 June 2009.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, chief executive of the Company nor their respective associates had or was deemed to have any interests or short position in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO), which has been recorded in the register maintained by the Company pursuant to Section 352 of the SFO or which has been notified to the Company and the SEHK pursuant to the above mentioned Model Code of the Hong Kong Listing Rules.

8.2 (i) Substantial Shareholders’ Interests pursuant to the Act

The interests of the Substantial Shareholders of the Company in the Shares as recorded in the Register of Substantial Shareholders as at the Latest Practicable Date are set out below:

	Direct Interest	Direct Interest	Deemed Interest
	Number of		Number of
	Shares	%	Shares	%
Substantial
Shareholders
Pioneer Top	343,376,000(1)	34.34	–	–
Go Power	297,734,000(2)	29.77	–	–
Liu Xingxu	600,000	0.06	343,376,000(1)	34.34
Yan Yunhua	300,000	0.03	297,734,000(2)	29.77

Notes:

• (1) Pioneer Top is a company incorporated in British Virgin Islands. The Chairman and CEO, Mr. Liu Xingxu holds 42% interest in Pioneer Top, with the remaining 58% held in trust by Mr. Liu Xingxu for the beneficiaries under a trust agreement dated 26 July 2006. The beneficiaries under the trust agreement are Mr. Li Buwen, with 16% equity interest, Mr. Li Yushun, Mr. Ru Zhengtao, Mr. Wang Nairen, Mr. Zhang Qingjin, Mr. Zhu Xingye and Mr. Shang Dewei, with 7% equity interest respectively. The shareholdings of Pioneer Top are held through the nominee, HKSCC Nominees Limited. Pursuant to the trust agreement, Mr. Liu Xingxu has the absolute discretion to exercise the voting rights held by Pioneer Top in the Company.

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LETTERS TO SHAREHOLDERS

• (2) Go Power is a company incorporated in British Virgin Islands. The CFO and Executive Director, Madam Yan Yunhua holds 12.74% interest in Go Power, with the remaining 87.26% held in trust by Madam Yan Yunhua for the beneficiaries under a trust agreement dated 26 July 2006 and a trust confirmation dated 16 June 2009. The beneficiaries under the trust agreement and the trust confirmation comprise a total of 1,463 current and past employees and certain past and present customers/suppliers of the Group. The shareholdings of Go Power are held through the nominee, HKSCC Nominees Limited. Pursuant to the trust agreement and the trust confirmation, Madam Yan Yunhua has the absolute discretion to exercise the voting rights held by Go Power in the Company.

(ii) Substantial Shareholders’ Interests pursuant to the SFO

As at the Latest Practicable Date, insofar as is known to the Directors and chief executive of the Company, the following persons who had an interest or short position in the shares and underlying shares of the Company which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or had any options in respect of such capital.

				Approximate	Approximate
			Number of	percentage
Name of the			Shares directly	of issued share
Substantial	Name of		or indirectly	capital of
Shareholder	Corporation	Capacity/nature of interests	held	the Company
					(%)
Pioneer Top(1)	The Company	Registered and beneficial	343,376,000		34.34
		owner
Liu Xingxu(1)	The Company	Deemed interest and interest	343,376,000		34.34
		of controlled company
Liu Xingxu	The Company	Registered and beneficial	600,000		0.06
		owner
Go Power(2)	The Company	Registered and beneficial	297,734,000		29.77
		owner
Yan Yunhua(2)	The Company	Deemed interest and interest	297,734,000		29.77
		of controlled company
Yan Yunhua	The Company	Registered and beneficial	300,000		0.03
		owner

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LETTERS TO SHAREHOLDERS

Notes:

• (1) Liu Xingxu is deemed or taken to be, interested in 343,376,000 Shares (approximately 34.34% of the issued share capital of the Company) all of which are held by Pioneer Top. Mr. Liu is the registered owner of 100% shareholding in Pioneer Top of which beneficially owns approximately 42% of the equity interest in Pioneer Top and holds approximately 58% of the equity interest in Pioneer Top on trust for 7 beneficiaries, including approximately 16% for Li Buwen under a trust agreement dated 26 July 2006.

• (2) Yan Yunhua is deemed or taken to be, interested in 297,734,000 Shares (approximately 29.77% of the issued share capital of the Company) all of which are held by Go Power. Ms. Yan is the registered owner of 100% shareholding in Go Power, of which Ms. Yan beneficially owns approximately 12.74% of the equity interest in Go Power, and holds approximately 87.26% of the equity interest in Go Power on trust for 1,463 beneficiaries. Ms. Yan has the absolute discretion to exercise the voting rights held by Go Power in the Company in accordance with the trust agreement dated 26 July 2006 and the trust confirmation dated 16 June 2009.

Save as disclosed above and insofar as is known to the Directors and chief executive of the Company, as at the Latest Practicable Date, there were no other persons who had an interest or short position in the Shares and underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or were required to be notified to the Company and the SEHK pursuant to Section 324 of the SFO, or who is, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or had any options in respect of such capital.

None of our Directors, Substantial Shareholders and their associates have any interests in the Proposed Expansion.

9. IRREVOCABLE UNDERTAKINGS BY THE CONTROLLING SHAREHOLDERS TO VOTE IN FAVOUR OF THE PROPOSED EXPANSION

Our controlling shareholders, Mr. Liu Xingxu and Ms. Yan Yunhua, who hold in aggregate 34. 4% and 29.8% of the deemed interests in the Company, through Pioneer Top and Go Power, respectively. Having considered the commercial viability and risks of the Proposed Expansion, each of Mr. Liu Xingxu and Ms. Yan Yunhua have given an irrevocable undertaking to the Company that he/she will vote in favour of the Proposed Expansion at the EGM.

Mr. Liu Xingxu is deemed to be interested in the shares held by Pioneer Top by the virtue of the fact that he beneficially owns approximately 42% of the equity interest in Pioneer Top, and has the absolute discretion to exercise the voting rights held by Pioneer Top in the Company in accordance with a trust agreement dated 26 July 2006.

Ms. Yan Yunhua is deemed to be interested in the shares held by Go Power by the virtue of the fact that she beneficially owns approximately 12.74% of the equity interest in Go Power, and has the absolute discretion to exercise the voting rights held by Go Power in the Company in accordance with the trust agreement dated 26 July 2006 and the trust confirmation dated 16 June 2009.

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LETTERS TO SHAREHOLDERS

10. DIRECTORS’ RECOMMENDATIONS

The Directors, having carefully considered the terms and rationale of the Proposed Expansion, are of the view that the Proposed Expansion is in the interests of the Group and is not prejudicial to Shareholders as a whole. Accordingly, the Directors recommend that Shareholders vote in favour of the resolution to be proposed at the EGM.

11. EXTRAORDINARY GENERAL MEETING

The EGM, notice of which is set out on page 39 of this Circular, is being convened at Amara Singapore Hotel, 165 Tanjong Pagar Road, Singapore 088539 on 26 June 2012 at 9 a.m. for the purpose of considering and, if thought fit, passing, with or without any modifications, the resolution(s) set out therein.

Your attention is drawn to the notice of EGM, which is set out on page 39 of this Circular.

12. ACTION TO BE TAKEN BY SHAREHOLDERS

Shareholders who are unable to attend the EGM and wish to appoint a proxy to attend and vote at the EGM on their behalf will find attached to this Circular a Proxy Form which they are requested to complete, sign and return in accordance with the instructions printed thereon as soon as possible and in any event so as to arrive at the registered office of the Company not less than 48 hours before the time fixed for the EGM. The sending of a proxy form by a Shareholder does not preclude him from attending and voting in person at the EGM if he finds that he is able to do so. In such event, the relevant proxy form will be deemed to be revoked.

13. DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors collectively and individually accept full responsibility for the accuracy of the information given in this Circular and confirm after making all reasonable enquires that, to the best of their knowledge and belief, this Circular constitutes full and true disclosure of all material facts about the Proposed Expansion, the Company and its subsidiaries, and the Directors are not aware of any facts the omission of which would make any statement in this Circular misleading.

Where information contained in this Circular has been extracted from published or otherwise publicly available sources, the sole responsibility of the Directors has been to ensure that such information has been accurately and correctly extracted from these sources and/or reproduced in this Circular in its proper form and contexts.

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LETTERS TO SHAREHOLDERS

14. GENERAL AND STATUTORY INFORMATION

14.1 Material Contracts

Save as disclosed on SGXNET and contracts in relation to the Proposed Expansion, there are no material contracts, which are not entered into in the ordinary course of business by the Company or any subsidiary of the Group, for the period of two years before the date of the Circular.

14.2 Litigation

Save as disclosed on SGXNET, neither the Company, nor its subsidiaries is engaged in any litigation as plaintiff or defendant in respect of any claims or amounts which are material in the context of the financial position or the business of the Company or its subsidiaries and the Directors have no knowledge of any proceedings which are pending or threatened against the Company or its subsidiaries or of any facts likely to give rise to any litigation, claims or proceedings which might materially affect the financial position or business of the Company or its subsidiaries.

14.3 Material Adverse Change

Save as disclosed in this Circular, the Directors are not aware of any event which has occurred since 31 December 2011 (being the end of the period covered by the most recent financial statements of the Group) to the Latest Practicable Date which may have a material effect on the financial or trading position and results of our Group.

14.4 Share Capital

As at the Latest Practicable Date, there is only one class of shares in the capital of the Company, being our shares which are in registered form. The rights and privileges attached to our Shares are stated in the Articles of the Company. There are no founder, management or deferred shares, the Shares owned by the Directors and controlling shareholders do not carry any different voting rights.

There has not been any public take-over offer, by a third party in respect of our Shares or by the Company in respect of the shares of another corporation, which has occurred during the last and current financial year.

There were no changes in the issued and paid-up ordinary share capital of the Company and its subsidiaries for cash or for a consideration other than cash during the last two years preceding the date of this Circular.

There are no shares in the Company that are held by or on behalf of the Company or by its subsidiaries.

Save as disclosed in the section “Shareholding Interests of Directors and Substantial Shareholders” of this Circular, the Company is not directly or indirectly owned or controlled by another corporation, any government or other natural or legal person whether severally or jointly.

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LETTERS TO SHAREHOLDERS

There is no known arrangement the operation of which may, at a subsequent date, result in a change of control of the Company.

15. MISCELLANEOUS

15.1 Experts and Consents

The Legal Adviser to the Company on Singapore Law, the Legal Adviser to the Company on Hong Kong Law, the Legal adviser to the Company on the PRC Law and the Consultant Company, in respect of the Proposed Expansion have each given and have not withdrawn their respective written consents to issue this Circular with the inclusion of its letters or reports or their respective names and references to their respective names in the forms and context in which they respectively appear in this Circular and to act in such respective capacities in relation to this Circular.

15.2 Documents available for inspection

Copies of the following documents may be inspected at the registered office of the Company at 333 North Bridge Road, #08-00 KH KEA Building, Singapore 188721, and the office of the Hong Kong company secretary, 20/F, Alexandra House, 18 Chater Road, Central, Hong Kong, during normal business hours for three (3) months from the date hereof:

• (a) The M&A;

• (b) The annual report of the Company for FY2011;

• (c) The Feasibility Report; and

• (d) The valuation report prepared by Xinjiang Hongchang Real Estate Appraisal Co., Ltd. (新疆宏昌房地產評估有限責任事務所) dated 12 March 2012.

Completion of the Proposed Expansion and the transactions contemplated thereunder may or may not take place. Shareholders and potential investors should exercise caution when dealing in the Shares. Where appropriate, the Company will make further disclosure or obtain further approval(s) from the Shareholders in relation to the Proposed Expansion in accordance with the requirements under the Hong Kong Listing Rules and Singapore Listing Manual.

Yours faithfully, For and on behalf of the Board of Directors China XLX Fertiliser Ltd. Mr. Liu Xingxu Chief Executive Officer

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NOTICE OF EXTRAORDINARY GENERAL MEETING

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(A limited liability company incorporated in the Republic of Singapore) (Company Registration No. 200610384G) Singapore Stock Code: B9R.SI Hong Kong Stock Code: 01866

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting (“ EGM ”) of the Members of China XLX Fertiliser Ltd. (the “ Company ”) will be held at Amara Singapore Hotel, 165 Tanjong Pagar Road, Singapore 088539 on 26 June 2012 at 9 a.m. for the purpose of considering and, if thought fit, passing with or without any modifications the following ordinary resolutions:

THE PROPOSED CONSTRUCTION OF THE FIFTH PRODUCTION PLANT AND EXPANSION OF PRODUCTION CAPACITY OF THE COMPANY (THE “PROPOSED EXPANSION”)

That :

• (a) approval be and is hereby given for the Company to carry out the proposed construction of the fifth production plant and expansion of its production capacity as details set out in the circular of the Company dated 31 May 2012 at an estimated cost of approximately RMB2.7 billion (or such higher cost or on such other terms as the Directors may decide, provided always that the Audit Committee of the Company is of the opinion that the Proposed Expansion is in the interests of the Group and is not prejudicial to the shareholders of the Company as a whole);

• (b) the Directors be and are hereby authorized to enter into any negotiations, agreement, contract, document or carry out all other actions in connection with or arising from the Proposed Expansion.

By Order of the Board China XLX Fertiliser Ltd. Mr. Liu Xingxu Chief Executive Officer

Singapore, 31 May 2012

• For identification purpose only

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

1. A Member of the Company entitled to attend and vote at the above EGM may appoint more than one proxy to attend and vote instead of him. A proxy need not be a member and where there is more than one proxy, the proportion (expressed as a percentage of the whole) of his shareholding to be represented by each proxy must be stated.

2. The instrument appointing a proxy shall, in the case of an individual, be signed by the appointer or his attorney, and in the case of a corporation shall be either under the common seal or signed by its attorney or an officer on behalf of the corporation.

3. The instrument appointing a proxy must be deposited at the Share Registrar’s office of the Company at KCK CorpServe Pte. Ltd., 333 North Bridge Road, #08-00 KH KEA Building Singapore 188721 (for Singapore shareholders) or Tricor Investor Services Limited, 26/F Tesbury Centre, 28 Queen’s Road East, Hong Kong (for Hong Kong shareholders), not less than forty-eight (48) hours before the time for holding the EGM.

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