Convenience Retail Asia Limited - Proxy Solicitation & Information Statement 2017

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)

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

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

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The capitalized terms used in the lower portion of this circular shall have their respective meanings in the ‘‘Definitions’’ page of this circular.

A notice convening the EGM of the Company to be held at Block A, 6th Floor, Eastern Sea Industrial Building, 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong on Thursday, 23 March 2017 at 9:30 a.m. is set out on pages 51 to 52 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 5 to 22 of this circular and a letter from the Independent Board Committee containing its recommendations to the Independent Shareholders is set out on pages 23 to 24 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 25 to 45 of this circular.

If you are not 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 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 later than 48 hours (excluding any part of a day that is a public holiday) before the time appointed for holding the meeting or any adjournment thereof. Completion and delivery of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish and in such event, the form of proxy shall be deemed to be revoked.

Hong Kong, 8 March 2017

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Letter from Donvex Capital Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	46
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51

– i –

DEFINITIONS

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

‘‘2016 AH Annual Cap’’

the annual cap for the AH Sales Transactions under the 2018 AH Master Sales Agreement for the year ended 31 December 2016

‘‘2016 AH Sales Transactions’’

the AH Sales Transactions under the 2018 AH Master Sales Agreement for the year ended 31 December 2016

‘‘2016 AH Transaction Amount’’
the total transaction amount of approximately HK$160,260,000 under the 2018 AH Master Sales Agreement with Mr. Hirdaramani for the year ended 31 December 2016
‘‘2016 FM Annual Cap’’
the annual cap for the FM Sales Transactions under the 2018 FM Master Sales Agreement for the year ended 31 December 2016
‘‘2016 FM Transaction Amount’’
the total transaction amount of approximately HK$183,350,000 under the 2018 FM Master Sales Agreement with Mr. Omar for the year ended 31 December 2016
‘‘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 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

‘‘AH Group’’

the 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

– 1 –

DEFINITIONS

‘‘Approved AH Annual Caps’’
the annual caps for the AH Sales Transactions under the 2018 AH Master Sales Agreement for the two years ending 31 December 2018 as approved by the then Independent Shareholders at the extraordinary general meeting of the Company held on 29 December 2015
‘‘Approved FM Annual Caps’’
the annual caps for the FM Sales Transactions under the 2018 FM Master Sales Agreement for the two years ending 31 December 2018 as approved by the then independent Shareholders at the extraordinary general meeting of the Company held on 29 December 2015
‘‘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 or a duly authorized committee thereof for the time being, including the independent non-executive Directors
‘‘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
‘‘Director(s)’’ the director(s) of the Company
‘‘EGM’’
the extraordinary general meeting to be convened by the Company to consider, and if thought fit, to ratify the 2016 AH Sales Transactions and approve the Revised AH Annual Caps and the Revised FM Annual Caps
‘‘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

– 2 –

DEFINITIONS

‘‘HK$’’
Hong Kong dollars, the lawful currency of Hong Kong
‘‘Hong Kong’’

the Hong Kong Special Administrative Region of the People’s Republic of China

‘‘Independent Board Committee’’
an independent committee of the Board, comprising all the independent non-executive Directors, namely Mr. NG Kwok Tung, Mr. YING Wei and Mr. William LAM, formed to advise the Independent Shareholders in respect of the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps
‘‘Independent Financial Adviser’’
Donvex Capital Limited, a licensed corporation to carry out type 6 (advising on corporation finance) regulated activities under the SFO, is the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps
‘‘Independent Shareholders’’
Shareholders who are not prohibited from voting at the general meeting in connection with the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps
‘‘Latest Practicable Date’’
6 March 2017, being the latest practicable date prior to the printing of this circular for ascertaining information contained herein
‘‘Listing Rules’’ the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
‘‘Mr. Hirdaramani’’
Mr. Anil Kumar Lalchand Hirdaramani, a director and a substantial shareholder of a non-wholly owned subsidiary of the Company and accordingly, a connected person of the Company under the Listing Rules
‘‘Mr. Omar’’
Mr. Feroz Omar, a director and a substantial shareholder of a non-wholly owned subsidiary of the Company and accordingly, a connected person of the Company under the Listing Rules

– 3 –

DEFINITIONS

‘‘PRC’’ or	the People’s Republic of China, which for the purpose of
‘‘China’’	this circular only, excludes Hong Kong, the Macau Special
	Administrative Region of the People’s Republic of China
	and Taiwan
‘‘relative(s)’’	has the meaning ascribed to it in the Listing Rules
‘‘Revised AH Annual Caps’’	the adjusted annual caps for the AH Sales Transactions
	under the 2018 AH Master Sales Agreement for the two
	years ending 31 December 2018
‘‘Revised FM Annual Caps’’	the adjusted annual caps for the FM Sales Transactions
	under the 2018 FM Master Sales Agreement for the two
	year ending 31 December 2018
‘‘SFO’’	Securities and Futures Ordinance (Chapter 571 of the Laws
	of Hong Kong) as amended from time to time
‘‘Share(s)’’	the ordinary share(s) of the Company
‘‘Shareholders’’	the holders of the Shares
‘‘subsidiary(ies)’’	has the meaning ascribed to it in the Listing Rules
‘‘substantial shareholder(s)’’	has the meaning ascribed to it in the Listing Rules
‘‘Stock Exchange’’	The Stock Exchange of Hong Kong Limited
‘‘%’’	per cent

– 4 –

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. CHEN Minghong Mr. LAN Jiang

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

Registered Office: Block A, 6th Floor, Eastern Sea Industrial Building 29-39 Kwai Cheong Road Kwai Chung New Territories Hong Kong

Independent non-executive Directors: Mr. NG Kwok Tung Mr. YING Wei Mr. William LAM

8 March 2017

To the Shareholders

Dear Sir/Madam,

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EXTRAORDINARY GENERAL MEETING

1. INTRODUCTION

Reference is made to the announcement of the Company dated 26 January 2017 in relation to, among other things, the exceeding of the 2016 AH Annual Cap, the Revised AH Annual Caps and the Revised FM Annual Caps.

The purpose of this circular is to provide the Shareholders with, among other things, (i) details of the 2018 AH Master Sales Agreement and the transactions contemplated thereunder; (ii) details of the 2018 FM Master Sales Agreement and the transactions contemplated thereunder; (iii) details of the Revised AH Annual Caps; (iv) details of the Revised FM Annual Caps; (v) the advice and recommendations from the Independent Board Committee in respect of the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps; (vi) the advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps; and (vii) to give the Shareholders notice of the EGM to consider and, if thought fit, to ratify the 2016 AH Sales Transactions and approve the Revised AH Annual Caps and the Revised FM Annual Caps.

– 5 –

LETTER FROM THE BOARD

2. BACKGROUND OF THE 2018 AH MASTER SALES AGREEMENT

Reference is made to the announcement of the Company dated 18 November 2015 and the circular dated 11 December 2015 issued by the Company in relation to certain continuing connected transactions of the Company, including the AH Sales Transactions under 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 would 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 disagreement between the terms of an individual order and the 2018 AH Master Sales Agreement, the latter shall prevail and such individual order shall not be entered into.

Term:

The 2018 AH Master Sales Agreement has a fixed term of three years 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 favorable to the Group than those provided to independent third party customers.

– 6 –

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 offered to the AH Group are competitive and comparable to those being offered to independent third party customers of the Group and no less favorable to 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 normally compare the Group’s prices with the range of selling price of similar products charged by at least two competitors of the Group in the market on a case-by-case basis which depends on whether such competitors have updated their selling price quotations. Selling prices charged by competitors are widely available as there are many fabric suppliers in the market competing for attractive selling prices and the Group will select a few suppliers which are comparable to the Group in terms of size and product range as indicators given the wide range of fabric products provided and the large number of fabric suppliers in the market, and some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric suppliers when negotiating the selling price with the Group.

– 7 –

LETTER FROM THE BOARD

The 2018 AH Master Sales Agreement does not provide a predetermined 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 Assistant General 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.

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.

The payment terms for the AH Sales Transactions under the 2018 AH Master Sales Agreements will be stipulated in the relevant individual orders. Depending on the particular products and/or services to be purchased or supplied, the AH Sales Transactions under the 2018 AH Master Sales Agreements will normally be settled in the form of cash payment on a monthly basis and shall be consistent with the payment terms in the market. The Group usually allows a credit period ranging from 30 days to 60 days to its customers. The payment terms offered under the 2018 AH Master Sales Agreements will be in line with the payment terms offered by the Group to its independent third party customers.

– 8 –

LETTER FROM THE BOARD

The 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 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 1.3%, 1.2% and 2.5% of the Group’s total revenue for the three years ended 31 December 2015, 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 and no disadvantage to the Group has been identified as at the date of this circular.

Based on the above, the Directors are of the view that the AH Sales 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 AH Master Sales Agreement, including the Revised AH 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. EXCEEDING OF THE 2016 AH ANNUAL CAP AND SUBSTANTIAL USAGE OF THE 2016 FM ANNUAL CAP

During the preparation of the monthly management report of the Company for the month ended 31 December 2016, it came to the attention of the Board that (i) the 2016 AH Transaction Amount received by the Company under the 2018 AH Master Sales Agreement for the year ended 31 December 2016 was approximately HK$160,260,000, which exceeded the 2016 AH Annual Cap of HK$150,000,000 as stated in the circular of the Company dated 11 December 2015, by approximately HK$10,260,000, or approximately 6.84% of the 2016 AH Annual Cap; and (ii) the 2016 FM Transaction Amount received by the Company under the 2018 FM Master Sales Agreement for the year ended 31 December 2016 was approximately HK$183,350,000, which is approximately 79.72% of the 2016 FM Annual Cap of HK$230,000,000 as stated in the circular of the Company dated 11 December 2015. In light of the 2016 AH Transaction Amount and the 2016 FM Transaction Amount, the Board expects that the Approved AH Annual Caps and the Approved FM Annual Caps will be exceeded. Accordingly, the Board proposes to approve the revision of the Approved AH Annual Caps and the Approved FM Annual Caps at the EGM.

– 9 –

LETTER FROM THE BOARD

4. REASONS FOR EXCEEDING THE 2016 AH ANNUAL CAP

The 2016 AH Annual Cap has been exceeded due to:

(a) the steady increase of cotton prices in 2016 which exceeded the Group’s expectations. At the time when the Company determined the 2016 AH Annual Cap and the Approved AH Annual Caps, it has taken into account a rebound in the price of cotton after a continuing price drop of more than 25% during the years of 2013 and 2014 and the cost of cotton has only increased by 2.5% during the ten months ended 31 October 2015 according to the National Cotton Council of America. However, the cost of cotton has indeed increased by 15.6% during the year of 2016 according to the National Cotton Council of America. The price of cotton was at the lowest in March 2016 and at the highest in July 2016. During this period, cotton prices rose about 23.8%. According to the 2016 China Cotton Index annual report published by the China Cotton Association, the price of yarns was at the lowest in April 2016 and at the highest in July 2016. During this period, yarn prices rose about 21.1%. As cotton is used for the production of knitted fabrics, yarns, fibers and garment parts, the costs and prices of these products under the AH Sales Transactions also increased accordingly; and
(b) the AH Sales Transactions and the 2016 AH Transaction Amount were higher than expected. At the time when the Company determined the 2016 AH Annual Cap and the Approved AH Annual Caps, the Company has taken into account 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, which accounted for approximately HK$91,400,000, HK$82,955,000 and HK$84,676,000, respectively, with reference to the rebound in the price of cotton and has set the annual caps in a prudent way. However, the actual transaction amounts received by the Group under the AH Sales Transactions has significantly increased and were higher than anticipated, thus the 2016 AH Annual Cap was exceeded.

– 10 –

LETTER FROM THE BOARD

5. REVISION OF THE APPROVED AH ANNUAL CAPS

Set out below are the Approved AH Annual Caps for the AH Sales Transactions under the 2018 AH Master Sales Agreement for the three years ending 31 December 2018 as approved by the then Independent Shareholders at the extraordinary general meeting of the Company held on 29 December 2015 and the Revised AH Annual Caps for the two years ending 31 December 2018:

	Aggregate transaction	Aggregate transaction	amounts
	Year ending 31 December
2018 AH Master Sales Agreement	2016	2017	2018
	(HK$’000)	(HK$’000)	(HK$’000)
Approved AH Annual Caps	150,000	150,000	150,000
Revised AH Annual Caps	–	300,000	350,000

The Revised AH Annual Caps have been determined by reference to:

(a) the historical transaction amounts under the AH Sales Transactions for the three years ended 31 December 2016 of approximately HK$82,955,000, HK$167,163,000 and HK$160,260,000, respectively;
(b) the increase in the Group’s selling price for fabrics due to the higher fees charged by the Group’s value added product segment such as printing which the AH Group has continuously ordered such products from the Group and the increase in the cost will be transferred to the selling price of such products;
(c) the expected increase in the price of cotton and yarns by at least 23.8% and 21.1%, respectively, for the two years ending 31 December 2018, based on the figures published by the National Cotton Council of America and the China Cotton Association for the year of 2016;

– 11 –

LETTER FROM THE BOARD

(d) the expected increase in the demand of the products of the Group of approximately 30% and 35% for the two years ending 31 December 2017 and 31 December 2018, respectively from the ultimate clients of AH Group as the government of Sri Lanka is currently negotiating for reinstatement of the Generalised System of Preferences plus (‘‘GSP+’’) facilities with the European Union and is in discussions with China to increase its apparel exports based on the China-Sri Lanka Free Trade Agreement (the ‘‘China-Sri Lanka FTA’’). The European Commission has proposed on 11 January 2017 that a significant part of the remaining import duties on Sri Lankan products should be removed by the European Union in exchange for the country’s commitment to ratify and effectively implement 27 international conventions on human rights, labor conditions, protection of the environment and good governance. These one-way trade preferences would come under the GSP+ and consist of the full removal of duties on 66% of tariff lines, covering a wide array of products including textiles. If the GSP+ arrangement is successfully restored, the preferential tariff treatment will benefit the entire Sri Lankan textile and garment industry. Given that the AH Group’s ultimate clients are located in Europe (most of them are members of the European Union) and the AH Group’s main suppliers are located in China, the GSP+ and the China-Sri Lanka FTA will benefit the export sales of the AH Group’s products. As such, the AH Group has planned to expand the export sales of its products and increase its production capacities for the two years ending 31 December 2018 which in turn will increase the demand of the Group’s products;
(e) the business development plan of the Group, including operational equipment upgrades in fabric mills and production expansion, to partly cope with the expansion plan of the AH Group; and
(f) a 10% appropriate buffer to offer flexibility to the Group in dealing with any unforeseeable increase of the transaction amount under the 2018 AH Master Sales Agreement.

The Directors (excluding the members of the Independent Board Committee, the opinion of which, after taking into account the advice from the Independent Financial Adviser, is included in the section headed ‘‘Letter from the Independent Board Committee’’ in this circular) are of the view that the 2016 AH Sales Transactions and the Revised AH Annual Caps, are in the ordinary and usual course of business of the Group and on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole. None of the Directors has any material interests in the 2018 AH Master Sales Agreement and the AH Sales Transactions and accordingly were not required to abstain from voting on the relevant Board resolutions proposed to ratify the 2016 AH Sales Transactions and approve the Revised AH Annual Caps.

– 12 –

LETTER FROM THE BOARD

6. BACKGROUND OF THE 2018 FM MASTER SALES AGREEMENT

Reference is made to the announcement of the Company dated 18 November 2015 and the circular dated 11 December 2015 issued by the Company in relation to certain continuing connected transactions of the Company, including the FM Sales Transactions under 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 would procure members of the Group to, supply fabrics, yarns, fibers and garment parts, to members of 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 disagreement between the terms of an individual order and the 2018 FM Master Sales Agreement, the latter shall prevail such individual order shall not be entered into.

Term:

The 2018 FM Master Sales Agreement has a fixed term of three years 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 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 favorable 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 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 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 offered to the FM Group are competitive and comparable to those being offered to independent third party customers of the Group and no less favorable to 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 normally compare the Group’s prices with the range of selling price of similar products charged by at least two competitors of the Group in the market on a case-by-case basis which depends on whether such competitors have updated their selling price quotations. Selling prices charged by competitors are widely available as there are many fabric suppliers in the market competing for attractive selling prices and the Group will select a few suppliers which are comparable to the Group in terms of size and product range as indicators given the wide range of fabric products provided and the large number of fabric suppliers in the market, and some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric suppliers when negotiating the selling price with the Group.

– 14 –

LETTER FROM THE BOARD

The 2018 FM Master Sales Agreement does not provide a predetermined 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 Assistant General Manger 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.

The payment terms for the FM Sales Transactions under the 2018 FM Master Sales Agreements will be stipulated in the relevant individual orders. Depending on the particular products and/or services to be purchased or supplied, the FM Sales Transactions under the 2018 FM Master Sales Agreements will normally be settled in the form of cash payment on a monthly basis and shall be consistent with the payment terms in the market. The Group usually allows a credit period ranging from 30 days to 60 days to its customers. The payment terms offered under the 2018 FM Master Sales Agreements will be in line with the payment terms offered by the Group to its independent third party customers.

– 15 –

LETTER FROM THE BOARD

The 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 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 2.2%, 2.3% and 3.2% of the Group’s total revenue for the three years ended 31 December 2015, 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 and no disadvantage to the Group has been identified as at the date of this circular.

7. REVISION OF THE APPROVED FM ANNUAL CAPS

Set out below are the Approved FM Annual Caps for the FM Sales Transactions under the 2018 FM Master Sales Agreement for the three years ending 31 December 2018 as approved by the then Independent Shareholders at the extraordinary general meeting of the Company held on 29 December 2015 and the Revised FM Annual Caps for the two years ending 31 December 2018:

	Aggregate transaction	Aggregate transaction	amounts
	Year ending 31 December
2018 FM Master Sales Agreement	2016	2017	2018
	(HK$’000)	(HK$’000)	(HK$’000)
Approved FM Annual Caps	230,000	230,000	230,000
Revised FM Annual Caps	–	300,000	350,000

The Revised FM Annual Caps have been determined by reference to:

(a) the historical transaction amounts under the FM Sales Transactions for the three years ended 31 December 2016 of approximately HK$155,037,000, HK$211,783,000 and HK$183,350,000, respectively;
(b) the increase in the Group’s selling price for fabrics due to the higher fees charged by the Group’s value added product segment such as printing which the FM Group has continuously ordered such kind of products from the Group and the increase in the cost will be transferred to the selling price of such products;
(c) the expected increase in the price of cotton and yarns by at least 23.8% and 21.1%, respectively, for the two years ending 31 December 2018, based on the figures published by the National Cotton Council of America and the China Cotton Association for the year of 2016;

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LETTER FROM THE BOARD

(d) the expected increase in the demand of the products of the Group of approximately 30% and 35% for the two years ending 31 December 2017 and 31 December 2018, respectively from the ultimate clients of FM Group as the government of Sri Lanka is currently negotiating for reinstatement of the GSP+ facilities with the European Union and is in discussions with China to increase its apparel exports based on the China-Sri Lanka FTA. The European Commission has proposed on 11 January 2017 that a significant part of the remaining import duties on Sri Lankan products should be removed by the European Union in exchange for the country’s commitment to ratify and effectively implement 27 international conventions on human rights, labor conditions, protection of the environment and good governance. These one-way trade preferences would come under the GSP+ and consist of the full removal of duties on 66% of tariff lines, covering a wide array of products including textiles. If the GSP+ arrangement is successfully restored, the preferential tariff treatment will benefit the entire Sri Lankan textile and garment industry. Given that the FM Group’s ultimate clients are located in Europe (most of them are members of the European Union) and the FM Group’s main suppliers are located in China, the GSP+ and the China-Sri Lanka FTA will benefit the export sales of the FM Group’s products. As such, the FM Group has planned to expand the export sales of its products and increase its production capacities for the two years ending 31 December 2018 which in turn will increase the demand of the Group’s products;
(e) the business development plan of the Group, including operational equipment upgrades in fabric mills and production expansion, to partly cope with the expansion plan of the FM Group; and
(f) a 10% appropriate buffer to offer flexibility to the Group in dealing with any unforeseeable increase of the transaction amount under the 2018 FM Master Sales Agreement.

The Directors (excluding the members of the Independent Board Committee, the opinion of which, after taking into account the advice from the Independent Financial Adviser, is included in the section headed ‘‘Letter from the Independent Board Committee’’ in this circular) are of the view that the Revised FM Annual Caps, are in the ordinary and usual course of business of the Group and on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole. None of the Directors has any material interests in the 2018 FM Master Sales Agreement and the FM Sales Transactions and accordingly were not required to abstain from voting on the relevant Board resolutions proposed to approve the Revised FM Annual Caps.

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

The Board has reflected on the effectiveness and efficiency of its internal control measures. In order to prevent the recurrence of similar incidents and to ensure continuous compliance with the Listing Rules, the Company will intensify its effort in monitoring its continuing connected transactions amounts, particularly under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement. To ensure the Company’s continuous compliance with the Listing Rules, the Company has adopted the remedial measures below.

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LETTER FROM THE BOARD

The Company immediately notified the Stock Exchange, made the relevant announcement timely and authorized the joint company secretary of the Company to publish the relevant announcements on the respective websites of the Stock Exchange and the Company as required. The Company has provided a continuing connected transactions training on 25 January 2017 to the Directors, on the relevant continuing connected transactions rules and regulations under the Listing Rules so as to strengthen their awareness on compliance requirements.

The Company will further provide a continuing connected transactions training to the senior management, accounting personnel and other relevant personnel of the sales department responsible for the continuing connected transactions of the Company, to enhance supervision of the continuing connected transactions, in particular the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement. The Company will periodically conduct the aforesaid training to ensure that all the above parties maintain their awareness on compliance requirements concerning continuing connected transactions.

The Company currently has in place a system for monitoring the continuing connected transactions of the Company, of which transaction data (including name of the customers, transaction amount and transaction date) is provided by each of the Company’s subsidiaries each month and reviewed by the Group’s finance department. The Company’s internal audit department will conduct sample checking based on random selection of at least five transactions entered into between the Group and the connected persons on a monthly basis to ensure the accuracy of transaction data. The internal audit department will review the relevant invoice/purchase order and make enquiries with the concerned sales staff and customers to verify the information contained in such invoice/purchase order. The corporate governance department of the Company is responsible for monitoring these figures on a monthly basis and immediately alert the independent non-executive Directors, internal audit department and joint company secretaries of a potential breach of the prescribed annual cap once the continuing connected transaction amount reaches 80% of the prescribed annual cap.

The corporate governance department of the Company has (i) alerted the independent nonexecutive Directors in November 2016 when the transaction amounts under the 2016 AH Sales Transaction for the ten months ended 31 October 2016 crossed the 80% threshold and (ii) immediately tightened the monitoring and control of the transaction amounts under the AH Sales Transaction. Provided that the transaction amounts under the 2016 AH Sales Transaction for the month ended 30 November 2016 did not exceed the 2016 AH Annual Cap, the Company was of the view at the time the transaction amounts under the 2016 AH Sales Transaction would not exceed the 2016 AH Annual Cap. Due to the time lag of receiving the data on the transaction amounts under the 2016 AH Sales Transaction for the month ended 31 December 2016, the Company could only discover the breach of the 2016 AH Annual Cap in January 2017 during its preparation of the monthly management report for the month ended 31 December 2016.

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LETTER FROM THE BOARD

In order to avoid future occurrence of events similar to the exceeding of the 2016 AH Annual Cap, the Company, after taking into account the time lag of receiving the transaction data, will now further lower this threshold and alert the independent non-executive Directors when the continuing connected transaction amount reaches 65% of the relevant annual cap. Once the continuing connected transaction amount reaches the new threshold at any point of the year, the corporate governance department will closely monitor the relevant continuing connected transactions and seek advice from the audit committee and the Board to consider the next steps, including discussion with the relevant connected persons on the anticipation of transaction amounts in the coming months as well as the need to inform the Stock Exchange, to publish any announcement and to seek Independent Shareholders’ approval for an increase in annual caps, if applicable.

The pricing policy for all the continuing connected transactions of the Group will be supervised and monitored by the Assistant General 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 (taking into account the payment terms (i.e. credit period granted to the connected persons), payment methods and delivery arrangement applicable to other independent third party customers/ suppliers) 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 Assistant General 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 on a monthly basis to review and assess whether individual transactions contemplated 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.

The Company will continue to closely review the continuing connected transactions on a regular basis and take prompt actions to make necessary disclosure and obtain Independent Shareholders’ approval in the event that any adjustment to an annual cap becomes foreseeable as required under the Listing Rules.

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LETTER FROM THE BOARD

9. LISTING RULES IMPLICATIONS

Mr. Hirdaramani is a director and a 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. Omar is a director and a 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.

Given that the 2016 AH Transaction Amount exceeded the 2016 AH Annual Cap, the 2016 AH Sales Transactions are subject to the ratification of the Independent Shareholders at the EGM. Pursuant to Rule 14A.54(1) of the Listing Rules, the Company is required to re-comply with the reporting, announcement and shareholders’ approval requirements before the annual cap for the continuing connected transactions is exceeded. The delay to re-comply with the announcement and shareholders’ approval requirements before the annual cap is exceeded constituted a breach of Rule 14A.54(1) of the Listing Rules. In addition, the Company has to re-comply with the reporting, announcement and shareholders’ approval requirements pursuant to Rule 14A.54(1) of the Listing Rules in respect of the Revised AH Annual Caps and the Revised FM Annual Caps.

10. INFORMATION ON THE GROUP, THE AH GROUP AND THE FM GROUP

The Company acts as an investment holding company. The Group is principally engaged in the production and sales of knitted fabrics, garments and provision of knitting, dyeing, printing and finishing services.

To the best knowledge of the Directors, AH Group is principally engaged in the business of manufacturing and exporting of knit and woven apparel for men, women and children.

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LETTER FROM THE BOARD

To the best knowledge of the Directors, FM Group is principally engaged in the business of manufacturing, exporting and distributing of apparel for men, women, and children.

11. EGM AND PROXY ARRANGEMENTS

The notice of the EGM is set out on pages 51 to 52 of this circular.

Pursuant to Rule 13.39(4) of the Listing Rules, all votes of the Shareholders at general meetings must be taken by poll except where the chairman of the meeting, 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, 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 is held in the manner prescribed under Rule 13.39(5) of the Listing Rules.

A form of proxy for use in connection with the EGM is enclosed with this circular and such form of proxy is also published on the respective websites of Hong Kong Exchanges and Clearing Limited (www.hkexnews.hk) and the Company (www.fshl.com). If you are not able to attend the EGM, please complete, sign and return it. 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 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 later than 48 hours (excluding any part of a day that is a public holiday) 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 in person at the EGM or its adjournment should you so wish and in such event, the form of proxy shall be deemed to be revoked.

12. GENERAL INFORMATION

Your attention is drawn to the letter of advice of the Independent Board Committee set out on pages 23 to 24 of this circular. Your attention is also drawn to the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps set out on pages 25 to 45 of this circular.

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LETTER FROM THE BOARD

13. RECOMMENDATION

The Directors (including the independent non-executive Directors who have formed their views after considering the advice from the Independent Financial Adviser) consider that the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps are in the ordinary and usual course of business of the Group, on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors (including the independent non-executive Directors) recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to ratify the 2016 AH Sales Transactions and to approve the Revised AH Annual Caps and the Revised FM Annual Caps.

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

Chairman and Chief Executive Officer

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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

8 March 2017

To the Independent Shareholders

Dear Sir/Madam,

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 8 March 2017 (the ‘‘Circular’’) of which this letter forms a part. Capitalized terms defined in the Circular have the respective same meanings when used herein unless the context otherwise requires.

The transactions under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules and are subject to the reporting, announcement and shareholders’ approval requirements under Chapter 14A of the Listing Rules. In addition, the Company has to re-comply with the reporting, announcement and shareholders’ approval requirements pursuant to Rule 14A.54(1) of the Listing Rules in respect of the Revised AH Annual Caps and the Revised FM Annual Caps.

We have been appointed by the Board as the Independent Board Committee to advise the Independent Shareholders on whether the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps are (i) conducted in the ordinary and usual course of business of the Group, (ii) on normal commercial terms, (iii) fair and reasonable, and (iv) in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders in respect of the resolutions to be proposed at the EGM to ratify the 2016 AH Sales Transactions and to approve the Revised AH Annual Caps and the Revised FM Annual Caps. Donvex Capital Limited has been appointed as the Independent Financial Adviser to advise us in this respect.

We wish to draw your attention to the letter of advice from the Independent Financial Adviser as set out on pages 25 to 45 of the Circular and the letter from the Board as set out on pages 5 to 22 of the Circular.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having considered the information set out in the letter from the Board, the opinion of the Independent Financial Adviser as stated in its letter of advice, we consider that the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps are (i) conducted in the ordinary and usual course of business of the Group, (ii) on normal commercial terms, (iii) fair and reasonable, and (iv) in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to ratify the 2016 AH Sales Transactions and to approve the Revised AH Annual Caps and the Revised FM Annual Caps.

Yours faithfully, For and on behalf of the Independent Board Committee

Mr. NG Kwok Tung Mr. YING Wei Independent Independent non-executive Director non-executive Director

Mr. William LAM Independent non-executive Director

– 24 –

LETTER FROM DONVEX CAPITAL LIMITED

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.

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

8 March 2017

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

Dear Sir/Madam

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR 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 relation to (i) the 2016 AH Sales Transactions and the Revised AH Annual Caps, and (ii) the Revised FM Annual Caps, details of which are set out in the letter from the Board (the ‘‘Letter from the Board’’) contained in the circular of the Company dated 8 March 2017 to the Shareholders (the ‘‘Circular’’), of which this letter forms part. Terms used herein have the same meanings as those defined in the Circular unless otherwise stated.

Reference is made to the announcement dated 26 January 2017, during the preparation of the monthly management report of the Company for the month ended 31 December 2016, it came to the attention of the Board that (i) the 2016 AH Transaction Amount received by the Company under the 2018 AH Master Sales Agreement was approximately HK$160,260,000, which exceeded the 2016 AH Annual Cap of HK$150,000,000, as stated in the circular of the Company dated 11 December 2015, by an amount of approximately HK$10,260,000, representing approximately 6.84% of the 2016 AH Annual Cap; and (ii) the 2016 FM Transaction Amount received by the Company under the 2018 FM Master Sales Agreement was approximately HK$183,350,000, which is approximately 79.72% of the 2016 FM Annual Cap of HK$230,000,000 as stated in the circular of the Company dated 11 December 2015.

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LETTER FROM DONVEX CAPITAL LIMITED

Furthermore, the Board considers that (i) the Approved AH Annual Caps for the two years ending 31 December 2017 and 2018 will be exceeded; and (ii) the Approved FM Annual Caps for the two years ending 31 December 2017 and 2018 will be exceeded. Therefore, the Company proposed to revise (i) the Approved AH Annual Caps for the two years ending 31 December 2017 and 2018 from HK$150 million and HK$150 million respectively to HK$300 million and HK$350 million respectively; and (ii) the Approved FM Annual Caps for the two years ending 31 December 2017 and 2018 from HK$230 million and HK$230 million respectively to HK$300 million and HK$350 million respectively.

Mr. Hirdaramani is a director and a 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. Omar is a director and a 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.

Given that the 2016 AH Transaction Amount exceeded the 2016 AH Annual Cap, the 2016 AH Sales Transactions are subject to ratification by the Independent Shareholders at the EGM. Pursuant to Rule 14A.54(1) of the Listing Rules, the Company is required to re-comply with the reporting, announcement and shareholders’ approval requirements before the annual cap for the continuing connected transactions is exceeded. The delay to re-comply with the reporting, announcement and shareholders’ approval requirements before the annual cap is exceeded constituted a breach of Rule 14A.54(1) of the Listing Rules. In addition, the Company has to recomply with the reporting, announcement and Shareholders’ approval requirement pursuant to Rule 14A.54(1) of the Listing Rules in respect of the Revised AH Annual Caps and the Revised FM Annual Caps. The Directors (excluding the members of the Independent Board Committee, the opinion of which, after taking into account the advice from the Independent Financial Adviser, is included in the Circular) are of the view that the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps, are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

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LETTER FROM DONVEX CAPITAL LIMITED

The EGM will be convened to consider and, if thought fit, to ratify the 2016 AH Sales Transactions and to approve the Revised AH Annual Caps and the Revised FM Annual Caps. To the best of the Directors’ knowledge, information and belief, as at the Latest Practicable Date, none of the Shareholders is required to abstain from voting on the relevant resolutions to ratify the 2016 AH Sales Transactions and to approve the Revised AH Annual Caps and the Revised FM Annual Caps at the EGM, pursuant to Rule 14A.36 of the Listing Rules.

Mr. NG Kwok Tung, Mr. YING Wei and Mr. William LAM, the independent non-executive Directors, have been appointed as members of the Independent Board Committee to advise the Independent Shareholders on whether the 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM Annual Caps are (i) conducted in the ordinary and usual course of business of the Group, (ii) on normal commercial terms, (iii) fair and reasonable, and (iv) in the interests of the Company and the Shareholders as a whole, and to advise on how the Independent Shareholders should vote in respect of the resolutions to be proposed at the EGM to ratify the 2016 AH Sales Transactions and to approve the Revised AH Annual Caps and the Revised FM Annual Caps.

OUR INDEPENDENCE

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. In addition to our engagement as the Independent Financial Adviser, Donvex Capital Limited has also acted as an independent financial adviser to the then independent board committee and independent shareholders of the Company in relation to the renewal of continuing connected transactions (details of which were set out in the circular of the Company dated 11 December 2015) in the last two years.

We were independent from and not connected with the Group pursuant to Rule 13.84 of the Listing Rules and accordingly, were qualified to advise the Independent Board Committee and the Independent Shareholders in respect of the 2016 AH Sales Transaction, the Revised AH Annual Caps and the Revised FM Annual Caps. Apart from the normal advisory fee payable to us in connection with our appointment as the Independent Financial Adviser, no arrangement exists whereby we shall receive any other fees or benefits from the Company.

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LETTER FROM DONVEX CAPITAL LIMITED

BASIS OF OUR OPINION

In formulating our opinion, we consider that we have reviewed sufficient and relevant information and documents and have taken reasonable steps as required under Rule 13.80 of the Listing Rules to reach an informed view and to provide a reasonable basis for our recommendation. We have relied on the information, statements, opinion and representations contained or referred to in the Circular and all information and representations which have been provided by the Company, the Directors and the management of the Company, for which they are solely and wholly responsible, are true and accurate at the time when they were made and continue to be so at the date hereof. We have also assumed that all statements of belief, opinion and intention of the Directors as set out in the Letter from the Board contained in the Circular were reasonably made after due and careful inquiry. We have also sought and obtained confirmation from the Company that no material facts have been omitted from the information provided and referred to in the Circular.

The Directors have collectively and individually 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, that the information contained in the Circular is accurate and complete in all material respects and not misleading or deceptive, and there are no material facts and representations the omission of which would make any statement in the Circular or the Circular misleading.

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company, or its subsidiaries or associates, nor have we considered the taxation implication on the Group or the qualifying Shareholders as a result of the Revised AH Annual Caps and the Revised FM Annual Caps.

Our opinion is based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note that subsequent developments (including any material change in market and economic conditions) may affect and/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. In addition, 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 2016 AH Sales Transactions, the Revised AH Annual Caps and the Revised FM 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.

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LETTER FROM DONVEX CAPITAL LIMITED

PRINCIPAL FACTORS AND REASONS CONSIDERED

Background information on the Company, the AH Group and the FM Group

To the best knowledge of the Directors, AH Group is principally engaged in the business of manufacturing and exporting of knit and woven apparels for men, women and children in Sri Lanka.

To the best knowledge of the Directors, FM Group is principally engaged in the business of manufacturing, exporting and distributing of apparels for men, women and children in Sri Lanka.

Background on the 2018 AH Master Sales Agreement and 2018 FM Master Sales Agreement

(a) 2018 AH Master Sales Agreement

Set out below are the principal terms of the 2018 AH Master Sales Agreement which have been approved at by the then independent Shareholders at the extraordinary general meeting of the Company held on 29 December 2015:

Date: 18 November 2015

Parties: (a) the Company (b) Mr. Hirdaramani

Subject: Pursuant to the 2018 AH Master Sales Agreement, the Company agreed to, or would 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.

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LETTER FROM DONVEX CAPITAL LIMITED

Terms:

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

Pricing policy:

(i) the expected cost to be incurred by the Group in providing such products. 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 offered to the AH Group are competitive and comparable to those being offered to independent third party customers of the Group and no less favorable to 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;
(ii) the prevailing market prices of the products to be sold by the Group to the AH Group. The sales department will normally compare the Group’s prices with the range of selling price of the similar products charged by at least two competitors of the Group in the market on a case-by-case basis which depends on whether such competitors have updated their selling price quotations. Selling prices charged by competitors are widely available as there are many fabric suppliers in the market competing for attractive selling prices and the Group will select a few suppliers which are comparable to the Group in terms of size and product range as indicators given the wide range of fabric products provided and the large number of fabric suppliers in the market, and some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric suppliers when negotiating the selling price with the Group;

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LETTER FROM DONVEX CAPITAL LIMITED

(iii) the quality and prices of the products available in the market. The Company will compare and analyze the quality and prices of the products in the market, which are similar to the products to be supplied to AH Group; and
(iv) the reasonable profit margin for the products provided. The 2018 AH Master Sales Agreement does not provide a predetermined 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 or labors at the relevant time, both of which can fluctuate depending on the conditions of the market at the time. In addition, 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 orders. 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 Assistant General 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.

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LETTER FROM DONVEX CAPITAL LIMITED

Payment terms:

(b) 2018 FM Master Sales Agreement

Set out below are the principal terms of the 2018 FM Master Sales Agreement which have been approved at by the then independent Shareholders at the extraordinary general meeting of the Company held on 29 December 2015:

Date: 18 November 2015 Parties: (c) the Company (d) Mr. Omar

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

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

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LETTER FROM DONVEX CAPITAL LIMITED

Pricing policy:

(i) the expected cost to be incurred by the Group in providing such products. 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 offered to the FM Group are competitive and comparable to those being offered to independent third party customers of the Group and no less favorable to 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;
(ii) the prevailing market prices of the products to be sold by the Group to the FM Group. The sales department will normally compare the Group’s prices with the range of selling price of the similar products charged by at least two competitors of the Group in the market on a case-by-case basis which depends on whether such competitors have updated their selling price quotations. Selling prices charged by competitors are widely available as there are many fabric suppliers in the market competing for attractive selling prices and the Group will select a few suppliers which are comparable to the Group in terms of size and product range as indicators given the wide range of fabric products provided and the large number of fabric suppliers in the market, and some of the Group’s customers will also provide the Group with selling prices they obtained from other fabric suppliers when negotiating the selling price with the Group;

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LETTER FROM DONVEX CAPITAL LIMITED

(iii) the quality and prices of the products available in the market. The Company will compare and analyze the quality and prices of the products in the market, which are similar to the products to be supplied to FM Group; and
(iv) the reasonable profit margin for the products provided. The 2018 FM Master Sales Agreement does not provide a predetermined 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 or labors at the relevant time, both of which can fluctuate depending on the conditions of the market at the time. In addition, 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 orders. 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 Assistant General 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.

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LETTER FROM DONVEX CAPITAL LIMITED

Payment terms:

Assessment of pricing policy and principal terms

In order to assess the fairness and reasonableness of the pricing policy and other principle terms of the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement, we have reviewed and compared:

a. the market price and payment term records of the similar products offered by the Group’s competitors. It is noted that the competitors that the Company selected are the major suppliers of the fabrics and yarns in the market, with similar business scale to the Company.

As stated in the Letter of the Board, the sales department of the Company has conducted the pricing comparison of similar products with at least two competitors in the market as the benchmark on a case-by-case basis (depends on whether such competitors have updated their respective selling price quotations) before determining the selling prices in the AH Sales Transactions and the FM Sales Transactions. Based on the records, we have compared the Group’s selling prices of similar products with those prices charged by several competitors in the market. After the comparison, we are of the view that the Group’s selling prices offered to AH Group and FM Group are (i) not less than those prices offered by the Group’s competitors; and (ii) in line with the prevailing market prices.

The Company has also compared the payment terms under the AH Sales Transactions and FM Sales Transactions with those offered by the at least two competitors in the market. Based on our review, as the payment terms offered by the Group’s competitors are on a monthly basis, we consider that the payment terms offered by the Group for the AH Sales Transactions and FM Sales Transactions are (i) not more favorable than those offered by the Group’s competitors; and (ii) consistent with the prevailing market payment terms.

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LETTER FROM DONVEX CAPITAL LIMITED

b. the purchase orders and invoices of four historical sales transactions for each of (i) the AH Sales Transactions, (ii) the FM Sales Transactions and (iii) the sales transactions with independent third party customers respectively (the ‘‘Comparables’’). We are of the view that the Comparables would provide a fair and reasonable view on the pricing terms under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement as the Comparables are frequently ordered by AH Group, FM Group and independent third party customers from time to time.

Based on the above comparison of the selling prices among the AH Sales Transactions, the FM Sales Transactions and the transactions conducted with independent third party customers, it is noted that the selling prices in the AH Sales Transactions and the FM Sales Transactions were similar and no less favorable than those provided to the independent third party customers.

c. the payment terms of the Comparables. Based on the comparison, the settlement terms offered by the Group to AH Group, FM Group and the independent third party customers as stated in the Comparables were on the monthly basis. As such, we are of the view that the payment terms of the AH Sales Transactions and the FM Sales Transactions are (i) in accordance with the payment terms set out in the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement respectively; and (ii) in line with the market payment terms after comparing the settlement methods among the Comparables.

Having considered that (i) the AH Sales Transactions and the FM Sales Transactions are based on the prevailing market prices; (ii) the pricing and terms of the AH Sales Transactions and the FM Sales Transactions are on similar basis with and not less favorable than those provided to independent third party customers; (iii) the payment of the AH Sales Transaction and the FM Sales Transactions has been made by cash on a monthly basis; and (iv) the payment terms of the AH Sales Transactions and the FM Sales Transactions have been consistent with the market payment terms of supplying such particular products, we consider that the pricing and payment terms of the AH Sales Transactions and the FM Sales Transactions are (i) on normal commercial terms after arms’ length negotiation between the Group and the relevant parties; and (ii) fair and reasonable so far as the Company and the Independent Shareholders are concerned.

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LETTER FROM DONVEX CAPITAL LIMITED

Exceeding of the 2016 AH Annual Cap and Substantial Usage of the 2016 FM Annual Cap

As stated in the Letter from the Board, during the preparation of the monthly management report of the Company for the month ended 31 December 2016, it came to the attention of the Board that (i) the 2016 AH Transaction Amount received by the Company under the 2018 AH Master Sales Agreement was approximately HK$160,260,000, which exceeded the 2016 AH Annual Cap of HK$150,000,000 as stated in the circular of the Company dated 11 December 2015, by approximately HK$10,260,000, or approximately 6.84% of the 2016 AH Annual Cap; and (ii) the 2016 FM Transaction Amount received by the Company under the 2018 FM Master Sales Agreement was approximately HK$183,350,000, which is approximately 79.72% of the 2016 FM Annual Cap of HK$230,000,000 as stated in the circular of the Company date 11 December 2015.

As stated in the Letter from the Board, the reasons for exceeding the 2016 AH Annual Cap are as follows:

(a) the steady increase of cotton prices in 2016 which exceeded the Group’s expectations. At the time when the Company determined the 2016 AH Annual Cap and the Approved AH Annual Caps, it has taken into account a rebound in the price of cotton after a continuing price drop of more than 25% during the years of 2013 and 2014 and the cost of cotton has only increased by 2.5% during the ten months ended 31 October 2015 according to the National Cotton Council of America. However, the cost of cotton has indeed increased by 15.6% during the year of 2016 according to the National Cotton Council of America. The price of cotton was at the lowest in March 2016 and at the highest in July 2016. During this period, cotton prices rose about 23.8%. According to the 2016 China Cotton Index annual report published by the China Cotton Association, the price of yarn was at the lowest in April 2016 and at the highest in July 2016. During this period, yarn prices rose about 21.1%. As cotton is used for the production of knitted fabrics, yarns, fibers and garment parts, the costs and prices of these products under the AH Sales Transactions also increased accordingly; and

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LETTER FROM DONVEX CAPITAL LIMITED

(b) the AH Sales Transactions and the 2016 AH Transaction Amount were higher than expected. At the time when the Company determined the 2016 AH Annual Cap and the Approved AH Annual Caps, the Company has taken into account 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, which accounted for approximately HK$91,400,000, HK$82,955,000 and HK$84,676,000, respectively, with reference to the rebound in the price of cotton and has set the annual caps in a prudent way. However, the actual transaction amounts received by the Group under the AH Sales Transactions has significantly increased and were higher than anticipated thus the 2016 AH Annual Cap was exceeded.

The Annual Caps Revision

As stated in the Letter from the Board, the Board expects that the Approved AH Annual Caps and the Approved FM Annual Caps for two years ending 31 December 2017 and 2018 will be exceeded. Accordingly, the Board proposes to approve the revision of the Approved AH Annual Caps and the Approved FM Annual Caps for two years ending 31 December 2017 and 2018 at the EGM.

Set out below are (i) the Approved AH Annual Caps and the Approved FM Annual Caps; and (ii) the Revised AH Annual Caps and the Revised FM Annual Caps under the 2018 AH Master Sales Agreement and 2018 FM Master Sales Agreement respectively:

	2018 AH	Master Sales	Agreement	2018 FM	Master Sales	Agreement
	Year	ending 31 December		Year	ending 31 December
	2016	2017	2018	2016	2017	2018
	(HK$’000)	(HK$’000)	(HK$’000)	(HK$’000)	(HK$’000)	(HK$’000)
Approved Annual Caps	150,000	150,000	150,000	230,000	230,000	230,000
Revised Annual Caps	–	300,000	350,000	–	300,000	350,000

As confirmed by the Directors, save for the Revised AH Annual Caps and the Revised FM Annual Caps, the terms of the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement will remain unchanged.

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LETTER FROM DONVEX CAPITAL LIMITED

Basis of determination of the Revised AH Annual Caps and the Revised FM Annual Caps

According to the Letter from the Board, the proposed Revised AH Annual Caps and Revised FM Annual Caps have been determined in the following manner:

(a) the historical transaction amounts under the AH Sales Transactions for the three years ended 31 December 2016 of approximately HK$82,955,000, HK$167,163,000 and HK$160,260,000, respectively;
(b) the historical transaction amounts under the FM Sales Transactions for the three years ended 31 December 2016 of approximately HK$155,037,000, HK$211,783,000 and HK$183,350,000, respectively;
(c) the increase in the Group’s selling price for fabrics due to the higher fees charged by the Group’s value added product segment such as printing, which the AH Group and the FM Group have continuously ordered such products from the Group and the increase in the cost will be transferred to the selling price of such products;
(d) the expected increase in the price of cotton and yarns by at least 23.8% and 21.1%, respectively, for the two years ending 31 December 2018, based on the figures published by the National Cotton Council of America and the China Cotton Association for the year of 2016;
(e) the expected increase in the demand of the products of the Group of approximately 30% and 35% for the two years ending 31 December 2017 and 2018 respectively from the ultimate clients of AH Group and FM Group as the government of Sri Lanka is currently negotiating for reinstatement of the GSP+ facilities with the European Union and is in discussions with China to increase its apparel exports based on the China-Sri Lanka Free Trade Agreement (the ‘‘China-Sri Lanka FTA’’). The European Commission (‘‘EC’’) has proposed on 11 January 2017 that a significant part of the remaining import duties on Sri Lankan products should be removed by the European Union (‘‘EU’’) in exchange for the country’s commitment to ratify and effectively implement 27 international conventions on human rights, labor conditions, protection of the environment and good governance. These one-way trade preferences would come under the GSP+ and consist of the full removal of duties on 66% of tariff lines, covering a wide array of products including textiles. If the GSP+ arrangement is successfully restored, the preferential tariff treatment will benefit the entire Sri Lankan textile and garment industry. Given that (i) the ultimate clients of AH Group and FM Group are located in Europe (most of them are members of the EU); and (ii) the main suppliers of AH Group and FM Group are located in China; the GSP+ and the ChinaSri Lanka FTA will benefit the export sales of products of AH Group and FM Group. As such, AH Group and FM Group have planned to expand the export sales of products and increase their production capacities for the two years ending 31 December 2018, which in turn will increase the demand of the Group’s products;

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LETTER FROM DONVEX CAPITAL LIMITED

(f) the business development plan of the Group, including operational equipment upgrades in fabric mills and production expansion to partly cope with the expansion plan of AH Group and FM Group; and
(g) a 10% appropriate buffer to offer flexibility to the Group in dealing with any unforeseeable increase of the transaction amount under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement respectively.

Assessment of the reasonableness of the proposed Revised Annual Caps

To further assess the fairness and reasonableness of the Revised AH Annual Caps and the Revised FM Annual Caps, we have considered the following factors:

(a) the historical transaction amounts under the AH Sales Transactions have demonstrated an increase of approximately 93% for the three year ended 31 December 2016 (average growth rate per annum at 31%) while the historical transaction amounts under the FM Sales Transactions have demonstrated an increase of approximately 18% for the three years ended 31 December 2016 (average growth rate per annum at 6%). However, it is noted that the 2016 AH Transaction Amount and the 2016 FM Transaction Amount had a decrease of 4.1% and 13.4% respectively as compared to the corresponding period in 2015. As the cotton price was at a low level after a drop of more than 25% during the years of 2013 and 2014, the Company estimated the 2016 AH Annual Cap and the 2016 FM Annual Cap in a conservative way. In view of the foreseeable increase in the cotton price of approximately 23.8% as elaborated below, we consider that the amounts of the AH Sales Transactions and the FM Sales Transactions for 2017 and 2018 will increase as a result of the increased cotton price.

Besides, having taken into account the below factors:

(i) based on the historical transaction amounts, the average growth rate of approximately 31% for the AH Sales Transaction was significantly higher than the average growth rate of approximately 6% for the FM Sales Transactions, for the three years ended 31 December 2016; and
(ii) the utilization rate of the 2016 AH Annual Cap was approximately 106.84% while the utilization rate of the 2016 FM Annual Cap was approximately 79.72%.

We concur with the Directors that the increase in the amounts of the AH Sales Transactions is estimated to be higher than the FM Sales Transactions for the two years ending 31 December 2018. As a result, it is fair and reasonable that the increase applied to the Revised AH Annual Caps is greater than to the Revised FM Annual Caps, from the Approved AH Annual Caps and the Approved FM Annual Caps respectively.

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LETTER FROM DONVEX CAPITAL LIMITED

(b) taking advantage of the printing technology for fabrics that has been adopted since 2016, the Group has been able to supply more value-added products in accordance with the specific requirements on fabrics from clients. The increase in the cost will be transferred to the selling price of the printing fabric products to clients by the Company. As a result, a higher selling price of improved printing fabrics will increase the transaction amounts of the AH Sales Transactions and the FM Sales Transactions for the two years ending 31 December 2018.

In this regard, we are of the view that the increase in the Revised AH Annual Caps and the Revised FM Annual Caps is fair and reasonable, considered that the selling prices of printing fabric products sold to AH Group and FM Group will increase as a result of the improved technology.

(c) with reference to a report published on 11 October 2016 in Futures Daily, a professional publication for China’s futures market, it forecasts that the cotton prices will remain the upward trend during the period 2017, and exceed a price of RMB18,500 per ton after July of 2017. Given the cotton price at the end of December 2016 was approximately RMB15,800 per ton, the increase in cotton prices for 2017 is estimated to be 17% to 20% approximately, which is close to the Company’s estimation of approximately 23.8% as abovementioned. As such, we consider that the Company’s estimation on the price of cotton and yarns is fair and reasonable;
(d) as cotton and yarns are the raw materials for knitted fabrics and garment parts, the increase in the prices of cotton and yarns will result in an increase in the cost of knitted fabric products and garment parts. As confirmed by the management of the Company, the Company will entirely transfer the cost to the selling price of fabrics to be supplied to AH Group or FM Group under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement respectively;
(e) China and Sri Lanka have officially launched the negotiations on the China-Sri Lanka FTA since 2014, and recently the 5th round of the China-Sri Lanka FTA negotiations was held in Colombo, Sri Lanka. Under the proposed China-Sri Lanka FTA, the dutyfree liberalization of textile and clothing products may result in a relatively large increase in the exports of textile and clothing products from Sri Lanka to China. Furthermore, the government of Sri Lanka is negotiating to reinstate the GSP+ facilities with the EU, in which they have already applied for reinstatement in July 2016. In response, the EC has proposed to EU to remove the import duties on Sri Lanka’s products and restore Sri Lanka’s GSP+ trade access to the markets within EU. The exports from Sri Lanka to EU will benefit from the GSP+ arrangement once it is successfully restored.

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LETTER FROM DONVEX CAPITAL LIMITED

To assess the influence of the GSP+ and free trade agreement with China, we have conducted the research on the impact of the GSP+ and free trade agreement on Pakistan. Pakistan has the similar geographical position with Sri Lanka in South Asia and Pakistan is also benefited from the EU’s GSP+ and China-Pakistan Free Trade Agreement (‘‘China-Pakistan FTA’’) respectively. With reference to the statistics disclosed by the EC, Pakistan’s export to EU rose by approximately 22% immediately after the grant of the GSP+ status in 2014. Meanwhile, the total trading volumes between Pakistan and China increased approximately 25% immediately after the China-Pakistan FTA is in effect in January 2007. In this regard, Sri Lanka should have the similar experience as Pakistan on the increase in the import and export of textile and clothing, once the GSP+ and China-Sri Lanka FTA have been granted.

Having considered that the ultimate clients of AH Group and FM Group are members of EU and the main suppliers of AH Group and FM Group are located in China, we concur with the Directors that the GSP+ and the China-Sri Lanka FTA will benefit the export sales of products of AH Group and FM Group. Thus, in view of their business development plans, both AH Group and FM Group have planned to expand the export sales of products and increase their production capacities for the two years ending 31 December 2018, which in turn will increase (i) the demand of the Group’s products; and (ii) the sales amounts of AH Sales Transaction and the FM Sales Transaction for the two years ending 31 December 2018 accordingly.

Based on the above assessment, we consider that the expected growth rate of approximately 30% and 35% for the year ending 31 December 2017 and 2018 respectively for the AH Sales Transactions and the FM Sales Transactions are fair and reasonable.

(f) we noted that the Company has adopted a buffer of 10% as an assumption for the determination of the Revised AH Annual Caps and the Revised FM Annual Caps.

Having considered that the additional buffer of 10% was (i) necessary to maintain sufficient level of capability to cater for unforeseeable circumstances for the AH Sales Transactions and the FM Sales Transactions, such as the unpredictable increase in the material prices of the cotton or yarns market; and (ii) built in to cater for any unexpected increase in demand from AH Group or FM Group, which may increase the utilization of annual caps significantly, we consider the buffer of 10% is fair and reasonable.

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LETTER FROM DONVEX CAPITAL LIMITED

Views

Taking into account that (i) the increase in the amounts of the AH Sales Transactions is estimated to be greater than the FM Sales Transactions for the two years ending 31 December 2018; (ii) a higher selling price of improved printing fabrics will result in an increase in transaction amounts for the AH Sales Transactions and the FM Sales Transactions for the two years ending 31 December 2018; (iii) the selling price of fabrics and yarns are expected to increase by approximately 20% in 2017; (iv) the transactions amounts of the AH Sales Transactions and the FM Sales Transactions are expected to increase by approximately 30% and 35% for 2017 and 2018 respectively; and (v) the buffer of 10% was applied for unforeseeable circumstances, we consider that the Revised AH Annual Caps and the Revised FM Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned.

Internal Control for the Continuing Connected Transactions

With reference to the Letter from the Board, the Company has adopted remedial measures to avoid future occurrence of events similar to the exceeding of 2016 AH Annual Cap and to ensure continuous compliance with the applicable requirements under the Listing Rules. Details of the remedial measures are set out in the paragraphs headed ‘‘INTERNAL CONTROL FOR THE GROUP’S CONTINUING CONNECTED TRANSACTIONS’’ in the Letter from the Board.

As stated in the Letter from the Board, the remedial measures adopted by the Company are summarized as follows:

(a) the Company notified the Stock Exchange and made the relevant announcement in a timely manner when they were aware of the exceeding of the 2016 AH Annual Cap;
(b) the Company has provided a continuing connected transactions training on 25 January 2017 to the Directors, on the relevant continuing connected transactions rules and regulations under the Listing Rules to strengthen their awareness on compliance requirements;
(c) additional and continuing training on the continuing connected transactions will be provided to all the Directors and staffs on a regular basis to enhance the supervision of the continuing connected transactions, particularly the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement;
(d) the corporate governance department of the Company will continue to monitor the transaction figures for the continuing connected transactions of the Company on a monthly basis; and

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LETTER FROM DONVEX CAPITAL LIMITED

(e) the Company will now further lower the threshold from 80% to 65% of the relevant annual caps, so once the continuing connected transaction amount reaches the threshold at any point during the year, the corporate governance department will closely monitor the relevant continuing connected transactions and seek advice from the audit committee and the Board to consider next steps, including discussion with the relevant connected persons on the anticipation of transaction amounts in coming months as well as the need to inform the Stock Exchange, publish any announcement and to seek independent Shareholders’ approval for an increase of in annual caps if applicable.

Assessment of the remedial measures on internal controls

To assess the effectiveness on the remedial measures on the internal controls for the AH Sales Transactions and the FM Sales Transactions, we have reviewed the materials provided to the Directors on the training session hold by the Company on 25 January 2017. We understand that the Company has enhanced Directors’ awareness on the compliance with rules and regulations in relation to continuing connected transactions under the Listing Rules.

Besides, we have reviewed the revised guideline of internal controls for the continuing connected transactions. We noted that the Company has revised the threshold of the relevant annual caps from 80% to 65% in order to alert the independent non-executive Directors in a timely manner once the transaction amount reach the threshold. Meanwhile, the internal audit department and corporate governance department will strengthen the monitoring process to the transaction figures, including the selling prices and sales volumes, on a monthly basis for the continuing connected transactions under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement.

Based on the abovementioned assessment, we consider that the implementation on the remedial measures will (i) ensure the transactions to be conducted in accordance with the pricing terms of the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement; (ii) lower the risk of exceeding of the annual caps under the 2018 AH Master Sales Agreement and the 2018 FM Master Sales Agreement; and (iii) be effective and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM DONVEX CAPITAL LIMITED

RECOMMENDATION

Having considered the abovementioned principal factors and reasons, we are of the view that (i) the AH Sales Transactions under the 2018 AH Master Sales Agreement and the FM Sales Transactions under the 2018 FM Master Sales Agreement are in the ordinary and usual course of business of the Group, on normal commercial terms and in the interests of the Company and the Shareholders as a whole, and they are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Revised AH Annual Caps and the Revised FM Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. Therefore, we recommend the Independent Board Committee to advise the Independent Shareholders, and we also recommend the Independent Shareholders, to vote in favor of the resolution(s) to be proposed at the EGM to (i) ratify the 2016 AH Sales Transactions; and (ii) approve the Revised AH Annual Caps and the Revised FM Annual Caps.

Yours faithfully, For and on behalf of Donvex Capital Limited Vily Leung Director

Ms. Vily Leung is a person licensed to carry out type 6 (advising on corporate finance) regulated activity under the SFO and is a responsible officer of Donvex Capital Limited who has over 8 years of experience in corporate finance industry.

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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. INTEREST 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 corporations (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
			percentage of
Name of Director	Nature of Interest	Number of Shares	shareholding
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.

Long positions in underlying Shares – Share options:

			Number of
			underlying Shares
		Vesting and	comprised in
Name of Director	Date of grant	Exercise period	share options
Dr. Yen Gordon	18.08.2011	19.08.2012 to 18.08.2017	1,320,000
		(Note 1)

Note:

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.

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GENERAL INFORMATION

APPENDIX

3. INTEREST OF SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to the Directors and the chief executive of the Company, the following person/entities (other than a Director or the 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 Shares:

			Approximate
			percentage of
Name of Substantial Shareholders	Capacity	Number of shares	shareholding
Chinatex Corporation (‘‘Chinatex’’)	Interest of controlled	433,494,000 (L)	35.97%
	corporations	(Note 1 and 2)
Chinatex Yieldfull Investment	Beneficial owner	409,036,000 (L)	33.94%
Co., Ltd. (‘‘Yieldfull’’)		(Note 1)
Chinatex Jinhui Investment	Interest of a controlled	409,036,000 (L)	33.94%
Management Co., Ltd (‘‘Jinhui’’)	corporation	(Note 1)
Mr. HA Chung Fong	Beneficial owner	101,898,000 (L)	8.46%
(‘‘Mr. Ha’’)		(Note 3)
	Other interests	69,160,948 (L)	5.74%
		(Note 3 and 5)
Ms. TANG Kuen Mui	Spouse interest	171,058,948 (L)	14.20%
		(Note 3)
Super Brilliance Company Limited	Beneficial owner	69,160,948 (L)	5.74%
(‘‘Super Brilliance’’)		(Note 4 and 5)
Island Treasure Investments Limited	Interest of a controlled	69,160,948 (L)	5.74%
(‘‘Island Treasure’’)	corporation	(Note 4 and 5)
Onwide (H.K.) Limited	Trustee	69,160,948 (L)	5.74%
(‘‘Onwide’’)		(Note 4 and 5)
Mr. WONG Tak Leung, Charles	Interest of controlled	69,160,948 (L)	5.74%
(‘‘Mr. Wong’’)	corporations	(Note 4 and 5)

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GENERAL INFORMATION

APPENDIX

Notes:

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. Reference is made to an announcement of the Company dated 27 July 2016, Chinatex will be a wholly-owned subsidiary of COFCO Corporation, which is a state wholly-owned enterprise in the People’s Republic of China (the ‘‘PRC’’) and a direct wholly-owned subsidiary of the State-owned Assets Supervision and Administration Commission of the State Council of the PRC.
As at the Latest Practicable Date, Chinatex (H.K.) Holding Limited (‘‘Chinatex (H.K.)’’) held 24,458,000 Shares as beneficial owner. Chinatex (H.K.) is a wholly-owned subsidiary of Chinatex. Chinatex is therefore also deemed to be interested in the Shares held by Chinatex (H.K.).
Ms. Tang Kuen Mui, spouse of Mr. Ha, is deemed to be interested in the Shares held by Mr. Ha Chung Fong.
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. Therefore, each of Island Treasure, Onwide and Mr. Wong is deemed to be interested in the Shares held by Super Brilliance.
Onwide is the trustee of the HA Trust, a discretionary trust set up by Mr. Ha for the benefit of his family.

4. 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.

5. 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.

6. 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 2015, being the date to which the latest published audited financial statements of the Group were made up.

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GENERAL INFORMATION

APPENDIX

7. 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.

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, leased to any member of the Group, since 31 December 2015, 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.

8. GENERAL

(a) None of the Directors had any direct or indirect interest in any assets which had been acquired, 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 2015, being the date to which the latest published audited financial statements of the Group were made up, and up to the Latest Practicable Date.
(b) 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 located at Block A, 6th Floor, Eastern Sea Industrial Building, 29-39 Kwai Cheong Road, Kwai Chung, New Territories, Hong Kong.
(d) The share registrar of the Company in Hong Kong is Tricor Secretaries Limited.
(e) The English text of this circular shall prevail over the Chinese text for the purpose of interpretation.

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GENERAL INFORMATION

APPENDIX

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the Company’s registered office and principal place of business in Hong Kong at Block A, 6th Floor, 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 AH Master Sales Agreement;
(b) The 2018 FM Master Sales Agreement;
(c) The circular dated 11 December 2015 issued by the Company in relation to certain continuing connected transactions of the Company, including the AH Sales Transactions under the 2018 AH Master Sales Agreement and the FM Sales Transactions under the 2018 FM Master Sales Agreement;
(d) The letter from the Independent Board Committee, the text of which is set out on pages 23 to 24 of this circular;
(e) The letter from the Independent Financial Adviser, the text of which is set out on pages 25 to 45 of this circular; and
(f) This circular.

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NOTICE OF EGM

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(Incorporated in Hong Kong with limited liability)

(Stock Code: 420)

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting (the ‘‘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 Thursday, 23 March 2017 at 9:30 a.m. or its adjournment to consider and if thought fit, to pass with or without amendments, the following resolutions as ordinary resolutions of the Company.

ORDINARY RESOLUTION

1. ‘‘THAT:

the continuing connected transactions conducted during the year ended 31 December 2016 under the master sales agreement (the ‘‘2018 AH Master Sales Agreement’’) (a copy of which has been produced to the meeting marked ‘‘A’’ and signed by the chairman of the meeting for the purpose of identification) dated 18 November 2015 and entered into between the Company and Mr. Anil Kumar Lalchand Hirdaramani (‘‘Mr. Hirdaramani’’) in relation to the sale of fabrics, yarns, fibers and garment parts by the Company and its subsidiaries to the 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 majority of the board of directors, of which the aggregate value amount to approximately HK$160,260,000, which had exceeded the annual cap of HK$150,000,000 in respect of such transactions for the year ended 31 December 2016 previously estimated by the board of directors of the Company and approved in the extraordinary general meeting of the Company held on 29 December 2015 be and are hereby confirmed, ratified and approved.’’

2. ‘‘THAT:

the revised annual caps of HK$300,000,000 and HK$350,000,000, being the maximum aggregate annual value in respect of the transactions contemplated under the 2018 AH Master Sales Agreement for each of the two years ending 31 December 2018, respectively be and are hereby approved and confirmed.’’

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NOTICE OF EGM

3. ‘‘THAT:

the revised annual caps of HK$300,000,000 and HK$350,000,000, being the maximum aggregate annual value in respect of the transactions contemplated under the master sales agreement (a copy of which has been produced to the meeting marked ‘‘B’’ and signed by the chairman of the meeting for the purpose of identification) dated 18 November 2015 and entered into between the Company and Mr. Feroz Omar (‘‘Mr. Omar’’) in relation to the sale of fabrics, yarns, fibers and garment parts by the Company and its subsidiaries to the 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 majority of the board of directors, for each of the two years ending 31 December 2018, respectively be and are hereby approved and confirmed.’’

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

Chairman and Chief Executive Officer

Hong Kong, 8 March 2017

Notes:

All votes of the shareholders of the Company (the ‘‘Shareholders’’) 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 Meeting, 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 respective websites of Hong Kong Exchanges and Clearing Limited and the Company in accordance with the Listing Rules.
Any Shareholder entitled to attend and vote at the 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 Meeting on a poll. A proxy need not be a Shareholder. 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.
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 share registrar in Hong Kong, Tricor Secretaries Limited at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 48 hours (excluding any part of a day that is a public holiday) before the time appointed for the holding of the Meeting or its adjournment. Delivery of the form of proxy shall not preclude a Shareholder from attending and voting in person at the Meeting and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
The translation into Chinese language of this notice is for reference only. In case of any inconsistency, the English version shall prevail.
As at the date of this notice, the executive directors are Mr. ZHAO Yao, Mr. CHEN Minghong and Mr. LAN Jiang; the non-executive directors are Dr. YEN Gordon and Mr. ZHANG Chong; and the independent non-executive directors are Mr. NG Kwok Tung, Mr. YING Wei and Mr. William LAM.

– 52 –

AI assistant

Convenience Retail Asia Limited — Proxy Solicitation & Information Statement 2017

49496_rns_2017-03-08_1774f9b1-c1d9-480d-b8d4-be4493280e24.pdf

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

(Stock Code: 420)

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EXTRAORDINARY GENERAL MEETING

1. INTRODUCTION

LETTER FROM THE BOARD

2. BACKGROUND OF THE 2018 AH MASTER SALES AGREEMENT

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

3. EXCEEDING OF THE 2016 AH ANNUAL CAP AND SUBSTANTIAL USAGE OF THE 2016 FM ANNUAL CAP

LETTER FROM THE BOARD

4. REASONS FOR EXCEEDING THE 2016 AH ANNUAL CAP

LETTER FROM THE BOARD

5. REVISION OF THE APPROVED AH ANNUAL CAPS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

6. BACKGROUND OF THE 2018 FM MASTER SALES AGREEMENT

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

7. REVISION OF THE APPROVED FM ANNUAL CAPS

LETTER FROM THE BOARD

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

LETTER FROM THE BOARD

LETTER FROM THE BOARD

9. LISTING RULES IMPLICATIONS

10. INFORMATION ON THE GROUP, THE AH GROUP AND THE FM GROUP

11. EGM AND PROXY ARRANGEMENTS

12. GENERAL INFORMATION

LETTER FROM THE BOARD

13. RECOMMENDATION

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

EXCEEDING OF 2016 AH ANNUAL CAP AND REVISION OF ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM DONVEX CAPITAL LIMITED

LETTER FROM DONVEX CAPITAL LIMITED

OUR INDEPENDENCE

LETTER FROM DONVEX CAPITAL LIMITED

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

Background information on the Company, the AH Group and the FM Group

Background on the 2018 AH Master Sales Agreement and 2018 FM Master Sales Agreement

(a) 2018 AH Master Sales Agreement

LETTER FROM DONVEX CAPITAL LIMITED

LETTER FROM DONVEX CAPITAL LIMITED

(b) 2018 FM Master Sales Agreement

LETTER FROM DONVEX CAPITAL LIMITED

LETTER FROM DONVEX CAPITAL LIMITED

Assessment of pricing policy and principal terms

LETTER FROM DONVEX CAPITAL LIMITED

LETTER FROM DONVEX CAPITAL LIMITED

Exceeding of the 2016 AH Annual Cap and Substantial Usage of the 2016 FM Annual Cap

LETTER FROM DONVEX CAPITAL LIMITED

The Annual Caps Revision

Basis of determination of the Revised AH Annual Caps and the Revised FM Annual Caps

Assessment of the reasonableness of the proposed Revised Annual Caps

LETTER FROM DONVEX CAPITAL LIMITED

LETTER FROM DONVEX CAPITAL LIMITED

LETTER FROM DONVEX CAPITAL LIMITED

Views

Internal Control for the Continuing Connected Transactions

LETTER FROM DONVEX CAPITAL LIMITED

Assessment of the remedial measures on internal controls

LETTER FROM DONVEX CAPITAL LIMITED

RECOMMENDATION

1. RESPONSIBILITY STATEMENT

2. INTEREST OF DIRECTORS

3. INTEREST OF SUBSTANTIAL SHAREHOLDERS

4. DIRECTORS’ SERVICE CONTRACTS

Convenience Retail Asia Limited Proxy Solicitation & Information Statement 2017