Convenience Retail Asia Limited — Proxy Solicitation & Information Statement 2015

Dec 11, 2015

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Fountain Set (Holdings) Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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(Incorporated in Hong Kong with limited liability) (Stock code: 420)

RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EGM

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

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A notice convening the EGM of Fountain Set (Holdings) Limited to be held at Block A, 6th Floor, Eastern Sea Industrial Building, 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong on 29 December 2015 at 9:30 a.m. is set out on pages 54 to 55 of this circular. A form of proxy for use at the EGM is also enclosed. Such form of proxy is also published on the websites of Hong Kong Exchanges and Clearing Limited (www.hkexnews.hk) and the Company (www.fshl.com) .

A letter from the Board is set out on pages 6 to 30 of this circular and a letter from the Independent Board Committee containing its recommendations to the Independent Shareholders is set out on page 31 of this circular. A letter from Donvex Capital Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 32 to 47 of this circular.

Whether or not you are able to attend the EGM, please complete and sign the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar in Hong Kong, Tricor Secretaries Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude shareholders from attending and voting in person at the EGM or any adjournment thereof if they so wish.

The translation into Chinese language of this circular is for reference only. In case of any inconsistency, the English version shall prevail.

11 December 2015

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Letter from Donvex Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32
Appendix – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	54

– i –

DEFINITIONS

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

• “2015 AH Master Sales Agreement”

• the master sales agreement dated 19 April 2013 entered into between the Company and Mr. Hirdaramani in relation to the AH Sales Transactions

• “2015 CCT Agreements”

• the 2015 AH Master Sales Agreement, the 2015 FM Master Sales Agreement, the 2015 LFK Master Sales Agreement and the 2015 Material Purchase Framework Agreement

• “2015 FM Master Sales Agreement”

• the master sales agreement dated 19 April 2013 entered into between the Company and Mr. Omar in relation to the FM Sales Transactions

• “2015 LFK Master Sales Agreement”

• the master sales agreement dated 19 April 2013 entered into between the Company and LFK in relation to the LFK Sales Transactions

• “2015 Material Purchase Framework Agreement”

• the material purchase framework agreement dated 19 December 2012 entered into between the Company and Chinatex in relation to the Chinatex Purchase Transactions

• “2018 AH Master Sales Agreement”

• the master sales agreement dated 18 November 2015 entered into between the Company and Mr. Hirdaramani in relation to the AH Sales Transactions

• “2018 CCT Agreements”

• the 2018 AH Master Sales Agreement, the 2018 FM Master Sales Agreement, the 2018 LFK Master Sales Agreement and the 2018 Material Purchase Framework Agreement

• “2018 FM Master Sales Agreement”

• the master sales agreement dated 18 November 2015 entered into between the Company and Mr. Omar in relation to the FM Sales Transactions

• “2018 LFK Master Sales Agreement”

• the master sales agreement dated 18 November 2015 entered into between the Company and LFK in relation to the LFK Sales Transactions

– 1 –

DEFINITIONS

• “2018 Material Purchase the material purchase framework agreement dated 18 Framework Agreement” November 2015 entered into between the Company and Chinatex in relation to the Chinatex Purchase Transactions

• “AH Group”

• companies which Mr. Hirdaramani and his associates and relatives individually or together exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors

• “AH Sales Transactions” the sale of fabrics, yarns, fibers and garment parts, by members of the Group to members of the AH Group from time to time

• “Announcements” the announcements of the Company dated 10 December 2010, 30 November 2011, 19 December 2012 and 19 April 2013 in relation to the 2015 CCT Agreements

• “associate(s)”

• has the meaning ascribed to it in the Listing Rules

• “Board”

• the board of Directors, and in this circular, references to the “Board” shall mean the board of directors of the Company or a duly authorised committee thereof for the time being, including the independent non-executive directors of the Company

• “Chinatex”

• 中國中紡集團公司 (Chinatex Corporation), a state-owned enterprise established under the laws of the PRC, a controlling shareholder of the Company and is interested in approximately 35.94% of the Shares

• “Chinatex Group”

• Chinatex and its subsidiaries from time to time

• “Chinatex Purchase Transactions”

• the purchase of yarns, cotton, fibers, garments and oil and foodstuff by members of the Group from members of the Chinatex Group from time to time

• “Circulars”

• the circulars of the Company dated 3 January 2011, 21 December 2011, 10 January 2013 and 13 May 2013 in relation to the 2015 CCT Agreements

– 2 –

DEFINITIONS

• “Company”

Fountain Set (Holdings) Limited, a company incorporated in Hong Kong with limited liability, the shares of which are listed on the Main Board of the Stock Exchange (Stock Code: 420)

• “connected person(s)” has the meaning ascribed to it in the Listing Rules

• “controlling shareholder” has the meaning ascribed to it in the Listing Rules

• “Director(s)” the director(s) of the Company

• “EGM”

• the extraordinary general meeting to be convened by the Company at Block A, 6th Floor, Eastern Sea Industrial Building, 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong on Tuesday, 29 December 2015 at 9:30 a.m. or any adjournment thereof

• “FM Group”

• companies which Mr. Omar and his associates and relatives individually or together exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors

• “FM Sales Transactions”

• the sale of fabrics, yarns, fibers and garment parts, by members of the Group to members of the FM Group from time to time

• “Group”

• the Company and its subsidiaries from time to time

• “HK$”

• Hong Kong dollars, the lawful currency of Hong Kong

• “Hong Kong”

• the Hong Kong Special Administrative Region of the PRC

• “Independent Board Committee”

• an independent committee of the Board, comprising all the independent non-executive Directors, namely Mr. Ng Kwok Tung, Mr. Chow Wing Kin, Anthony, SBS, JP and Mr. Ying Wei, formed to advise the Independent Shareholders in respect of the renewal of the Chinatex Purchase Transactions, the AH Sales Transactions, the LFK Sales Transactions and the FM Sales Transactions

– 3 –

DEFINITIONS

• “Independent Financial Adviser” or “Donvex Capital”

• “Independent Shareholders”

• “Latest Practicable Date”

• “LFK”

• “LFK Group”

• “LFK Sales Transactions”

• “Listing Rules”

• “Mr. Ha”

• “Mr. Hirdaramani”

• Donvex Capital Limited, a licensed corporation to carry out type 6 (advising on corporation finance) regulated activities under the Securities and Futures Ordinance, is the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the 2018 Material Purchase Framework Agreement, the 2018 AH Master Sales Agreement, the 2018 LFK Master Sales Agreement, the 2018 FM Master Sales Agreement and the annual caps

• Shareholders who are not prohibited from voting at the general meeting in connection with the Chinatex Purchase Transactions, the AH Sales Transactions, the LFK Sales Transactions and the FM Sales Transactions

• 3 December 2015, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular

• LFK (Holdings) Limited, a company incorporated in the British Virgin Islands with limited liability, being a company which is 100% owned by a discretionary trust whose settlor and protectors include Mr. Ha’s relatives

• LFK and its subsidiaries from time to time

• the sale of fabrics, yarns, fibers and garment parts, by members of the Group to members of the LFK Group from time to time

• the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

• Mr. Ha Kam On, Victor, an executive Director, Shareholder and accordingly a connected person of the Company under the Listing Rules

• Mr. Anil Kumar Lalchand Hirdaramani, a director and substantial shareholder of a non-wholly owned subsidiary of the Company and accordingly a connected person of the Company under the Listing Rules

– 4 –

DEFINITIONS

“Mr. Omar”	Mr. Feroz Omar, a director and substantial shareholder of
	a non-wholly owned subsidiary of the Company and
	accordingly a connected person of the Company under
	the Listing Rules
“PRC”	the People’s Republic of China
“relative(s)”	has the meaning ascribed to it in the Listing Rules
“Share(s)”	share(s) of the Company
“Shareholders”	the holders of the Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“%”	per cent

– 5 –

LETTER FROM THE BOARD

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(Incorporated in Hong Kong with limited liability)

(Stock code: 420)

Executive Directors:

Mr. ZHAO Yao (Chairman and Chief Executive Officer) Mr. HA Kam On, Victor (Vice Chairman) Mr. GONG Zhengyi Mr. CHEN Minghong

Registered Office, Principal Place of Business in Hong Kong and head office: Block A, 6/F. Eastern Sea Industrial Building 29-39 Kwai Cheong Road Kwai Chung, New Territories Hong Kong

Non-executive Director: Dr. YEN Gordon Mr. ZHANG Chong

Independent Non-executive Directors:

Mr. NG Kwok Tung Mr. CHOW Wing Kin, Anthony, SBS, JP Mr. YING Wei

11 December 2015

To the Shareholders

Dear Sir/Madam,

RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EGM

1. INTRODUCTION

Reference is made to the announcement of the Company dated 18 November 2015 in relation to, among others, the 2018 CCT Agreements and the transactions contemplated thereunder.

The purposes of this circular are, among other things: (i) to provide the Shareholders with further details on the 2018 CCT Agreements and the transactions contemplated thereunder; (ii) to set out the recommendation of the Independent Board Committee relating to the 2018 CCT Agreements and the transactions contemplated thereunder; (iii) to set out the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders relating to the 2018 CCT Agreements and the transactions contemplated thereunder; and (iv) to give the Shareholders notice of the EGM to consider and, if thought fit, to approve the 2018 CCT Agreements and the transactions contemplated thereunder.

– 6 –

LETTER FROM THE BOARD

2. RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS

I. BACKGROUND

Reference is made to the Announcements and Circulars of the Company in relation to, among others, the following continuing connected transactions between the Company and the relevant parties:

• (1) the 2015 Material Purchase Framework Agreement;

• (2) the 2015 AH Master Sales Agreement;

• (3) the 2015 LFK Master Sales Agreement; and

• (4) the 2015 FM Master Sales Agreement.

As the above 2015 CCT Agreements will be expiring on 31 December 2015, on 18 November 2015, the Company and the relevant parties entered into the 2018 CCT Agreements to renew the 2015 CCT Agreements for a term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

II. RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS

(1) 2018 MATERIAL PURCHASE FRAMEWORK AGREEMENT

The Company and Chinatex entered into the 2015 Material Purchase Framework Agreement on 19 December 2012 in relation to the Chinatex Purchase Transactions. As the 2015 Material Purchase Framework Agreement will be expiring on 31 December 2015 and since it is anticipated that the Group will continue to enter into new Chinatex Purchase Transactions with the Chinatex Group in the ordinary and usual course of its business, the 2018 Material Purchase Framework Agreement was entered into on 18 November 2015 between the Company and Chinatex to renew the 2015 Material Purchase Framework Agreement for a term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

Set out below are the principal terms of the 2018 Material Purchase Framework Agreement.

Date: 18 November 2015 Parties: (1) the Company (2) Chinatex

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LETTER FROM THE BOARD

Subject:

Pursuant to the 2018 Material Purchase Framework Agreement, the Chinatex Group agreed to, or procure its subsidiaries to, supply yarns, cotton, fibers, garments and cooking oil and foodstuffs to the Group. The yarns, cotton and other materials for the manufacture of fabric and garments to be purchased by the Group will be used for the manufacture of textile products, whereas the cooking oil and foodstuffs will be used for the provision of meals to the employees of the Group.

The Group and the Chinatex Group will enter into individual orders setting out specific terms of the Chinatex Purchase Transactions. The terms of the individual orders will be consistent with the principles and the terms of the 2018 Material Purchase Framework Agreement. If there is any conflict between the terms of an individual order and the 2018 Material Purchase Framework Agreement, the latter shall prevail.

Conditions: The 2018 Material Purchase Framework Agreement is conditional upon the passing of an ordinary resolution at the general meeting by the Independent Shareholders to approve the 2018 Material Purchase Framework Agreement and the transactions contemplated thereunder. If such condition is not fulfilled by 31 December 2015 or such later date as may be agreed by the Company and Chinatex in writing, the 2018 Material Purchase Framework Agreement shall terminate with immediate effect and none of the parties thereto shall have any rights against the other party except in relation to any antecedent breach of the 2018 Material Purchase Framework Agreement.

Term: The 2018 Material Purchase Framework Agreement has a fixed term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

Pricing policy:

As a general principle, the price and terms of the individual order in respect of the Chinatex Purchase Transactions will be on normal commercial terms, negotiated on an arm’s length basis, on similar basis as the Group transacts business with other independent third party suppliers and shall be on terms which are no less favourable to the Group than those provided by independent third party suppliers.

– 8 –

LETTER FROM THE BOARD

Subject to the general principle disclosed above, the Group will also take into account the following factors when determining the purchase price payable by the Group under the individual orders in respect of the Chinatex Purchase Transactions: (i) the prevailing market prices of similar products obtained through internal checks and research conducted by the Company; (ii) the quality and prices of the products offered by other independent third party suppliers; and (iii) the expected cost to be incurred by the Chinatex Group in providing such products. In addition to the above, the Group will semi-annually obtain market prices of the products through publicly available sources.

Given that none of the products under the 2018 Material Purchase Framework Agreement has a fixed unit price, in determining the purchase price for an individual order, the Group will invite quotations from at least three independent suppliers to get a reference on the prevailing market prices for the relevant products to be procured. Such quotations will be (i) reviewed and evaluated from both the technical and commercial perspectives, taking into account of factors such as the purity, cleanliness, yarn count, pricing and lead time, jointly by the Group’s production and procurement departments and subject to the final approval by the Group’s general manager of the production department and assistant general manager of the procurement department; and (ii) compared against the quotation from the Chinatex Group to ensure that the products to be procured from the Chinatex Group are comparable to the prices for such products being offered by independent third parties. Upon receipt of the initial quotations from the Chinatex Group and the independent suppliers, the Group will then invite each of the suppliers to submit a revised offer based on preliminary feedback provided by the Group. The revised offers will then again be reviewed and evaluated from both the technical and commercial perspectives by the Group’s production and procurement departments and compared with the offer of the Chinatex Group and purchases will only be made from the Chinatex Group if the price and terms offered are competitive and comparable and no less favourable to the Group than those offered by independent third party suppliers. Additionally, the Group will also make reference to the China Statistical Yearbook which contains price indices of certain commodities such as cotton and cooking oil.

– 9 –

LETTER FROM THE BOARD

Cap amount:

The proposed annual caps for the transactions contemplated under the 2018 Material Purchase Framework Agreement for the three years ending 31 December 2018 are as follows:

Year ending 31 December 2016 2017 2018 (HK$’000) (HK$’000) (HK$’000)

Proposed annual cap under the 2018 Material Purchase Framework Agreement 100,000 200,000 300,000

The proposed annual caps for the three years ending 31 December 2018 were determined with reference to (i) the historical transaction amounts under the Chinatex Purchase Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015; (ii) the increase in the Group’s demand for yarn and cotton for the manufacture of fabric and garments as a result of the expected increase in the Group’s production capacity by approximately 59% in the coming year and utilization rate as the Group purchases new knitting machines and steady rebound in real consumption of the U.S. market which is the Group’s major target market, taking into consideration of the expected growth of 30% per annum in the coming few years in the number of orders of the Group’s fabric and garment products; (iii) the expansion of the Group’s sales network in South Asia and Middle-East in 2016; (iv) the increase in yarns to be purchased from the Chinatex Group in terms of both the volume and as a proportion of the Group’s total purchase of yarn as the Chinatex Group’s lead time is shorter than other suppliers after order confirmations, which in turn enable the Group to maintain a relatively low level of raw material inventory by only placing orders when there is a demand; (v) anticipated rebound in price of yarn and cotton after continuing price drop of more than 25% during the last two years. The Company anticipates a rebound in price of yarn and cotton as (a) the price of modal yarn, a special type of yarn purchased from the Chinatex Group by the Group and a raw material the Group uses in the production of its fabrics, has increased by approximately 10% in 2015 as compared to the previous year; (b) the cotton area in the US is expected to be reduced by approximately 18.5% in 2015/16 as compared to the previous year, according to the National Cotton Council of

– 10 –

LETTER FROM THE BOARD

America; and (c) the cotton supply in China in 2015 is estimated to experience a year-on-year drop by 18.79%, according to China Cotton Association. The price of cotton will directly affect the price of yarn as cotton is used to produce yarn; and (vi) a reasonable increment of approximately 2% to the unit price of the products purchased from the Chinatex Group as a result of inflation.

The historical transaction amount under the Chinatex Purchase Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015 are as follows:

			Ten months
	**Year **	ended	ended
	31 December		31 October
	2013	2014	2015
	(HK$’000)	(HK$’000)	(HK$’000)
	(Audited)	(Audited)	(Unaudited)
Historical
transaction
amount	26,792	31,053	16,690

As at the date of the Latest Practicable Date, the annual caps under the 2015 Material Purchase Framework Agreement for the three years ending 31 December 2015 have not been exceeded.

Reasons for and benefits of entering into the Chinatex Purchase Transactions are set out below:

The Chinatex Group is under the direct administration of the State-Owned Assets Supervision and the Administration Commission of the State Council of the PRC and is one of the 500 largest enterprises in the PRC. It has two core businesses, namely, textiles business and grains and oils business. Taking into consideration of the quality of the products offered by the Chinatex Group, the Board is of the view that the Chinatex Group has competitive strengths over other independent suppliers of similar products in the PRC and considers that the 2018 Material Purchase Framework Agreement will enable the Group to obtain stable supply of yarns, cotton and other materials related to the production of fabrics and garments and enhance its position as one of the leading fabric suppliers to garment manufacturers in the global market. The entering into of the 2018 Material Purchase Framework Agreement will enable the Group to continue to secure a long-term stable supply of such materials and the Group has established an excellent cooperation relationship with the Chinatex Group from the previous Chinatex Purchase Transactions.

– 11 –

LETTER FROM THE BOARD

Based on the above, the Directors are of the view that the Chinatex Purchase Transactions have been and will continue to be entered into in the ordinary and usual course of business of the Group and on normal commercial terms. The terms of the 2018 Material Purchase Framework Agreement, including the proposed annual caps, were negotiated on an arm’s length basis and are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

(2) 2018 AH MASTER SALES AGREEMENT

The Company and Mr. Hirdaramani entered into the 2015 AH Master Sales Agreement on 19 April 2013 in relation to the AH Sales Transactions. As the 2015 AH Master Sales Agreement will be expiring on 31 December 2015 and since it is anticipated that the Group will continue to enter into new AH Sales Transactions with the AH Group in the ordinary and usual course of its business, the 2018 AH Master Sales Agreement was entered into on 18 November 2015 between the Company and Mr. Hirdaramani to renew the 2015 AH Master Sales Agreement for a term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

Set out below are the principal terms of the 2018 AH Master Sales Agreement.

Date: 18 November 2015 Parties: (1) the Company (2) Mr. Hirdaramani

Subject: Pursuant to the 2018 AH Master Sales Agreement, the Company agreed to, or procure members of the Group to, supply fabrics, yarns, fibers and garment parts, to members of the AH Group from time to time during the term of the 2018 AH Master Sales Agreement.

The Group and the AH Group will enter into individual orders setting out specific terms of the AH Sales Transactions. The terms of the individual orders will be consistent with the principles and the terms of the 2018 AH Master Sales Agreement. If there is any conflict between the terms of an individual order and the 2018 AH Master Sales Agreement, the latter shall prevail.

– 12 –

LETTER FROM THE BOARD

Conditions:

The 2018 AH Master Sales Agreement is conditional upon the passing of an ordinary resolution at the general meeting by the Independent Shareholders to approve the 2018 AH Master Sales Agreement and the transactions contemplated thereunder. If such condition is not fulfilled by 31 December 2015 or such later date as may be agreed by the Company and Mr. Hirdaramani in writing, the 2018 AH Master Sales Agreement shall terminate with immediate effect and none of the parties thereto shall have any rights against the other party except in relation to any antecedent breach of the 2018 AH Master Sales Agreement.

Term: The 2018 AH Master Sales Agreement has a fixed term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

Pricing policy: As a general principle, the price and terms of the individual orders in respect of the AH Sales Transactions will be on normal commercial terms, negotiated on an arm’s length basis, on similar basis as the Group transacts business with other independent third party customers and shall be on terms which are no less favourable to the Group than those provided to independent third party customers.

– 13 –

LETTER FROM THE BOARD

Subject to the general principle disclosed above, the sales department of the Group will also take into account the following factors when determining the selling price under the individual orders in respect of the AH Sales Transactions: (i) the prevailing market prices of the products to be sold by the Group to the AH Group; (ii) the quality and prices of the products available in the market; and (iii) the expected cost to be incurred by the Group in providing such products. In considering the above three factors, the Group will evaluate and assess the scope of the relevant order and prepare a detailed cost calculation with reference to the cost of materials, products and labors, quotations of the Group provided to other independent third party customers to ensure that the prices of the products of the Group are competitive and comparable to those being offered to independent third party customers of the Group. The evaluation and assessment of orders received and the preparation of costs calculations are mainly prepared by the Group’s sales department and subject to final approval by the head of the sales department. Additionally, the sales department will compare the Group’s prices with the range of selling price of similar products charged by competitors of the Group in the market. Selling prices charged by competitors are widely available as there are many fabric and yarn suppliers in the market competing for attractive selling prices. Some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric and yarn suppliers when negotiating the selling price with the Group.

The 2018 AH Master Sales Agreement does not provide a pre-determined profit margin for the products under the AH Sales Transactions as the profit margin depends on many circumstantial factors such as the then prevailing market price of the products and the cost of raw materials at the relevant time, both of which can fluctuate depending on the conditions of the market at the time. Additionally, the Group may accept orders with lower profit margins in certain circumstances, such as when production capacity is not fully utilized or if the customer is making bulk purchases. The above factors will be considered by the Group’s sales department in determining the selling prices for all products under the AH Sales Transactions and will be subject to the final approval of the head of the sales department. The senior manager of the Group’s internal audit department and the senior vice president of the Group will also supervise and monitor to ensure that all AH Sales Transactions are conducted in accordance with such pricing policy.

– 14 –

LETTER FROM THE BOARD

Further, the Group has a standard pricing policy for its sales which is applicable to all customers. In setting or revising the pricing for the products, market prices are obtained through recent transactions of the Group, enquiry with other industry players, researches on industry websites and the Group’s customers. The prices for all products to be sold to the AH Group under the 2018 AH Master Sales Agreement will be governed by such pricing policy and will not be less than the price of similar products sold by the Group to independent customers.

Cap amount:

The proposed annual caps for the transactions contemplated under the 2018 AH Master Sales Agreement for the three years ending 31 December 2018 are as follows:

	**Year **	**Year **	**ending 31 **	December
	2016		2017	2018
	(HK$’000)	(HK$’000)		(HK$’000)
Proposed annual
cap under the
2018 AH Master
Sales Agreement	150,000		150,000	150,000

The proposed annual caps for the three years ending 31 December 2018 were determined with reference to (i) the historical transaction amounts under the AH Sales Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015; (ii) the expected increase in the Group’s selling price for fabrics as compared to previous years due to the higher fees charged by the Group’s value added product segment such as printing on the fabric to be supplied; (iii) the AH Group’s stable demand for fabrics and yarns as compared to its historical demand due to its steady sales to its customers in the coming years for the AH Group; and (iv) the expected increase in the Group’s selling price for fabrics and yarns to cater for the anticipated rebound in price of yarn and cotton after continuing price drop of more than 25% during the last two years. The Company anticipates a rebound in price of yarn and cotton as (a) the price of modal yarn, a special type of yarn purchased from the Chinatex Group by the Group and a raw material the Group uses in the production of its fabrics, has increased by approximately 10% in 2015 as compared to the previous year; (b) the cotton area in the US is expected to be reduced by approximately 18.5% in 2015/16 as compared to the previous year, according to the National Cotton Council of America; and (c) the cotton supply in China in 2015 is estimated to experience a year-on-year drop by 18.79%, according to China Cotton Association. The price of cotton will directly affect the price of yarn as cotton is used to produce yarn.

– 15 –

LETTER FROM THE BOARD

The historical transaction amount under the AH Sales Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015 are as follows:

			Ten months
	**Year **	ended	ended
	31 December		31 October
	2013	2014	2015
	(HK$’000)	(HK$’000)	(HK$’000)
	(Audited)	(Audited)	(Unaudited)
Historical
transaction
amount	91,400	82,955	84,676
	(Note)

Note: The 2015 AH Master Sales Agreement commenced on 1 September 2013 and for the four months ended 31 December 2013, the transaction amount under this agreement was HK$25,752,000.

As at the date of the Latest Practicable Date, the annual caps under the 2015 AH Master Sales Agreement for the three years ending 31 December 2015 have not been exceeded.

Reasons for and benefits of entering into the AH Sales Transactions are set out below:

The Group has been entering into the AH Sales Transactions with the AH Group for almost 20 years and the sales to the AH Group has generated a stable source of revenue for the Group in the past years, which accounted for approximately 0.9%, 1.3% and 1.2% of the Group’s total revenue for the three years ended 31 December 2014, respectively. Taking into consideration of the stable and well-established cooperation history and strategic business relationship between the Group and the AH Group, the Board considers that the 2018 AH Master Sales Agreement will facilitate the Group to maintain existing revenue stream and business which in turn will benefit the Group’s revenue growth and future development.

Based on the above, the Directors are of the view that the AH Sales Transactions had been and will continue to be entered into in the ordinary and usual course of business of the Group and on normal commercial terms. The terms of the 2018 AH Master Sales Agreement, including the proposed annual caps, were negotiated on an arm’s length basis and are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

(3) 2018 LFK MASTER SALES AGREEMENT

The Company and LFK entered into the 2015 LFK Master Sales Agreement on 19 April 2013 in relation to the LFK Sales Transactions. As the 2015 LFK Master Sales Agreement will be expiring on 31 December 2015 and since it is anticipated that the Group will continue to enter into new LFK Sales Transactions with the LFK Group in the

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LETTER FROM THE BOARD

ordinary and usual course of its business, the 2018 LFK Master Sales Agreement was entered into on 18 November 2015 between the Company and LFK to renew the 2015 LFK Master Sales Agreement for a term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

Set out below are the principal terms of the 2018 LFK Master Sales Agreement.

Date: 18 November 2015

Parties: (1) the Company

(2) LFK

Subject: Pursuant to the 2018 LFK Master Sales Agreement, the Company agreed to, or procure members of the Group to, supply fabrics, yarns, fibers and garment parts, to members of the LFK Group from time to time during the term of the 2018 LFK Master Sales Agreement.

The Group and the LFK Group will enter into individual orders setting out specific terms of the LFK Sales Transactions. The terms of the individual orders will be consistent with the principles and the terms of the 2018 LFK Master Sales Agreement. If there is any conflict between the terms of an individual order and the 2018 LFK Master Sales Agreement, the latter shall prevail.

Conditions:

The 2018 LFK Master Sales Agreement is conditional upon the passing of an ordinary resolution at the general meeting by the Independent Shareholders to approve the 2018 LFK Master Sales Agreement and the transactions contemplated thereunder. If such condition is not fulfilled by 31 December 2015 or such later date as may be agreed by the Company and LFK in writing, the 2018 LFK Master Sales Agreement shall terminate with immediate effect and none of the parties thereto shall have any rights against the other party except in relation to any antecedent breach of the 2018 LFK Master Sales Agreement.

Term:

The 2018 LFK Master Sales Agreement has a fixed term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

– 17 –

LETTER FROM THE BOARD

Pricing policy:

As a general principle, the price and terms of the individual orders in respect of the LFK Sales Transactions will be on normal commercial terms, negotiated on an arm’s length basis, on similar basis as the Group transacts business with other independent third party customers and shall be on terms which are no less favourable to the Group than those provided to independent third party customers.

Subject to the general principle disclosed above, the sales department of the Group will also take into account the following factors when determining the selling price under the individual orders in respect of the LFK Sales Transactions: (i) the prevailing market prices of the products to be sold by the Group to the LFK Group; (ii) the quality and prices of the products available in the market; and (iii) the expected cost to be incurred by the Group in providing such products. In considering the above three factors, the Group will evaluate and assess the scope of the relevant order and prepare a detailed cost calculation with reference to the cost of materials, products and labors, quotes of the Group to other independent third party customers to ensure that the prices of the products of the Group are competitive and comparable to those being offered to independent third party customers of the Group. The evaluation and assessment of orders received and the preparation of costs calculations are mainly prepared by the Group’s sales department and subject to final approval by the head of the sales department. Additionally, the sales department will compare the Group’s prices with the range of selling price charged by competitors of the Group in the market. Selling prices charged by competitors are widely available as there are many fabric and yarn suppliers in the market competing for attractive selling prices. Some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric and yarn suppliers when negotiating the selling price with the Group.

– 18 –

LETTER FROM THE BOARD

The 2018 LFK Master Sales Agreement does not provide a pre-determined profit margin for the products under the LFK Sales Transactions as the profit margin depends on many circumstantial factors such as the then prevailing market price of the products and the cost of raw materials at the relevant time, both of which can fluctuate depending on the conditions of the market at the time. Additionally, the Group may accept orders with lower profit margins in certain circumstances, such as when production capacity is not fully utilized or if the customer is making bulk purchases. The above factors will be considered by the Group’s sales department in determining the selling prices for all products under the LFK Sales Transactions and will be subject to the final approval of the head of the sales department. The senior manager of the Group’s internal audit department and the senior vice president of the Group will also supervise and monitor to ensure that all LFK Sales Transactions are conducted in accordance with such pricing policy.

Further, the Group has a standard pricing policy for its sales which is applicable to all customers. In setting or revising the pricing for the products, market prices are obtained through recent transactions of the Group, enquiry with other industry players, researches on industry websites and the Group’s customers. The prices for all products to be sold to the LFK Group under the 2018 LFK Master Sales Agreement will be governed by such pricing policy and will not be more favorable than the price of similar products sold by the Group to independent customers.

Cap amount: The proposed annual caps for the transactions contemplated under the 2018 LFK Master Sales Agreement for the three years ending 31 December 2018 are as follows:

	**Year **	**ending 31 **	December
	2016	2017	2018
	(HK$’000)	(HK$’000)	(HK$’000)
Proposed annual
cap under the
2018 LFK Master
Sales Agreement	300,000	340,000	380,000

– 19 –

LETTER FROM THE BOARD

The proposed annual caps for the three years ending 31 December 2018 were determined with reference to (i) the historical transaction amounts under the LFK Sales Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015; (ii) the improvements in the production capacity and utilization rate of the Group’s production equipment; (iii) the increase in the LFK Group’s demand for fabrics and yarns is expected to nearly double as compared to its historical demand as a result of steady rebound in real consumption of the U.S. market which is the LFK Group’s major target market and the business expansion of the LFK Group; and (iv) the expected increase in the Group’s selling price for fabrics and yarns to cater for the anticipated rebound in price of yarn and cotton after continuing price drop of more than 25% during the last two years. The Company anticipates a rebound in price of yarn and cotton as (a) the price of modal yarn, a special type of yarn purchased from the Chinatex Group by the Group and a raw material the Group uses in the production of its fabrics, has increased by approximately 10% in 2015 as compared to the previous year; (b) the cotton area in the US is expected to be reduced by approximately 18.5% in 2015/16 as compared to the previous year, according to the National Cotton Council of America; and (c) the cotton supply in China in 2015 is estimated to experience a year-on-year drop by 18.79%, according to China Cotton Association. The price of cotton will directly affect the price of yarn as cotton is used to produce yarn.

– 20 –

LETTER FROM THE BOARD

The historical transaction amount under the LFK Sales Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015 are as follows:

			Ten months
	**Year **	ended	ended
	31 December		31 October
	2013	2014	2015
	(HK$’000)	(HK$’000)	(HK$’000)
	(Audited)	(Audited)	(Unaudited)
Historical
transaction
amount	97,440	117,545	179,996
	(Note)

Note: The 2015 LFK Master Sales Agreement commenced on 1 September 2013 and for the four months ended 31 December 2013, the transaction amount under this agreement was HK$31,744,000.

As at the date of the Latest Practicable Date, the annual caps under the 2015 LFK Master Sales Agreement for the three years ending 31 December 2015 have not been exceeded.

Reasons for and benefits of entering into the LFK Sales Transactions are set out below:

The Group has been entering into the LFK Sales Transactions with the LFK Group over 20 years and the sales to the LFK Group has generated an increasing source of revenue for the Group in the past years, which accounted for approximately 0.8%, 1.4% and 1.7% of the Group’s total revenue for the three years ended 31 December 2014, respectively. Taking into consideration of the stable and well-established cooperation history and strategic business relationship between the Group and the LFK Group, the Board considers that the 2018 LFK Master Sales Agreement will facilitate the Group to maintain existing revenue stream and business which in turn will benefit the Group’s revenue growth and future development.

Based on the above, the Directors are of the view that the LFK Sales Transactions had been and will continue to be entered into in the ordinary and usual course of business of the Group and on normal commercial terms. The terms of the 2018 LFK Master Sales Agreement, including the proposed annual caps, were negotiated on an arm’s length basis and are fair and reasonable and are in the interests of the Group and the Shareholders as a whole.

– 21 –

LETTER FROM THE BOARD

(4) 2018 FM MASTER SALES AGREEMENT

The Company and Mr. Omar entered into the 2015 FM Master Sales Agreement on 19 April 2013 in relation to the FM Sales Transactions. As the 2015 FM Master Sales Agreement will be expiring on 31 December 2015 and since it is anticipated the Group will continue to enter into new FM Sales Transactions with the FM Group in the ordinary and usual course its business, the 2018 FM Master Sales Agreement was entered into on 18 November 2015 between the Company and Mr. Omar to renew the 2015 FM Master Sales Agreement for a term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

Set out below are the principal terms of the 2018 FM Master Sales Agreement.

Date: 18 November 2015

Parties: (1) the Company

• (2) Mr. Omar

Subject:

Pursuant to the 2018 FM Master Sales Agreement, the Company agreed to, or procure members of the Group to, supply fabrics, yarns, fibers and garment parts, to the FM Group from time to time during the term of the 2018 FM Master Sales Agreement.

The Group and the FM Group will enter into individual orders setting out specific terms of the FM Sales Transactions. The terms of the individual orders will be consistent with the principles and the terms of the 2018 FM Master Sales Agreement. If there is any conflict between the terms of an individual order and the 2018 FM Master Sales Agreement, the latter shall prevail.

Conditions:

The 2018 FM Master Sales Agreement is conditional upon the passing of an ordinary resolution at the general meeting by the Independent Shareholders to approve the 2018 FM Master Sales Agreement and the transactions contemplated thereunder. If such condition is not fulfilled by 31 December 2015 or such later date as may be agreed by the Company and Mr. Omar in writing, the 2018 FM Master Sales Agreement shall terminate with immediate effect and none of the parties thereto shall have any rights against the other party except in relation to any antecedent breach of the 2018 FM Master Sales Agreement.

– 22 –

LETTER FROM THE BOARD

Term:

Pricing policy:

The 2018 FM Master Sales Agreement has a fixed term of three years commencing from 1 January 2016 to 31 December 2018 (both days inclusive).

As a general principle, the price and terms of the individual orders in respect of the FM Sales Transactions will be on normal commercial terms, negotiated on an arm’s length basis, on similar basis as the Group transacts business with other independent third party customers and shall be on terms which are no less favourable to the Group than those provided to independent third party customers.

Subject to the general principle disclosed above, the sales department of the Group will also take into account the following factors when determining the selling price under the individual orders in respect of the FM Sales Transactions: (i) the prevailing market prices of the products to be sold by the Group to the FM Group; (ii) the quality and prices of the products available in the market; and (iii) the expected cost to be incurred by the Group in providing such products. In considering the above three factors, the Group will evaluate and assess the scope of the relevant order and prepare a detailed cost calculation by reference to the cost of materials, products and labors, quotes of the Group to other independent third party customers to ensure that the prices of the products of the Group are competitive and comparable to those being offered to independent third party customers of the Group. The evaluation and assessment of orders received and the preparation of costs calculations are mainly prepared by the Group’s sales department and subject to final approval by the head of the sales department. Additionally, the sales department will also compare the Group’s prices with the range of selling price charged by competitors of the Group in the market (if available). Selling prices charged by competitors are widely available as there are many fabric and yarn suppliers in the market competing for attractive selling prices. Some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric and yarn suppliers when negotiating the selling price with the Group.

– 23 –

LETTER FROM THE BOARD

The 2018 FM Master Sales Agreement does not provide a pre-determined profit margin for the products under the FM Sales Transactions as the profit margin depends on many circumstantial factors such as the then prevailing market price of the products and the cost of raw materials at the relevant time, both of which can fluctuate depending on the conditions of the market at the time. Additionally, the Group may accept orders with lower profit margins in certain circumstances, such as when production capacity is not fully utilized or if the customer is making bulk purchases. The above factors will be considered by the Group’s sales department in determining the selling prices for all products under the FM Sales Transactions and will be subject to the final approval of the head of the sales department. The senior manager of the Group’s internal audit department and the senior vice president of the Group will also supervise and monitor to ensure that all FM Sales Transactions are conducted in accordance with such pricing policy.

Further, the Group has a standard pricing policy for its sales which is applicable to all customers. In setting or revising the pricing for the products, market prices are obtained through recent transactions of the Group, enquiry with other industry players, researches on industry websites and the Group’s customers. The prices for all products to be sold to the FM Group under the 2018 FM Master Sales Agreement will be governed by such pricing policy and will not be less than the price of similar products sold by the Group to independent customers.

Cap amount: The proposed annual caps for the transactions contemplated under the 2018 FM Master Sales Agreement for the three years ending 31 December 2018 are as follows:

	**Year **	**Year **	**ending 31 **	December
	2016		2017	2018
	(HK$’000)	(HK$’000)		(HK$’000)
Proposed annual
cap under the
2018 FM Master
Sales Agreement	230,000		230,000	230,000

– 24 –

LETTER FROM THE BOARD

The proposed annual caps for the three years ending 31 December 2018 were determined with reference to (i) the historical transaction amounts under the FM Sales Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015; (ii) the expected increase in the FM Group’s demand for fabrics and yarns provided by the Group as compared to its historical demand as a result of the business expansion of the FM Group; and (iii) the expected increase in the Group’s selling price for fabrics and yarns to cater for the anticipated rebound in price of yarn and cotton after continuing price drop of more than 25% during the last two years. The Company anticipates a rebound in price of yarn and cotton as (a) the price of modal yarn, a special type of yarn purchased from the Chinatex Group by the Group and a raw material the Group uses in the production of its fabrics, has increased by approximately 10% in 2015 as compared to the previous year; (b) the cotton area in the US is expected to be reduced by approximately 18.5% in 2015/16 as compared to the previous year, according to the National Cotton Council of America; and (c) the cotton supply in China in 2015 is estimated to experience a year-on-year drop by 18.79%, according to China Cotton Association. The price of cotton will directly affect the price of yarn as cotton is used to produce yarn.

The historical transaction amount under the FM Sales Transactions for the two years ended 31 December 2014 and the ten months ended 31 October 2015 are as follows:

			Ten months
	**Year **	ended	ended
	31 December		31 October
	2013	2014	2015
	(HK$’000)	(HK$’000)	(HK$’000)
	(Audited)	(Audited)	(Unaudited)
Historical
transaction
amount	152,879	155,037	160,753
	(Note)

Note: The 2015 FM Master Sales Agreement commenced on 1 September 2013 and for the four months ended 31 December 2013, the transaction amount under this agreement was HK$52,882,000.

– 25 –

LETTER FROM THE BOARD

As at the date of the Latest Practicable Date, the annual caps under the 2015 FM Master Sales Agreement for the three years ending 31 December 2015 have not been exceeded.

Reasons for and benefits of entering into the FM Sales Transactions are set out below:

The Group has been entering into the FM Sales Transactions with the FM Group for almost 20 years and the sales to the FM Group has generated a stable source of revenue for the Group in the past years, which accounted for approximately 2.0%, 2.2% and 2.3% of the Group’s total revenue for the three years ended 31 December 2014, respectively. Taking into consideration of the stable and well-established cooperation history and strategic business relationship between the Group and the FM Group, the Board considers that the 2018 FM Master Sales Agreement will facilitate the Group to maintain existing revenue stream and business which in turn will benefit the Group’s revenue growth and future development.

Based on the above, the Directors are of the view that the FM Sales Transactions had been and will continue to be entered into in the ordinary and usual course of business of the Group and on normal commercial terms. The terms of the 2018 FM Master Sales Agreement, including the proposed annual caps, were negotiated on an arm’s length basis and are fair and reasonable and are in the interests of the Group and the Shareholders as a whole.

III. PAYMENT TERMS

The payment terms for the transactions contemplated under each of the 2018 CCT Agreements will be stipulated in the relevant individual orders. Depending on the particular products and/or services to be purchased or supplied, the transactions contemplated under each of the 2018 CCT Agreements will normally be settled in the form of cash payment on a monthly, quarterly or agreed period basis and shall be consistent with the payment terms in the market. The payment terms offered under each of the 2018 CCT Agreements will be in line with the payment terms offered by the Group to its independent third party customers/suppliers.

IV. INTERNAL CONTROL FOR THE GROUP’S CONTINUING CONNECTED TRANSACTIONS

The pricing policy for all the continuing connected transactions of the Group will be supervised and monitored by the senior manager of the Group’s internal audit department and the senior vice president of the Group and management of the Group in charge to ensure all the continuing connected transactions are conducted on normal commercial terms and in accordance with the pricing policy of the Group and will not be prejudicial to the interests of the Company and its Shareholders as a whole. The senior manager of the Group’s internal audit department and the senior vice president of the Group and management of the Group will conduct regular checks to review and assess whether individual transactions contemplated

– 26 –

LETTER FROM THE BOARD

under continuing connected transactions are conducted in accordance with the terms of its respective agreement and will also regularly review whether the price charged/paid for a specific transaction is fair and reasonable and in accordance with the aforesaid pricing policy. The independent non-executive Directors will review the transactions contemplated under all continuing connected transactions of the Company and the auditors of the Group will also conduct an annual review on the pricing terms and annual caps thereof. Accordingly, the Directors consider that the internal control mechanism is effective to ensure that the transactions contemplated under all continuing connected transactions have been and will be conducted on normal commercial terms and in accordance with the pricing policy of the Group and not prejudicial to the interests of the Company and the Shareholders as a whole.

V. LISTING RULE IMPLICATIONS

Chinatex is a controlling shareholder of the Company and hence a connected person of the Company under the Listing Rules. Accordingly, members of the Chinatex Group are associates of Chinatex and hence connected persons of the Company under the Listing Rules. Accordingly, the entering into of the 2018 Material Purchase Framework Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

Mr. Hirdaramani is a director and substantial shareholder of a non-wholly owned subsidiary of the Company and hence a connected person of the Company under the Listing Rules. The AH Group comprises companies which Mr. Hirdaramani and his associates and relatives individually or together exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors. Accordingly, members of the AH Group are associates of Mr. Hirdaramani and hence connected persons of the Company under the Listing Rules. Accordingly, the entering into of the 2018 AH Master Sales Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules. Mr. Hirdaramani is not a Shareholder.

Mr. Ha is an executive Director and hence a connected person of the Company under the Listing Rules. LFK is 100% owned by a discretionary trust whose settlor and protectors include Mr. Ha’s relatives. Accordingly, members of the LFK Group are associates of Mr. Ha and hence connected persons of the Company under the Listing Rules. Accordingly, the entering into of the 2018 LFK Master Sales Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

Mr. Omar is a director and substantial shareholder of a non-wholly owned subsidiary of the Company and hence a connected person of the Company under the Listing Rules. The FM Group comprises companies which Mr. Omar and his associates and relatives individually or together exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors. Accordingly, members of the FM Group are associates of Mr. Omar and hence connected persons of the Company under the Listing Rules. Accordingly, the entering into of the 2018 FM Master Sales Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules. Mr. Omar is not a Shareholder.

– 27 –

LETTER FROM THE BOARD

As one or more of the applicable percentage ratios (other than the profit ratio) for the proposed annual cap amounts under each of the 2018 CCT Agreements is or are, on an annual basis, expected to exceed 5%, the transactions contemplated under each of the 2018 CCT Agreements are subject to the reporting, annual review, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

Details of each of the 2018 CCT Agreements will be disclosed in the Company’s next published annual report and accounts, as required by the Listing Rules.

VI. INFORMATION ON THE GROUP AND THE CONNECTED PERSONS

The Group is principally engaged in the production and sales of knitted fabrics, sales of garments and provision of knitting, dyeing, printing and finishing services.

To the best knowledge of the Directors,

• (a) the Chinatex Group is principally engaged in the business of manufacturing and sales of yarns, cotton, garments and oil and foodstuff;

• (b) the AH Group is principally engaged in the business of manufacturing and exporting of knit and woven apparel for men, women and children;

• (c) the LFK Group is principally engaged in the business of design, manufacturing and sale of garment products; and

• (d) the FM Group is principally engaged in the business of manufacturing, exporting and distributing of apparel for men, women, and children.

VII. GENERAL

The Directors (including the independent non-executive Directors) are of the view that the transactions contemplated under each of the 2018 CCT Agreements are in the ordinary and usual course of business of the Group and on normal commercial terms. The terms of each of the 2018 CCT Agreements are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

As members of the LFK Group are associates of Mr. Ha under the Listing Rules, Mr. Ha is treated to have a material interest in the transactions contemplated under the 2018 LFK Master Sales Agreement and accordingly, Mr. Ha and Dr. Yen Gordon (brother-in-law of Mr. Ha), had abstained from voting on the resolution proposed at the board meeting of the Company to approve the renewal of the 2018 LFK Master Sales Agreement and the transactions contemplated thereunder. Save as mentioned above, no Directors have any material interests in the transactions contemplated under the 2018 CCT Agreements and accordingly had not abstained from voting on the relevant resolutions proposed at the board meeting of the Company to approve the 2018 CCT Agreements and the transactions contemplated thereunder.

– 28 –

LETTER FROM THE BOARD

An Independent Board Committee has been established to consider and advise the Independent Shareholders on the terms of and the transactions contemplated under each of the 2018 CCT Agreements and the Independent Financial Adviser has been appointed by the Company to provide its opinion to the Independent Board Committee and the Independent Shareholders regarding the same.

The Company will propose ordinary resolutions at the EGM to approve the 2018 CCT Agreements and the transactions contemplated thereunder. Pursuant to Rule 14A.36 of the Listing Rules, any Shareholder who has a material interest in a continuing connected transaction is required to abstain from voting on the relevant resolutions to approve such a transaction at the a general meeting. Accordingly, to the best of the Directors’ knowledge, information and belief, as at the date of the Latest Practicable Date, (i) Chinatex and its associates are required to abstain from voting on the resolution to be proposed at the EGM to approve the 2018 Material Purchase Framework Agreement and the transactions contemplated thereunder and were in aggregate interested in approximately 35.94% of the total number of issued Shares; and (ii) Mr. Ha and his associates and relatives are required to abstain from voting on the resolution to be proposed at the EGM to approve the 2018 LFK Master Sales Agreement and the transactions contemplated thereunder and were in aggregate interested in approximately 13.89% of the total number of issued Shares.

3. EGM AND PROXY ARRANGEMENT

The notice of the EGM is set out on pages 54 to 55 of this circular.

Pursuant to Rule 13.39(4) of the Listing Rules, all votes of the Shareholders at a general meetings must be taken by poll except where the chairman of the Company, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands. To the best of the knowledge, information and belief of the Directors, save for Chinatex and its associates shall abstain from voting on the proposed resolution approving the 2018 Material Purchase Framework Agreement and the transactions contemplated thereunder, and Mr. Ha and his associates and relatives shall abstain from voting on the proposed resolution approving the 2018 LFK Master Sales Agreement and the transactions contemplated, none of the Shareholders is required to abstain from voting on any of the resolutions to be proposed at the EGM. An announcement on the poll results will be published by the Company after the EGM in the manner prescribed under Rule 13.39(5) of the Listing Rules.

A form of proxy for use at the EGM is enclosed with this circular and such form of proxy is also published on the websites of Hong Kong Exchanges and Clearing Limited (www.hkexnews.hk) and the Company (www.fshl.com) . To be valid, the form of proxy must be completed and signed in accordance with the instructions printed thereon and deposited, together with the power of attorney or other authority (if any) under which it is signed or a notarially certified copy of that power of attorney or authority at the Company’s branch share registrar in Hong Kong, Tricor Secretaries Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof. Completion and delivery of the form of proxy will not preclude you from attending and voting at the EGM or any adjournment thereof if you so wish.

– 29 –

LETTER FROM THE BOARD

4. GENERAL INFORMATION

Your attention is drawn to the appendix headed “General Information” to this circular.

5. RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 31 of this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders regarding the proposed resolution to approve the 2018 CCT Agreements and the transactions contemplated thereunder; and (ii) the letter from the Independent Financial Adviser set out on pages 32 to 47 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in respect of the fairness and reasonableness of the terms of the 2018 CCT Agreements and the transactions contemplated thereunder.

The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that the terms of the 2018 CCT Agreements and the transactions contemplated thereunder are in the interests of the Company and the Shareholders as a whole and are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM in respect of the approval of the 2018 CCT Agreements and the transactions contemplated thereunder.

The Board considers that the 2018 CCT Agreements and the transactions contemplated thereunder are fair and reasonable so far as the Shareholders are concerned and are in the interests of the Company and its Shareholders as a whole. The Board considers that the resolution proposed in the notice of EGM is in the best interests of the Company and the Shareholders and therefore recommends you to vote in favour of the relevant resolution to be proposed at the EGM.

Yours faithfully,

For and on behalf of the Board Fountain Set (Holdings) Limited ZHAO Yao

Chairman and Chief Executive Officer

– 30 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter of recommendation, prepared for the purpose of incorporation in the circular, from the Independent Board Committee to the Independent Shareholders in respect of approving the 2018 CCT Agreements and the transactions contemplated thereunder.

==> picture [220 x 44] intentionally omitted <==

(Incorporated in Hong Kong with limited liability)

(Stock code: 420)

11 December 2015

To the Independent Shareholders

Dear Sir or Madam,

RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 11 December 2015 (the “ Circular ”), in which this letter forms a part. Unless the context requires otherwise, capitalised terms used in this letter will have the same meanings as those defined in the Circular unless the context otherwise requires.

We have been appointed by the Board as the Independent Board Committee to advise the Independent Shareholders on whether the terms of each of the 2018 CCT Agreements and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Group and the Shareholders as a whole.

We wish to draw your attention to the letter of advice from the Independent Financial Adviser as set out on pages 32 to 47 of the Circular and the letter from the Board as set out on pages 6 to 30 of the Circular.

Having considered the information set out in the letter from the Board, the terms and conditions of each of the 2018 CCT Agreements, the factors and reasons considered by, and the opinion of Independent Financial Adviser as stated in its letter of advice, we consider that the terms of each of the 2018 CCT Agreements and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Group and the Shareholders as a whole and accordingly recommend the Independent Shareholders to vote in favour of the ordinary resolution in relation to the approval of the 2018 CCT Agreements and the transactions contemplated thereunder to be proposed at the EGM.

Yours faithfully,

For and on behalf of the

Independent Board Committee

Mr. NG Kwok Tung Independent Non-executive Director

Mr. CHOW Wing Kin, Anthony, SBS, JP Independent Non-executive Director

Mr. YING Wei

Independent Non-executive Director

– 31 –

LETTER FROM DONVEX CAPITAL

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

==> picture [103 x 62] intentionally omitted <==

Unit 1305, 13th Floor, Carpo Commercial Building 18-20 Lyndhurst Terrace Central Hong Kong

11 December 2015

• The Independent Board Committee and the Independent Shareholders of Fountain Set (Holdings) Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the 2018 Material Purchase Framework Agreement, the 2018 AH Master Sales Agreement, the 2018 LFK Master Sales Agreement, the 2018 FM Master Sales Agreement and the annual caps applicable thereto, details of which are set out in the Letter from the Board (the “ Board Letter ”) contained in the circular of the Company dated 11 December 2015 to the Shareholders (the “ Circular ”) of which this letter forms part. Capitalised terms used herein have the same meanings as defined elsewhere in the Circular unless the context requires otherwise.

Reference is made to the Company’s announcement dated 18 November 2015 in relation to the followings:

1. On 18 November 2015, the Company and Chinatex entered into the 2018 Material Purchase Framework Agreement to renew the 2015 Material Purchase Framework Agreement as disclosed in the Company’s announcement dated 19 December 2012 and the Company’s circular dated 10 January 2013 upon its expiration. The 2018 Material Purchase Framework Agreement will expire on 31 December 2018.

2. On 18 November 2015, the Company, the AH Group, LFK Group and FM Group entered into the 2018 AH Master Sales Agreement, the 2018 LFK Master Sales Agreement and the 2018 FM Master Sales Agreement to renew the 2015 AH Master Sales Agreement, 2015 LFK Master Sales Agreement and 2015 FM Master Sales Agreement, respectively, as disclosed in the Company’s announcement dated 19 April 2013 and the Company’s circular dated 13 May 2013 upon their expiration. The 2018 AH Master Sales Agreement, the 2018 LFK Master Sales Agreement and the 2018 FM Master Sales Agreement will all expire on 31 December 2018.

– 32 –

LETTER FROM DONVEX CAPITAL

Chinatex is a controlling shareholder of the Company and hence a connected person of the Company under Chapter 14A of the Listing Rules. Accordingly, members of the Chinatex Group are associates of Chinatex under the Listing Rules and connected persons of the Company. As such, the entering into of the 2018 Material Purchase Framework Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

Mr. Hirdaramani is a director and substantial shareholder of a non-wholly owned subsidiary of the Company and hence a connected person of the Company under Chapter 14A of the Listing Rules. The AH Group comprises companies which Mr. Hirdaramani and his associates and relatives individually or together exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors. Members of the AH Group are associates of Mr. Hirdaramani under the Listing Rules and connected persons of the Company. As such, the entering into of the 2018 AH Master Sales Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

Mr. Ha is an executive Director and hence a connected person of the Company under Chapter 14A of the Listing Rules. LFK is 100% owned by a discretionary trust whose settlor and protectors include Mr. Ha’s relatives. Members of the LFK Group are associates of Mr. Ha under the Listing Rules and connected persons of the Company. As such, the entering into of the 2018 LFK Master Sales Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

Mr. Omar is a director and substantial shareholder of a non-wholly owned subsidiary of the Company and hence a connected person of the Company under Chapter 14A of the Listing Rules. The FM Group comprises companies which Mr. Omar and his associates and relatives individually or together exercise or control the exercise of more than 50% of the voting power at general meetings or control the composition of a majority of the board of directors. Members of the FM Group are associates of Mr. Omar under the Listing Rules and connected persons of the Company. As such, the entering into of the 2018 FM Master Sales Agreement and the transactions contemplated thereunder constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules.

As one or more of the applicable percentage ratios for the transactions contemplated under each of the 2018 CCT Agreements exceed 5% on an annual basis for the three years ending 31 December 2018, the transactions contemplated thereunder are subject to the reporting, annual review, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

The Independent Board Committee, comprising Mr. Ng Kwok Tung, Mr. Chow Wing Kin, Anthony, SBS , JP and Mr. Ying Wei, all being the independent non-executive Directors, has been formed to consider whether (i) the terms of the 2018 CCT Agreements are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the continuing connected transactions contemplated under the 2018 CCT Agreements,

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including the annual caps are in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole, and to make recommendations to the Independent Shareholders in respect thereof. Being the Independent Financial Adviser, our role is to give an independent opinion to the Independent Board Committee and the Independent Shareholders in this regard.

We are independent from, and not connected with, the Company or any of its substantial shareholders, directors, chief executive, or any of their respective associates, and have sufficient expertise and resources to give an opinion on the transactions. As at the Latest Practicable Date, we did not have any relationship with or interest in the Company or any other parties that could reasonably be regarded as relevant to our independence. Apart from normal professional fees in connection with this appointment as the Independent Financial Adviser, no other arrangements exist whereby we had received or will receive any fees and/or benefits from the Company or any other parties that could reasonably be regarded as relevant to our independence. We did not act as the independent financial adviser to the Company’s other transactions in the last two years, except for the current engagement as the Independent Financial Adviser.

BASIS OF OUR OPINION

In formulating our opinion to the Independent Board Committee and the Independent Shareholders, we have relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Directors and management of the Company. We have no reason to believe that any information and representations relied on by us in forming our opinion is untrue, inaccurate or misleading, nor are we aware of any material facts the omission of which would render the information provided and the representations made to us untrue, inaccurate or misleading. We have assumed that all statements, information, opinions and representations contained or referred to in the Circular, which have been provided by the Directors and management of the Company and for which they are solely and wholly responsible, were true and accurate at the time they were made and continue to be true until the date of the EGM.

The Directors have jointly and severally accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, which to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in the Circular misleading.

We consider that we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We have not, however, for the purpose of this exercise, conducted any form of independent in-depth investigation or audit into the businesses or affairs or future prospects of the Company, the Chinatex Group, the AH Group, the LFK Group and the FM Group and their respective associates, nor have we carried out independent verification on the information supplied. Our opinion is necessarily based on the financial, economic, market and other conditions in effect and the information made available to us as

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at the Latest Practicable Date. Shareholders should note that subsequent developments, including any material change in market and economic conditions, may affect or change our opinion and we have no obligation to update this opinion to take into account events occurring after the Latest Practicable Date or to update, revise or reaffirm our opinion. Nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

This letter is issued for the information of the Independent Board Committee and the Independent Shareholders solely in connection with their consideration of the 2018 CCT Agreements and the annual caps and, except for its inclusion in the Circular, is not to be quoted or referred to, in whole or in part, nor shall this letter be used for any other purposes, without our prior written consent.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the 2018 CCT Agreements and the annual caps, we have taken into consideration the following principal factors and reasons:

1. Background of and reason for the 2018 CCT Agreements

Background of the Group

The Group is one of the world’s largest circular knitted fabric manufacturers providing vertically integrated operations in fabric knitting, dyeing, printing and finishing. The Group is a major knitted fabric supplier to garment manufacturers in over 40 countries that supply apparel products to many internationally renowned retailers and brands. The Group has production facilities in the PRC, Sri Lanka and Indonesia, with market and representative offices in 5 countries and a global staff presence.

2018 Material Purchase Framework Agreement

On 19 December 2012, the Company entered into the 2015 Material Purchase Framework Agreement with Chinatex, pursuant to which, the Chinatex Group shall supply and the Group shall purchase yarn, cotton, other materials for manufacture of fabric, garments and cooking oil and foodstuffs for the three years ending 31 December 2015. Since it is anticipated that the Group will continue to enter into new Chinatex Purchase Transactions with the Chinatex Group in the ordinary and usual course of its business, the 2018 Material Purchase Framework Agreement was entered into on 18 November 2015 between the Company and Chinatex to renew the 2015 Material Purchase Framework Agreement for a term of three years ending 31 December 2018.

The Chinatex Group is under the direct administration of the State-Owned Assets Supervision and the Administration Commission of the State Council of the PRC and is one of the 500 largest enterprises in the PRC. It has two core-businesses, namely, textiles business and grains and oils business.

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The Group has established an excellent cooperation relationship with the Chinatex Group from the previous Chinatex Purchase Transactions. As the Chinatex Group has competitive strengths over other suppliers of similar products in the PRC and taking into consideration of the quality of the products offered by Chinatex Group, the Directors are of the view that it will enable the Group to secure a long-term stable supply of yarns, cotton and other materials related to the production of fabrics, garments and enhance its position as one of the leading fabric suppliers to garment manufacturers in the global market by entering into the 2018 Material Purchase Framework Arrangement.

Due to the fact that (i) Chinatex Group is under the direct administration of the State-Owned Assets Supervision and the Administration Commission of the State Council of the PRC and is one of the 500 largest enterprises in the PRC; (ii) the Group have been purchasing raw materials from Chinatex Group since 2012; and (iii) the actual purchase amount of yarn, cotton, other materials for the manufacture of fabric, garments and cooking oil and foodstuffs by the Group from Chinatex Group was approximately HK$27 million, HK$31 million and HK$17 million for the years ended 31 December 2013 and 2014 and ten months ended 31 October 2015, respectively, the Board is of the view, and we concur with their view that the 2018 Material Purchase Framework Agreement is conducted in the ordinary and usual course of the Group’s business and will enable the Group to secure a long-term stable supply of raw materials for its production.

2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement

The Group has been entering into AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions over many years, the aggregate amounts of the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions have represented a stable source of revenue for the Group, accounting for approximately 3.7%, 4.9% and 5.2% for the years ended 31 December 2012, 2013 and 2014, respectively. The Group has developed a stable and well-established cooperation history and strategic business relationship with AH Group, LFK Group and FM Group.

Taking into account (i) the Group’s long term strategic business relationship with AH Group and FM Group for almost 20 years, and with LFK Group for over 20 years; and (ii) the aggregate amounts from the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions were increasing steadily over the past three years to approximately 5% of the Group’s revenue as mentioned above, the Board is of the view and we concur with their view, that the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement, particularly that the continuing connected transactions are revenue generating in nature, are conducted in the ordinary and usual course of the Group’s business and will facilitate the Group to maintain existing revenue stream and business which will provide stable cashflow to the Group and in turn benefit the Group’s revenue growth and future development.

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2. Basis of determination

Pricing and payment terms of 2018 Material Purchase Framework Agreement

Pricing policy

As a general principle, the price and terms of the individual order in respect of the Chinatex Purchase Transactions will be on normal commercial terms, negotiated on an arm’s length basis, on similar basis as the Group transacts business with other independent third party suppliers and shall be on terms which are no less favourable than those provided by independent third party suppliers to the Group.

Subject to the general principle disclosed above, the Group will also take into account the following factors when determining the purchase price payable by the Group under the individual orders in respect of the Chinatex Purchase Transactions: (i) the prevailing market prices of similar products obtained through internal checks and research conducted by the Company; (ii) the quality and prices of the products offered by other independent third party suppliers; and (iii) the expected cost to be incurred by the Chinatex Group in providing such products. In addition to the above, the Group will semi-annually obtain market prices of the products through publicly available sources.

Given that none of the products under the 2018 Material Purchase Framework Agreement has a fixed unit price, in determining the purchase price for an individual order, the Group will invite quotations from at least three independent suppliers to get a reference on the prevailing market prices for the relevant products to be procured. Such quotations will be:

• (i) reviewed and evaluated from both the technical and commercial perspectives, such as the purity, cleanliness, yarn count, pricing and lead time, jointly by the Group’s production and procurement departments and subject to the final approval by the Group’s general manager of the production department, assistant general manager of the procurement department; and

• (ii) compared against the quotation from the Chinatex Group to ensure that the products to be procured from the Chinatex Group are comparable to the prices for such products being offered by independent third parties. Upon receipt of the initial quotations from the Chinatex Group and the independent suppliers, the Group will then invite each of the suppliers to submit a revised offer based on preliminary feedback provided by the Group. The revised offers will then again be reviewed and evaluated from both the technical and commercial perspectives by the Group’s production and procurement departments and compared with the offer of the Chinatex Group.

In addition, the Group will make reference to the China Statistical Yearbook which contains price indices of certain commodities such as cotton and cooking oil.

Purchases will only be made from the Chinatex Group if the price and terms offered are at least competitive and comparable and no less favourable than to those offered by independent suppliers.

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Payment terms

Under the 2018 Material Purchase Framework Agreement, payments shall be made by cash on a monthly, quarterly or an agreed basis and the payment terms for the materials shall be consistent with the market payment terms of purchasing such materials.

Views

In assessing the reasonableness of the above pricing and payment terms, we have reviewed the followings:

• (i) the 2018 Material Purchase Framework Agreement, which has clearly stated that the transaction will be based on (a) market price; (b) payments shall be made by cash on a monthly, quarterly or an agreed basis; and (c) the payment terms for the materials shall be consistent with the market payment terms of purchasing such materials;

• (ii) the Company’s purchase procedure, it is noted that the purchasing department will obtain quotes from at least three independent suppliers to ensure that the final purchase made are at market price and payment terms are similar to that of independent suppliers;

• (iii) three sample agreements for purchasing raw materials which were signed during the ten months ended 31 October 2015, which we consider are sufficient representative samples for us to compare and allow us to provide a fair and reasonable view on the 2018 Material Purchase Framework Agreement. We compared the samples with the 2018 Material Purchase Framework Agreement, it is noted that the transactions will be based on (i) market price; (ii) payments shall be made by cash on a monthly, quarterly or on an agreed basis; and (iii) the payment terms for the materials shall be consistent with the market payment terms of purchasing such materials, which are in line with the terms of the 2018 Material Purchase Framework Agreement; and

• (iv) three largest samples of Chinatex Purchase Transactions for each of the year ended 31 December 2013 and 2014 and ten months ended 31 October 2015, which we consider are sufficient representative samples for us to provide a fair and reasonable view of the Chinatex Purchase Transactions. We compared the samples against contracts of similar transactions or quotations provided by independent third parties, it is noted that the pricing and payment term are in line with those offered by independent third parties.

As such, we consider that the basis of determination of the price and payment terms pursuant to the 2018 Material Purchase Framework Agreement is (i) on normal commercial terms after arm’s length negotiation between the Group and the relevant parties; and (ii) fair and reasonable so far as the Independent Shareholders are concerned.

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Pricing and payment terms of 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement

Pricing policy

As a general principle, the price and terms of the individual orders in respect of the AH Sales Transactions, LFK Sales Transaction and FM Sales Transaction will be on normal commercial terms, negotiated on an arm’s length basis, on similar basis as the Group transacts business with other independent third party customers and shall be on terms which are no less favourable than those provided by independent third party customers to the Group.

Subject to the general principle disclosed above, the Group will also take into account the following factors when determining the selling price under the individual orders in respect of the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions:

• (i) the prevailing market prices of the products to be sold by the Group to the AH Group, LFK Group and FM Group and the quality and prices of the products available in the market.

Given that none of the products under the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement has a fixed unit price or has a published reference price, in determining the selling price for the products for an individual order, the Group will evaluate and assess the scope of the relevant order and prepare a detailed cost calculation with reference to the cost of materials, products and labors, quotations of the Group provided to other independent third party customers to ensure that the prices of the products of the Group are competitive and comparable to those being offered to independent third party customers of the Group. The evaluation and assessment of orders received and the preparation of costs calculations are mainly prepared by the Group’s sales department and subject to final approval by the head of the sales department. The sales department will compare the Group’s prices with the range of selling price of similar products charged by competitors of the Group in the market. Selling prices charged by competitors are widely available as there are many fabric and yarn suppliers in the market competing for attractive selling prices. Some of the Group’s customer will also provide the Group with selling prices they obtained from other fabric and yarn suppliers when negotiating the selling price with the Group.

In addition, the Group has a standard pricing policy for its sales which is applicable to all customers. In setting or revising the pricing for the products, market prices are obtained through, among other things, recent transactions of the Group, enquiry with other industry players, researches on industry websites and the Group’s customers. The prices for the products to be sold to the AH Group, LFK Group and FM Group under the 2018 AH Master Sales Agreement, 2018 LFK Sales Agreement and 2018 FM Sales Agreement will be governed by such pricing policy and will not be less than the price of similar products sold by the Group to independent customers.

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• (ii) the Group does not have a pre-determined profit margin for its products in setting prices as the profit margin depends on many circumstantial factors such as the then prevailing market price of the products and the cost of raw materials at the time, both of which can fluctuate depending on the conditions of the market at the relevant time. In addition, the Group may accept orders with lower profit margins in certain circumstances, such as when production capacity is not fully utilised or if the customer is making bulk purchases.

Payment terms

The payment terms for the continuing connected transactions contemplated under the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement as stipulated in the relevant sales contracts, depending on the particular products to be supplied, which are normally in the form of cash payment on a monthly, quarterly or agreed period basis and shall be consistent with the market payment terms of supplying such particular products.

Views

In assessing the reasonableness of the above pricing and payment terms, we have reviewed the followings:

• (i) the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement, which have clearly stated that the transactions will be based on (a) market price; (b) payments shall be made by cash on a monthly, quarterly or an agreed basis; and (c) payment terms shall be consistent with the market payment terms of supplying such particular products.

• (ii) three largest historical sales transactions with each of the AH Group, LFK Group and FM Group for each of the year ended 31 December 2013 and 2014 and ten months ended 31 October 2015, which we consider are sufficient representative samples for us to provide a fair and reasonable view on the continuing connected transactions contemplated thereunder. Comparing to similar transactions with independent third parties, it is noted that the price offered to AH Group, LFK Group and FM Group was similar to the offers provided to independent third parties for same or similar products. As such, the pricing and payment terms of these historical sales transactions are on normal commercial terms and are in-line with the terms offered to independent third parties. As there are no material differences in the selling price offered to AH Group, LFK Group and FM Group with other independent third parties, there are no material differences in the profit margin.

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Given that the considerations to be received by the Group for the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions are similar to the consideration received from independent third party after reviewing on invoice issued to the independent third party relating to transactions similar to the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions, we consider that the basis of determination of the consideration pursuant to the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement is (i) on normal commercial terms after arm’s length negotiation between the Group and the relevant parties; and (ii) fair and reasonable so far as the Independent Shareholders are concerned.

3. Other major terms

We have reviewed other major terms of the 2018 CCT Agreements and are aware that, among others, (i) if there are any conflicts between the terms of an individual material purchase contract or sales contract and the 2018 CCT Agreements, the 2018 CCT Agreements shall prevail; and (ii) the sale and purchase of raw materials and products under the 2018 CCT Agreements are on a non-exclusive basis. We have reviewed three samples of master agreements entered by the Group with independent third parties during the ten months ended 31 October 2015, which we consider are sufficient representative samples for us to provide a fair and reasonable view. We noted that the terms were no less favourable than those offered to or provided by independent third parties.

In light of the foregoing, we are of the opinion that the terms of the 2018 CCT Master Agreements are fair and reasonable so far as the Independent Shareholders are concerned, on normal commercial terms and in the interests of the Independent Shareholders as a whole.

4. The annual caps

2018 Material Purchase Framework Agreement

As set out in the Board Letter, the historical transaction amounts, the annual caps for the three years ending 31 December 2015 and the proposed annual caps for the three years ending 31 December 2018 are summarized as follows:

	Historical amount	Historical amount	Historical amount		Annual caps		**Proposed annual **	**Proposed annual **	caps
			Ten months
	**Year **	ended	ended		Year ended			Year ending
	31 December		31 October	31 December			31 December
	2013	2014	2015	2013	2014	2015	2016	2017		2018
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Chinatex Purchase
Transaction	26,792	31,053	16,690	310,000	411,000	512,000	100,000	200,000	300,000

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Basis of determination of the proposed annual caps

As stated in the Board Letter, the proposed annual caps for the three years ending 31 December 2018 have been determined in the following manner:

• (i) the historical Chinatex Purchase Transactions for the two years ended 31 December 2014 and ten months ended 31 October 2015;

• (ii) the increase in the Group’s demand for yarn and cotton for the manufacture of fabric and garments as a result of the expected increase in the Group’s production capacity by approximately 59% in the coming year and utilization rate as the Group purchases new knitting machines and steady rebound in real consumption of the U.S. market which is the Group’s major target market, taking into consideration of the expected growth of 30% per annum in the number of orders of the Group’s fabric and garment products;

• (iii) the expansion of the Group’s sales network in South Asia and Middle-East in 2016;

• (iv) the increase in proportion of yarns purchasing from Chinatex Group in terms of both the volume and proportion of the Group’s total purchase of yarn as the Chinatex Group’s lead time is shorter than other suppliers after order confirmations, which in turn enable the Group to maintain a relatively lower raw material inventory by only placing orders when there is a demand;

• (v) anticipated rebound in price of yarn and cotton after continuing price drop of more than 25% during the last two years, which the price of cotton will directly affect the price of yarn as cotton is used to produce yarn. The Company anticipates a rebound in price of yarn and cotton as (a) the price of modal yarn, a special type of yarn purchased from the Chinatex Group and a raw material the Group uses in the production of its fabrics, has increased by approximately 10% in 2015 as compared to the previous year; (b) the cotton area in the US is expected to be reduced by approximately 18.5% in 2015/16 as compared to previous year, according to the National Cotton Council of America; and (c) the cotton supply in China in 2015 is estimated to experience a year-on-year drop by 18.79%, according to China Cotton Association; and

• (vi) a reasonable increment of approximately 2% to the unit price of products purchased from the Chinatex Group as a result of inflation

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Assessment of the reasonableness of the proposed annual caps

In assessing the reasonableness of the proposed annual caps of the 2018 Material Purchase Framework Agreement, we have reviewed the followings:

• (i) the actual purchase amount of yarn, cotton, other materials for the manufacture of fabric, garments and cooking oil and foodstuffs by the Group from other parties for the two years ended 31 December 2013 and 2014 and ten months ended 31 October 2015 was approximately HK$4,872 million, HK$4,224 million and HK$3,562 million respectively, representing an annualized average yearly purchase of approximately HK$4,457 million. The proposed annual cap of the Chinatex Purchase Transaction for the year ending 31 December 2016 represents approximately 2% of the average yearly purchase.

• (ii) the proposed annual cap of the Chinatex Purchase Transaction for the year ending 31 December 2017 and 2018 represents an increase of 100% and 50% as compared to that for the year ending 31 December 2016 and 2017.

• (iii) according to World Economic Outlook published by the International Monetary Fund in October 2015, China GDP is projected to increase by 6.8% and 6.3% in 2015 and 2016, therefore the markets price for yarn, cotton, other materials for the manufacture of fabric, garments are expected to increase. In addition, the GDP of U.S., the major target market of the Group, is projected to maintain a steady growth at a rate of 2.6% and 2.8% in 2015 and 2016, as a result the number of sales orders is expected to increase and at the same time the Group’s demand of raw material will increase.

• (iv) as advised by the Company, the Company has purchased a number of knitting machines which are expected to commence operation in the coming year. As a result, the production capacity will be increased and more materials may be purchased by the Company for production in the coming year.

• (v) as further advised by the Company, the Company has engaged a new marketing agent in India in view of sourcing new customers in South Asia and Middle-East in the coming year. According to the World Economic Outlook published by the International Monetary Fund in October 2015, the GDP of India, the largest economy in South Asia, and Middle-East is projected to increase by 7.5% and 3.8% respectively in 2016. As such, we concur with the management that the expansion of the Group’s sales network in South Asia and Middle-East may increase the number of sales orders of the Group and further increase the Group’s demand of raw materials.

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• (vi) the Company has been purchasing modal yarns from suppliers, amounting to approximately HK$18 million and HK$24 million for the year ended 31 December 2014 and ten months ended 31 October 2015. The Company has been purchasing these modal yarns from Chinatex since the year ended 31 December 2014. As the yarns from Chinatex were of equal or better quality than other suppliers, the Company is expected to purchase more of these modal yarns in the future and has since then increased the proportion of yarns purchasing from Chinatex, from approximately 4% during the year ended 31 December 2014 to approximately 9% during the ten months ended 31 October 2015. The management is of the view that more yarns will be purchased from Chinatex in the coming years.

• (vii) as advised by the Company, the Company currently purchase from over 70 suppliers, many have been considered by the Company as minor suppliers which sell yarn, cotton, other material for the manufacture of fabric and garments that requires more than one month delivery time, whereas Chinatex can deliver within one month. As a result, the Group was required to maintain a higher inventory level when purchasing from other suppliers and an increase in inventory turnover days. The Group aims to maintain a lower inventory level in the coming years to avoid obsolescence and excessive storage cost. By renewing the 2018 Material Purchase Framework Agreement the Company can reduce its inventory turnover days and secure raw materials in a timely manner for production whenever urgent production orders are received. As such, it is in the interest of the Company to renew the 2018 Material Purchase Framework Agreement and purchase from Chinatex in the coming years. We have reviewed three sample invoices and contracts for the ten months ended 31 October 2015, which we consider are sufficient representative samples for us to provide a fair and reasonable view, and compared the delivery terms of Chinatex with independent third parties and noted that the delivery time was faster for Chinatex.

• (viii) according to the Indices of Market Prices for Non-Fuel and Fuel Commodities, 2012-2015 published by the International Monetary Fund in 5 November 2015, the market price of cotton has dropped from US$0.904 per pound in 2013 to US$0.688 per pound in the first quarter of 2015. The market price has then slightly increased back to US$0.71 per pound in the third quarter of 2015 due to a weak supply and the management is of the view that the cotton price is anticipated to continue to rise in the near future. As such, the dollar value of cotton yarn purchased from Chinatex by the Group may increase with the increase in cotton price.

• (ix) the Company had taken into account the anticipated inflationary pressures in the coming years as a result of the recovery of the global economy in view of the projected increase of the world GDP of 3.1% and 3.6% in 2015 and 2016, respectively, according to the World Economic Outlook published by the International Monetary Fund published in October 2015.

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Views

Based on the factors and reasons discussed above, and after taking into account that the continuing connected transactions under the 2018 Material Purchase Framework Agreement are in line with the business development plan of the Group, we are of the view of the proposed annual caps is fair and reasonable so far the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. However, as the proposed annual caps of Chinatex Purchase Transactions relates to future events, we therefore express no opinion as to how closely the actual amount to be incurred under the 2018 Material Purchase Framework Agreement corresponds with the proposed annual caps.

2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement

As set out in the Board Letter, the historical transaction amounts, the annual caps for the three years ending 31 December 2015 and the proposed annual caps for the three years ending 31 December 2018 are summarized as follows:

	Historical amount	Historical amount	Historical amount	Annual Caps	Annual Caps	**Proposed Annual **	**Proposed Annual **	Caps
			Ten months
	**Year **	ended	ended	Year ended			Year ending
	31 December		31 October	31 December		31 December
	2013	2014	2015	2014	2015	2016	2017	2018
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
AH Sales Transaction	91,400	82,955	84,676	230,000	230,000	150,000	150,000	150,000
LFK Sales Transaction	97,440	117,545	179,996	372,000	372,000	300,000	340,000	380,000
FM Sales Transaction	152,879	155,037	160,753	230,000	230,000	230,000	230,000	230,000

Basis of determination of the proposed annual caps

As stated in the Board Letter, the proposed annual caps for the three years ending 31 December 2018 have been determined in the following manner:

• (i) the historical transaction amounts under the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions for the two years ended 31 December 2014 and ten months ended 31 October 2015;

• (ii) the AH Group’s stable demand for fabrics and yarns as compared to its historical demand due to its steady sales to its customers in the coming years for the AH Group;

• (iii) the increase in the LFK Group’s demand for fabrics and yarns is expected to nearly double as compared to its historical demand as a result of steady rebound in real consumption of the U.S. market which is the LFK Group’s major target market and the business expansion of the LFK Group;

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• (iv) the expected increase in the FM Group’s demand for fabrics and yarns provided by the Group as compared to its historical demand as a result of the business expansion of the FM Group;

• (v) the expected increase in the Group’s selling price for fabrics and yarns to cater for the anticipated rebound in price of yarn and cotton after continuing price drop of more than 25% during the last two years, which the price of cotton will directly affect the price of yarn as cotton is used to produce yarn. The Company anticipates a rebound in price of yarn and cotton as (a) the price of modal yarn, a special type of yarn purchased from the Chinatex Group by the Group and a raw material the Group uses in the production of its fabrics, has increased by approximately 10% in 2015 as compared to the previous year; (b) the cotton area in the US is expected to be reduced by approximately 18.5% in 2015/16 as compared to the previous year, according to the National Cotton Council of America, and (c) the cotton supply in China in 2015 is estimated to experience a year-on-year drop by 18.79%, according to China Cotton Association; and

• (vi) the expected increase in the Group’s selling price for fabrics as compared to previous years due to higher fees charged by the Group’s value added product segment such as printing on the fabric to be supplied;

• (vii) the improvements in production capacity and utilization rate of the Group’s production equipment.

Assessment of the reasonableness of the proposed annual caps

In assessing the reasonableness of the proposed annual caps of the 2018 Material Purchase Framework Agreement, we have reviewed the followings:

• (i) as the Group has been entering into AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions over many years, the aggregate amounts of the AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions have represented a stable source of revenue for the Group, accounting for approximately 3.7%, 4.9% and 5.2% for the years ended 31 December 2012, 2013 and 2014, respectively. The continuation of these transactions will facilitate the Group to maintain existing revenue stream;

• (ii) in view of the estimated U.S. GDP growth by the International Monetary Fund as discussed above, the LFK Group is expected to expand with the recovery of the U.S. market in the coming years, leading to an increase in demand for raw materials from the Group. In addition, sales to LFK Group have increased by approximately 21% and 43% for the year ended 31 December 2014 and ten months ended 31 October 2015, respectively. As such, we concur with the management that the increasing trend may continue in the coming years;

• (iii) as mentioned above regarding the trend of cotton price stated by the International Monetary Fund, the Group is expected to increase its selling prices in response with the increase in cost;

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LETTER FROM DONVEX CAPITAL

• (iv) as advised by the management, the Company has been investing in new fabric digital printing equipment, which is expected to commence operation by the end of 2015. As a result, the production capacity will be improved and the Company may charge a higher selling price with the advanced technology;

• (v) as further advised by the Company, the Company’s production capacity were fully utilized hence certain orders from the LFK Group were not taken up in prior years. While the Group has improved its production capacity and utilization rate, the management is of the view that the Company can take up more orders from the LFK Group in the coming years.

Views

Based on the factors and reasons discussed above, and after taking into account that the continuing connected transactions under the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement are in line with the business development plan of the Group, we are of the view of the proposed annual caps is fair and reasonable so far the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. However, as the proposed annual caps of AH Sales Transactions, LFK Sales Transactions and FM Sales Transactions relates to future events, we therefore express no opinion as to how closely the actual amount to be incurred under the 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement corresponds with the proposed annual caps.

RECOMMENDATION

Having considered the abovementioned principal factors and reasons, we are of the view that the terms and conditions under the 2018 Material Purchase Framework Agreement, 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement have been entered into within the ordinary and usual course of business of the Company based on the normal commercial terms and its terms together with the annual caps are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders, and we also recommend the Independent Shareholders, to vote in favour of the ordinary resolution(s) to be proposed at the EGM to approve the 2018 Material Purchase Framework Agreement, 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement, 2018 FM Master Sales Agreement and the annual caps.

Yours faithfully, For and on behalf of

Donvex Capital Limited Vily Leung Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(a) Interests of Directors

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the shares, underlying shares and debentures of the Company and any of its associated corporation (within the meaning of Part XV of the SFO) which were required (i) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange, were as follows:

Long positions in Shares and underlying Shares:

			Approximate
		Number of	percentage of
Name of Director	Nature of Interest	Shares	Shareholding
Mr. Ha	Beneficial owner	35,363,096 (L)	2.93%
	Spouse interests	2,578,000 (L)	0.21%
		(Note 2)
Dr. Yen Gordon	Beneficial owner	8,380,000 (L)	0.70%

Notes:

• (1) The letter “L” denotes the person’s long position in such Shares.

• (2) As at the Latest Practicable Date, Ms. Law Ho Suen, Victoria, spouse of Mr. Ha held 2,578,000 Shares as beneficial owner. Mr. Ha Kam On, Victor, spouse of Ms. Law Ho Suen, Victoria, is deemed to be interested in 2,578,000 Shares held by Ms. Law Ho Suen, Victoria.

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GENERAL INFORMATION

APPENDIX

Long positions in underlying Shares – Share options:

		Vesting and	Number of
Name of Director	Date of grant	Exercise period	share options
Mr. Ha	17.09.2010	17.03.2014 – 17.03.2017	4,600,000
		(Note 1)
	18.08.2011	19.08.2012 – 18.08.2017	3,300,000
		(Note 2)
Dr. Yen Gordon	18.08.2011	19.08.2015 – 18.08.2017	1,320,000
		(Note 3)

Notes:

• (1) 30% of the share options are exercisable from 17 March 2014 to 17 March 2017, up to 60% of the share options are exercisable from 17 March 2015 to 17 March 2017 and all share options are exercisable from 17 March 2016 to 17 March 2017.

• (2) 20% of the share options are exercisable from 19 August 2012 to 18 August 2017, up to 40% of the share options are exercisable from 19 August 2013 to 18 August 2017, up to 60% of the share options are exercisable from 19 August 2014 to 18 August 2017, up to 80% of the share options are exercisable from 19 August 2015 to 18 August 2017 and all share options are exercisable from 19 August 2016 to 18 August 2017.

• (3) 50% of the share options are exercisable from 19 August 2015 to 18 August 2017 and all share options are exercisable from 19 August 2016 to 18 August 2017.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company and any of its associated corporation (within the meaning of the SFO) which were required (i) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange.

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GENERAL INFORMATION

APPENDIX

(b) Interests of substantial shareholders

As at the Latest Practicable Date, so far as is known to the Directors and the chief executive of the Company, Shareholders (other than a Director or chief executive of the Company) who had an interest or short position in the Shares and underlying Shares which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of SFO, or who was, directly or indirectly interested in 5% or more of the issued share capital of the Company:

			Percentage of
Name	Capacity	Number of Shares	Shareholding
Chinatex	Interest of	433,098,000 (L)	35.94%
	controlled	(Note 1 and 2)
	corporation
Chinatex Yieldfull	Beneficial owner	409,036,000 (L)	33.94%
Investment Co., Ltd.		(Note 1)
(“Yieldfull”)
Chinatex Jinhui Investment	Interest of	409,036,000 (L)	33.94%
Management Co., Ltd.*	controlled	(Note 1)
(“Jinhui”)	corporation
Mr. Ha Chung Fong	Beneficial owner	51,964.000 (L)	4.31%
		(Notes 3)
	Other Interests	69,160,948 (L)	5.74%
		(Notes 3 and Note 5)
Ms. Tang Kuen Mui	Spouse interest	121,124,948 (L)	10.05%
		(Notes 3)
Super Brilliance	Beneficial owner	69,160,948 (L)	5.74%
Company Limited		(Notes 4 and 5)
(“Super Brilliance”)
Island Treasure	Interest of	69,160,948 (L)	5.74%
Investments Limited	controlled	(Notes 4 and 5)
(“Island Treasure”)	corporation
Onwide (H.K.) Limited	Trustee	69,160,948 (L)	5.74%
(“Onwide”)		(Notes 4 and 5)
Mr. Wong Tak Leung,	Interest of	69,160,948 (L)	5.74%
Charles	controlled	(Notes 4 and 5)
	corporation

* For identification purpose only

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GENERAL INFORMATION

APPENDIX

Notes:

• (1) Yieldfull is a wholly-owned subsidiary of Jinhui and Jinhui is a wholly-owned subsidiary of Chinatex. Therefore, each of Jinhui and Chinatex is deemed to be interested in the Shares held by Yieldfull.

• (2) As at the Latest Practicable Date, Chinatex (H.K.) Holding Limited held 24,062,000 Shares as beneficial owner. Chinatex (H.K.) Holding Limited is a wholly-owned subsidiary of Chinatex. Chinatex is therefore also deemed to be interested in the Shares held by Chinatex (H.K.) Holding Limited.

• (3) Ms. Tang Kuen Mui, spouse of Mr. Ha Chung Fong, is deemed to be interested in the Shares held by Mr. Ha Chung Fong.

• (4) Super Brilliance is a wholly-owned subsidiary of Island Treasure, Island Treasure is a wholly-owned subsidiary of Onwide and Onwide is owned as to 100% by Mr. Wong Tak Leung, Charles. Therefore, each of Island Treasure, Onwide and Mr. Wong Tak Leung, Charles is deemed to be interested in the Shares held by Super Brilliance.

• (5) Onwide is the trustee of the HA Trust, a discretionary trust set up by Mr. Ha Chung Fong for the benefit of his family.

3. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into a service contract with any member of the Group which does not expire or which is not determinable by the Company within one year without payment of compensation (other than statutory compensation), subject to retirement by rotation and re-election pursuant to the articles of association of the Company and the Listing Rules.

4. COMPETING BUSINESS INTEREST OF DIRECTORS

As at the Latest Practicable Date, none of the Directors or their respective associates was interested in any business which competes or is likely to compete, either directly or indirectly, with the business of the Group as required to be disclosed pursuant to the Listing Rules.

5. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2014, being the date to which the latest published audited financial statements of the Group were made up.

6. EXPERT’S QUALIFICATIONS AND CONSENTS

The Independent Financial Adviser has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which it appears.

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GENERAL INFORMATION

APPENDIX

The following is the qualification of the expert or professional adviser who has given its opinion or advice contained in this circular:

Name

Qualification

Donvex Capital Limited

A licensed corporation to conduct Type 6 (advising on corporate finance) regulated activities under the SFO

As at the Latest Practicable Date, the Independent Financial Adviser did not have any direct or indirect interest in any assets which had been acquired, disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group, since 31 December 2014, the date to which the latest published audited financial statements of the Group was made up; and was not beneficially interested in the share capital of any member of the Group and did not have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

7. GENERAL

• (a) 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 or proposed to be so acquired, disposed of by or leased to any member of the Group since 31 December 2014, being the date to which the latest published audited accounts of the Group were made up, and up to the Latest Practicable Date.

• (b) Save for the 2018 LFK Master Sales Agreement, none of the Directors was materially interested in any contract, save the service contracts, or arrangement entered into by any member of the Group, which was subsisting and was significant in relation to the business of the Group.

• (c) The registered office and principal place of business of the Company is Block A, 6/F., Eastern Sea Industrial Building 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong.

• (d) The branch share registrar of the Company in Hong Kong Tricor Secretaries Limited.

• (e) The English text of this circular shall prevail over their respective Chinese text for the purpose of interpretation.

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GENERAL INFORMATION

APPENDIX

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the Company’s principal place of business in Hong Kong at Block A, 6/F., Eastern Sea Industrial Building 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong during normal business hours on any weekdays, except public holidays, from the date of this circular up to and including the date of the EGM:

• (a) the 2018 Material Purchase Framework Agreement;

• (b) the 2018 AH Master Sales Agreement;

• (c) the 2018 LFK Master Sales Agreement;

• (d) the 2018 FM Master Sales Agreement;

• (e) the letter from the Independent Board Committee, the text of which is set out on page 31 of this circular;

• (f) the letter from the Independent Financial Adviser, the text of which is set out on pages 32 to 47 of this circular;

• (g) the consent letter of the Independent Financial Adviser referred to in the section headed “Expert’s Qualifications and Consents” in this appendix; and

• (h) this circular.

– 53 –

NOTICE OF EGM

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(Incorporated in Hong Kong with limited liability)

(Stock code: 420)

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notice is hereby given that an extraordinary general meeting of Fountain Set (Holdings) Limited (the “ Company ”) will be held at Block A, 6th Floor, Eastern Sea Industrial Building, 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong on Tuesday, 29 December 2015 at 9:30 a.m. or any adjournment thereof to consider and, if thought fit, to pass with or without amendments, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT :

• (a) the 2018 Material Purchase Framework Agreement (as defined in the circular of the Company dated 11 December 2015 (the “ Circular ”)) and the transactions contemplated thereunder as set out in the Circular be and are hereby approved and confirmed;

• (b) the 2018 AH Master Sales Agreement (as defined in the Circular) and the transactions contemplated thereunder as set out in the Circular be and are hereby approved and confirmed;

• (c) the 2018 LFK Master Sales Agreement (as defined in the Circular) and the transactions contemplated thereunder as set out in the Circular be and are hereby approved and confirmed;

• (d) the 2018 FM Master Sales Agreement (as defined in the Circular) and the transactions contemplated thereunder as set out in the Circular be and are hereby approved and confirmed;

• (e) any director of the Company be and is hereby authorised to take any step and execute such other documents as they consider necessary, desirable or expedient to carry out or give effect to or otherwise in connection with the 2018 Material Purchase Framework Agreement, 2018 AH Master Sales Agreement, 2018 LFK Master Sales Agreement and 2018 FM Master Sales Agreement (as defined in the Circular) and the transactions contemplated hereunder.”

By order of the Board Fountain Set (Holdings) Limited ZHAO Yao

Chairman and Chief Executive Officer

Hong Kong, 11 December 2015

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NOTICE OF EGM

Notes:

1. The above at the meeting will be taken by poll pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Listing Rules ”) except where the chairman of the Company, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands. The results of the poll will be published on the websites of Hong Kong Exchanges and Clearing Limited and the Company in accordance with the Listing Rules.

2. Any shareholder of the Company entitled to attend and vote at the above meeting is entitled to appoint another person as his proxy to attend and vote instead of him. A shareholder who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at the above meeting. A proxy need not be a shareholder of the Company. If more than one proxy is appointed, the number of shares in respect of which each such proxy so appointed must be specified in the relevant form of proxy.

3. In order to be valid, the form of proxy together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power of attorney or authority, must be deposited at the Company’s branch share registrar in Hong Kong, Tricor Secretaries Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof. Delivery of the form of proxy shall not preclude a shareholder of the Company from attending and voting in person at the meeting and, in such event, the instrument appointing a proxy shall be deemed to be revoked.

4. The translation into Chinese language of this notice is for reference only. In case of any inconsistency, the English version shall prevail.

5. As at the date of this circular, the executive Directors are Mr. ZHAO Yao, Mr. HA Kam On, Victor, Mr. GONG Zhengyi and Mr. CHEN Minghong; the non-executive Director is Dr. YEN Gordon and Mr. ZHANG Chong; and the independent non-executive Directors are Mr. NG Kwok Tung, Mr. CHOW Wing Kin, Anthony, SBS, JP, and Mr. YING Wei.

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