CMON Limited — Proxy Solicitation & Information Statement 2002

Jul 5, 2002

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your securities in Shenyang Public Utility Holdings Company Limited, you should at once hand this circular and the accompanying form of proxy and reply slip to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

瀋 陽 公 用 發 展 股 份 有 限 公 司 SHENYANG PUBLIC UTILITY HOLDINGS COMPANY LIMITED

(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

MAJOR TRANSACTION

DISPOSAL OF AN APPROXIMATELY 99.37% INTEREST IN SHENYANG WATER COMPANY LIMITED AND

POSSIBLE CHANGE IN USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

Financial adviser

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Tai Fook Capital Limited

A notice convening an extraordinary general meeting of Shenyang Public Utility Holdings Company Limited to be held at 4th Floor, No. 14 Shisiwei Road, Heping District, Shenyang, the PRC on 20th August, 2002, at 9:00 a.m. is set out on pages 23 and 24 of this circular. Whether or not you are able to attend the meeting, please complete and return the enclosed reply slip and form of proxy in accordance with the instructions printed thereon to the office of the Company’s H share registrar in Hong Kong, Hong Kong Registrars Limited, at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as practicable but in any event for the reply slip, on or before 30th July, 2002, and for the form of proxy, not less than 24 hours before the time appointed for the holding of the extraordinary general meeting. Completion of the form of proxy will not preclude you from attending and voting at the extraordinary general meeting or any adjourned meeting or meetings thereof should you so wish.

5th July, 2002

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
The Disposal Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Information on Shenyang Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Reasons for and benefits of the Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Revised use of proceeds from the Public Offer
and proposed use of proceeds from the Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Business of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Appendix I – Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Appendix II – Business valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Appendix III – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23

– i –

DEFINITIONS

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

“associates”	has the meaning ascribed to it in the Listing Rules
“Board”	the board of Directors
“Company”	瀋陽公用發展股份有限公司(Shenyang Public Utility Holdings
	Company Limited), a joint stock limited company incorporated in
	the PRC with limited liability, the H shares of which are listed on
	the Stock Exchange
“Consideration”	the total consideration of RMB900 million (approximately HK$841
	million) payable by Zheng Xing in respect of the Disposal under
	the Disposal Agreement
“Directors”	the directors of the Company
“Disposal”	the disposal of the Company’s approximately 99.37% equity
	interest in Shenyang Water by the Company to Zheng Xing
	pursuant to the Disposal Agreement
“Disposal Agreement”	the conditional sale and purchase agreement dated 13th June, 2002
	entered into between the Company and Zheng Xing in relation to
	the Disposal
“Extraordinary General	an extraordinary general meeting of the Company to be convened
Meeting”	on 20th August, 2002 to consider and, if thought fit, approve (i)
	the Disposal; and (ii) the change in the use of proceeds raised
	from the Public Offer
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“H Share(s)”	overseas listed foreign invested shares in the issued share capital
	of the Company with a renminbi-denominated nominal value of
	RMB1.00 each, which are listed on the Stock Exchange and
	subscribed for and traded in Hong Kong dollars
“Latest Practicable Date”	3rd July, 2002, being the latest practicable date prior to the printing
	of this circular for ascertaining certain information for inclusion
	in this circular
“Listing Rules”	The Rules Governing the Listing of Securities on the Stock
	Exchange
“PRC” or “China”	the People’s Republic of China which for the purpose of this
	circular, excludes Hong Kong, Macau Special Administrative
	Region and Taiwan

– 1 –

DEFINITIONS

“Public Offer”	the issue of 420,400,000 H Shares for subscription by public
	investors at an issue price of HK$1.70 in December 1999
“Raw Water Purchase	the raw water purchase agreement entered into between SWGC
Agreement”	and Shenyang Water dated 21st November, 1999 relating to the
	purchase of raw water by Shenyang Water from SWGC
“Share(s)”	State Shares and H Shares
“Shareholder(s)”	the holder(s) of the Share(s)
“Shenyang”	Shenyang, Liaoning Province, the PRC
“Shenyang Municipal	瀋陽市人民政府(the Shenyang Municipal People’s Government)
Government”
“Shenyang Water”	瀋陽水業有限公司(Shenyang Water Company Limited), a
	company established in the PRC with limited liability in which
	the Company owns an approximately 99.37% equity interest
“SPU”	瀋陽公用集團有限公司(Shenyang Public Utility Group Company
	Limited), a company established in the PRC with limited liability
	and the existing controlling shareholder of the Company with an
	interest of approximately 58.8% in the issued share capital of the
	Company
“State Share(s)”	ordinary shares with a nominal value of RMB1.00 each in the
	share capital of the Company, issued by the Company to SPU
	credited as fully paid
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Supervisor(s)”	member(s) of the supervisory committee of the Company
“SWGC”	瀋陽市自來水總公司(Shenyang Water General Corporation), a
	company established in the PRC
“SWGC Water Supply	淨化水供應及購買協議(the Purified Water Supply and Purchase
Agreement”	Agreement) dated 6th August, 1999 and the supplementary
	agreement dated 24th November, 1999 entered into between SWGC
	and Shenyang Water in relation to Shenyang Water’s sale of
	purified water to SWGC
“Undertaking”	the undertaking of SPU to guarantee the performance of SWGC’s
	obligations under the SWGC Water Supply Agreement in favour
	of Shenyang Water

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DEFINITIONS

“Valuer” Sallmanns (Far East) Limited, a professional valuer which is independent of and not connected with the Directors, the promoters, the Supervisors, chief executive or substantial shareholders of the Company or any of its subsidiaries or an associate of any of them

“Zheng Xing” 瀋陽政興企業集團有限責任公司 (Shenyang Zheng Xing Enterprise Group Company Limited), a limited liability company established in the PRC in 1999 by and is under the supervisory control of the Shenyang Municipal Government, which is independent of and not connected with the Directors, the promoters, the Supervisors, chief executive or substantial shareholders of the Company or any of its subsidiaries or an associate of any of them “HK$” Hong Kong dollar “RMB” Renminbi, the lawful currency of the PRC

Unless otherwise specified in this circular, amounts dominated in RMB have been translated, for the purpose of illustration only, into Hong Kong dollars as follows:

HK$0.9346 = RMB1.00

No representation is made that any amounts in RMB or HK$ have been or could be converted at the above rate or at any other rates or at all.

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LETTER FROM THE BOARD

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瀋 陽 公 用 發 展 股 份 有 限 公 司 SHENYANG PUBLIC UTILITY HOLDINGS COMPANY LIMITED (a joint stock limited company incorporated in the People’s Republic of China with limited liability)

Executive Directors:

Mr. Zhang Guo Xiang (Chairman) Mr. Zhang Ying Jian Mr. Chan Kam Ling Mr. Wang Se Mr. Geng Jian Wei

Non-executive Directors: Mr. Lin Wen Bin Mr. Liu Gang Mr. Alain Charles Fabry

Independent non-executive Directors: Mr. Choy Shu Kwan, Wilson Mr. Cheng Wei

Legal Address: No. 24-1 Mo Chou Hu Street Shenyang Economic and Technological Development Zone Shenyang the PRC

Place of business in the PRC: No. 14 Shisiwei Road Heping District Shenyang the PRC

5th July, 2002

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION

DISPOSAL OF AN APPROXIMATELY 99.37% INTEREST IN SHENYANG WATER COMPANY LIMITED AND POSSIBLE CHANGE IN USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

INTRODUCTION

The Board announced on 13th June, 2002 that the Company entered into the Disposal Agreement whereby the Company agreed to sell, and Zheng Xing agreed to acquire, the approximately 99.37% equity interest held by the Company in Shenyang Water at a cash consideration of RMB900 million (approximately HK$841 million). Shenyang Water is engaged in the production and sale of purified water.

The Disposal constitutes a major transaction for the Company within the meaning of the Listing Rules. The purpose of this circular is to (a) provide you with details of the Disposal and certain information on the Group in compliance with the requirements of Chapters 14 and 19A of the Listing Rules; and (b) give you notice of the Extraordinary General Meeting to seek the approval of the Shareholders to (i) the Disposal as contempleted in the Disposal Agreement; and (ii) the change in use of proceeds raised from the Public Offer.

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LETTER FROM THE BOARD

THE DISPOSAL AGREEMENT

Date

13th June, 2002

Parties

Vendor: the Company

• Purchaser: Zheng Xing a state-owned enterprise established in the PRC as a company with limited liability, which is under the supervisory control of the Shenyang Municipal Government

Save that Zheng Xing is under the supervisory control of the Shenyang Municipal Government, Zheng Xing is independent of and not connected with the Directors, the promoters, the Supervisors, chief executive or substantial shareholders of the Company or any of its subsidiaries or an associate of any of them.

Assets to be disposed of

An approximately 99.37% interest in the registered share capital of Shenyang Water, representing the entire interest in Shenyang Water held by the Company. Shenyang Water is engaged in the production and sale of purified water.

The consideration for the Disposal

The consideration for the Disposal is RMB900 million (approximately HK$841 million). Pursuant to the Disposal Agreement, the consideration is payable in cash by Zheng Xing to the Company as follows:

1. an amount of RMB200 million (approximately HK$187 million), representing approximately 22.2% of the total consideration, within fifteen days following the date of the Disposal Agreement, which amount was already paid by Zheng Xing on 26th June, 2002;

2. an amount of RMB200 million (approximately HK$187 million), representing approximately 22.2% of the total consideration, on or before 15th July, 2002; and

3. the remaining balance of RMB500 million (approximately HK$467 million), representing approximately 55.6% of the total consideration, upon completion of the Disposal or by 31st December, 2002, whichever is earlier.

The parties commenced preliminary negotiations relating to the Disposal in early 2002 and the major terms of the Disposal have been agreed in April 2002, subject to the results of the independent business valuation of Shenyang Water as at 1st April, 2002 and the finalisation of the unaudited management accounts of Shenyang Water for the period up to 31st March, 2002. Accordingly, pursuant to the Disposal Agreement, it was agreed between the parties that the economic benefits (including the rights and obligations) relating to the approximately 99.37% equity interest of Shenyang Water in the period commencing from 1st April, 2002 to (and inclusive of) the date of completion of the Disposal will be borne by Zheng Xing. Subject to the Shareholders’

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LETTER FROM THE BOARD

approval being obtained and the review by the audit committee of the Company and to its satisfaction that there is no major obstacle in relation to completion of the Disposal, the economic benefits (including the rights and obligations) relating to the approximately 99.37% equity interest of Shenyang Water for the three months ending 30th June, 2002 will not be incorporated in the interim results of the Company for the six months ending 30th June, 2002, which will be published by the Company on or before 30th September, 2002. In respect of the annual results of the Company for the year ending 31st December, 2002, the publication date of which will be on or before 30th April, 2003, the economic benefits (including the rights and obligations) relating to the approximately 99.37% equity interest of Shenyang Water for the nine months ending 31st December, 2002 will not be incorporated in the annual results of the Company for the year ending 31st December, 2002, subject to the audit by the auditor of the Company and to its satisfaction all conditions for completion of the Disposal have been fulfilled. If the Disposal is not completed on or before 31st March, 2003 or such other date as agreed between the parties, there will not be any change in the ownership of Shenyang Water. Accordingly, Shenyang Water will continue to be accounted for as an approximately 99.37% owned subsidiary in the Company’s accounts.

The Directors consider that the Disposal Agreement was negotiated on an arm’s length basis and agreed on normal commercial terms between the parties involved with reference to the following:

1. the net asset value, as audited by the PRC auditors, of Shenyang Water as at 31st December, 2001 of approximately RMB833 million (approximately HK$779 million);

2. the net amount of the assets and liabilities of Shenyang Water as at 31st December, 2001 of approximately RMB790 million (approximately HK$738 million) as valued by an independent PRC valuer, 遼寧東方資產評估有限責任公司 (Liaoning Eastern Assets Valuation Co. Ltd.) (Note a);

3. a valuation on the approximately 99.37% equity interest of Shenyang Water as at 1st April, 2002 of approximately RMB762 million (approximately HK$712 million) by the Valuer (Note b);

4. the unaudited net asset value, prepared under the accounting principles generally accepted in the PRC, of Shenyang Water as at 31st March, 2002 of approximately RMB883 million (approximately HK$825 million); and

5. 5 the unaudited net asset value, prepared under the accounting principles generally accepted in Hong Kong, of Shenyang Water as at 31st March, 2002 of approximately RMB867.8 million (approximately HK$811 million).

Notes:

• a. The valuation was prepared by 遼寧東方資產評估有限責任公司 (Liaoning Eastern Assets Valuation Co. Ltd.) on the assets and liabilities of Shenyang Water as at 31st December, 2001. The valuation was prepared to comply with the relevant PRC laws and regulations for transfer/ disposal of state-owned assets.

• b. The valuation on the approximately 99.37% equity interest of Shenyang Water as at 1st April, 2002 was prepared by the Valuer. In arriving at the business value of Shenyang Water, the Valuer applied the income approach technique known as the discounted cash flow method. Under this method, value depends on the present worth of future economic benefits to be derived from the operations of Shenyang Water. Please refer to Appendix II for the summary of the valuation prepared by the Valuer.

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LETTER FROM THE BOARD

Based on the consideration for the Disposal of RMB900 million and the net assets of Shenyang Water as at 31st March, 2002 of approximately RMB867.8 million, calculated by applying the accounting principles generally accepted in Hong Kong, the Company will record a profit from the Disposal of approximately RMB37.7 million (being RMB900 million less approximately 99.37% of the net assets of Shenyang Water as at 31st March, 2002 attributable to the Company).

Conditions for completion of the Disposal

Completion of the Disposal is subject to the following major conditions:

1. the passing of the relevant resolution in the Extraordinary General Meeting, in which SPU will abstain from voting, to approve the transfer of the approximately 99.37% equity interest in Shenyang Water held by the Company to Zheng Xing pursuant to Disposal Agreement;

2. the waiver by the other shareholder in Shenyang Water of its pre-emptive rights to purchase the approximately 99.37% equity interest in Shenyang Water held by the Company and to be sold to Zheng Xing pursuant to the Disposal Agreement;

3. the passing of the relevant resolution by the existing shareholders of Shenyang Water to approve the transfer of the approximately 99.37% equity interest in Shenyang Water held by the Company to Zheng Xing pursuant to the Disposal Agreement; and

4. the filing of the asset valuation report relating to the transfer of the approximately 99.37% equity interest in Shenyang Water with the finance authorities in the PRC.

Completion

Completion of the Disposal shall take place on the fifth business day following the due fulfillment of the conditions thereof. If any of the above conditions has not been fulfilled by 31st March, 2003 or such later date as agreed between the parties, the provisions of the Disposal Agreement shall be of no effect and no party shall have any liability under them. Accordingly, the full amount of the consideration of RMB900 million as paid by Zheng Xing in the manner as described under the paragraph headed “The consideration for the Disposal” above shall be refunded in full amount, without interest, to Zheng Xing.

INFORMATION ON SHENYANG WATER

Shenyang Water, which is held as to approximately 99.37% by the Company and approximately 0.63% by 瀋陽市城市基礎設施建設投資發展有限公司 (Shenyang Urban Infrastructure Facility Construction Investment Development Company Limited), the controlling shareholder of SPU, is engaged in the extraction of ground water, the development and management of water sources and water processing plants in Shenyang, as well as the production of purified water for sale exclusively to SWGC, the principal water distributor in Shenyang. At present, Shenyang Water owns and operates a total of eight water plants and is the largest producer of purified water in Shenyang.

Pursuant to the SWGC Water Supply Agreement, SWGC undertakes to purchase from Shenyang Water purified water in an amount no less than an annual minimum purchase quantity at an unit price adjustable based on the provisions of the SWGC Water Supply Agreement for 30

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LETTER FROM THE BOARD

years starting from 2nd July, 1999. Also pursuant to the SWGC Water Supply Agreement, SPU has undertaken to guarantee the performance of SWGC’s obligations under the SWGC Water Supply Agreement.

Set out below is the financial performance of the Group based on the audited consolidated accounts of the Company and its subsidiaries for the financial years ended 31st December, 2000 and 31st December, 2001 respectively (prepared based on the accounting principles generally accepted in Hong Kong) as extracted from the annual report of the Company for the year ended 31st December, 2001:

	Year ended	31st December,
	2001	2000
	(RMB million)	(RMB million)
Turnover
Urban water supply	577	595
Property sale	90	Nil
Leasing and operating long distance buses
and granted routes_(Note)_	Nil	16
Administration of bus terminals_(Note)_	Nil	2
	667	613
Profit attributable to Shareholders	191	288

Note: The business of leasing and operating long distance buses and granted routes and administration of bus terminals were carried out by 瀋陽經緯客運有限公司 (Shenyang Jingwei Passenger Transportation Company Limited), a previous 99% owned subsidiary of the Company, which was sold by the Company in December 2000 to Zheng Xing as disclosed in the announcement of the Company dated 20th December, 2000.

Set out below is the results of Shenyang Water as extracted from the financial statements, as audited by the PRC auditors based on the accounting principles generally accepted in the PRC, of Shenyang Water for the year ended 31st December, 2001:

	Year ended 31st December,	Year ended 31st December,
	2001	2000
	(RMB million)	(RMB million)
Turnover	577	595
Profit before taxation	203	315
Profit after taxation	210	211

According to the financial statements, as audited by the PRC auditors, of Shenyang Water as at 31st December, 2001, the net asset value of Shenyang Water as at 31st December, 2001 amounted to approximately RMB833 million (approximately HK$779 million).

REASONS FOR AND BENEFITS OF THE DISPOSAL

The principal activities of the Group are (i) the production and sale of purified water; (ii) property development and sale; and (iii) the investment in a joint venture which produces and sells

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LETTER FROM THE BOARD

electricity and heat. The Group’s business of the production and sale of purified water (including relevant assets and liabilities) are owned and carried out by Shenyang Water. In proposing the Disposal, the Directors have considered the following reasons:

(i) Increase in production cost of Shenyang Water

The principal raw materials used by Shenyang Water for water production is raw water. At present, Shenyang Water sources raw water from pump wells owned by it and SWGC, which accounts for approximately 73% and 27% of the total raw water consumed by Shenyang Water respectively. Pursuant to a notice issued by Liaoning Province, the PRC, dated 26th February, 2002 (《關於調整水資源費、污水處理費征收標準和省直水庫供水 價格及有關事宜通知》) (the “Notice”), Liaoning Provincial Government increased the raw water fee for raw water extracted from underground water sources and reservoirs in Liaoning Province, the PRC, with effect from 1st March, 2002 and the Notice applies to Shenyang Municipality.

At present, Shenyang Water is not required to pay any raw water fee for raw water extracted from pump wells owned by it. According to the Notice, Shenyang Water is required to pay RMB0.20 and RMB0.40 per cubic meter of raw water extracted from pump wells located at non-environmental protection region and environmental protection region respectively. Also, pursuant to the Raw Water Purchase Agreement, the current unit purchase cost of raw water paid by Shenyang Water to SWGC is RMB0.45 per cubic meter, of which RMB0.15 is pipe maintenance fee. According to the Notice, the unit purchase cost of raw water charged by Liaoning Provincial Government to SWGC will increase from RMB0.30 (not including any pipe maintenance fee) to RMB0.50 per cubic meter. Pursuant to the Raw Water Purchase Agreement, the parties agreed that the unit purchase cost shall be adjusted in accordance with any variation of SWGC’s cost for provision of raw water to Shenyang Water and therefore the unit purchase cost payable by Shenyang Water to SWGC should be adjusted from RMB0.30 to RMB0.50 per cubic meter (before the pipe maintenance fee) as a result of the implementation of the Notice.

In 2001, Shenyang Water used a total quantity of raw water of approximately 456 million cubic meters, of which approximately 249 million cubic meters and approximately 82 million cubic meters were obtained from pump wells located at environmental protection and non-environmental protection region respectively and the balance of approximately 125 million cubic meters were supplied by SWGC. Based on the above, it is estimated that the increase in the raw water fee will result in an increase in future annual production cost of Shenyang Water by approximately RMB141 million, of which RMB116 million will result from an increase in raw water fee for raw water extracted from underground (being the sum of 249 million cubic meters multiplied by RMB0.40 per cubic meter and 82 million cubic meters multiplied by RMB0.20 per cubic meter) and RMB25 million will result from an increase in raw water purchase cost to be paid by the Company to SWGC (being 125 million cubic meters multiplied by RMB0.20 per cubic meter).

Under the terms of the SWGC Water Supply Agreement, the burden of increase in the production cost cannot be transferred to SWGC as the mechanism for adjustment of purified water’s unit price contained in the SWGC Water Supply Agreement does not provide for an upward adjustment of the unit price due to increase in raw water fee. Taking into consideration the fact that SWGC is the sole customer of Shenyang Water and the business of which is completely dependent on the terms of the SWGC Water Supply Agreement, Shenyang Water would need to absorb the negative impact arising from the increase in raw water fee and any further increase in raw water fee by relevant governmental authorities.

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LETTER FROM THE BOARD

(ii) Decreasing demand for water consumption in Shenyang

Pursuant to the terms of the SWGC Water Supply Agreement, SWGC agreed to purchase from Shenyang Water purified water in a total annual quantity of not less than a minimum purchase commitment of 547,500,000 cubic meters (the “Minimum Purchase Commitment”) for each year starting from year 2000 for a term of 30 years. The Minimum Purchase Commitment is non-adjustable in all events. Accordingly, there is no provision contained in the SWGC Water Supply Agreement to provide for downward adjustment of the Minimum Purchase Commitment in the event if the actual demand for purified water by end users in Shenyang is in fact lower than the Minimum Purchase Commitment.

Since early 2000, the actual demand for purified water by end users in Shenyang has decreased significantly which was partly attributable to a serious drought in the northeastern part of the PRC including Shenyang and the corresponding water usage tightening policy including a progressive water fee scale adopted for the consumption of purified water implemented by the Shenyang Municipal Government. The shutting down of certain largescale industrial plants in Shenyang in recent years have also led to the decreased water consumption in Shenyang. Accordingly, the actual demand for purified water by SWGC decreased from approximately 495 million cubic meters in 2000 to approximately 456 million cubic meters in 2001 and both of which were below the Minimum Purchase Commitment.

The Directors consider that future water demand for Shenyang Water’s purified water by end users would continue to be lower than the Minimum Purchase Commitment. Firstly, the water usage tightening policy including a progressive water fee scale implemented by the Shenyang Municipal Government in response to the drought in the northeastern part of the PRC is still in place. The policy requires the active adoption of water-saving measures by all industrial and commercial enterprises and residents in the whole city to lower the total consumption of purified water by approximately 10% to 20% respectively. Secondly, Shenyang is currently undergoing economic restructuring, which would not be in favor of establishment of large-scale industrial enterprises which have a high water demand. Thirdly, certain large-scale industrial enterprises with demand for purified water usage have been relocated out of Shenyang Municipality in the past few years due to environmental protection reasons and this relocation process is expected to continue.

Based on the reasons as presented above, the Directors expect that the actual demand for Shenyang Water’s purified water by the end users in Shenyang in the near and medium terms would be below the Minimum Purchase Commitment. Accordingly, the chances of Shenyang Water achieving business growth and turnover in excess of the Minimum Purchase Commitment in the next few years would be low and the decrease in actual water usage would affect the future business growth as well as the value of Shenyang Water as explained below under the paragraph headed “(iv) Substantial decrease in the value of the equity interest in Shenyang Water”.

(iii) Uncertainty relating to SWGC’s ability to fully honour its obligations to Shenyang Water pursuant to the SWGC Water Supply Agreement

Based on the audited financial statements of Shenyang Water for the year ended 31st December, 2000 and 2001, Shenyang Water recorded a turnover of approximately RMB595 million (approximately HK$556 million) and RMB577 million (approximately HK$539 million) respectively and a profit before taxation of approximately RMB315 million

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LETTER FROM THE BOARD

(approximately HK$294 million) and RMB203 million (approximately HK$190 million) respectively. The significant decrease in the operating results of Shenyang Water was due to a doubtful debt provision made by Shenyang Water in the amount of approximately RMB131 million (approximately HK$122 million) against SWGC. As explained under the paragraph headed “(ii) Decreasing demand for water consumption in Shenyang” above, the actual water usage by end users in Shenyang was lower than the Minimum Purchase Commitment. Given that SWGC was required to pay water fee to the Company based on the Minimum Purchase Commitment irrespective of the actual demand and that SWGC has experienced difficulties in collecting water fees from the end-users, who were required to pay a higher water fee and to consume less water, SWGC was unable to fully settle the water fee due to Shenyang Water on a timely basis in 2001. Since 2001, the Company has taken appropriate measures to push for the collection of the receivables from SWGC including negotiating with SWGC and serving notices to SWGC indicating that possible legal actions will be taken by the Company against SWGC pursuant to the relevant provisions of the SWGC Water Supply Agreement. Notwithstanding the above, SWGC was and is still unable to fully settle the outstanding amount due to Shenyang Water and a provision of doubtful debt (the “Unsettled Debt”) in the amount of approximately RMB131 million (approximately HK$122 million) was made by Shenyang Water in accordance with the prudence principle in the financial year 2001. Based on the Company’s unaudited management accounts as at 31st March, 2002, the total amount due from SWGC was approximately RMB352 million (approximately HK$329 million). Up to the Latest Practicable Date, Shenyang Water has not waived any of its rights in relation to the Unsettled Debt and it will continue to negotiate with SWGC regarding the settlement of the Unsettled Debt. Upon completion of the Disposal, the ownership of Shenyang Water, together with all its assets (including but not limited to the Unsettled Debt) and liabilities, will be transferred to Zheng Xing. Accordingly, the collection of the Unsettled Debt or part thereof will not be recorded in the Company’s accounts.

The Directors are of the view that given the uncertain factors surrounding the future demand for purified water by end-users in Shenyang, the ability of SWGC making good its obligation to Shenyang Water pursuant to the SWGC Water Supply Agreement is in doubt.

(iv) Substantial decrease in the value of the equity interest in Shenyang Water

As stated in the prospectus of the Company dated 7th December, 1999 (the “Prospectus”), the 99% equity interest of Shenyang Water as at 30th September, 1999 as valued by the Valuer was approximately RMB1,638 million (the “Old Valuation”). To assess the value of the equity interest in Shenyang Water subsequent to (a) the increase in raw water fee; (b) expected decrease in actual water usage by end-users in Shenyang; (c) the inability of SWGC to fully honour its obligation under the SWGC Water Supply Agreement (collectively, the “Factors”), the Company engaged the Valuer to conduct a valuation on the 99.37% equity interest in Shenyang Water as at 1st April, 2002 (the “Present Valuation”). Please refer to Appendix II for the summary of the valuation prepared by the Valuer. The Valuer’s assessment of the Present Valuation is approximately RMB762 million, representing a decrease of approximately 54% as compared with the Old Valuation. To formulate the Present Valuation, the Valuer took into account of the Factors and assumed, among other things, the following:

• (i) the raw water fee will maintain at the level as stipulated under the Notice;

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LETTER FROM THE BOARD

• (ii) the actual demand for Shenyang Water’s purified water by end-users will continuously be lower than the Minimum Purchase Commitment; and

• (iii) an increase in the discount rate to take into account the credit risk relating to SWGC.

Based on the above, the Directors are of the view that any variation of the Factors in any ways unfavorable to Shenyang Water may give rise to further downward adjustment to the value of the equity interest in Shenyang Water.

The Directors (including the independent non-executive Directors) consider that the Disposal is in the interest of the Shareholders and the Company as a whole because of (i) the increase in the production cost of Shenyang Water; (ii) the depressing business potential of Shenyang Water due to limited actual water consumption demand and the Minimum Purchase Commitment; (iii) the uncertainty relating to SWGC’s ability to fully honour its obligations to Shenyang Water pursuant to the SWGC Water Supply Agreement; and (iv) the substantial decrease in the value of the equity interest in Shenyang Water. The Directors further consider that the Disposal represents a good opportunity for the Company to realise its interest in Shenyang Water under the present difficult operating environment in the water production business in Shenyang.

REVISED USE OF PROCEEDS FROM THE PUBLIC OFFER AND PROPOSED USE OF PROCEEDS FROM THE DISPOSAL

As a result of the Public Offer, the Company raised net proceeds of approximately RMB684 million by the issue of 420,400,000 H Shares to the public. As stated in the Prospectus, amongst the net proceeds of approximately RMB684 million, approximately RMB489 million was intended by the Company to be used for the water plants, of which approximately RMB289 million has been so used by the Company as of the Latest Practicable Date. If the Disposal is completed, subject to the Shareholders’ approval the Directors intend to apply the remaining balance of approximately RMB200 million as follows:

• i. an amount of approximately of RMB120 million will be used to finance the acquisition of the Land (as described below); and

• ii. the balance of approximately RMB80 million will be used as working capital.

It is currently intended that the proceeds from the Disposal in the amount of RMB900 million will be used for investment in property and education projects. The Company is in the course of identifying appropriate projects for investment and the proceeds will be used to finance such investments. In this connection, the Company entered into a non-legal binding letter of intent (the “Letter of Intent”) with 瀋陽經濟技術開發區管理委員會 (The Administration Committee of Shenyang Economic and Technology Development Zone), an independent third party not connected with the Company, on 6th June, 2002, pursuant to which the Company intended to acquire the land use rights of a piece of land for a term of 50 years with a gross area of approximately 1,200 acres in Shenyang Economic and Technology Development Zone (the “Land”) for development of property and education projects (the “Projects”).

It is currently estimated by the Directors that the total acquisition cost of the Land will amount to approximately RMB120 million, which will be financed by the proceeds from the Public Offer as described above. As stated in the Letter of Intent, the Company will be responsible for developing property projects on the Land and introducing a prestigious PRC university to

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LETTER FROM THE BOARD

participate in development and management of education projects such as setting up primary and secondary schools on the Land. Also as stated in the Letter of Intent, it is estimated that the total investment to be incurred by the Company for completion of the Projects will amount to no less than RMB1,000 million of which no less than RMB150 million will be used in education projects.

The Directors expect that Phase I and II of the property projects to be developed on the Land will be completed by the second half of 2005 and the relevant investment cost will amount to approximately RMB390 million. Also, the Directors expect that the education projects to be established on the Land will be completed by the second half of 2004 and the estimated total investment cost will amount to RMB200 million. It is expected that the investment cost of the Projects in the amount of approximately RMB590 million will be financed by the net proceeds from the Disposal.

As stated in the annual report of the Company for the financial year ended 31st December, 2001, the business of property development and sale is carried out through Shenyang Development Real Estate Company Limited (the “Real Estate Company”), a subsidiary of the Company established in June 2000. During 2001, there was a steady growth in the turnover of Real Estate Company which recorded a turnover of approximately RMB90 million (approximately HK$84 million), representing approximately 13.5% of the Company’s 2001 total turnover of approximately RMB667 million (approximately HK$623 million). Having considered the reasons as explained under the paragraphs headed “Reasons for the Disposal” above, the Company entered into the Disposal Agreement to dispose of Shenyang Water for a consideration of RMB900 million (approximately HK$841 million). Taking into consideration that (i) the prosperous state of the property market in the PRC, particularly in the major cities of the PRC; (ii) the satisfactory results of the Company’s property development project in the past year; (iii) the Company’s intention to form alliance with prestigious university in the PRC to jointly develop education projects; and (iv) the business potential in setting up private schools in Shenyang, the Directors intend to utilize the proceeds from the Disposal in the amount of approximately RMB590 million to invest in the Projects. The balance of net proceeds in the amount of approximately RMB310 million will be applied in property development project and education project to be identified by the Company.

BUSINESS OF THE GROUP

The Company is an investment holding company. The Group is principally engaged in the production and sale of urban purified water, the development and sale of real estate, the investment in a joint venture which is principally engaged in the production and sale of electricity and heat and has an approximately 8% equity interests in a business venture which is principally engaged in high-tech investment projects.

Following completion of the Disposal, the principal investment of the Company will comprise its 99.0% interests in Real Estate Company (principally engaged in development and sale of property) which holds a 99% interest in Shenyang Hongji Property Management Company Limited (principally engaged in property management, rental and maintenance). Considering the prosperous state of the PRC property market and the satisfactory results of the Company’s property development projects in the past year, the Company will continue to focus on investment in property projects and intend to form alliance with prestigious university in the PRC to jointly develop education projects. The Directors consider that the commercial potential for the provision of high quality education service such as private primary or secondary school is significant in view of Shengyang’s economic development which demands for a community with higher education. The Directors further consider that the development of education projects as an ancillary facility to the properties to be developed by the Company and will enhance the value of such properties.

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LETTER FROM THE BOARD

GENERAL

The Disposal constitutes a major transaction of the Company under the Listing Rules and accordingly, requires the Shareholder’s approval in an extraordinary general meeting of the Company. The Extraordinary General Meeting will be convened at which a special resolution will be proposed to approve the Disposal, and an ordinary resolution will be proposed to approve the change in use of proceeds raised from the Public Offer. Though SPU is independent of and not connected with Zheng Xing, in view of its interest in the Disposal due to the Undertaking, it will abstain from voting on the special resolution relating to the Disposal in the Extraordinary General Meeting.

EXTRAORDINARY GENERAL MEETING

The notice convening the Extraordinary General Meeting at which a special resolution and an ordinary resolution will be respectively proposed to the Shareholders to consider and, if thought fit, to approve (i) the Disposal; and (ii) the change in use of proceeds raised from the Public Offer, as set out on pages 23 and 24 of this circular.

A reply slip for attendance of the Extraordinary General Meeting to be held at 4th Floor, No. 14 Shisiwei Road, Heping District, Shenyang, the PRC at 9:00 a.m. on 20th August, 2002 is enclosed. Whether or not you intend to attend the Extraordinary General Meeting, you are requested to complete and return the reply slip to the Company’s H share registrar in Hong Kong, Hong Kong Registrars Limited, at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong on or before 30th July, 2002.

A proxy form for use at the Extraordinary General Meeting to be held at 4th Floor, No. 14 Shisiwei Road, Heping District, Shenyang, the PRC at 9:00 a.m. on 20th August, 2002 is also enclosed. Whether or not you intend to attend the Extraordinary General Meeting, you are requested to complete and return the proxy form to the Company’s H share registrar in Hong Kong, Hong Kong Registrars Limited, at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 24 hours before the time appointed for the holding of the Extraordinary General Meeting. Completion and return of the proxy form will not preclude you from attending and voting in person at the Extraordinary General Meeting or at any adjourned meeting(s) thereof should you so wish.

ADDITIONAL INFORMATION

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

Yours faithfully,

For and on behalf of the Board of

Shenyang Public Utility Holdings Company Limited Zhang Guo Xiang

Chairman

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. PRO FORMA STATEMENT OF ADJUSTED NET TANGIBLE ASSETS OF THE GROUP UPON COMPLETION OF THE DISPOSAL

The following proforma statement of the adjusted net tangible asset value of the Group upon completion of the Disposal, calculated by applying the accounting principles generally accepted in Hong Kong, is prepared based on the audited consolidated net tangible assets of the Group as at 31st December, 2001 and adjusted as described below:

Audited consolidated net tangible assets of the Group as at 31st December, 2001 Unaudited consolidated profit of the Group for the three months ended 31st March, 2002 Estimated increase in net tangible assets of the Group after the Disposal Proforma consolidated net tangible assets of the Group after the Disposal	RMB’000 1,746,956 59,609 37,677
	1,844,242

2. INDEBTEDNESS

At the close of business on 31st May, 2002, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, apart from intra-group liabilities, the Group had no outstanding mortgages, charges, debentures or other loan capital or bank overdrafts, loans or hire purchase or finance lease commitments, guarantees or other material contingent liabilities.

3. WORKING CAPITAL

Taking into account of the Group’s available cash and bank balances and the net proceeds from the Disposal, the Directors are of the opinion that the Group has sufficient working capital for its present requirements.

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

For the year ended 31st December, 2001, the turnover of the Group amounted to RMB667,435,000, representing an increase of approximately 8.94% from that of the previous year. Profit attributable to Shareholders amounted to RMB191,778,000, representing a decrease of approximately 33.76% from that of the previous year.

In 2001, the Group had experienced relatively unfavourable external business environment, which led to the decrease in the operating results of the Group. As described in detail in the Letter from the Board, the drought in the northeastern China including Shenyang since early 2002, the adoption of water-saving measures by all the enterprises and residents in Shenyang as directed by the Shenyang Municipal Government and the adoption of a progressive water fee scale for the consumption of water by residents resulted in the decrease in the sales volume of purified water of Shenyang Water for 2001 by 7.92% from that of the previous year. In addition, the work in collecting water fee by SWGC was very unsatisfactory. As a result, SWGC experienced very difficult financial position and could not make full payment of water fee on a timely basis to Shenyang Water. Accordingly, in accordance with the prudence principle, Shenyang Water had made a provision for doubtful debts of RMB130,587,000 for certain receivables in 2001.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

In view of the adverse business environment relating to the operation of Shenyang Water, the Board proposed the Company to dispose of its entire interest in Shenyang Water. Upon completion of the Disposal, the Group will focus on property and education related projects.

5. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2001, the date to which the latest published audited consolidated financial statements of the Group were made up.

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BUSINESS VALUATION

APPENDIX II

==> picture [209 x 59] intentionally omitted <==

5th July, 2002

The Directors

Shenyang Public Utility Holdings Company Limited No. 14, Shisiwei Road Heping District Shenyang, China

Dear Sirs,

In accordance with instructions from Shenyang Public Utility Holdings Company Limited (“Listco”) we have undertaken a valuation of a 99.37 per cent equity interest in Shenyang Water Company Limited (“Shenyang Water”) as at 1st April, 2002 (“Valuation Date”). This letter summarises the principal conclusions of our detailed valuation report dated 5th July, 2002.

We understand that the valuation is for sale and acquisition reference purposes.

Our valuation has been carried out on a market value basis. Market value is defined as “ the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion .”

Shenyang Water, of which Listco has a 99.37% equity interest, is engaged in the extraction of ground water, the development and management of water sources and water processing plants in Shenyang, as well as the production of purified water for the sale exclusively to Shenyang Water General Corporation (“SWGC”), the principal water distributor in Shenyang. Currently, Shenyang Water owns and operates a total of eight water plants in Shenyang.

Shenyang Water entered into a Water Supply Agreement (“Water Supply Agreement”) with SWGC under which SWGC is obligated to purchase from Shenyang Water a minimum amount of purified water (“Minimum Purchase Commitment”) at a unit price adjustable based on the provisions of the Water Supply Agreement for 30 years starting from 2nd July, 1999.

In conducting the valuation of Shenyang Water, we have considered, in particular, the following factors:–

Under the Water Supply Agreement, SWGC is required to purchase the Minimum Purchase Commitment which is 547 million cubic meter per year. However, over the past two years, SWGC failed to conform to the Minimum Purchase Commitment as a result of the low demand for purified water by end users in Shenyang. The actual water supply from Shenyang Water to SWGC was approximately 495 million cubic meter and 456 million cubic meter in 2000 and 2001 respectively. The Shenyang Municipal Government has carried out the corresponding water usage tightening policy which affects the demand for purified water.

As stated in the annual report of Listco for the year ended 31st December, 2001, SWGC was unable to settle the outstanding account payable on a timely basis which result in a doubtful debt

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BUSINESS VALUATION

APPENDIX II

provision made by Shenyang Water in the amount of approximately RMB131 million. SWGC’s inability to fully honour its obligation under the Water Supply Agreement is detrimental to Shenyang Water’s water business as SWGC is its sole customer and hence contributor to all of its profits.

Previously, Shenyang Water sourced approximately three-quarter, or 73% of its raw water from pump wells which required no water fee and the other quarter, or 27% from SWGC of which Shenyang Water will pay SWGC RMB0.3 per cubic meter of raw water. Pursuant to a notice issued by Liaoning Province, the PRC dated 26th February, 2002 (關於調整水資源費，污水處理 費征收標準和省直水庫供水價格及有關事宜通知 ) (the “Notice”), effective on 1st March, 2002, Shenyang is required to pay RMB0.20 and RMB0.40 per cubic meter of raw water extracted from pump wells located at non-environmental protection region and environmental protection region respectively. In addition, the raw water fee paid to SWGC will be adjusted upward from RMB0.3 per cubic meter to RMB0.5 per cubic meter.

Prior to 2002, Shenyang Water had been enjoying a tax rebate of 18% out of the 33% income tax as subsidiary income by the local municipal government. However, the tax rebate has been stopped since 1st January, 2002 which affects the profitability and hence the business value of Shenyang Water.

In assessing the market value of Shenyang Water, we have adopted the income approach technique known as the discounted cash flow method. Under the discounted cash flow method, value depends on the present worth of the future economic benefits to be derived from contractual agreements and projected businesses. Indications of value have been developed by discounting projected net future cash flow available for payment of shareholders’ interest to their present worth at market derived rates of return over the joint venture period which in our opinion are appropriate for the risks of the business.

We have reviewed relevant information, documents and other pertinent data relating to Shenyang Water. We believe such information to be reliable and legitimate. We have also made relevant inquiries and obtained further information as considered necessary for the purposes of this valuation.

The valuation of Shenyang Water requires consideration of all pertinent factors affecting the operation of the respective operational areas and the company’s ability to generate future investment returns. The factors considered in this valuation included, but were not limited to, the following:

• the operating condition of Shenyang Water;

• the economic outlook in general and the specific economic environment related to the business;

• past and projected operating results of Shenyang Water;

• the potential of the business and industrial outlook;

• comparative advantages and disadvantages of the business and industry;

• market-derived investment returns of entities engaged in similar lines of business; and

• the financial and operational risk of the business including the continuity of income and the projected future results.

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BUSINESS VALUATION

APPENDIX II

In determining the value of Shenyang Water, we have made the following key assumptions:

• We estimated the future cash flow for Shenyang Water for the period 2002-2006, and have assumed that the projected business for each division could be achieved with the effort of Listco and Shenyang Water’s management. In addition, by applying a going concern assumption to the operations of Shenyang Water, we have given a terminal value for its operation in 2006 with reference to its projected profitability in order to take into account the operations after the projection period.

• In order to realize the growth potential of the business and maintain a competitive edge, additional manpower, equipment and facilities are necessary to be employed. For the valuation exercise, we have assumed that proposed facilities and systems are sufficient for future expansion.

• We have assumed that the terms and conditions in the Water Supply Agreement will be honoured by SWGC in which SWGC will purchase the Minimum Purchase Commitment.

• We have assumed that the raw water fee will be maintained at the level as stipulated under the Notice.

• We have assumed that the actual demand for water by end-users will continuously be lower than the Minimum Purchase Commitment.

• In preparing the valuation model, we have assumed that the terms and conditions of the Water Supply Agreement between Shenyang Water and SWGC will be honoured notwithstanding the possibility of difficulty in collecting water fee from SWGC. In this regard, no doubtful debt provision is provided in the projection of cashflow.

• We have applied a discount rate of 22% to reflect a higher risk as a result of the possibility of difficulty in collecting water fee from SWGC.

In determining the discount rate for the operations adopted in the valuation, we have taken into account a number of factors including the current market information and the underlying risk inherent in the business, such as uncertainty risk, liquidity risk, etc.

The conclusion of value is based on accepted valuation procedures and practices that rely substantially on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. Further, while the assumptions and consideration of such matters are considered by us to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of Listco, Shenyang Water and Sallmanns (Far East) Limited.

Based on our investigation and analysis, it is our opinion that as at 1st April, 2002, the 99.37 per cent equity interest of Shenyang Water is reasonably stated by the amount of RMB762 million (RENMINBI SEVEN HUNDRED AND SIXTY TWO MILLION ONLY) .

Yours faithfully, For and on behalf of

Sallmanns (Far East) Limited Paul L. Brown

Director

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GENERAL INFORMATION

APPENDIX III

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

• (a) As at the Latest Practicable Date, none of the Directors, the promoters, the Supervisors or chief executive of the Company had any interest in the equity or debt securities of the Company or any associated corporations (within the meaning of the SDI Ordinance) which have to be notified to the Company and the Stock Exchange pursuant to section 28 of the SDI Ordinance (including interests which they are deemed or taken to have under section 31 or Part I of the Schedule to, the SDI Ordinance) or which are required, pursuant to section 29 of the SDI Ordinance, to be entered in the register referred to therein, or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to have been notified to the Company and the Stock Exchange.

• (b) Save as disclosed herein, as at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group since 31st December, 2001 (the date to which the latest published audited consolidated financial statements of the Company were made up) or proposed to be so acquired, disposed of or leased.

• (c) Save as disclosed herein, there is no contract or arrangement subsisting at the date of this circular in which any of the Directors is materially interested and which is significant in relation to the business of the Group.

3. SUBSTANTIAL SHAREHOLDER

As at the Latest Practicable Date, the following direct interest of 10 per cent. or more in the issued share capital of the Company was recorded in the register of interests required to be kept by the Company pursuant to section 16(1) of the SDI Ordinance:

	Number of	Percentage of the
Name of Shareholder	State Shares held	issued share capital
Shenyang Public Utility Group	600,000,000	58.80%
Company Limited

Save as disclosed herein it is not known to the Directors, Supervisors, promoters or chief executive of the Company that there is any person who, as at the Latest Practicable Date, was directly or indirectly interested in 10% or more in the issued share capital of the Company or in any interests which was required to be recorded pursuant to section 16(1) of the SDI Ordinance.

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GENERAL INFORMATION

APPENDIX III

4. MATERIAL CONTRACTS

The following contracts have been entered into by the Company and its subsidiaries (not being contracts entered into in the ordinary course of business) within the two years immediately preceding the date of this circular and are or may be material:-

• (1) the Disposal Agreement; and

• (2) The sale and purchase agreement dated 20th December, 2000 entered into between the Company as the vendor and Zheng Xing as the purchaser relating to the entire 99% interest in 瀋陽經緯客運有限公司 (Shenyang Jingwei Passenger Transportation Company Limited), a company with limited liability established in the PRC on 16th August, 1999.

Save as aforesaid, during the two years prior to the date of this circular, neither the Company nor any of its subsidiaries has entered into any contract, not being a contract entered into in the ordinary course of business, which is or may be material.

5. QUALIFICATIONS OF EXPERT

The following is the qualification of expert who has given opinion and/or advice which are contained in this circular:

Name Qualifications

Sallmanns (Far East) Limited Chartered Surveyors, property consultants, plant and machinery valuers, financial and intangible asset valuers

6. CONSENT

Sallmanns (Far East) Limited has given and has not withdrawn its written consent to the issue of this circular, with the inclusion herein and reference to its name, in the form and context in which it appears.

7. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any litigation or arbitration of material importance and, as far as the Directors are aware, no litigation or claim of material importance is pending or threatened against the Company or any of its subsidiaries.

8. SERVICE CONTRACT

None of the Directors has any existing or proposed service contract with the Company or any member of the Group (excluding contracts expiring or determinable by the Company within one year without payment of compensation other than statutory compensation).

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GENERAL INFORMATION

APPENDIX III

9. GENERAL

• (i) The secretary of the Company is Mr. Wang Se. Mr. Wang Se is also an executive director of the Company. Mr. Wang Se graduated from Northeast Heavy Machinery Institute in the PRC in 1982 with a bachelor’s degree in science and also obtained a master’s degree in economics in 1992 from Liaoning University. Mr. Wang Se has extensive experience in corporate reorganisation, assets management and investment.

• (ii) The H share registrar of the Company in Hong Kong is Hong Kong Registrars Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

• (iii) The English text of this circular shall prevail over the Chinese text.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the principal office in Hong Kong of the Company at Unit 2808, 28th Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong from the date of this circular up to and including 19th July, 2002:

• (i) the memorandum and articles of association of the Company;

• (ii) the annual reports of the Company for each of the two years ended 31st December, 2000 and 31st December, 2001;

• (iii) the valuation report on the approximately 99.37% equity interest of Shenyang Water as at 1st April, 2002 issued by the Valuer;

• (iv) the material contracts referred to in paragraph 4 of this Appendix; and

• (v) the written consent referred to in paragraph 6 of this Appendix.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

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瀋 陽 公 用 發 展 股 份 有 限 公 司 SHENYANG PUBLIC UTILITY HOLDINGS COMPANY LIMITED

(a joint stock limited company incorporated in the People’s Republic of China with limited liability)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of the holders of State shares and H shares of 瀋陽公用發展股份有限公司 (Shenyang Public Utility Holdings Company Limited) will be held at 4th Floor, No. 14 Shisiwei Road, Heping District, Shenyang, the PRC on Tuesday, 20th August, 2002 at 9:00 a.m. for the purpose of considering and, if thought fit, passing the following resolution numbered 1 as special resolution and passing the following resolution numbered 2 as ordinary resolution:

SPECIAL RESOLUTION NO.1

1. “ THAT the conditional sale and purchase agreement (the “Disposal Agreement”) relating to the proposed disposal of approximately 99.37% of the entire registered capital of Shenyang Water Company Limited dated 13th June, 2002 and entered into between 瀋陽公用發展股份有限公司 (Shenyang Public Utility Holdings Company Limited) (the “Company”) as vendor and 瀋陽政興企業集團有限責任公司(Shenyang Zheng Xing Enterprise Group Company Limited), as purchaser, a copy of which has been produced at the meeting marked “A” and signed by the Chairman for the purposes of identification, be and is hereby approved and that the transactions contemplated therein be and are hereby approved and that any one director of the Company be and is hereby authorized to do such acts or execute such other documents which in his/her opinion may be necessary, desirable or expedient or carry into effect or to give effect to the Disposal Agreement, including such changes and amendments thereto as any one director of the Company may consider necessary, desirable or expedient, and, subject to the satisfaction or waiver (as the case may) of the conditions of the Disposal Agreement.”

ORDINARY RESOLUTION NO.2

1. “ THAT conditional upon the special resolution numbered 1 set out in the notice of extraordinary general meeting of 瀋陽公用發展股份有限公司 (Shenyang Public Utility Holdings Company Limited) (the “Company”) dated 5th July, 2002 of which this resolution forms part (the “Notice”) being passed by the holders of H shares and State shares in the Company, the use of the remaining unused net proceeds of approximately Renminbi 200 million out of the net proceeds of Renminbi 489 million originally intended to be used for the water plants of Shenyang Water Company Limited from the total net proceeds of approximately Renminbi 684 million raised by the issue of 420,400,000 H shares in the Company for subscription by public investors at the issue price of HK$1.70 in December 1999 be revised with effect from the date of this resolution and will now be applied by the Company in the following manner:-

2. (a) an amount of approximately Renminbi 120 million will be used to finance the acquisition of the land use rights of a piece of land for a term of 50 years with a gross floor area of approximately 1,200 acres in Shenyang Economic and

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Technology Development Zone for development of property and education projects; and

• (b) the balance of approximately Renminbi 80 million will be used as working capital of the Company.”

By the order of the Board Zhang Guo Xiang Chairman

Hong Kong, dated 5th July, 2002

Principal place of business in the PRC:

No. 14

Shisiwei Road Heping District Shenyang The PRC

Notes:

1. The register of holders of H shares of the Company will be closed from Sunday, 21st July, 2002 to Monday, 19th August, 2002 (both dates inclusive), during which period no transfer of H Shares will be registered. Holders of State shares or H shares of the Company whose names appear in the register of members of the Company as at 4:00 p.m. on Friday, 19th July, 2002 shall be entitled to attend and to vote at the meeting.

2. Any holder of the State shares or H shares of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a holder of the State shares or H shares of the Company.

3. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power or authority shall be deposited at the Company’s H share registrars in Hong Kong, Hong Kong Registrars Limited, at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 24 hours before the time appointed for holding the meeting or adjourned meeting.

4. Holders of State shares or H shares of the Company who intend to attend the Extraordinary General Meeting should complete the enclosed “REPLY SLIP FOR EXTRAORDINARY GENERAL MEETING ” and return it to the Company’s H share registrar in Hong Kong, Hong Kong Registrars Limited, at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong on or before 30th July, 2002. The reply slip may be delivered by hand, by post or by fax to the number (852) 2865 0990 / 2529 6087.

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