CR Construction Group Holdings Limited - Proxy Solicitation & Information Statement 2011

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 your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Chinese People Holdings Company Limited (the “Company”), 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.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities.

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 disclaims any liability whatsoever for any loss howsoever arising from or in reliance on the whole or any part of the contents of this circular.

**CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 681)

MAJOR TRANSACTION AND NOTICE OF SPECIAL GENERAL MEETING

A notice convening a special general meeting of the Company to be held at Function Room of Macau Jockey Club, 1st Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong immediately after the conclusion of the annual general meeting of the Company to be held on Monday, 29 August 2011 at 11:00 a.m. is set out on pages 174 to 175 of this circular.

Whether or not you are able to attend the special general meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjourned meeting (as the case may be) if you so wish.

12 August 2011

For identification purpose only

		Page
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		5
Appendix I	– Valuation report on Shenzhen Le Cai. . . . . . . . . . . . . . . . . . . . . . . . . . . .	46
Appendix II	– Financial information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	73
Appendix III	– Accountants’ report on the Grand Destiny Group. . . . . . . . . . . . . . . . . .	78
Appendix IV	– Accountants’ report on Shenzhen Le Cai. . . . . . . . . . . . . . . . . . . . . . . . .	105
Appendix V	– Accountants’ report on Shenzhen Jin Cai . . . . . . . . . . . . . . . . . . . . . . . . .	134
Appendix VI	– Unaudited pro forma financial information of the Enlarged Group. . . .	154
Appendix VII	– General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	166
Notice of SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		174

– i –

DEFINITIONS

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

“Acquisition”
the acquisition of the Sale Share by the Company from the Vendor pursuant to the terms and conditions of the Agreement
“Agreement” the agreement dated 13 June 2011 and entered into between the Company, as a purchaser and the Vendor, as a vendor in respect of the acquisition of the Sale Share by the Company from the Vendor
“Asian Allied” Asian Allied Limited, a company incorporated in the British Virgin Islands with limited liability and Dr. Mo Shikang, an executive Director, has 42.75% interest in Asian Allied.
“associates” has the meaning ascribed to this term under the Listing Rules
“Beijing Zhongmin” 北京中民燃氣有限公司 (Beijing Zhongmin Gas Company Limited [#] ), a company established in the PRC with limited liability
“Board” the board of Directors
“Business Day” a day (other than a Saturday, a Sunday or a public holiday) on which licensed banks are generally open for business in Hong Kong throughout their normal business hours
“Company” Chinese People Holdings Company Limited, a company incorporated in Bermuda with limited liability and the issued Shares of which are listed on the Stock Exchange
“Completion” completion of the sale and purchase of the Sale Share in accordance with the terms and conditions of the Agreement
“connected person(s)” has the meaning ascribed to this term under the Listing Rules
“Consideration” HK$465,226,560, being the consideration for the sale and purchase of the Sale Share
“Consideration Shares”
1,727,729,582 new issued Shares falling to be allotted and issued upon Completion to satisfy part of the Consideration

– 1 –

DEFINITIONS

“Debt”

the debt owing by the Vendor to the Company in the total amount of HK$45,388,271.50
“Directors”

the directors of the Company

“Enlarged Group” the Group as enlarged by the Target Group
“Grand Destiny Group” together the Target Company and Zhongmin Yongheng
“Group” the Company and its subsidiaries
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Issue Price” the issue price of HK$0.243 per Consideration Share
“Keno Games Agreement” the agreement entered into between Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心）on 28 December 2010 pursuant to which Shenzhen Le Cai will be the sole agent to operate and sell Keno Games Lottery in Shenzhen
“Keno Games and
Lottery Agreement”
the framework agreement entered into between Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心）on 1 August 2011, pursuant to which Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心） has appointed Shenzhen Le Cai as its sole agent to distribute Keno Games Lottery and as its agent to distribute Welfare Lotteries in Shenzhen for a term of 20 years
“Keno Games Lottery”
keno games lottery（快樂彩）mentioned in the Keno Games Agreement
“Last Trading Day”
10 June 2011, being the last trading day for the Shares prior to the execution of the Agreement
“Latest Practicable Date”
10 August 2011, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange

– 2 –

DEFINITIONS

“Lottery Agreement” the agreement entered into between Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心）on 18 April 2011 pursuant to which Shenzhen Le Cai will set up betting branches to sell Welfare Lottery in Shenzhen
“Lotto Lotteries” being the computer-based lotteries of Welfare Lottery (“樂透型彩票”)
“PRC” the People’s Republic of China, which for the purpose of this circular, excluding Hong Kong, Macau Special Administrative Region and Taiwan
“Sale Share” one ordinary share of US$1.00 in the issued share capital of the Target Company, representing the entire issued share capital of the Target Company
“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“SGM” the special general meeting of the Company to be held at Function Room of Macau Jockey Club, 1st Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong immediately after the conclusion of the annual general meeting of the Company to be held on Monday, 29 August 2011 at 11:00 a.m. and convened for the purpose of considering and, if thought fit, approving the Acquisition and the allotment and issue of the Consideration Shares
“Share(s)” ordinary issued share(s) of HK$0.07 each in the capital of the Company
“Shareholder(s)” holder(s) of the Share(s)
“Shenzhen Jin Cai” 深圳市永恒進彩科技開發有限公司 (Shenzhen Yongheng Jin Cai Technology Development Limited [#] ), a company established in the PRC with limited liability
“Shenzhen Le Cai” 深圳市永恒樂彩科技開發有限公司 (Shenzhen Yongheng Le Cai Technology Development Limited [#] ), a company established in the PRC with limited liability

– 3 –

DEFINITIONS

“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Super Win”	Super Win Development Limited, a company incorporated in the
	British Virgin Islands with limited liability and a wholly-owned
	subsidiary of Asian Allied
“Target Company”	Grand Destiny Group Limited, a company incorporated in the
	British Virgin Islands with limited liability
“Target Group”	together the Target Company, Zhongmin Yongheng, Shenzhen
	Le Cai and Shenzhen Jin Cai
“Welfare Lottery”	including “深圳風采”(Shenzhen Feng Cai_#_), “雙色球”(Shuang
	Se Qiu_#), “七樂彩” (Qi Le Cai#_), “3D” and other allowed welfare
	lotteries in Shenzhen
“Vendor”	Yongheng Development Corporation Limited, a company
	incorporated in Hong Kong with limited liability
“Zhongmin Yongheng”	北京中民永恒投資咨詢有限公司(Beijing Zhongmin Yongheng
	Investment Consultant Limited_#_), a company established in the
	PRC with limited liability
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“US$”	the lawful currency of The United States of America
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

# the English translations of Chinese names or words in this circular, where indicated, are included for information purpose only, and should not be regarded as the official English translation of such Chinese names or words.

For the purpose of this circular, unless otherwise indicated, conversion of RMB into HK$ is calculated at the approximate exchange rate of RMB1.00 to HK$1.2055. This exchange rate is for illustration purpose only and does not constitute a representation that any amounts have been, could have been, or may be exchanged at this or any other rate at all.

– 4 –

LETTER FROM THE BOARD

**CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 681)

Executive Directors:

Xu Ruixin Mo Shikang Zhang Hesheng Zhu Peifeng Jin Song Chu Kin Wang Peleus

Independent non-executive Directors:

Liu Junmin Tan Qinglian Sin Ka Man

Registered office:

Canon’s Court 22 Victoria Street Hamilton HM 12 Bermuda

Head office:

No. 36 BDA International Business Park No. 2 Jingyuan North Street Economic Technological Development Area Beijing, 100176, China

Principal place of business in Hong Kong: Unit 2111, 21st Floor China Merchants Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

12 August 2011

To the Shareholders

Dear Sir or Madam

MAJOR TRANSACTION AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

Reference is made to the announcement of the Company dated 15 June 2011 in which the Board announced that on 13 June 2011, the Company, as a purchaser, entered into the Agreement with the Vendor, as a vendor, pursuant to which the Company has conditionally agreed to purchase and the Vendor has conditionally agreed to sell the Sale Share for a total consideration of HK$465,226,560, which shall be satisfied by the Company as to (i) HK$419,838,288.50 by the Company to allot and issue the Consideration Shares to the Vendor credited as fully paid at the Issue Price upon Completion; and (ii) HK$45,388,271.50 by setting off against the Debt.

For identification purpose only

– 5 –

LETTER FROM THE BOARD

The purpose of this circular is to provide you with further information regarding the Acquisition and to seek approval from the Shareholders for the Acquisition and the transactions contemplated thereunder.

THE AGREEMENT

Date: 13 June 2011

Parties: (1) Company, as a purchaser

(2) Vendor, as a vendor

The Vendor is an investment holding company duly incorporated in Hong Kong with limited liability. Messrs. Yang Songsheng (“Mr. Yang”) and Yeung Paak Ching (“Mr. Yeung”), being the directors and shareholders of the Vendor and brothers, currently holds 7,500,000 shares options and 5,000,000 share options of the Company, respectively, which may be exerciseable between 1 December 2010 to 30 November 2013 (both days inclusive), with an exercise price of HK$0.282. Mr. Yeung also holds 600,000 Shares as at the Latest Practicable Date. Save as disclosed above and to the best knowledge, information and belief of the Directors after having made all reasonable enquiries, as at the Latest Practicable Date, the Vendor and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons.

Assets to be acquired

The Sale Share, representing the entire issued share capital of the Target Company as at the Latest Practicable Date.

Upon completion of the sale and purchase of the Sale Share, the Target Company will become a wholly-owned subsidiary of the Company and its financial information will be consolidated into the Group.

– 6 –

LETTER FROM THE BOARD

Consideration

The consideration for the sale and purchase of the Sale Share is HK$465,226,560, which shall be satisfied by the Company in the following manner:

(1) HK$419,838,288.50 shall be satisfied by the Company to allot and issue the Consideration Shares to the Vendor credited as fully paid at the Issue Price upon Completion; and
(2) HK$45,388,271.50 shall be satisfied by setting off against the Debt.

The consideration was determined through arm’s length negotiations between the Vendor and the Company and on a commercial basis with reference to (i) the aggregate combined net asset value of the Target Group as at 31 March 2011 of HK$141,336,000; and (ii) the preliminary valuation of Shenzhen Le Cai of RMB645,000,000 (equivalent to approximately HK$777,548,000) performed by Asset Appraisal Limited, an independent valuer, on 31 May 2011. Compared to the fair value of 60% equity interest in Shenzhen Le Cai in the amount of RMB387,000,000 (equivalent to approximately HK$466,529,000) as at 31 May 2011, as appraised by the independent valuer, using the income approach with discounted cash flow modeling, the Consideration represented a discount of approximately 0.28% to the appraised value of 60% equity interest in Shenzhen Le Cai.

As the income approach with discounted cash flow modeling used by the independent valuer constitutes a profit forecast under Rule 14.61 of the Listing Rules, the Company has submitted the following to the Stock Exchange as required under Rule 14.62 of the Listing Rules:

(1) details of the principal assumptions as set out in the section headed "Valuation assumptions" in Appendix I to this circular on pages 68 to 70 of this circular, including commercial assumptions, upon which the forecast was based;
(2) a letter from the auditors of the Company confirming that they have revised the accounting policies and calculations for the forecast and containing their report; and
(3) a letter from the Board confirming that they have made the forecast after due and careful enquiry.

The material assumption used in the valuation of Shenzhen Le Cai includes the following:

(1) The setting up of lottery betting branches

It was assumed that the proposed set up of the lottery betting branches in Shenzhen would be carried out on time and smoothly in future. The Target Group aimed to establish four lottery stations for selling Keno Games Lottery and eighty lottery stores for selling Welfare Lottery in Shenzhen during year 2011.

– 7 –

LETTER FROM THE BOARD

As at the Latest Practicable Date, the Target Group has established three lottery stores for distribution of Welfare Lottery in Shenzhen . Other three stores are under renovation and scheduled to commence business in August 2011. The Target Group is actively locating suitable locations to open lottery stations and lottery stores. The Company is optimistic that such target can be achieved.

(2) Revenue and commission rates

It was assumed that the commission rates for the distribution of each of the Keno Games Lottery and the Welfare Lottery would be 7% and 6%, respectively, from the total sales of lottery in Shenzhen.

As the valuation was made on the basis of (i) the current welfare lottery market in the PRC; and (ii) the expected growth of the Target Group in the future, the Directors consider the assumptions in the valuation to be fair and reasonable.

As such, the Directors consider that the terms and conditions of the Agreement to be fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

Conditions precedent

Completion shall be conditional upon and subject to:

(1) the purchaser being satisfied with the results of the due diligence review to be conducted;
(2) the passing by the Shareholders at the SGM the necessary resolutions to approve the Agreement and the transactions contemplated thereunder (including but not limited to the allot and issue of the Consideration Shares), as required by the Listing Rules;
(3) the Listing Committee of the Stock Exchange granting the listing of and permission to deal in the Consideration Shares;
(4) all necessary consents and approvals required to be obtained in respect of the transactions contemplated under the Agreement having been obtained by the Vendor;
(5) all necessary consents and approvals required to be obtained in respect of the transactions contemplated under the Agreement having been obtained by the Company;
(6) the warranties provided by the Vendor under the Agreement remaining true and accurate in all respects;

– 8 –

LETTER FROM THE BOARD

(7) the obtaining of the legal opinion issued by a firm of PRC lawyers acceptable to the Company covering the following matters of the PRC laws relevant to the transactions contemplated under the Agreement in such form and substance to the absolute satisfaction of the Company:
(i) the due and proper establishment and valid existence under the laws of the PRC of Zhongmin Yongheng, Shenzhen Le Cai and Shenzhen Jin Cai;
(ii) the obtaining of all necessary consents, licenses and approvals required to be obtained from the relevant PRC governmental and regulatory authorities or agencies in relation to the operation of the business of Zhongmin Yongheng, Shenzhen Le Cai and Shenzhen Jin Cai;
(iii) the legality, validity and enforceability of all consents, licenses and approvals in relation to the operation of the business of Zhongmin Yongheng, Shenzhen Le Cai and Shenzhen Jin Cai;
(iv) the legality, validity and enforceability of Keno Games Agreement;
(v) the legality, validity and enforceability of Lottery Agreement;
(vi) any other matters as may be required by the Company; and
(8) the obtaining of a valuation report (in form and substance satisfactory to the Company) prepared by an independent valuer appointed by the Company in relation to the value of Shenzhen Le Cai of not less than RMB645,000,000 (equivalent to approximately HK$777,548,000).

The above conditions (except conditions (2), (3), (4), (5), (7) and (8)) are capable of being waived by the Company. If the conditions have not been satisfied at or before 12:00 p.m. on 30 September 2011 or such later date as the Company and the Vendor may agree in writing, the Agreement shall cease and determine, and thereafter neither party shall have any obligations and liabilities towards each other thereunder save for any antecedent breaches of the terms thereof.

As required by the Company, the legal opinion to be issued by a firm of PRC lawyers will also cover the legality, validity and enforceability of the Keno Games and Lottery Agreement.

Completion

Completion shall take place at 4:00 p.m. on the date falling on the third Business Day after the fulfillment of the conditions or such later day as agreed by both parties.

– 9 –

LETTER FROM THE BOARD

There is no intention to (i) have any significant changes to the Group’s existing business or (ii) change the composition of the Board upon Completion. The Group will, however, continue to explore other business opportunities to strengthen its revenue stream.

Consideration Shares

The Consideration Shares to be allotted and issued upon Completion represent approximately (i) 42.32% of the existing issued share capital of the Company as at the Latest Practicable Date; and (ii) 29.74% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares. The allotment and issue of the Consideration Shares will not result in a change in control. The Consideration Shares shall rank pari passu in all respects among themselves and with the existing issued Shares as at the date of the allotment. The Board considers that although the percentage of the equity interests of the existing Shareholders in the Company will be diluted upon the allotment and issue of the Consideration Shares, the consolidated net asset value of the Company will also increase and it is expected that the Acquisition will improve the operation of the Group and maximise the return of the Shareholders. As such, the Directors consider the Acquisition is in the interest of the Shareholders as whole.

The Company will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

The issue price of HK$0.243 per Consideration Share represents (i) a premium of approximately 2.1% over the closing price of HK$0.238 per Share as quoted on the Stock Exchange on the Last Trading Day; (ii) the average closing price of HK$0.243 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day; (iii) a discount of approximately 0.41% to the average closing price of HK$0.244 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day; (iv) a premium of approximately 30.6% over the closing price of HK$0.186 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and (v) a discount of approximately 14.1% to the consolidated net asset value of the Company per Share of approximately HK$0.283 as shown in the latest audited consolidated financial statements of the Company for the year ended 31 March 2011.

The Consideration Shares are to be issued under a special mandate to be approved by the Shareholders at the SGM.

Profit Guarantee and security

The Vendor guarantees to the Company that the net profits after tax of the Target Group as shown in the audited consolidated financial statement of the Target Group for the period from the date of Completion to 31 March 2013 shall be not less than RMB60,000,000 (equivalent to approximately HK$72,330,000)(the “Profit Guarantee”) and will compensate the Company for any shortfall between the Profit Guarantee and the actual profits after tax as shown in the audited consolidated financial statement of the Target Group.

– 10 –

LETTER FROM THE BOARD

As a security for the performance of the Profit Guarantee by the Vendor, upon Completion, the Company and the Vendor agreed to charge the 297,654,321 Consideration Shares held by the Vendor. Such share charge shall be released (i) upon the fulfillment of the Profit Guarantee; or (ii) in the event that the Target Group has successfully applied for a new genre of game or developed a new market during the period of the Profit Guarantee and a valuation report (in form and substance satisfactory to the Company) prepared by an independent valuer appointed by the Company in relation to the value of such new genre of game or new market of not less than RMB193,000,000 (equivalent to approximately HK$232,662,000). The Target Group plans to participate in lottery agency business in cities other than Shenzhen and to develop in mobile lottery related business. In the event of an enforcement of such share charge, the Company will appoint placing agent(s) to place the relevant Shares to third parties independent of the Company and its connected persons. Under no circumstance will the Company repurchase any of the relevant Shares.

Upon Completion, the Target Company will become a wholly-owned subsidiary of the Company. The Company will retain the existing key personnel and exercise dominant control over the Target Group. The critical factor for success is the agency license where the Target Group has already obtained from the relevant authority. The current licenses specify the operation in Shenzhen and on certain types of welfare lotteries. A common method to expand business is to enlarge the geographical area and the products mix. As an incentive to the Vendor (who also is a key personnel), the Company offered the terms to release the share charge. The profit guarantee clause served as in incentive, rather than a penalty clause, to induce the contribution from the Vendor. In fact, the RMB193 million is approximately 30% of the valuation and is approximately 300% of the share charge. The Company considers that the guaranteed amount is commercial-wise fair and reasonable and the Company is of the opinion that the value of such new genre of game or the new market is fair and reasonable.

– 11 –

LETTER FROM THE BOARD

EFFECTS ON SHAREHOLDING STRUCTURE OF THE COMPANY

The changes of the shareholding structure of the Company immediately before and after Completion are as follow:

Super Win_(note)_ Vendor Public Investors Total	As at the Latest Practicable Date Number of Shares Approximate percentage of shareholding (%) 1,000,798,538 24.52 – – 3,081,426,016 75.48 4,082,224,554 100.00	Immediately after Completion Number of Shares Approximate percentage of shareholding (%) 1,000,798,538 17.23 1,727,729,582 29.74 3,081,426,016 53.03 5,809,954,136 100.00
	Number of Shares 1,000,798,538 – 3,081,426,016 4,082,224,554	Number of Shares 1,000,798,538 1,727,729,582 3,081,426,016 5,809,954,136

Note:

This represents interests held by Dr. Mo Shikang, a director of the Company, through Asian Allied, which holds 1,000,798,538 Shares registered under Super Win, a wholly-owned subsidiary of Asian Allied. Dr. Mo Shikang has 42.75% interests in Asian Allied, he is therefore deemed to be interested in 1,000,798,538 Shares.

INFORMATION ON THE TARGET GROUP

The Target Company

The Target Company is an investment holding company duly incorporated in the British Virgin Islands with limited liability. The Target Company was inactive prior to disposal by the Company to the Vendor as at 31 March 2011. The Vendor acquired the Target Company for its restructuring.

Zhongmin Yongheng

Zhongmin Yongheng is a company duly established in the PRC with limited liability. Zhongmin Yongheng is principally engaged in investment consultancy, corporate management consultancy and business consultancy. As at the Latest Practicable Date, the Target Company held the entire issued share capital of Zhongmin Yongheng.

– 12 –

LETTER FROM THE BOARD

Shenzhen Le Cai

Shenzhen Le Cai is a company duly established in the PRC with limited liability. Shenzhen Le Cai is principally engaged in electronic engineering software development, real estate development and management, investment in other entities and projects, research, development and manufacturing of lottery machines, lottery sales and lottery business. As at the Latest Practicable Date, Zhongmin Yongheng held 60% of the registered capital of Shenzhen Le Cai and Beijing Zhongmin, a whollyowned subsidiary of the Company, held 40% of the registered capital of Shenzhen Le Cai.

The Keno Games Agreement

On 28 December 2010, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心）entered into the Keno Games Agreement pursuant to which Shenzhen Le Cai will be the sole agent to operate and sell Keno Games Lottery in Shenzhen for a operating period of five years.

Shenzhen Welfare Lottery Issuing Centre was founded in 1987 as a provincial distribution body for China welfare lotteries in Shenzhen. The operation of Shenzhen Welfare Lottery Issuing Centre is directly led by Shenzhen Bureau of Civil Affairs, guided by China Welfare Lottery Issuance and Management Centre, and supervised by Shenzhen Bureau of Finance. Shenzhen Welfare Lottery Issuing Centre adheres to the distribution objectives to help the elderly and handicapped, provide for the orphans, help the poor, and provide relief work, and follows the “Open, Fair, and Equal” distribution principles. Distribution and undertaking of legally issued welfare lottery in Shenzhen will raise public fund, and support welfare work and other charity work, which ensures social harmony and stability as well as overall economic development. Brave exploration and industrious entrepreneurship, multiple first claimants during the development process of welfare lottery in the PRC, multiple awards granted by China Welfare Lottery Issuance and Management Centre and Guangdong Province Department of Civil Affairs, such as first prize and second prize, and a test field of welfare lottery in the PRC allow Shenzhen to be the only sub-provincial metropolis that keeps its provincial distribution qualification.

Source: Website of Shenzhen Welfare Lottery Issuing Centre (http://www.szlottery.org/about)

Pursuant to the Keno Games Agreement, the commission receivable by Shenzhen Le Cai for the lottery distribution is 7% of the total amount of lottery sales under Keno Games Lottery, with a bonus rate of 1% on the excess sale amount if the total amount of lottery sales per betting station exceeds RMB500,000 (equivalent to approximately HK$603,000) per month.

On 11 May 2011, the General Office of the Ministry of Finance of the PRC announced the “Notification in respect of Increasing Proportion of Pay-out for Keno Welfare Lottery in Certain Locations”（關於提高部分地方福利彩票快速開獎遊戲返獎比例的通知）whereby agreeing that China Welfare Lottery Issuance and Management Centre is to sell Keno Games Lottery in Shenzhen and the lottery pool is to be divided into pay-out dividend, lottery distribution fee, and lottery charity fund in the proportion of 59%, 13% and 28% respectively.

– 13 –

LETTER FROM THE BOARD

On 1 June 2011, China Welfare Lottery Issuance and Management Centre（中國福利彩票發行管理中心）announced the “Approval regarding the Sale of High Pay-out Keno Games Lottery in Shengzhen Municipal, Guangdong Province”《關於在廣東省深圳市銷售高返獎快速開獎遊戲快樂彩的批覆》whereby agreeing that Guangdong Welfare Lottery Issuing Centre（廣東省福利彩票發行中心）is to sell high pay-out Keno Games Lottery in Shenzhen.

China Welfare Lottery Issuance and Management Centre is an entity directly under the Ministry of Civil Affairs. China Welfare Lottery Issuance and Management Centre under authorisation of the Ministry of Civil Affairs is responsible for the distribution and sales of nationwide welfare lottery and the implementation of business guidelines. Its key responsibilities also involve in formulation of specific rules for distribution, sales and announcement of draws and prizes based on the relevant national rules and regulations, implementation of professional standard and technical regulations, provision of technique support and services, adjustment of plans for distribution and sales, organization of joint sale, fund settlement, and inspection and supervision of the sale tasks assigned by the Ministry of Civil Affairs. China Welfare Lottery Issuance and Management Centre comprises offices, Party Commission Office, Marketing Department I, Marketing Department II, Marketing Department III, Marketing Department IV, Printing Department, Technique Support Department, Human Resource Department, Publicity Department, Training Department, Finance Department, Auditors’ Office, General Affairs Office, Research and Development Centre, Beijing Training Hub, and Huangshan Training Hub.

Source: Website of China Welfare Lottery Issuance and Management Centre (http:// fezx.mca.gov.cn/ article/igzn)

On 8 June 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into a letter of intent pursuant to which Shenzhen Welfare Lottery Issuing Centre conditionally agreed to extend the sole distribution rights granted to Shenzhen Le Cai via the Keno Games Agreement for a term of 20 years, during which will sign a renewable contract once 5 years with the last term expiring in 2031.

Although that the letters of intent is not legally binding, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into a legally binding framework agreement on 1 August 2011 in relation to the appointment of Shenzhen Le Cai by Shenzhen Welfare Lottery Issuing Centre as its sole agent to distribute Keno Games Lottery and as its agent to distribute Welfare Lotteries in Shenzhen for a term of 20 years.

The Lottery Agreement

On 18 April 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心）entered into the Lottery Agreement pursuant to which Shenzhen Le Cai will set up betting branches to sell the Welfare Lottery in Shenzhen. The commission receivable by Shenzhen Le Cai for the lottery distribution is 6% of the total amount of lottery sales under the Welfare Lottery.

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LETTER FROM THE BOARD

On 8 June 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into a letter of intent pursuant to which Shenzhen Welfare Lottery Issuing Centre conditionally agreed to extend Shenzhen Le Cai’s distribution rights to sell computer-based Welfare Lotteries in Shenzhen for a term of 20 years, during which will sign a renewable contract once 3 years with the last term expiring in 2031.

The Keno Games and Lottery Agreement

On 1 August 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into a framework agreement in relation to the appointment of Shenzhen Le Cai by Shenzhen Welfare Lottery Issuing Centre as its sole agent to distribute Keno Games Lottery and as its agent to distribute Welfare Lotteries in Shenzhen for a term of 20 years.

It is common for local lottery issuing centres to appoint other parties as agency to distribute welfare lottery and for system support. Pursuant to the guideline on the operation of betting stations/ stores from Shenzhen Welfare Lottery Issuing Centre, there is no clause or requirement stating that any party will need to pay any consideration from them to be appointed as agents. Shenzhen Welfare Lottery Centre has discretion to select and appoint any of their agents.

Shenzhen Jin Cai

Shenzhen Jin Cai is a company duly established in the PRC with limited liability. Shenzhen Jin Cai is principally engaged in computer hardware and software development, marketing, computers, electronic products, technology development and related technical services, network technology development, communication technology development, mobile phone software, communications equipment, software and hardware technology development, communications equipment sales, installation, maintenance and information services business. As at the Latest Practicable Date, Shenzhen Le Cai held the entire registered capital of Shenzhen Jin Cai.

MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE TARGET GROUP

Business Review

For the three financial years ended 31 March 2009, 2010 and 2011, none of the subsidiaries of Target Group has commenced any business during such period. After the official launch of the lottery business for the Target Group, the financial results of the Target Group will be improved.

Grand Destiny Group

Loss for the year amounted to approximately HK$nil; HK$294,000 and HK$1,066,000 for the years ended 31 March 2009; 2010 and 2011 respectively. The expenses incurred mostly represented office rentals; annual government fee and other administrative expenses. Due to the exchange differences arising on translation of financial statements of an overseas subsidiary – Zhongmin Yongheng, it has recorded a positive difference of approximately HK$ nil; HK$50,000 and HK$534,000 for the years ended 31 March 2009; 2010 and 2011, resulting in the total comprehensive expense for the years ended 31 March 2009; 2010 and 2011 were approximately HK$nil; HK$244,000 and HK$532,000 respectively.

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LETTER FROM THE BOARD

Shenzhen Le Cai

Loss amounted to approximately HK$2,059,000; HK$6,203,000 and HK$9,885,000 for the period from 10 December 2008 (date of establishment) to 31 March 2009; years ended 31 March 2010 and 2011 respectively. Mostly are general and administrative expenses such as staff costs; office rental; travelling; charitable donation and bank interest income received. After crediting the exchange differences arising from retranslation of approximately HK$58,000; HK$312,000 and HK$5,186,000, the total comprehensive expense for the period from 10 December 2008 (date of establishment) to 31 March 2009; years ended 31 March 2010 and 2011 were approximately HK$2,001,000; HK$5,891,000 and HK$4,699,000 respectively.

Shenzhen Jin Cai

Loss amounted to approximately HK$34,000 for the period from 1 November 2010 (date of establishment) to 31 March 2011. The total comprehensive income for the period was approximately HK$156,000 after crediting the exchange differences arising from retranslation. Mostly are bank interest income received and general and administrative expenses such as office expenses incurred.

Financial Resources and Liquidity

The audited consolidated net liabilities of the Grand Destiny Group as at 31 March 2009, 2010 and 2011 were approximately HK$ nil, HK244,000 and HK$776,000 respectively. The main asset of Grand Destiny Group was cash and cash equivalents amounting to approximately HK$nil; HK$13,781,000 and HK$13,134,000 as at 31 March 2009; 2010 and 2011 respectively. Grand Destiny Group had no bank borrowing. The gearing ratio of the Grand Destiny Group (total borrowings/total assets) was nil as at 31 March 2009; 2010 and 2011 respectively.

The audited net assets of Shenzhen Le Cai as at 31 March 2009, 2010 and 2011 were approximately HK$14,973,000, HK77,154,000 and HK$129,348,000 respectively, of which the bank balances and cash of approximately HK$2,430,000, HK$56,303,000 and HK$33,530,000 as at 31 March 2009, 2010 and 2011 respectively and there was no bank borrowing. The gearing ratio of the Shenzhen Le Cai (total borrowings/total assets) was nil as at 31 March 2009; 2010 and 2011 respectively.

The audited net assets of Shenzhen Jin Cai as at 31 March 2011 was approximately HK$12,764,000. The bank balances and cash amounted to approximately HK$12,829,000 while there was no bank borrowing. The gearing ratio of the Shenzhen Jin Cai (total borrowings/total assets) was nil as at 31 March 2011.

The cash and cash equivalent in the Target Group are sourced from the shareholders’ funds which mostly are deposited in the PRC’s banks.

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LETTER FROM THE BOARD

The Target Company has an authorised capital of US$50,000 divided into 50,000 shares of US$1.00 each and 1 fully paid shares of which has been issued since its incorporation on 17 December 2007 and up to the Latest Practicable Date.

The registered and paid up capital of Zhongmin Yongheng was HK$14,000,000 since its establishment (8 September 2009) and up to the Latest Practicable Date.

The registered and paid up capital of Shenzhen Le Cai was RMB75,000,000 at the date of establishment of which Beijing Zhongmin, a wholly-owned subsidiary of the Company, held 40% of the registered capital of Shenzhen Le Cai. On 25 March 2010, the registered capital of Shenzhen Le Cai was further increased from RMB75,000,000 to RMB125,000,000 pursuant to the amendment of constitution documents.

The registered and paid up capital of Shenzhen Jin Cai was RMB10,800,000 since its establishment (1 November 2010) and up to the Latest Practicable Date.

The Target Group’s primary objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for its shareholders, by products commensurately with the level of risk and by securing access to a reasonable cost. The Target Group financed its operations primarily with the shareholders’ fund.

The Target Group does not use derivative financial instruments for hedging purpose. There were no other contingent liabilities and capital expenditure commitment as at the respective reporting date.

Investment, material acquisition and disposal of subsidiaries and affiliated companies

On 8 May 2011, Zhongmin Yongheng entered into the equity transfer agreement with Shenzhen Yongheng Development Group (Shenzhen) Company Limited (“Shenzhen Yongheng”), a wholly-owned subsidiary of the Vendor, pursuant to which Zhongmin Yongheng has agreed to purchase and Shenzhen Yongheng has agree to sell, the 60% of the entire registered capital and paid up capital of Shenzhen Le Cai for a consideration of RMB42,000,000 (equivalent to approximately HK$50,631,000). Shenzhen Yongheng, is a legal entity established and subsisting under the laws of the PRC. Save as to the Company’s 40% equity interests in Shenzhen Le Cai prior to the Acquisition, the Company is independent and not connected with Shenzhen Yongheng.

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LETTER FROM THE BOARD

On 15 May 2011, Shenzhen Le Cai entered into equity transfer agreements with Mr. Yang and an independent third party, respectively, pursuant to which Shenzhen Le Cai acquired 100% equity interest in Shenzhen Jin Cai at an aggregate consideration of approximately RMB51,006,000 (equivalent to approximately HK$61,488,000). Part of the consideration in the amount of, RMB35,000,000 (equivalent to approximately HK$42,193,000) payable to Mr. Yang will be settled within ten years in equal installment amount of RMB3,500,000 (equivalent to approximately HK$4,219,000).

On 1 June 2011, China Welfare Lottery Issuance and Management Centre announced the “Approval regarding the Sale of High Pay-out Keno Games Lottery in Shenzhen City, Guangdong Province[#] ”《關於在廣東省深圳市銷售高返獎快速開獎遊戲快樂彩的批覆》whereby agreeing that Guangdong Welfare Lottery Issuing Centre is to sell high pay-out Keno Games Lottery in Shenzhen. As such approval, the Company agreed pay the Consideration, which is relatively high as compared to the aggregate consideration paid for the acquisition of 60% and 100% of the registered and paid up capital of Shenzhen Le Cai and Shenzhen Jin Cai respectively.

Save as disclosed as above, the Target Group has no acquisition or disposal of subsidiary or associated company during the three years ended 31 March 2011 and up to the Latest Practicable Date.

Employees and staff policy

There were no staff costs incurred for the Target Company; Zhongmin Yongheng and Shenzhen Jin Cai for the three years ended 31 March 2011.

The remuneration of employees in Shenzhen Le Cai were approximately HK$34,000, HK$1,131,000 and HK$1,190,000 for the period from 10 December 2008 (date of establishment) to 31 March 2009; years ended 31 March 2010 and 2011 respectively. As at the Latest Practicable Date, Shenzhen Le Cai had 20 full-time employees, most of them were stationed in Shenzhen.

The remuneration policy and package of the Target Group’s employees are periodically reviewed. More staffs may be recruited in the future to meet the expansion of the Target Group’s business. Apart from fixed salaries, employees are entitled to social insurance. At the same time, the Target Group, from time to time, provides on job training for employees to discharge their job duties. The Target Group did not operate any share option scheme during the three years ended 31 March 2011.

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LETTER FROM THE BOARD

Sufficiency of management expertise

Shenzhen Le Cai’s success is, to a significant extent, attributable to the business connection and solid experience in lottery sales channel service and operation service of its management personnel. The biographical details of the senior management (including the existing managements of the Shenzhen Le Cai) who will be responsible for the operation of the Shenzhen Le Cai are as follow:

Mr. Yang , aged 50, holds a university degree. In 1981, he started his civil service at the local government of Zijin County, Guangdong Province. During 1989 to 1993, he was appointed as Manager of Shenzhen Hengye Eletronics Limited（深圳恒業電子有限公司）. Since 1993 to present, he has served as director of Shenzhen Yongheng. Since 2000, he has served as the Chief Executive Officer of The Chinese Yongheng Charitable Foundation. Currently, he is appointed as the president of Yongheng Development Corporation Limited, chief executive officer of The Chinese Yongheng Charitable Foundation, director of China Association of Social Workers (Shenzhen Office), and president of the magazine “Society and Public Welfare”. He is also a member of Standing Executive Committee on Lottery of China Association of Social Workers, standing director of China Chamber of Charity Association, vice-president of Shenzhen Lion Club of China. He has profound industry experiences and extensive network in mainland lottery industry and will be crucial for the business development of the Target Group.

Mr. Huang Zhong Mou , aged 66, graduated from Shenzhen Open University. During 1967 to 1984, he served at the Office of Industry Affairs and Publicity of District Commission under the People’s Government of Shantou City, and at the district vocational college. During 1985 to 2006, he worked at the Shenzhen Bureau of Civil Affairs, Fund-raising Committee, and Shenzhen Welfare Lottery Issuing Centre, and historically served as secretary, president, and vice-director. In 2006, Mr. Huang retired. During 2006 to 2008, he was re-appointed by the Shenzhen Welfare Lottery Issuing Centre as consultant responsible for application work related to sales outlets of China Lottery Online. During 2008 to 2009, he was appointed as general manager of Shantou Jie Si Technology Development Limited（汕頭市傑思科技開發有限公司）. Since 2009 to present, he has served as manager of the Shenzhen Le Cai.

Mr. Luo Lie Wu , aged 54, graduated from Sun Yat-sen University with postgraduate degree. During 1982 to 1983, he was appointed as general manager of Research Institute of Food Testing and Exmination of Department of Commerce（商業部食品檢測科學研究所）. During 1993 to 2009, he was the general engineer of Sun Yat-sun University Industry Group Environmental Engineering Limited（中山大學產業集團環保工程公司）. Since 2009 to present, he is the vice general manager of Shenzhen Le Cai. He serves as senior manager for many years with extensive experience in corporate management. Mr. Luo Lie Wu has experience in corporate management and lottery industry, together with his knowledge in the lottery industry, can assist the Target Group to become a sustainable and healthy business and establish standardised, scientific and efficient corporate management.

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LETTER FROM THE BOARD

Should the senior management of Shenzhen Le Cai leave Shenzhen Le Cai and the Group fail to identify suitable replacement, Shenzhen Le Cai’s business may be adversely affected. Currently, Shenzhen Le Cai has recruited a professional management team comprising a lottery expert ( Mr. Huang Zhong Mou) and business management experts (Mr. Yang and Mr. Luo Lei Wu). In addition, as the lottery business savors constant growth, the Target Group will continue to recruit experts in lottery-related business for the composition of management team, so as to accelerate the development of lottery-related business.

Charges on the assets

There were no pledge of assets of the Target Group during the three years ended 31 March 2011.

Future plans for material investments or capital assets

According to the Keno Games Agreement and Lottery Agreement, Shenzhen Le Cai intends to set up four lottery stations for selling “Keno Games Lottery” and eighty betting stores for selling Welfare Lottery in Shenzhen during 2011. Currently, three betting stores setup to sell Welfare Lottery has already operated, uniformed planning, relocation and renovation for the remaining lottery stations and betting stores are still in progress. China Welfare Lottery Franchise License（“中國福利彩票特許經營許可證”）for operation will be granted upon completion of decoration. The Target Group intends to set up four Keno Games Lottery station and thirty Welfare Lottery betting stores in August 2011. A further forty-two welfare lottery betting stores are planned to be set up in September 2011.

The abovementioned investment plan will be funded by the internal working capital of the Target Group.

Exposure to fluctuation in exchange rates

The Target Group operates in the PRC and the majority of the Target Group’s revenues, expenses and cashflows are denominated in Renminbi. Assets and liabilities of the Target Group are mostly denominated in Renminbi. Hong Kong dollar is the Target Group’s financial report presentation currency. Any significant exchange rate fluctuations of Renminbi against Hong Kong dollar may have impact on the Target Group’s financial report presentation. Such fluctuations however would have little effect on the business operations of the Target Group.

Contingent liabilities

Save for those disclosed in the accountants’ report of the Target Group if any, there are no other contingent liabilities that the Target Group is aware of.

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LETTER FROM THE BOARD

Prospect of the Target Group

According to the Ministry of Finance of the PRC, the sales of welfare lottery during 2010 compared with last year increased by 28.03% to approximately RMB96.802 billion in the PRC, reflecting that the welfare lottery industry continues its healthy and fast growth. Guangdong Province has been the biggest market for lottery sales in the PRC with an increase of 36.16% to approximately RMB11.355 billion in sales of the welfare lottery in 2010 as compared with last year, claiming its top sale in the welfare lottery and reflecting its significant status.

The Target Group is principally engaged in the welfare lottery agency business in the PRC, and its “Keno Games Lottery” business in Shenzhen, Guangdong Province has been approved by the competent bodies, such as the Ministry of Finance of the PRC and China Welfare Lottery Issuance and Management Centre. Besides, the Target Group entered into the Keno Games Agreement, the Lottery Agreement and the Keno Games and Lottery Agreement with Shenzhen Welfare Lottery Issuing Centre in order to distribute “Keno Games Lottery”, “Shenzhen Feng Cai”, “Shuang Se Qiu”, “Qi Le Cai”, and “3D” together with other welfare lotteries approved by Shenzhen Welfare Lottery Issuing Centre. Against the backdrop of rapid development in the welfare lottery market, a promising prospect in future is believed to lie ahead of the lottery business of the Target Group, thus generating considerable cash flow and substantial investment returns for the Group.

Shareholding structure of the Target Group

Set out below is the shareholding structure of the Target Group (i) as at the Latest Practicable Date; and (ii) immediately after Completion:

(i) As at the Latest Practicable Date:

==> picture [199 x 222] intentionally omitted <==

----- Start of picture text -----

Target Company Company
100% 100%
Zhongmin Yongheng Beijing Zhongmin
60% 40%
Shenzhen Le Cai
100%
Shenzhen Jin Cai
----- End of picture text -----

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LETTER FROM THE BOARD

(ii) Immediately after Completion:

==> picture [200 x 286] intentionally omitted <==

----- Start of picture text -----

Company
100%
100%
Target Company
100%
Beijing Zhongmin
Zhongmin Yongheng
60% 40%
Shenzhen Le Cai
100%
Shenzhen Jin Cai
----- End of picture text -----

Financial information of the Target Group

Set out below is a summary of the key financial data of the Target Group based on the financial statements of each of the members of the Target Group for each of the three years ended 31 March 2011:

Grand Destiny Group

	For the year ended	For the year ended	For the year ended
	31 March 2011	31 March 2010	31 March 2009
	( audited)	(audited)	(audited)
	HK$’000	HK$’000	HK$’000
Loss before tax	1,066	294	–
Loss after tax	1,066	294	–

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LETTER FROM THE BOARD

Shenzhen Le Cai

			From
			10 December 2008
			(being the date of
	For the year ended	For the year ended	establishment) to
	31 March 2011	31 March 2010	31 March 2009
	( audited)	(audited)	(audited)
	HK$’000	HK$’000	HK$’000
Loss before tax	9,885	6,203	2,059
Loss after tax	9,885	6,203	2,059

Shenzhen Jin Cai

	From
	1 November 2010
	(being the date
	of establishment)
	to 31 March 2011
	( audited)
	HK$’000
Loss before tax	34
Loss after tax	34

The net liabilities of Grand Destiny Group was approximately HK$776,000 as at 31 March 2011. The net asset value of Shenzhen Le Cai and Shenzhen Jin Cai was approximately HK$129,348,000 and HK$12,764,000 respectively as at 31 March 2011.

For further information of the financial information of the Target Group, please refer to Appendix III to V of this circular.

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LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE ACQUISITION

Assets and liabilities

Upon Completion, the Target Group will become a wholly-owned subsidiary of the Company. The financial results of the Target Group will be consolidated into the accounts of the Group. Set out in Appendix VI of this circular is the unaudited pro forma consolidated financial information of the Enlarged Group. Based on the unaudited pro forma consolidated financial information of the Enlarged Group, the consolidated total assets of the Enlarged Group would be increased by approximately 44.33% from approximately HK$1.77 billion to approximately HK$2.55 billion upon Completion. The consolidated total liabilities of the Enlarged Group would be increased by approximately 34.71% from approximately HK$0.62 billion to approximately HK$0.83 billion.

Earnings

The net loss before and after tax of the Grand Destiny Group was approximately HK$1.07 million for the year ended 31 March 2011. The net loss before and after tax of Shenzhen Le Cai was approximately HK$9.89 million for the year ended 31 March 2011. The net loss before and after tax of Shenzhen Jin Cai was approximately HK$34,000 for the period ended 31 March 2011. The Acquisition will not have any immediate effect on the earnings of the Group.

OVERVIEW OF THE LOTTERY SALES INDUSTRY

At the end of 2010, the global lotteries had generated revenue of approximately US$250 billion, which represented a growth of approximately 6.3%. Asia-Pacific region recorded a growth of 12.5% in 2010 on year-to-year basis. Of which, The PRC’s lottery sales grew by approximately 25.5%, which is far higher than that of other countries and regions.

At the end of 2008, the size of the PRC’s lottery market was about US$15.2 billion, ranking fourth in the world. In 2008, the US was the world’s largest lottery market and its lottery per capita spending was approximately US$180. The PRC had the lowest lottery per capita spending among the top lottery markets in the world, which was approximately US$12. The following table illustrates the data of the top ten largest lottery markets in 2008.

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LETTER FROM THE BOARD

Table 1: Top ten lottery markets in the world at 2008:

				Per capita	% of gross
		Total		spending	domestic
Rank	Country	lottery sales	Population	on lottery	product
		(US$ in million)	(in million)	(US$)
1	US	54,340	301.1	180.47	0.38%
2	Italy	27,297	58.1	469.83	1.19%
3	Spain	17,449	40.4	431.91	1.09%
4	PRC	15,225	1,321.9	11.52	0.30%
5	France	14,383	63.7	225.79	0.50%
6	Japan	11,763	127.4	92.33	0.24%
7	Germany	11,642	82.4	141.29	0.32%
8	Greece	7,812	10.7	730.09	2.19%
9	UK	7,440	60.8	122.37	0.28%
10	Canada	5,903	33.4	176.74	0.42%

Source: 2008 World Lottery Almanac

The consumer spending and gross domestic products per capita in the PRC have been demonstrating an increasing trend in recent years and it is expected that the PRC citizens will increase its spending on welfare lottery entertainment accordingly. According to the statistics released by the Ministry of Finance of the PRC, the total revenue generated from the lottery business in the PRC was approximately RMB132.48 billion and RMB166.25 billion in 2009 and 2010 respectively, representing an increase of approximately 25.5%, among which, revenue generated by welfare lottery business has increased from approximately RMB75.6 billion in 2009 to RMB96.8 billion in 2010, representing an increase of approximately 28.0%. Such considerable growth corresponded with the growth of the PRC’s gross domestic products of approximately 10.3% as quoted on National Bureau of Statistics of China（中國國家統計局）for the same period. The following table and diagram illustrate the growth of China’s lottery market sales during the period 2000 to 2010 and first five months of 2011.

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LETTER FROM THE BOARD

Table 2: Total lottery sales in the PRC from 2000 to 2010 and first five months of 2011:

								Growth
			Total		Welfare		Sports	of total
		lottery sales		lottery sales		lottery sales		lottery sales
		(billion in RMB)		(billion in RMB)		(billion in RMB)		(%)
2000			18.100		10.740		7.360	N/A
2001			28.887		13.987		14.900	59.60%
2002			38.572		16.872		21.700	33.53%
2003			40.140		20.040		20.100	4.07%
2004			38.057		22.657		15.400	–5.19%
2005			71.385		41.185		30.200	87.57%
2006			81.930		49.630		32.300	14.77%
2007			100.000		62.000		38.000	22.06%
2008			105.947		60.347		45.600	5.95%
2009			132.479		75.606		56.873	25.04%
2010			166.248		96.802		69.446	25.49%
January	to
May	2011		83.692		48.531		35.161	N/A

Source: Ministry of Finance, the PRC

The growth of the PRC lottery market has been facilitated by a number of drivers and initiatives, including favorable population demographics and positive economic growth in the region. Since 1987, the lottery industry in the PRC has experienced two explosive growths in 1995 and 2007 respectively due to the introduction of new lottery sales system. Historically, new sales channels were proven to have a great positive impact on the lottery market in the PRC. Before 1995, the lottery tickets were only sold in a concentrated way, since then, computer was utilized as a medium of lottery sales. The introduction of computer lottery boosted up the lottery sales from approximately RMB17 billion in 1994 to RMB71 billion in 2005, approximately representing triple in growth in sales. Until 2007, the lottery industry in the PRC has experienced another revolution by launching more ancillary sales channels such as interactive voice response, short message service and video lottery terminal, etc. These sales channels make use of various public platforms in the society which are deemed to be easily accessible. The lottery sales in the PRC exceeded RMB160 billion in 2010 and is expected to continue to grow rapidly.

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LETTER FROM THE BOARD

The total revenue generated from the lottery business in the PRC is almost distributed in the following manners:

50% of the revenue is distributed as prize to winners, 1% of which is allocated as coordination fee;
35% of the revenue is distributed as community charity fund to the government, which is spited as 17.5% to the central and local government respectively; and
15% of the revenue is distributed by the local lottery issuing centres as issuing cost from all sectors, including lottery distribution fee and lottery sales system support and maintenance fee. The percentage of revenue distributed by local lottery issuing centre as distribution fee to respective service agent is a commercial decision of the local lottery issuing centre. It may vary and be determined based on the negotiation between the local lottery issuing centre and relevant agent after taken into account of various factors such as scope of services, as well as sales operation services provided by agent.

Shenzhen Le Cai will charge Shenzhen Lottery Issuing Centre a lottery distribution fee and such fee will be calculated based on a aforementioned percentage range of the income from sales of Welfare Lottery.

The Keno Games Lottery is a new kind of computer-based Welfare Lottery that will be introduced in Shenzhen in the near future. The is a kind of high frequency lottery in lottery result for a games shall be generated and shown of the terminals of lottery stations every five minutes. The first of this kind of lottery is known as Hainan Kuai2, which was introduced in October 2009 in Hainan Province. Hainan Kuai2 generates lottery results for a game every five minutes. According to the Hainan Welfare Lottery Issuing Centre, the accumulative betting on Hainan Kuai2 up to September 2010 amounted to approximately RMB398 million, which accounted for approximately 65% of total betting of welfare lottery of the province.

Shenzhen Feng Cai, Shuang Se Qiu, Qi Le Cai and 3D, distributed through computer network, are Lotto Lotteries, and are telecast live on TV.

To the best knowledge of the Directors, there are no other competitors currently providing lottery sales agency for Keno Games Lottery covered by the Keno Games Agreement. Shenzhen Le Cai has a competitive advantage on such sole agency for the distribution of Keno Games Lottery in Shenzhen and to remain competitive in the market. The Target Group’s competitors in Shenzhen with respect to traditional computerized Welfare Lotteries, being “Shenzhen Feng Cai”（深圳風采）, “Shuang Se Qiu”（雙色球）, “Qi Le Cai”（七樂彩）and “3D”, are principally comprised of traditional welfare lottery operators, mainly sole proprietorships, in Shenzhen. The businesses of these operators, which attain insignificant market shares, are fragmented. Compared to Shenzhen Le Cai, these operators have no competitive strengths.

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LETTER FROM THE BOARD

Currently, in addition to the traditional computerized Welfare Lotteries mentioned above, other traditional welfare lotteries in Shenzhen include, among other things, “China Lottery Online”（中福在線）and “Happy 8”（快樂8）. To a certain extent, the development of these lotteries will pose a threat to the Target Group’s lottery business development. However, the Target Group is in optimistic that Keno Games Lottery will have strong competitive strengths given its great appeal.

Based on information available to the Directors, the following are the companies listed on the Stock Exchange whose major business activities include lottery-related business. A summary of the descriptions of their business is set out below:

Company name Stock code Business description

REXLot Holdings 555 Limited (“REXLot”)
REXLot is an investment holding company. REXLot was engaged in the lottery business and financial services, including broking, securities margin financing, corporate finance and asset management, and money lending. The lottery business comprises development and production of lottery machines, related operating software system and networks for lottery industry, the distribution and marketing of lottery products and development of mobile value-added services for lottery business in PRC. Its subsidiaries and jointly controlled entities are principally engaged in lottery system and games design business; distribution and marketing of lottery products, and financial business.
VODone Limited 82 (“VODone”)

VODone is an investment holding company. VODone is engaged in tele-media services ranging from news production, Internet-video production and broadcasting, advertising, mobile gaming to mobile lottery. It operates in three segments: tele-media business, lottery-related business, mobile gaming business.

China Lotsynergy 8161 Holdings Ltd. (“Lotsynergy”)

LotSynergy is a Hong Kong based investment holding company. LotSynergy is engaged in the business of provision of lottery systems, game products, terminal equipment and related technologies and marketing services to the lottery market in the PRC. It is the equipment provider for the video lottery game of the PRC Welfare Lottery Online (video lottery terminals). It is the supplier of computer-generated ticket game (CTG) betting terminal equipment for Guangdong province, and supplies lottery ticket scanners and readers to other customers. It is a licensed technology and service provider of mobile lottery service.

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LETTER FROM THE BOARD

The current challenges in the PRC lottery market are to deliver a system capable of linking across the provinces to a central system, in which the network and technologies need to be fast, stable, capable to accommodate multiple games and safeguard against counterfeit tickets, and develop a comprehensive sales and management system. The demand for technology increase as the breath of distribution increases. The challenge is accentuated by the weak infrastructure at many regions across China. The future growth opportunities in the PRC lottery market come from growth in the new product offerings. The various lottery product offerings, such as high frequency keno, scratch instant lottery, mobile platform and sports guessing game (SMG) and video lottery terminals (VLTs) are likely to be effective in stimulating the market, given their higher frequencies, increased simplicity and greater variety.

STRUCTURES AND REGULATIONS RELATING TO THE LOTTERY

In the PRC, lottery business is sanctioned by the PRC Government and is for the purpose of raising public welfare funds for society and facilitating the development of social community initiatives. The lottery sector is strictly regulated by the PRC government which currently intends to tighten regulations against illegal gambling activities in the PRC. The Lottery Management Regulations（彩票管理條例）enacted by the State Council (State Council Decree No. 554) in July 2009 was the first formal regulatory code on lottery industry, which is aimed to remove regulatory ambiguities. The Lottery Management Regulations governs all lottery businesses in the PRC, which states that all enterprises are to be operated with sound legal protection. This paved the way for continued rapid growth in the industry and fostering the safe and healthy development of the PRC lottery market. Currently, the welfare lottery market is regulated by various authorities in the PRC and Shenzhen Le Cai is the sole sales agent for Keno Games Lottery and is one of the lottery sales agent traditional computerized of Welfare Lotteries for Shenzhen Welfare Lottery Issuing Centre administered by the China Welfare Lottery Issuance and Management Centre（中國福利彩票發行管理中心）to distribute the Welfare Lottery in Shenzhen, the PRC.

According to the Lottery Management Regulations, the State Council（國務院）authorised the issuance of welfare lottery（福利彩票）and sports lottery（體育彩票）. No foreign lottery can be issued and sold within the PRC. The Ministry of Finance of the State Council（國務院財政部門） is responsible for the supervision and administrative of the lotteries nationwide. The Ministry of Civil Affairs（國務院民政部門）and the State General Administration of Sports of the State Council（國務院體育行政部門）are responsible for the administration of welfare and sports lotteries nationwide respectively. The Ministry of Civil Affairs and State General Administration of Sports of the State Council establish a welfare lottery issuing organization（China Welfare Lottery Issuance and Management Centre 中國福利彩票發行管理中心）and a sports lottery issuing organization（China Sports Lottery Administration Centre 國家體育總局體育彩票管理中心）to be responsible for the issuance and sales of welfare and sports lotteries nationwide respectively. The lottery issuing organizations may engage other service providers to support its sales of lottery. The vast lottery supporting services and equipment provision market is open to private enterprises. The local branches of the Ministry of Finance in the provinces, autonomous cities and municipalities are responsible for the supervision and administration of lotteries within their areas of administration.

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LETTER FROM THE BOARD

Keno Games Lottery is a brand new type of welfare lottery introduced in Shenzhen. Pursuant to Lottery Management Regulations《彩票管理條例》, approvals from competent authorities such as the State Council, the Ministry of Finance, the Ministry of Civil Affairs and China Welfare Lottery Issuance and Management Centre, are required to issue and distribute welfare lotteries. Shenzhen Welfare Lottery Issuing Centre has obtained such approvals. Shenzhen Le Cai have entered into Keno Games Agreement and Lottery Agreement with Shenzhen Welfare Lottery Issuing Centre for the distribution of Keno Games Lottery and Welfare Lottery.

Besides such approvals, the China Welfare Lottery Franchise License (“中國福利彩票特許經營許可證”) and the Lottery Salesperson Qualification Certificate (“銷售員上崗證”) are required to carry out Keno Games Lottery business.

Traditional computerized Welfare Lotteries, being “Shenzhen Feng Cai”, “Shuang Se Qiu”, “Qi Le Cai” and “3D”, have been being distributed in Shenzhen. To carry out such business, the Target Group only needs the China Welfare Lottery Franchise License and the Lottery Salesperson Qualification Certificate.

Following completion of decoration for each of the Target Group’s lottery stations/branches, these licenses and certificates are expected to be obtained within a shorter period and the business will soon be officially commenced.

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LETTER FROM THE BOARD

The structure of the PRC lottery market:

==> picture [388 x 367] intentionally omitted <==

----- Start of picture text -----

國務院
(State Council)
民政部國家體育總局
財政部
(Ministry of (Ministry of Finance) (General Administration
Civil Affairs) of Sports)
中國福利彩票發行管理中心
中國體育彩票發行管理中心
(China Welfare Lottery
(China Sports Lottery
Issuance and
Administration Centre)
Management Centre)
地方福利彩票發行中心地方財政部門地方體育彩票發行中心
(local welfare lottery (local branches of the (local sports lottery
issuing centres) Ministry of Finance) issuing centres)
----- End of picture text -----

Source: The Lottery Management Regulations became effective from 1 July 2009

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LETTER FROM THE BOARD

MODE OF BUSINESS OPERATION OF SHENZHEN LE CAI

Shenzhen Le Cai will be the sole agent in Shenzhen and is to set up betting stations for distributing Keno Games Lottery and allowed to set up 80 branches to distribute computer-based Welfare Lottery in Shenzhen.

Keno Games Lottery is a computer-based lottery which can be purchased through sale outlets. Keno Games Lottery is a lottery game buyer select two numbers from (1) one to (20) twenty. The unit for each bet is RMB2 and the maximum amount for each ticket is RMB20,000. Each draw of the Keno Games Lottery takes place every five minutes.

Revenue model and major customers

Shenzhen Le Cai is the agent of Shenzhen Welfare Lottery Issuing Centre for the distribution Keno Games Lottery and Welfare Lotteries. The rights to act as a sales agent of Shenzhen Welfare Lottery Centre are not transferrable. The Directors expect that Shenzhen Welfare Lottery Issuing Centre will remain as the major customer for Shenzhen Le Cai’s business in the future. The revenue earned by Shenzhen Le Cai is the commission received from Shenzhen Welfare Lottery Issuing Centre (calculated based on the lottery sales in each betting station/branches) instead of the lottery sales from general public.

Shenzhen Le Cai will charge Shenzhen Welfare Lottery Issuing Centre a commission based on a percentage of the income from sales of lottery ranging from 6% to 7%. The commission in general will be paid monthly by Shenzhen Welfare Lottery Issuing Centre to Shenzhen Le Cai in the PRC.

The commission from Keno Games Lottery is higher than that of the traditional welfare lotteries, which can be attributable to the following reasons:

(1) Traditional welfare lotteries are the existent lottery genre, which have been in the market for some time. As the traditional welfare lotteries have been distributed in the market for a certain period of time, the sales are fairly stable. As such, there are limited variation on the percentage of distribution commission. The Keno Games Lottery, on the other hand, is a new genre of welfare lottery and new to the market , there is a degree of uncertainty on the sales of the Keno Games Lottery; and there is no fixed percentage of distribution commission, the distribution commission is negotiated by the relevant parties .
(2) As Shenzhen Welfare Lottery Issuing Centre emphasizes and supports the development of the Keno Games Lottery in Shenzhen as well as operation of the Keno Games Lottery by the Shenzhen Le Cai, the higher distribution commission provides additional incentive for Shenzhen Le Cai to operate the Keno Games Lottery business.

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LETTER FROM THE BOARD

(3) High winning rate of the Keno Games Lottery will attract more lottery buyers to buy the Keno Games Lottery who bought illegal lottery previously, thus effectively reducing illegal lottery in Shenzhen. Shenzhen Welfare Lottery Issuing Centre agrees to a higher proportion in the distribution commission for the Keno Games Lottery with a view to encourage the operators to rapidly develop the Keno Games Lottery business as well as to reduce illegal lottery.

Comparative advantages of Shenzhen Le Cai

High commission rate

Under the Keno Games Agreement and the Lottery Agreement entered into between Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre, Shenzhen Le Cai, as the lottery agent, receives commission of 7% on the sales revenue of Keno Games Lottery and 6% on the sales revenue of traditional computerized Welfare Lotteries, which are relatively high in the industry.

The companies listed on the Stock Exchange whose major business activities include lotteryrelated business are principally engaged in the provision of lottery betting equipment, software and related services, and are not directly involved in lottery distribution. As such, they get lower commission rates ranging from 0.4% to 2%.

The sole agent of Keno Games Lottery in Shenzhen

The approval for the distribution by Shenzhen Le Cai of Keno Games Lottery in Shenzhen has been granted. Pursuant to the Keno Games Agreement, Shenzhen Le Cai will be the sole agent other than Shenzhen Welfare Lottery Issuing Centre to distribute Keno Games Lottery in Shenzhen with exclusive license. During the term prescribed in the Keno Games Agreement, anyone else may not distribute Keno Games Lottery in Shenzhen.

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LETTER FROM THE BOARD

Shenzhen Le Cai’s traditional computerized Welfare Lottery distribution business may develop scales of economies and brand strengths

Under the Lottery Agreement, Shenzhen Le Cai is licensed to establish and operate 80 betting branches in Shenzhen to distribute traditional computerized Welfare Lottery, being “Shenzhen Feng Cai”, “Shuang Se Qiu”, “Qi Le Cai” and “3D”. The rights to distribute the Welfare Lottery are nonexclusive to Shenzhen Le Cai.

Shenzhen Feng Cai is a computer-based welfare lottery which can be purchased through sale outlets. Buyer choose 7 patterns out of 35 patterns. Each pattern is represented by a number. The unit for each bet is RMB2. Two draws of the Shenzhen Feng Cai will take place every week.

Shuang Se Qiu is a computer-based welfare lottery which is sold via the computer network. Buyer of Shuang Se Qiu select 6 numbers and 1 number out of the red ball pool and the blue ball pool, respectively. There are a total of 33 numbers and 16 numbers from the red ball pool and the blue ball pool, respectively. The unit for each bet is RMB2. Three draws will be held every week.

Qi Le Cai is a computer-based welfare lottery which can be purchased through sale outlets. Qi Le Cai is a lottery game which buyer select 7 numbers out of 30 numbers. The unit for each bet is RMB2. Three draws will take place every week.

3D is a computer-based welfare lottery which can be purchased through sale outlets. Buyer select one three-digit number from 000 to 999. The unit for each bet is RMB2. One draw will be held every day.

According to Shenzhen Le Cai’s lottery business development planning, aiming at building a “Lottery Supermarket”, Shenzhen Le Cai will operate a chain of betting branches, so as to progressively develop scales of economies and continuously enhance its brand value.

According to the prevailing distribution model for traditional welfare lotteries in the PRC, traditional welfare lotteries, such as “Shenzhen Feng Cai”, “Shuang Se Qiu”, “Qi Le Cai” and “3D”, will be distributed through specialised betting equipment deployed in the internet-based betting stores. The results of the lotteries will be broadcasted on TV.

Shenzhen Le Cai will set up specialised betting stores to distribute the traditional welfare lotteries, based on the following considerations:

(1) the current distribution model of the traditional welfare lottery;
(2) the large market for traditional welfare lottery in the PRC and a relatively high growth is expected each year;

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LETTER FROM THE BOARD

(3) the distribution of such traditional welfare lottery is in line with the business development of Shenzhen Le Cai;
(4) traditional welfare lottery takes up certain market share in Shenzhen and the distribution of such traditional welfare lottery is in line with the policies for the lottery industry;
(5) chain-store basis operated by Shenzhen Le Cai resulting in strong competitive advantage due to effects of branding and economics of scales; and
(6) distribution of such traditional welfare lotteries will bring operational profits for Shenzhen Le Cai as well as generate investment returns for the Shareholders upon Completion.

REASONS FOR THE ACQUISITION

The Group has been actively seeking business opportunities wherever appropriate in order to broaden the revenue base of the Group and enhance profitability. The Group has also been proactively applying for the lottery related business. The Acquisition is based on the thorough consideration by the Company in terms of the following bases:

(1) The lottery market in the PRC is large with a rapid growing trend . According to the statistics of the Ministry of Finance of the PRC, the total sale of lottery in the PRC in year 2010 amounted to approximately RMB166.25 billion, representing a year-on-year growth of approximately 25.5%. Of the total sale, the sale for welfare lottery increased by 28.0% to approximately RMB96.8 billion year on year. During January to May 2011, the total sale of lottery nationwide was approximately RMB83.69 billion, representing a year-on-year growth of approximately 32.5%. Of the total sale, the sale for welfare lottery increased by approximately 32.1% to approximately RMB48.53 billion year on year.
(2) Guangdong Province ranked first in the PRC in terms of lottery sale . According the statistics of the Ministry of Finance of the PRC, Guangdong Province ranks the first in terms of the monetary value lottery sale in the PRC, claiming approximately RMB18.87 billion in 2010 with a year-on-year increase of approximately 36.9%, of which the lottery sales amounted to approximately RMB11.36 billion with a year-on-year increase of approximately 36.2%.

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LETTER FROM THE BOARD

(3) Shenzhen Le Cai is an approved distributor of “Keno Games Lottery” . On 28 December, 2010, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into the Keno Games Agreement, whereby Shenzhen Le Cai will become the sole agent to operate and distribute “Keno Games Lottery”, and will be entitled to the commission fee of at least 7% of the sale. According to the “Notification in respect of Increasing Proportion of Pay-out for Keno Welfare Lottery in Certain Locations” announced by the office of Ministry of Finance and “Approval regarding the Sale of High pay-out Keno Games Lottery in Shenzhen Municipal, Guangdong Province” announced by China Welfare Lottery Issuance and Management Centre, the welfare lottery “Keno Games Lottery” is permitted to be distributed in Shenzhen.
(4) Shenzhen Le Cai can set up 80 betting stores in Shenzhen to distribute Welfare Lottery . On 18 April, 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into the Lottery Agreement, whereby Shenzhen Le Cai can set up 80 betting stores for the distribution of Welfare Lottery, such as “Shenzhen Feng Cai”, “Shuang Se Qiu”, “Qi Le Cai”, and “3D” together with other welfare lotteries approved by Shenzhen Welfare Lottery Issuing Centre, and will be entitled with the commission fee of 6% of the total sale of Welfare Lottery.
(5) The business license for value-added telecommunication has been granted to Shenzhen Jin Cai . On 10 December 2010, Shenzhen Jin Cai obtained the People’s Republic of China Value-added Telecom Service Operation Permit issued by Guangdong Communications Administration (the business license number: YUE B2-20100583). The license for mobile lottery business is currently in progress of application. The Target Group is now accelerating the application process for the license for the mobile lottery business.

Pursuant to the 電話銷售彩票管理暫行辦法 (Interim Administrative Measures for Telephone Lottery Sales [#] ), approvals from the Ministry of Finance, the Ministry of Civil Affairs and China Welfare Lottery Issuance and Management Centre are required for the distribution of lotteries through telemarketing (via fixed phones and mobile phones) in an administrative region. Relevant partners and distributors are also required to obtain the 增值電信業務經營許可證 (Value-added Telecom Service Operation License [#] ) and enter into a cooperation agreement or a distribution contract in respect of lottery telemarketing with the welfare lottery issuance and sales agencies. According to the statistics of the Ministry of Industry and Information Technology of the PRC, in 2010, the mobile users of China Mobile amounted to approximately 860 million, representing development potential for mobile lottery sale as a result from an immense potential clientele.

If Shenzhen Jin Cai be granted with the license for and is successful in commencing the “mobile lottery agency business”, based on the swift development of the lottery industry and the large number of mobile phone users in Guangdong province, a larger potential customer base will be provided to the Target Group. As such, the Company considers that the “mobile lottery agency business” will generate considerable revenue to the Target Group.

If Shenzhen Jin Cai fails to obtain the license for the “mobile lottery agency business”, it may carry on information services business, so as to its investment return.

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LETTER FROM THE BOARD

Neighbouring Hong Kong, Shenzhen is the first special economic zone as well as a pioneer of the reform and open-up policies in the PRC, which has resulted in its leading economic development in mainland China. According to the Statistics Bureau of Shenzhen, in 2010, the GDP of Shenzhen increased by approximately 12.0% to approximately RMB951.1 billion year on year, and per capita disposal income increased by approximately 10.7% to approximately RMB32,000, exceeding the nationwide average level during the corresponding period. According to the “General Proposal of Shenzhen Comprehensive Reforms”, by intensifying the complementation between Shenzhen and Hong Kong and promoting Shenzhen-Hong Kong interaction, the region will develop into a global financial center, a logistics center, a trade center, an innovation center and a center of international culture and creative industries. Meanwhile, there are expansion plans to double the size of Shenzhen while maintaining its status of “first try, first practice” for further its development.

The Directors have been identifying further investment opportunities in order to expand its existing business and maximise the return of the Shareholders. The Directors believe, such acquisition represents a good opportunity for the Group, and forge further control over Shenzhen Le Cai. The Directors hold optimistic about the future growth in the welfare lottery business in the PRC as well as lottery business development of Shenzhen Le Cai. The Directors also believe, such acquisition in future will generate considerable profits and cash flow for the Group, and will generate constant returns for the Shareholders. Thus, the Board believes the Acquisition represents a good opportunity for the Group to expand its businesses, maximise the return of the Shareholders, which represents the interests of the Company and its shareholders as a whole.

RISK FACTORS FOR THE ACQUISITION

Increased competitiveness in the lottery business in the PRC

It is expected that the competition in the lottery industry would be intensified in the near future. With the proliferation of different gaming methods, venues and other channels, Shenzhen Le Cai faces severe competition. A number of competitive factors could have a material effect on the results of operations in the current market, including but not limited to:

Greater degree of operational efficiencies of competitors.
Increased diversities of products and gaming channels offered by competitors.
Immersive expansions of market share by competitors.

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LETTER FROM THE BOARD

The lottery industry is subject to the fluctuations in general economic conditions, lottery buyers’ spending powers and sentiments

In general, the gross gaming revenue of lotteries is closely related to the lottery buyers’ personal preferences, gambling patterns, level of disposable incomes and confidence in the economy as well as many other factors beyond the control of Shenzhen Le Cai. Although the PRC has shown signs of economic recovery, there is no assurance that it can regain the rapid growth exhibited in the past. In short, any change in lottery buyers’ gambling behavior due to changes in economic conditions could materially affect the operating performance of the business.

Regulatory controls on welfare lottery business

The Lottery Management Regulations enacted by the State Council in July 2009 was the first formal regulatory code on lottery industry, which provides regulation assurance, technical assurance and management assurance to the lottery industry. It requires (i) lottery issuing organizations to provide risk control proposal when applying for new lottery categories; (ii) lottery issuing organizations to be equipped with advanced and secured lottery hardware, software system and technical service; and (iii) lottery issuing organizations to keep good control of data and fund for lottery sales system. The possible amendment or adoption of newly implemented or revised laws and regulations in the PRC in relation to Shenzhen Le Cai’s business could significantly impair the growth of the Target Group or have a material adverse effect on its business operations and financial condition.

Change of regulatory policy requirements

The interpretation and application of existing PRC laws and regulations, the stated positions of the Ministry of Civil Affairs and the possible introduction of new laws or regulations have created uncertainties regarding the legality of existing and future businesses and the activities of Shenzhen Le Cai operating in the PRC welfare lottery industry. Currently, Shenzhen Le Cai is an agent for the distribution of Keno Games Lottery and Welfare Lottery, which require an operating permit from Shenzhen Welfare Lottery Issuing Centre and its business license. But there is no assurance that an operating permit, license or approval would not be required for Shenzhen Le Cai to carry out its planned scope of business as a result of any change in or clarification of existing PRC laws or regulations (or the interpretation thereof) or an introduction of any new laws and regulations. However, the Directors consider that the likelihood and the impact of such risk to the Shenzhen Le Cai is not material as the likelihood for the Shenzhen Le Cai to obtain such permit, licence or approval is high, because Shenzhen Le Cai has signed Keno Game Lottery Agreement and Welfare Lottery Agreement with Shenzhen Welfare Lottery Issuing Centre.

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LETTER FROM THE BOARD

Business model and pricing control on the Keno Games Agreement, the Lottery Agreement and the Keno Games and Lottery Agreement

Pursuant to the aforementioned agreements, Shenzhen Le Cai was authorised to act as an agent for Shenzhen Welfare Lottery Issuing Centre to distribute Keno Games Lottery and Welfare Lottery in Shenzhen for a term of 20 years from the time of business operation starts in the aforesaid regions. Under the agreements, Shenzhen Le Cai will charge Shenzhen Lottery Issuing Centre an agency fee based on an agreed percentage of the income from sales of lottery by the lottery station/branches. There is no assurance that Shenzhen Le Cai could continue to renew the Keno Games Agreement and Welfare Agreement with favourable terms and obtain favourable pricing as agency fee and the possible regulatory control and pricing control on welfare lottery business has created uncertainties regarding the renewal and pricing of existing agreements with Shenzhen Welfare Lottery Issuing Centre.

Lack of exclusive right to distribute Welfare Lottery under the Lottery Agreement

Pursuant to the aforementioned agreement, Shenzhen Le Cai was authorised to act as an agent to distribute Welfare Lottery in Shenzhen. However, Shenzhen Le Cai has not obtained any exclusive right under this agreement to carry out this Welfare Lottery distribution business in the respective areas. Any other competitors’ entrance into the new agreement with Shenzhen Welfare Lottery Issuing Centre to act as agent in the relevant areas may adversely affect Shenzhen Le Cai’s business, results of operations or financial condition.

Shenzhen Le Cai relies on proper operation and maintenance of lottery sales system and software

The lottery sales system and software, together with its experience and knowledge in the industry, are critical to operate its business. The lottery sales system, which is supplied by Shenzhen Welfare Lottery Issuing Centre, provides a database of information regarding sales records, fund levels and various other facets of the business to assist lottery sales management. Shenzhen Le Cai cannot be assured that the lottery sales system and software will operate properly or without interruption. Any malfunction to any part or all of the lottery sales system and software for a prolonged period may cause delays in operations or a breakdown of the overall system network. Shenzhen Le Cai cannot be assured that the level of security software currently maintained will be sufficient to protect the system from third party intrusions, viruses, lost or stolen data or similar situations. If the existing or future system and software do not function properly, Shenzhen Le Cai’s business and results of operations may be materially and adversely affected.

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LETTER FROM THE BOARD

Impact of illegal lottery development

The development of the PRC lottery industry has been, and will continue to be, affected by the development of illegal lottery. Illegal lottery appeals to lottery players for its higher return, and its unrestrained development poses a significant threat to the lottery industry. In view of the harmful consequences brought by the illegal lottery, the competent authorities of the PRC lottery industry have been sternly cracking illegal lottery, by way of enhanced legal system, improved laws and regulations, and more efforts into guiding lottery players towards purchases of state-permitted lotteries, to facilitate the healthy and sustainable development of the lottery industry.

Impact of competition from different types of lotteries and different lottery distribution channels

As the PRC lottery types are becoming diversified and the lottery distribution channels continue to expand, new lottery types or distribution channels will inevitably and adversely affect the existing ones.

Should the expansion of the Keno Games Lottery in the existing region hindered, the operational results of the Target Group will be affected

The Keno Games Lottery operated by the Target Group is a brand new genre of welfare lottery. Should its business expansion be hindered, the operational results of the Target Group will be adversely impacted. The management team will leverage the great attractiveness of the Keno Games Lottery, maintain and promote a positive corporate image through managerial standardisation and service optimisation, and scale up promotion to attract more lottery bettors to bet on the Keno Games Lottery. Meanwhile, the management team will continue to expand its Keno Games Lottery coverage, so as to realise cross-region operation and improve its operational results of the Target as a result of increasing sales of the Keno Games Lottery.

The impact caused by the failure to renew the lease agreement required for the lottery distribution business upon its expiry

The properties principally required for the lottery distribution business of the Target Group are for the lease purpose. Should renewal of certain lease agreements fail when due, certain lottery businesses of the Target Group will to some extent be adversely affected. The management team will first sign a lease agreement with the lessor for longer term and negotiate with the lessor for renewal before such agreement is expired. Should the failure to renew such agreement occurs, relocation will be prearranged in avoidance of impact on the sales due to relocation.

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LETTER FROM THE BOARD

Sufficiency of funding

The Target Group depends on cash generated from its operations as well as access to external financing to operate and expand our business. The future funding requirements will depend, to a large extent, on its working capital requirements. The Target Group needs working capital for the distribution and marketing activities so as to keep pace with the competitive landscape in the PRC lottery industry. If the Target Group are unable to generate sufficient funding for our expansion plan, it may not be able to achieve its desired operating scale or expansion plans, which in turn may adversely impact its competitiveness and, therefore, its results of operations.

BUSINESS STRATEGY, PLAN AND INTENTION

The Target Group aimed to establish four lottery stations for selling Keno Games Lottery and eighty lottery stores for selling Welfare Lottery in Shenzhen during year 2011. The Target Group intends to establish four betting stations in 2011, sixteen stations in 2012, ten stations in each of 2013 and 2014 and five stations in each year between 2015 and 2022, which amounts to eighty betting stations by 2022. The Target Group will maintain eighty betting stations and will deploy ten Keno Games Lottery betting machines in each betting station. The estimated initial cost to set up eighty betting stations and eighty betting stores are approximately RMB73 million which are mainly for acquisition of equipment; decoration and deposits for lottery terminals and betting stations/branches. The Target Group will finance the set up costs and operating cost by internal resources and revenue generated by the Target Group. The costs incurred up to the Latest Practicable Date is approximately RMB543,000 (equivalent to approximately HK$655,000). As at 30 June 2011, the Target Group had a bank balance and cash of approximately RMB26.4 million. Given that the Vendor guarantees to the Company that the net profits after tax of the Target Group for the period from the date of Completion to 31 March 2013 shall be not less than RMB60 million. The Company is of the optimistic that the Target Group has sufficient internal working capital for the setup of the respective betting stores.

To cope with needs to market the Keno Games Lottery business, the Target will increase its promotion on the Keno Games Lottery through different channels to expand its market presence, forge its reputation among the lottery bettors and create a sound corporate image.

At the preliminary stage of development, the Target Group will expand its market and solidify its position within the Shenzhen region; and will raise its company profile through the enhancement of corporate governance, rationalized development and improved service quality. To cope with great effort taken to market the Keno Games Lottery business, Shenzhen Le Cai will also scale up promotion of the Keno Games Lottery through a variety of appropriate approaches to expand its market presence, forge its reputation amongst the lottery bettors, and create a sound corporate image. The Target Group will also expand its lottery agency business into other provinces in the PRC and expand its lottery offering and distribution channel in due course.

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LETTER FROM THE BOARD

As disclosed in Appendix II to this circular, the capital commitments of the Enlarged Group as at 30 June 2011 was approximately HK$ 225 million which were related to existing piped gas fuel business and investment in an associate. As the Target Group is principally engaged in the agency for the distribution in the Keno Games Lottery and Welfare Lottery, the Target Group may require capital to maintain and continuously expand the number of betting stations/branches. Currently, the Directors estimated that the capital expenditure for the Target Group will be around RMB11.8 million in year 2012, which would mainly be used for the acquisition of equipment; decoration and deposits for lottery terminals and betting stations/branches. The Directors consider the capital expenditure on Target Group is not material as compared to the expected revenue to be generated by the Target Group. It is expected that the funding requirements for operations of the Target Group will be funded by internal resources and the revenue to be generated by the Target Group.

The Target Group has employed a manager who was a consultant of Shenzhen Welfare Lottery Issuing Centre. The manager has the relevant experience and knowledge in the lottery industry to manage the operations of the Target Group. Upon Completion, as the lottery operations of the Target Group continue to growth, the Group will consider hiring additional expertise.

Feasibility study on the Target Group

Before the Acquisition, the Board has performed series of feasibility study on the business of the Target Group, including but not limited to:

obtained and reviewed statistical data and information from various external public sources and market research company concerning the lottery industry in the PRC and other countries, such as lottery sales forecast in the PRC, proportional share of welfare lottery to the whole lottery industry; projected welfare lottery sales in Shenzhen;
reviewed the business proposal prepared by the Target Group;
reviewed the Keno Games Agreement and the Lottery Agreement entered into by Shenzhen Le Cai;
considered the reason for the Acquisition, details of which are set out on pages 35 to 37 of this Circular;
reviewed the financial results of the Target Group;
reviewed the mode of business operation of Shenzhen Le Cai;
appointed PRC legal advisers to give opinions on the legality of the Target Group, the business licence and permit required by the Target Group and the legality of the Keno Games Agreement ; the Lottery Agreement and Keno Games and Lottery Agreement signed by Shenzhen Le Cai;

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LETTER FROM THE BOARD

interviewed the management of the Target Group;
engaged an independent valuer to conduct valuation on Shenzhen Le Cai and interviewed with the valuer to understand the assumptions and basis of the preliminary valuation of Shenzhen Le Cai; and
preliminary due diligence review on the Target Group.

The Board was satisfied with the results of the feasibility study, which shows (i) promising business potential in the welfare lottery industry in the PRC; (ii) good standing of Keno Games Agreement and Lottery Agreement entered into by Shenzhen Le Cai; (iii) satisfactory PRC legal opinions on the legality of the Target Group and the Keno Games Agreement and the Lottery Agreement; (iv) a professional and experienced management team of the Target Group; and (v) a professional and independent valuation report on Shenzhen Le Cai, and no material problem was found.

The Board has considered the following important factors from the feasibility study when evaluating the Target Group’s prospects:

The Lottery Agreement and the Keno Games Agreement being legal, valid and binding and enforceable against Shenzhen Welfare Lottery Issuing Centre.
The announcement made by China Welfare Lottery Issuance and Management Centre（中國福利彩票發行管理中心）on 1 June 2011 which agree to Guangdong Welfare Lottery Issuing Centre selling Keno Games Lottery in Shenzhen.
The potential growth in the lottery sales industry in the PRC, considering the growth rate of the lottery sales of 25.5% in 2010 and the relative low lottery per capita spending among the top lottery markets in the world.
Simplicity of the operation, given that Shenzhen Le Cai will be an agent of Shenzhen Welfare Lottery Issuing Centre and will only be selling Keno Games Lottery and Welfare Lotteries in the lottery stations/branches.
The success of Hainan Kuai2 introduced in Hainan Province in October 2009, which is similar to Keno Games Lottery.
The risks of the operations more particularly set out in the section headed “Risk factors for the Acquisition” in this Circular pages 37-41.

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LETTER FROM THE BOARD

INFORMATION OF THE GROUP

The Group is principally engaged in sales of liquefied petroleum gas; provision of piped gas fuel; construction of gas pipelines; operation of city gas pipeline network; and actively promote lottery agency sales and equipment supply.

IMPLICATIONS UNDER THE LISTING RULES

As the highest applicable percentage ratio (as defined in Rule 14.07 of the Listing Rules) in respect of the entering of the Agreement exceeds 25% but is less than 100%, the Acquisition constitutes a major transaction for the Company under Chapter 14 of the Listing Rules and is subject to the approval of the Shareholders by a majority vote at the SGM. As no Shareholder has a material interest in the Acquisition, no Shareholder is required to abstain from voting at the SGM.

SGM

Set out on pages 174 to 175 is a notice convening the SGM to be held at Function Room of Macau Jockey Club, 1st Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong immediately after the conclusion of the annual general meeting of the Company to be held on Monday, 29 August 2011 at 11:00 a.m. at which relevant resolution(s) will be proposed to the Shareholders to consider and, if thought fit, approve the Acquisition and the transactions contemplated thereunder.

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend the special general meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting (as the case may be) if you so wish.

RECOMMENDATION

The Board considers that the terms of the Acquisition are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolution as set out in the notice of SGM.

– 44 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

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

Yours faithfully

For and on behalf of the Board Chinese People Holdings Company Limited Jin Song Managing and Executive Director

– 45 –

VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

The following is the text of a valuation report, prepared for the purpose of incorporation in this circular received from Asset Appraisal Limited, an independent valuer, in connection with its valuation as at 31 May 2011 of the Shenzhen Le Cai.

==> picture [245 x 48] intentionally omitted <==

901 9 9 901

12 August 2011

The Board of Directors

Chinese People Holdings Company Limited.

Unit 2111 21/F China Merchants Tower Shun Tak Centre No. 168-200 Connaught Road Central Hong Kong

Dear Sirs,

Re: Business Valuation of Shenzhen Yongheng Le Cai Technology Development Limited

INTRODUCTION

In accordance with the instructions from Chinese People Holdings Company Limited (the “Company”), we have completed a valuation of 100% Enterprise Value of Shenzhen Yongheng Le Cai Technology Development Limited（深圳市永恒樂彩科技開發有限公司）, referred to as “Shenzhen Le Cai”) as at 31 May 2011 (the “Valuation Date”).

The objective of Asset Appraisal Limited (referred to as “ AAL ”) is to assess the Fair Value in order to provide the Company with an independent valuation report on the 100% equity interest of Shenzhen Le Cai. We must point out that this valuation report does not constitute a technical report and does not express opinions on technologies employed by Shenzhen Le Cai, legal title on any technical properties, technical issues and contractual rights involved in the business operations of Shenzhen Le Cai or its subsidiaries.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

The work program for this valuation involved the following tasks:

review of information provided by the Company, discussions with representatives of the Company and collection and review of documents provided to AAL;
analysis of the provided data and information and preparation of this valuation report.

The opinions expressed in this report have been based on the information supplied to AAL by the Company. Whilst AAL has have been confirmed that the Company has represented to AAL that full disclosure has been made of all material information and that to the best of its knowledge and understanding, such information is complete, accurate and true. AAL has no reason to doubt this representation.

Whilst AAL has exercised all due cares in reviewing the supplied information, the accuracy of the results and conclusions expressed herein are entirely reliant on the accuracy and completeness of the supplied data and information. No responsibility is assumed by AAL for any errors or omissions in the supplied information and AAL does not accept any consequential liability arising from commercial decisions or actions resulting from them.

Our valuation of Shenzhen Le Cai has involved projections by the Company’s management on the business operations of Shenzhen Le Cai. These are inherently forward looking statements which will necessarily differ from the actual performance of Shenzhen Le Cai. The variances in such projections may result from the inherent uncertainties in the economic uncertainty and other factors affecting discretionary consumer spending, in variations in the execution of business plans, availability of necessary equipment, supplies and manpower, government policy on lottery business, the continuity of the operating license, changes in government policies, regulations and directives.

CORPORATE BACKGROUND

Shenzhen Le Cai was established in the PRC on 10 December 2008 with limited liability of which 40% equity interest is held by Beijing Zhongmin Gas Company Limited（北京中民燃氣有限公司）which was incorporated in the PRC with limited liability and 60% equity interest is held by Zhongmin Yongheng Investment Consultant Limited（北京中民永恒投資咨詢有限公司）which was incorporated in the PRC with limited liability.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Group structure immediately after Completion

==> picture [200 x 286] intentionally omitted <==

----- Start of picture text -----

Company
100%
100%
Target Company
100%
Beijing Zhongmin
Zhongmin Yongheng
60% 40%
Shenzhen Le Cai
100%
Shenzhen Jin Cai
----- End of picture text -----

Shenzhen Le Cai is principally engaged in electronic engineering software development, real estate development and management, investment in other entities and projects, research, development and manufacturing of lottery machines, lottery sales and lottery business.

On 28 December 2010, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre（深圳市福利彩票發行中心）entered into the Keno Games Agreement (the “Keno Games Agreement”) pursuant to which Shenzhen Le Cai is appointed as the sole distributor to set up sale outlets for distributing of Keno Games Lottery（快樂彩）in Shenzhen for a term of 5 years. Pursuant to the Keno Games Agreement, Shenzhen Le Cai is entitled to commissions based on a commission rate of 7% on the total betting to be received by its sale outlets with a bonus rate of 1% on the excess sale amount of those betting outlets with monthly betting exceeds RMB500,000.

On 8 June 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into a letter of intent pursuant to which Shenzhen Welfare Lottery Issuing Centre conditionally agreed to extend the sole distribution rights granted to Shenzhen Le Cai via the Keno Games Lottery Agreement for a further term of 5 years, renewable for further terms of 5 years with the last term expiring in 2031.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

On 18 April 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into the Lottery Agreement pursuant to which Shenzhen Le Cai is allowed to set up 80 outlets to sell computer-base Welfare Lotteries in Shenzhen. Shenzhen Le Cai is entitled to sale commissions based on a commission rate of 6% of the total betting on computer-base Welfare Lotteries received by its outlets.

On 8 June 2011, Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into a letter of intent pursuant to which Shenzhen Welfare Lottery Issuing Centre conditionally agreed to extend Shenzhen Le Cai’s distribution rights to sell computer-base Welfare Lotteries in Shenzhen for a further term of 3 years, renewable for further terms of 3 years with the last term expiring in 2031.

Shenzhen Yongheng Jin Cai Technology Development Limited (“Shenzhen Jin Cai”, 深圳市永恒進彩科技開發有限公司）is a company duly established in the PRC with limited liability. Shenzhen Jin Cai is principally engaged in computer hardware and software development, marketing, computers, electronic products, technology development and related technical services, network technology development, communication technology development, mobile phone software, communications equipment, software and hardware technology development, communications equipment sales, installation, maintenance and information services business. As at the Valuation Date, Shenzhen Le Cai held the entire registered capital of Shenzhen Jin Cai. As confirmed by the Company, Shenzhen Jin Cai is yet to commence business.

The Keno Games and Lottery Agreement entered into between Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre on 1 August 2011, pursuant to which Shenzhen Welfare Lottery Issuing Centre has appointed Shenzhen Le Cai as its sole agent to distribute Keno Games Lottery and as its agent to distribute Welfare Lotteries in Shenzhen for a term of 20 years.

The Keno Games Agreement and the Lottery Agreement between the Company and Shenzhen Welfare Lottery Centre are to assist Shenzhen Welfare Lottery Centre to set up outlets for distributing of Keno Games Lottery and computer-based Welfare Lotteries.

The procedure to apply for the set up of the outlet (paper based instant lottery and computerbased lottery) in Shenzhen（深圳福彩投注站申請流程）is stipulated in the Shenzhen Lottery Issuing Centre web site (http://www.szlottery.org/station/process). The Shenzhen Welfare Lottery Issuing Centre has rule and guideline on the operation of the outlets (http://fczx.mca.gov.cn/article/ zcwj/200712/20071200008945.shtml).

Shenzhen Le Cai has obtained the agreements with Shenzhen Welfare Lottery Issuing Centre to set up the outlets and it is normal practice for respective welfare lottery centres to sub-contracts part of the workload to service providers.

– 49 –

VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

ECONOMIC OUTLOOK AND INDUSTRY ANALYSIS

PRC’s Economic Outlook

According to the National Bureau of Statistics of the PRC, the Nominal Gross Domestic Product (“GDP”) of the PRC in 2010 was RMB39,798 billion, representing a 16.88% growth year-on-year and a CAGR of 14.9% since 2000.

Nominal GDP

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----- Start of picture text -----

45,000
40,000
35,000
30,000
CAGR: 14.9%
25,000
20,000
15,000
10,000
5,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Rmb (billion)
----- End of picture text -----

Source: National Bureau of Statistics of PRC

In order to stimulate domestic demand in response to the global financial crisis in 2008, the PRC government announced a RMB4 trillion stimulus package through measures for economic growth in various industries. Boosted by the RMB4 trillion government stimulus plan and the cumulative effects of fiscal and monetary easing, the PRC has shifted its economy driver from exports towards domestic consumption and made the most impressive recovery from the global financial crisis among all major economies.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Lottery Market

Lotteries have been the considerable surpluses in many countries, especially for those largest lotteries countries, like Spain, Italy, Ireland, Canada, the US, the UK and Australia. In China, the PRC central government has so far allowed only two kinds of lotteries to be held around the whole country, namely social welfare lotteries and the sports lotteries. Set out below is the management structure of lotteries issuing in PRC.

==> picture [362 x 469] intentionally omitted <==

----- Start of picture text -----

The State Council
Ministry of Finance
General Administration
Ministry of Civil Affairs
of Sports
China Welfare Lottery China Sports Lottery
Issuing Centre Administration Centre
Local welfare lottery Local sports lottery
issuance centres issuance centres
----- End of picture text -----

Source: Ministry of Finance of PRC

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Under the prevailing policy, 35% of the total lotteries sale is the source of fiscal income to fund social and sport development, while 50% is sent back into circulation as prize money. And the 15% remainder is used maintain the operation of the lotteries. Set out below is the sales of the two kinds of lotteries in PRC in the last three years.

Sales of Lotteries in PRC

==> picture [308 x 312] intentionally omitted <==

----- Start of picture text -----

96.802
100
90
80 75.606
69.446
70
60.398
56.873
60
50 45.615
40
30
20
10
0
2008 2009 2010
Welfare Lottery (RMB billion)
Sports Lottery (RMB billion)
----- End of picture text -----

Source: Ministry of Finance People’s Republic of China

Statistics Ministry of Finance of PRC showed that welfare lottery sales had exceed RMB96 billions in 2010, indicating 26.6% of CAGR compared with the year 2008. And the sport lotteries had reached 69.446 billion in the same year with a 23.4% annual increase rate.

Lotteries are a form of gambling which involves the drawing of lots for a prize. Lottery is outlawed by some governments, while others review lotteries as gambling but as harmless fun.

Boosted by the strong economic growth of the PRC, the per capita annual disposable income of urban households in the PRC, as per the statistics published by the National Bureau of Statistics, have jumped to RMB19,109 in 2010, representing an approximately 7.8% of increase rate compared with 2009. Likewise, the per capita annual net income of rural households in the PRC have followed the trend with per capita annual net income increased to RMB5,919 in 2010, representing an increase rate of 10.9%.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Beside solid per capita income growth, the overall economic output of the PRC has also been boosted by the world largest population and population growth. With an overall economic output of RMB39,798 billion in 2010, the PRC’s population reached a staggering of 1.34 billion by end of 2010. Strong economic growth, large population base and the surging per capita disposable income lay strong ground for the development of lottery operations in the PRC, as evidence by the robust growth of lottery revenues over the recent years.

% of lottery consumption to disposable income of people in PRC

				Urban Chinese
				per capita	% of Lottery
	Total	Lottery	Lottery Sales	Disposable	Consumption to
		Sales	per capita	Income	Disposable
Year	(RMB	billion)	(RMB)	(RMB)	Income
2000		18.1	14.28	6,280	0.23%
2001		28.887	22.63	6,860	0.33%
2002		38.572	30.03	7,703	0.39%
2003		40.14	31.06	8,472	0.37%
2004		38.057	29.28	9,422	0.31%
2005		71.385	54.59	10,493	0.52%
2006		81.93	62.30	11,759	0.53%
2007		101.70	78.22	13,786	0.57%
2008		106.01	80.20	15.781	0.51%
2009		132.48	98.79	17.175	0.57%
2010		166.25	123.97	19,109	0.65%

Source: China Lottery Yearbooks and China Statistic Yearbooks

Lottery is currently the only legal form of gambling in the PRC. Other kinds of gambling such as casinos, horse-racing, and slot machines are all forbidden, apart from those operations in the Special Administrative Regions of Macau and Hong Kong. Like almost all sectors in the PRC, the lottery industry is sanctioned by the Central Government. In the case of lotteries, the central administration is under the Ministry of Finance, which has a ‘Lottery Administration Office’, whilst ultimate policy decisions are decided by the State Council. Each lottery may have a central administrative body reporting to the relevant ministry (e.g.: for the Sports Lottery, the State Sports Lottery Administration Centre under the State General Administration of Sports which in turn reports to the State Council). Much of the day-to-day administration and execution of lotteries, however, is run at a provincial and municipal level.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Forms of Lotteries in PRC

In the PRC, lotteries market is basically dominated by four types of games:

Computer-based lottery（電腦型彩票）– it is currently the most important lottery product in the PRC’s lottery market. Sales in 2010 amounted to approximately RMB10.822 billion, accounting for about 62.96% of total lottery sales.

Paper-based instant lottery（網點即開型彩票）– This is a kind of printed lotteries distributed through sale outlets. Lotteries buyers can learn the results instantly by scratching the lottery cards purchased from the outlets. Currently, paper-based instant lotteries include Gua Gua Le of Welfare Lottery and Ding Gua Gua of Sport Lottery. Sales of paper-based lotteries in 2010 amounted to approximately RMB3.412 billion, accounting for 19.85% of total lottery sales in PRC.

Sports Betting（體育競猜）– it is a kind of lottery betting on sport events. Leveraging the market opportunities brought about by the World Cup, sales of sports betting products expanded rapidly to RMB14.7 billion, representing the best performance since 2001. In 2010, sports betting achieved RMB1.722 billion.

China Lottery Online（中福在線）– It is the newest kind of lottery that allows buyers to play lotteries on VOL terminals. Due to its convenience and efficiency, the sales have achieved a total betting of RMB1.234 billion in 2010.

Set out below is the percentage of sales of the four lotteries in 2010.

Sales of Lotteries in 2010 in PRC

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----- Start of picture text -----

Paper-based Instant Lottery
20%
Computer-based
Lottery
63%
China Lottery Online
7%
Sports Betting
10%
----- End of picture text -----

Source: Ministry of Finance People’s Republic of China

– 54 –

VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Lotteries in Guangdong Province and Shenzhen City

Recent years, Guangdong has always ranked top one in lotteries sales among the whole nation. In 2010, Guangdong Province has sold approximately RMB 18.865 billion, among that welfare lotteries account for 60.19% of the total. Set out below is the top six provinces in lottery sales in 2010.

Percentage of Sales in 2010

==> picture [319 x 300] intentionally omitted <==

----- Start of picture text -----

14.00% 13.4%
11.73%
12.00%
10.8%
10.00% 9.28%
8.00% 7.47% 7.7% 7.58% 7.6%
6.00% 5.62%
4.4%
3.95%
4.00% 3.4%
2.00%
0.00%
Guangdong Jiangsu Shandong Zhejiang Liaoning Beijing
Welfare Lotteries
Sports Lotteries
----- End of picture text -----

Source: Ministry of Finance People’s Republic of China

According to the Ministry of Finance, the sales of welfare lotteries in Shenzhen accounted approximately RMB2 billion in 2010 accounting for 17.6% in Guangdong Province. Up to May of 2011, Shenzhen has sold RMB 1,077 million welfare lotteries indicating a 25.05% increase compared with 2010. Among that, the sales of paper-based lotteries accounts for RMB 412 million and Lotto lotteries accounts for RMB665 million.

– 55 –

VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Types of Lotto lotteries（樂透型）, being the computer-based lotteries of Welfare Lottery) in Shenzhen include Shuang Se Qiu（雙色球）, Shenzhen Feng Cai（深圳風采）, 3D and Qi Le Cai（七樂彩）. Keno Games Lottery is a new kind of Welfare Lottery that will be introduced in Shenzhen in the near future. This is a kind of high frequency lottery in lottery result for a game shall be generated and shown on the terminals of Keno Games Lottery betting outlets every 5 minutes. Shenzhen Le Cai has been appointed as the sole operator of the Keno Games Lottery betting outlets to distribute this new type of lottery in Shenzhen. The first of this kind of lottery known as Hainan Kuai 2（海南快2）was introduced in October 2009 in Hainan Province. Hainan Kuai 2 generates lottery results for a game every 5 minutes. which is a high frequency lottery (having 1 game every 5 minutes). According to the Hainan Welfare Lottery Issuing Centre, the accumulative betting of Hainan Kuai 2 up to September 2010 amounted to approximately RMB398 million, which account for approximately 65% of the total betting of welfare lottery of the province.

BASIS OF VALUATION

The Business Enterprise Value of Shenzhen Le Cai has been arrived at on the basis of (Fair Value (in the premise of continued use which, in our appraisal, reflects the future economic benefit to be derived from the ownership of the equity interest of Shenzhen Le Cai. Fair Value is defined as the estimated amount at which an asset might be expected to exchange on the Valuation Date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Enterprise Value is referred to the market capitalization plus debt and non-controlling interests less cash and marketable securities.

The definition of fair value adopted in this valuation report is similar and/or interchangeable with definitions of the valuation standards below:

Market Value

According to The Hong Kong Business Valuation Forum – Business Valuation Standards, market value is defined as the estimated amount for which an asset (a property) should exchange on the date of valuation between a willing buyer and willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

Fair Market Value

The International Valuation Glossary defines fair market value as the amount at which an asset would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

For the purpose of this valuation, the term fair value will be used throughout this valuation report. Our valuation has been prepared in accordance with the HKIS Valuation Standards on Trade related Business Assets and Business Enterprise (First Edition 2004) published by the Hong Kong Institute of Surveyors and the Business Valuation Standards (First Printed 2005) published by the Hong Kong Business Valuation Forum, which are generally accepted valuation standards followed by relevant professional practitioners in Hong Kong. These standards contain detailed guidelines on the basis and valuation approaches in valuing assets used in the operation of a trade or business and business enterprises

VALUATION METHODOLOGY

In arriving at our value, we have considered three generally accepted approaches. There are market approach, asset-based approach and income approach.

The Asset Based Approach

The asset based approach considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, as evidenced by observed condition or obsolescence present, whether arising from physical, functional or economic causes.

The asset based approach is not appropriate for valuing the Shenzhen Le Cai because it disregards the economic benefits of the assets of Shenzhen Le Cai.

The Market Approach

The market approach determines the fair value of the assets by reference to the transaction prices, or “valuation multiples” implicit in the transaction prices, of identical or similar assets on the market. A valuation multiple is a multiple determined by dividing the transaction price paid for similar business enterprises by a financial parameter, such as historical or prospective turnover or profit at a given level. Valuation multiples are applied to the corresponding financial parameter of the subject asset in order to value it. Adjustment are required to the transaction prices or valuation multiples to reflect the differentiating characteristics of the business enterprises and the comparable business enterprises for which the transaction prices or valuation multiples are know.

In addition, listed entities engaging in similar line of businesses can also be used to benchmark as the current market capitalization of a listed company can be substituted for the transaction price as it represents what investors in the market are willing to pay for the equity in a particular company at that point of time.

The market approach is not appropriate for valuing Shenzhen Le Cai because Shenzhen Le Cai is at the growth stage of its business cycle and no suitable financial parameter of the enterprise can be identified for comparison.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

The Income Approach

In this method, value depends on the present worth of future economic benefits to be derived. Thus, an indication of value is developed by discounting future debt free cash flows (DFCFs) available for distribution to the owners to their present worth at market-derived rates of return appropriate for the risks and hazards of investing in similar business.

A discount rate is the expected rate of return that an investor would have to give up by investing in the subject asset instead of available alternative investments that are comparable in terms of risk and other investment characteristics. The income approach is the most appropriate method for valuing a growth stage business with rapid growth in the future.

We adopt a discounted cash flow method, which requires a number of assumptions, including revenue and expense forecast, working capital requirement and capital expenditure requirement. We have relied heavily on the management’s representation on all the background and financial information, as well as the profit forecast required for the valuation. The projection required assumptions, including revenue, and expenses forecasts, working capital requirements, capital expenditure requirements and Shenzhen Le Cai future expansion plan. Our investigation included discussions with the Company and Shenzhen Le Cai’s management in relation to the nature, operations and prospects of the lottery business and review of other relevant documents.

Revenue

Shenzhen Le Cai plans to focus its operations in the following two core segments involving in the lottery business:

Computer-based Lottery – Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into the Lottery Agreement pursuant to which Shenzhen Le Cai will set up betting outlets to sell computer-based lotteries of Welfare Lottery in Shenzhen. Lotto games which are currently the computer-based lotteries of Welfare Lottery include Shenzhen Feng Cai（深圳風采）, Shuang Se Qiu（雙色球）, Qi Le Cai（七樂彩）and 3D. Shenzhen Le Cai will set up and operate 80 outlets in Shenzhen which shall generate commission income based on a commission rate of 6% on lottery sales.
Keno Games Lottery（快樂彩）- Shenzhen Le Cai and Shenzhen Welfare Lottery Issuing Centre entered into the Keno Games Agreement pursuant to which Shenzhen Le Cai will be the sole operator of Keno Games Lottery Betting Centres in Shenzhen. These betting centres shall generate commission incomes based on a commission rate of 7% on the total amount of Keno Games Lottery lottery sales.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Based on the forecasted prepared by the Company, the number of sale outlets, total amount of lottery betting received by the outlets and the commission incomes are set out as follows:

Forecasted revenues from computer-based lotteries (Lotto Games) for the period from 2011 to 2015:

RMB	2011
(Million)	(June–Dec)	2012	2013	2014	2015
No. of Outlets1	80	80	80	80	80
Monthly lottery sales of
each outlet2	0.300	0.345	0.397	0.476	0.571
Total amount of lottery sales	144	331.20	380.88	457.06	548.47
Commission incomes (6% of
total amount of lottery sales)	8.64	19.87	22.85	27.42	32.90

Notes:

1 According to the Lottery Agreement, Shenzhen Le Cai has been allowed to establish not more than 80 lottery sale outlets for selling computer-based welfare lotteries in Shenzhen City. As planned by Shenzhen Le Cai, all the 80 outlets shall be established and opened for operations by end of 2011. The same number of outlets shall be maintained by Shenzhen Le Cai throughout the entire operating period.
2 Average monthly lottery sales of each computer-based lottery outlet for year 2011 is estimated based on the historical average lottery sales of similar outlets operating in Shenzhen. Shenzhen Le Cai has forecasted an annual growth rate on computer-based lottery betting of 20% for the period between year 2014 and 2017, 7% for the period from year 2018 to 2020 and 5% from year 2021 and onward. According to the statistics released by the Shenzhen Welfare Lottery Issuing Centre, the historical growth rate of total welfare lottery betting for year 2006, 2007, 2008, 2009 and the first five months of 2010 are 35%, 39%, 18%, 38%, 17% and 25.05% respectively or a compound average growth rate of 28.35% per annum. It is also projected by CASH Financial Service Group Limited in its study on lottery market of the PRC released in May this year that the growth of the sales of lottery in the PRC will remain strong with an annual growth rate standing above 20% for the forthcoming years. Based on the aforesaid market observations, we considered the annual betting growth rates forecasted by Shenzhen Le Cai are reasonable.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Forecasted revenues from Keno Games Lottery for the period from 2011 to 2015:

RMB	2011
(Million)	(June–Dec)	2012	2013	2014	2015
No. of Outlets3	4	20	30	40	45
No. of Lottery Machine
in each outlets	10	10	10	10	10
Total no. of Lottery Machine	40	200	300	400	450
Monthly lottery sales of
each machine4	70	70	70	70	70
Total amount of lottery sales	112	1,680	2,520	3,360	3,780
Commission incomes (7% of
total amount of lottery sales)	7.84	117.60	176.40	235.20	264.60

Notes:

1 According to the business development plan of Shenzhen Le Cai, it is planned to set up a sale network comprising a total of 80 outlets in Shenzhen for selling Keno Games Lottery. It is expected to take 11 years (from year 2011 to year 2022) to establish the entire network. Thereafter, the same number of sales outlet shall be maintained by Shenzhen throughout the remaining operation period (from year 2023 to year 2031).
2 Shenzhen Le Cai has forecasted that the average betting per Keno machine for year 2011 is RMB700,000. With reference to the performance of “Hainan Kuai 2” which is distributing Keno in Hainan Province, a total betting of RMB536 million was achieved by the 9 “Kuai 2” outlets (installed with a total of 63 machines) during the first 12 months from its rolled out in October 2009. Therefore, each of the “Kuai 2” machines achieved an average monthly betting of RMB700,000. The forecast made by Shenzhen Le Cai on the average betting per Keno machine which is in line with the actual performance of the Hainan “Kuai “is considered to be reasonable.

Shenzhen Le Cai expected that the average betting per machine shall remain constant during the expansion stage (from year 2011 to 2022) and an annual sales growth of 5% is forecasted for the remaining operating period (from year 2023 to year 2031).

Shenzhen Le Cai’s forecast as mentioned above is considered reasonable and has been adopted in the construction of our discounted cash flows model.

Selling and Distribution Expenses

Selling and distribution expenses mainly comprise of such expenses as salary and welfare expenses, rental expenses and other outgoings in relation to the operations of the sales outlets.

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

General and Administration Expenses

General and administration expenses mainly comprises of fixed overheads to be incurred by the central administration of Shenzhen Le Cai.

Tax Rate

As confirmed by the management of Shenzhen Le Cai, its income shall be subject to business tax and surcharges (based on 5.385% on revenue) and income tax (based on 25% of taxable profit).

Capital Expenditures (“CAPEX”)

CAPEX are primarily attributable to costs for setting up new Keno Games Lottery betting centres and sales outlets for computer-based lotteries in Shenzhen. Major cost items include rental deposits, shop decoration and fitting-out costs and necessary initial set up costs.

As confirmed by the management of Shenzhen Le Cai, all lottery machines within the betting centres and sales outlets shall be provided by Shenzhen Welfare Issuing Centre at its own costs.

Working Capital

In view of the business model of Shenzhen Le Cai, no working capital except trade receivables on sales commission is allowed in the valuation model.

Determination of Discount Rate

When developing a discount rate, the cost of equity of companies engaging in operations similar to the appraised asset would provide a relevant proxy and cost of debt based on data and factors relevant to the economy and industry as at the valuation date. These cost were then weighted in terms of a typical or market participant industry capital structure to arrive at the estimated weighted average cost of capital (“WACC”).

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The formula of WACC as follows:

WACC = % of Debt × Rd × (1-Tax Rate) +% of Equity × Re

Re = cost of equity

Rd = cost of debt

Development of Cost of Equity (CAPM)

The cost of equity for the valuation was developed through the application of Capital Asset Pricing Model (“CAPM”), which is the most commonly adopted method of estimating the cost of equity. CAPM states that the cost of equity is the risk –free rate plus a linear function of a measure of systematic risk (“Beta”) times equity market premium in general.

The calculation of Cost of Equity as follows:

Cost of Equity = Risk free rate + Beta × Market Risk Premium + Size Premium + Company Specific Risk

Risk free rate, beta and market risk premium are data from Bloomberg. Risk free rate was found by looking at the yield of 10 year PRC Government Bond as at the valuation date. Market Risk Premium was calculated by subtracting the long-term average of the income return on riskless asset from the long-term average stock market return. The PRC market premium is 16.174%.

Selection of Comparable Companies

Due care was exercised in the selection of comparable companies by using reasonable criteria in deciding whether or not a particular company is relevant to compute beta in our determination of the cost of equity.

According to the prevailing laws and regulations, only the China Welfare Lottery Issuing Centre and the China Sports Lottery Administration Centre (collectively referred to as the “Lottery Centres”) are authorized to carry out lottery activities in the PRC including such tasks as designing lottery games, administrating prize fund, deciding payout ratios and maintaining betting records etc. All private companies participating in this industry are in the nature of service providers supplying necessary services and equipment to the Lottery Centres in implementing their lottery operations. Similar to those comparables companies which provide hardwares as well as necessary technical supporting services for the normal functioning of the hardwares and generate their revenues by way of sharing

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APPENDIX I

the amount of betting on the lotteries in associate with the services/equipment they are providing, Shenzhen Le Cai is taking the role of providing services to the China Welfare Lottery Issuing Centre in establishing and providing routine wagering services within the venues where Lotto Games and Keno are distributing by the China Welfare Lottery Issuing Centre. In return, Shenzhen Le Cai shares a fixed proportion on the betting received from the outlets established by it as revenues.

We have considered the lines of business, location of operation and other criteria. In valuation of Shenzhen Le Cai, we have selected several companies with the following criteria:

The comparable companies are devoted to gaming and entertainment business:
The comparable companies are based in the PRC;
The comparable are listed on the stock exchange of Hong Kong.

The following is the list of the comparable companies we have selected:

Market Capitalization as at the Name of Valuation Date Company (HK$ million) Description China Lotsynergy 1,800.742 China LotSynergy Holdings Limited is a Hong KongHoldings Ltd. based investment holding company. China LotSynergy (8161 HK) Holdings Limited is engaged in the business of provision of lottery systems, game products, terminal equipment and related technologies and marketing services to the lottery market in China. It is the equipment provider for the video lottery game of China Welfare Lottery Online (video lottery terminals). It is the supplier of computer-generated ticket game (CTG) betting terminal equipment for Guangdong province, and supplies lottery ticket scanners and readers to other customers. It is a licensed technology and service provider of mobile lottery service.

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APPENDIX I

Market Capitalization as at the Name of Valuation Date Company (HK$ million) Description

REXLot Holdings 6,151.868 REXLot Holdings Limited is an investment holding Limited company. REXLot Holdings Limited was engaged in (555 HK) the lottery business and financial services, including broking, securities margin financing, corporate finance and asset management, and money lending. The lottery business comprises development and production of lottery machines, related operating software system and networks for lottery industry, the distribution and marketing of lottery products and development of mobile value-added services for lottery business in the People’s Republic of China. Its subsidiaries and jointly controlled entities are principally engaged in lottery system and games design business; distribution and marketing of lottery products, and financial business.

Amax Holdings 523.234 Amax Holdings Limited, along with its subsidiaries, Limited is engaged in investment holding and investments in (959 HK) gaming and entertainment related business. The Company’s operation includes investments in gaming and entertainment related business segment, which includes investments in companies involving in the promotion, client development, co-ordination, operation of gaming related business and provision of technical consultancy services.

Dore Holdings 308.156 Dore Holdings Limited is an investment holding Limited company. The Company is engaged in the gaming (628 HK) and entertainment related business. Its segment includes the gaming and entertainment segment, which is engaged in the gaming and entertainment related business. The Company operates in two areas: gaming and entertainment business, which operates in Macau and administrative activities, which operates in Hong Kong.

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APPENDIX I

Market

Capitalization as at the

Name of Valuation Date Company (HK$ million) Description

VODone Limited 5,759.55 (82 HK)

VODone Limited is an investment holding company. The Company is engaged in tele-media services ranging from news production, Internet-video production and broadcasting, advertising, mobile gaming to mobile lottery. It operates in three segments: tele-media business, lottery-related business, mobile gaming business.

AGTech Holdings 1,623.416 Limited (8279 HK)

AGTech Holdings Limited is an investment holding company engaged in providing integrated professional game software, hardware and marketing consultancy services in the People’s Republic of China. Its subsidiaries provide sports lottery management and marketing consultancy services, supply sports lottery sales terminals (and accessories), and provide lottery advisory service. It operates through two segments: sports lottery management and marketing consultancy services and supply of sports lottery sales terminals (and accessories), which provides management and marketing consultancy services to China Sports Lottery Administration Centres (SLACs) and authorised operators of sports lottery, as well as supplies sports lottery sales terminals (and accessories) to the SLACs for certain municipality and provinces (Consultancy services), and lottery information technology solutions, which provides lottery advisory service to authorised operator of lottery (Information technology solutions).

Source: Bloomberg

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APPENDIX I

Size Premium

Size Premium is typically added to account for the additional risk inherent in small company stocks. Generally, small companies have higher risk than larger companies. Investors will demand for a higher return to compensate for the higher inherent risk.

The “micro cap” size premium return is cited from the study performed by Ibbotson Associates of which the study results are published in the Ibbotson Stock, Bonds, Bills and Inflation (SBBI) Classic Yearbook. Many studies have proved that smaller companies have higher costs of capital and higher returns than larger companies on average. In the study of Ibbotson Associates, it have divided all listing companies into 10 equally populated groups in accordance with their market capitalizations. Annual returns of the 10 groups (as represented by the weighted average of returns of the individual stocks of each groups) were measured and compared across the whole spectrum. It has been observed that the annual returns tend to increase as one moves from the group of large market capitalization to group of small market capitalization. The study has further measured the returns in excess of systematic risk (as measured by CAPM) for the smaller groups. As reported in the 2011 Yearbook, the size premium (return in excess of CAPM) for Mid-Cap, Low-Cap and Micro-Cap are 1.2%, 1.98% and 4.07% respectively. Given the size of market capitalization of Shenzhen Le Cai which is lower than the market capitalization of the comparable companies, a “micro cap” size premium return of 4.07% in excess of cost of equity has been adopted in our valuation.

Beta

The betas were unlevered to remove the effects of financial leverage on the indication of relative risk provided by the beta, and re-levered at the optimal industry capital structure. A capital structure based on debt to equity ratio of 14% to 86% has been adopted in the re-leveraging process.

Their levered betas have been extracted from the database of Bloomberg L.P.:

Stock Code	Name of Company	unlevered beta
8161 HK Equity	China Lotsynergy	0.863
555 HK Equity	REXLot Holding Limited	0.909
959 HK Equity	Amax Entertainment Holdings Ltd.	0.782
628 HK Equity	Dore Holdings Limited	0.836
82 HK Equity	VODone Limited	1.639
8279 HK Equity	AGTech Holdings Limited	0.886
8198 HK Equity	MelcoLot Limited	0.101

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VALUATION REPORT ON SHENZHEN LE CAI

APPENDIX I

Note

Estimated levered beta is translated into unlevered beta by the following formula:

Unlevered beta = levered beta/[1+(1-tax rate)xDebt-to-equity ratio]

Source: Bloomberg

Cost of Equity Conclusion

The calculation of the Cost of Equity as follows:

Risk Free Rate	3.84%
Beta	0.8628
Equity Risk Premium	12.334%
Small Company Premium	4.07%
	19.66%

WACC is the calculation of a firm’s cost of capital in which each category of capital is proportionately weighted.

The calculation of WACC (the discount rate):

Weight of Debt	12%
Cost of Debt(1)	6.8%
1-Tax rate(2)	75%
+
Weight of Equity	88%
Cost of Equity	19.66%
WACC	17.88%

(1) Cost of debt represents the borrowing rate set by the People’s Bank of China on corporate loan maturing in 5 years.

(2) Tax rate is based on standard income tax rate of 25% applicable to PRC corporates.

Before concluding our opinion on fair value for the share equity of Shenzhen Le Cai, we have applied to the assessed value a marketability discount. Marketability is defined as the ability to convert the business into cash quickly, with minimum transaction and administrative costs, and with a high degree of certainty as to the amount of net proceeds. There is usually a cost and a time lag associated with locating interested and capable buyers of interests in privately-held companies, because there is no established market of readily-available buyers and sellers. All other factors being equal, an interest

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APPENDIX I

in a publicly traded company is worth more because it is readily marketable. Conversely, an interest in a private-held company is worth less because no established market exists. Several empirical studies have been published that attempt to quantify the discount for lack of marketability. These studies include the restricted stock studies and the pre-IPO studies, such as Emory Pre-IPO Discount Studies.

Sensitivity Analysis

Sensitivity analysis is performed to measure the impact on the fair value of the Enterprise Value of Shenzhen Le Cai due to variation on the WACC (being the discount rate involved in the DCF valuation model.

The following table illustrates the sensitivity of the fair value of the Enterprise Value of Shenzhen Le Cai as at 31 May 2011 when discount rate is varying in the range of 100bps:

Discount Rate	Fair Value of Enterprise Value
	(RMB)
14.88%	809,000,000
15.88%	748,000,000
16.88%	694,000,000
17.88%	645,000,000
18.88%	601,000,000
19.88%	561,000,000
20.88%	525,000,000

VALUATION ASSUMPTIONS

Our appraisal included discussions with the management of Shenzhen Le Cai in relation to the history and nature of the business of Shenzhen Le Cai; a study of the unaudited financial statements; a review of the information provided by the management in connection with the strategy of and the plan of action to be taken to implement the business plan. We have assumed that such information, opinions and representation provided to us are true and accurate. Before arrived at our opinion of value, we have considered the following major factors:

i. the nature and the prospect of the concerned business operations;
ii. the financial conditions of Shenzhen Le Cai;
iii. the specific economic and competitive elements affecting Shenzhen Le Cai, the industry and the market which it operates;

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APPENDIX I

iv. the market-derived investment returns of enterprises engaged in a similar line of business;
v. the business risk of the Shenzhen Le Cai; and
vi. the financial statements of Shenzhen Le Cai.

In view of the general environment and the particular situation in which Shenzhen Le Cai is operating, the following assumptions have been adopted in our appraisal in order to sufficiently support our concluded value of Shenzhen Le Cai:

i. there will be no major change in the existing political, legal and economic conditions in which Shenzhen Le Cai is being operated;
ii. save for those proposed changes on taxation policies announced by the Tax Bureau, there will be no major change in the current taxation law and tax rates as prevailing and that all applicable laws and regulations on taxation will be complied with by Shenzhen Le Cai;
iii. the interest rates and exchange rates will not differ materially from those presently prevailing;
iv. the availability of finance will not be a constraint on the forecast growth of Shenzhen Le Cai operations in accordance with the business plans and the projection;
v. Shenzhen Le Cai shall have uninterrupted rights to operate its existing business during the unexpired term of its authorized enterprise operating period;
vi. The audited and unaudited financial statements of Shenzhen Le Cai as supplied to us have been prepared in a manner truly and accurately reflected the financial position of Shenzhen Le Cai as at the respective reporting dates;
vii. the production facilities, systems and the technology utilized by Shenzhen Le Cai in carrying out its existing businesses do not infringe any relevant regulations and law;
viii. Shenzhen Le Cai has obtained all necessary patents, permits and approvals to carry out its business and its ancillary services and shall be entitled to renew those permits and approvals for further terms of not less than 15 years expiring in 2031 subject to no legal impediment and costs of substantial amount;

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ix. Except those stated in the financial statements, Shenzhen Le Cai is free and clear of any lien, charge, option, pre-emption rights or other encumbrances or rights whatsoever that would adversely affect its Enterprise Value;
x. We have no reason to believe that any material facts have been withheld from us, however, we do not warrant that our investigation have revealed all the maters which an audit or more extensive examination might disclose;
xi. Shenzhen Le Cai shall secure and retain competent management, key personnel, marketing and technical staff to carry out and support their business operations;
xii. the estimated fair value does not include consideration of any extraordinary financing or income guarantees, special tax considerations or any other atypical benefits which may influence the ordinary Business Enterprise Value of Shenzhen Le Cai;
xiii. we have heavily relied on information provided by the management of Shenzhen Le Cai, such as but not limited to the development and prospect of the lottery market in the PRC, project total welfare lottery sales in Shenzhen, the proportional share of Lotto and Keno Games Lottery to the total welfare lottery sales in Shenzhen, the future development and operation of Keno Games Lottery and other relevant information of Shenzhen Le Cai;
xiv. Shenzhen Le Cai should have the exclusive license to sell Keno Games Lottery, which is a type of high frequency games with result announce every 5 minutes. As advised by the management of Shenzhen Le Cai, Shenzhen Le Cai has the exclusive license to sell such of high frequency games;
xv. Shenzhen Le Cai will implement the business plan of Keno Games Lottery and without any impediment to install the lottery machines as provided by Shenzhen Welfare Lottery Issuing Centre;
xvi. there will be no material changes in the Company’s business strategy and Government lottery policies.

LIMITING CONDITIONS

During the course of our valuation, we have reviewed the financial information, management representations and other pertinent data and the information made available to us. We have no reason to doubt the truth and accuracy of the information provided to us. We were also advised by the Company that no material factors have been omitted from the information to reach an informed view, and have no reason to suspect that any material information has been withheld.

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APPENDIX I

We have not carried out detailed site measurement to verify the correctness of the port areas but have assumed that the areas shown on the legal documents provided to us are correct. Based on our experience of valuation of similar assets in the PRC, we consider the assumptions so made to be reasonable. All documents and contracts have been used as reference only and all dimensions and areas are approximations.

We shall not be required to give testimony or attendance in court or to any government agency by reason of this valuation and with reference to the project described herein unless prior arrangements have been made. No responsibility is assumed for matters legal in nature. No investigation has been made of the title to or any liabilities against the business enterprise and its operating assets valued. In this valuation, it is presumed that, unless otherwise noted, the owners’ claim is valid, the property rights are good and marketable, and there are no encumbrances which cannot be cleared through normal processes.

No opinion is intended to be expressed for matters which require legal or other specialised expertise or knowledge, beyond that customarily employed by valuers.

Our conclusions assume continuation of prudent management policies over whatever period of time considered to be necessary in order to maintain the character and integrity of the assets valued. We assume that there are no hidden or unexpected conditions associated with the assets valued that might adversely affect their market value. Further, we assume no responsibility for changes in market conditions after the Valuation Date.

We do not investigate any industrial safety and health related regulations in association with this particular operations. It is assumed that all necessary licenses, procedures and measures were implemented in accordance with the government legislation and guidance.

No allowance has been made in our valuation for any off-balance sheet charges, debts or amounts owing on the assets valued nor for any expenses or taxation which may be incurred in effecting a sale. It is assumed that the assets valued are free from any off-balance sheet encumbrances, restrictions and outgoings of an onerous nature which could affect their values.

CONCLUSION OF VALUE

Based on the investigation and analysis stated above and on the valuation method employed, in our opinion, the fair value of the Enterprise Value of Shenzhen Le Cai as at the 31 May 2011 is RMB645,000,000 (RENMINBI SIX HUNDRED AND FORTY FIVE MILLION ONLY)

We hereby certify that we have neither present nor prospective interest in the appraised assets or the value reported.

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APPENDIX I

This conclusion of value was based on generally accepted valuation procedures and practices that rely extensively on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained.

Yours faithfully, For and on behalf of Asset Appraisal Ltd. Tse Wai Leung CFA Director

Tse Wai Leung is a CFA charterholder. He is on the list of Registered Business Valuer under the Hong Kong Business Forum and has over 10 years’ experiences in conducting business and intangible assets valuation for private and public companies in various industries, including similar assets or companies engaged in business activities similar to those of the Target Company.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

The audited consolidated financial information of the Group for the three years ended 31 March 2009, 31 March 2010 and 31 March 2011 respectively is disclosed in the annual report of the Company for the years ended 31 March 2009, 2010 and 2011 respectively, which have been published on the website of the Stock Exchange (www.hkexnews.hk) and the Company (www.681hk.com).

The Company’s auditors, SHINEWING (HK) CPA Limited, have not qualified the Company’s financial statements for the years ended 31 March 2011 and 2010. However, they have issued qualified audit opinion on the Company’s financial statement for the year ended 31 March 2009.

In short, the financial statements for year ended 31 March 2009 was disclaimed in view of the significance of the limitations in the scope of audit resulting from insufficiency of supporting documentation due to the lost of accounting books and records of certain subsidiaries of the Company as a result of the earthquake in Sichuan Province of the PRC. For details of the disclaimer opinion, please refer to pages 56 and 59 of the annual report of the Company for the year ended 31 March 2009.

2. INDEBTEDNESS STATEMENT

Borrowings

As at the close of business on 30 June 2011, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had total indebtedness of approximately HK$ 328,665,000 as follows:

(i) Interest bearing bank borrowings in the amount of approximately HK$254,819,000, of which due within one year was HK$46,653,000; in the second year was HK$19,113,000; third to fifth years, inclusive was HK$66,707,000 and over five years was HK$122,346,000 respectively;
(ii) Amounts due to associates in the amount of approximately HK$12,051,000 which was unsecured, non-interest bearing and repayable on demand;
(iii) Amount due to a joint venturer of approximately HK$1,610,000 which was unsecured, non-interest bearing and repayable on demand;

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(iv) Amount due to a beneficial owner of the Vendor of approximately HK$ 60,185,000, which was unsecured, non-interest bearing, of which due within one year was HK$ 22,211,000; in the second year was HK$4,219,000; third to fifth years, inclusive was HK$12,657,000 and over five years was HK$21,098,000 respectively.

Pledge of assets

As at the close of business on 30 June 2011, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, certain of the Group’s assets have been pledged to secure the borrowings of the Group with details as follow:

Property, plant and equipment Intangible assets – exclusive rights of operations Bank deposits Prepaid lease payments in respect of land use rights Commitments Contracted for but not provided in the consolidated financial statements Capital expenditure in respect of: Investment in an associate Commitments in respect of the acquisition of: Property, plant and equipment	HK$’000 5,220 2,278 6,889 8,297
	22,684

	HK$’000 160,332 64,621
	224,953

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

As at 30 June 2011, the Enlarged Group and the Group had total future minimum lease payments under non-cancellable operating leases which falling due as follows:

Within one year In the second to fifth years, inclusive After five years	HK$’000 7,354 10,233 1,323
	18,910

Save as aforesaid and apart from intra-group liabilities, at the close of business on 30 June 2011, the Group did not have any outstanding mortgages, charges, debentures or other loan capital or bank overdrafts, loans, debt securities or other similar indebtedness, liabilities under acceptances or acceptances credits or hire purchase commitments, or any guarantees or any contingent liabilities.

The Directors have confirmed that, save as disclosed above, there has not been any material change in the indebtedness and contingent liabilities of the Group since 30 June 2011 and up to the Latest Practicable Date.

For the purpose of the above indebtedness statement, foreign currency accounts have been translated into Hong Kong Dollars at the approximately rates of exchange prevailing at the close of business on 30 June 2011.

3. WORKING CAPITAL

The Directors, after due and careful enquiry, are of the opinion that taking into account the existing cash and bank balances, internal resources, available credit facilities and also the effect of the Acquisition, the Enlarged Group has sufficient working capital for its present requirements and for at least 12 months from the date of publication of this circular in the absence of unforeseeable circumstances.

4. FINANCIAL AND TRADING PROSPECT OF THE ENLARGED GROUP

At present, the Group is principally is principally engaged in the sale and distribution of natural gas and liquefied petroleum gas (collectively referred to as gas fuel) in the PRC including the sales of LPG in bulk and cylinders, the provision of piped gas fuel, construction of gas pipelines, the operation of city gas pipeline network, the sale of LPG and natural gas household appliances and lottery agency and equipment supply.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Piped gas fuel business

Compared with the other major fossil energies, namely, petroleum and coal, natural gas is less polluting, with the least emission of carbon dioxide. Hence, natural gas plays a major role in the energy consumption of developed countries in America and Europe. Abundant coal resources, along with scarce natural gas reserve, have led to the stagnant development of natural gas in PRC. Towards the 21st century, the PRC government intended to popularise natural gas in major cities, in response to the increased awareness of reducing pollution, energy saving, and reducing emission, as well as its recognition of transformation in economic growth pattern. To meet the soaring demand, the PRC government scales up domestic exploration and exploitation of natural gas, and seeks multiple channels to import natural gas. In recent years, China has achieved great development but low penetration rate of natural gas. During the period under the execution of the plan of “Twelfth Five Year”, the PRC government will aggressively commit itself on the application of natural gas. As expected, the percentage of natural gas will raise from 4% to 8% in the energy consumption by 2015. It will result in annual production of natural gas of 260 billion m[3] . The Group will solidify and explore the markets in the regions where our piped gas fuel business is located, and further enhance our service standard. It is believed that the piped gas fuel business of the Group will step forward during the upcoming years.

LPG business

In recent years the Group has been striving to develop LPG, the business scope of which is mainly located in Yunnan Province, Guizhou Province, and Huaihua City, Hunan Province. Natural resources are scarce in these areas while LPG serves as one of the dominant energies. For the development of LPG business, the Group explores stable supply of gas resources through multiple channels, so as to enhance transportation capacity of the Group and intensively expand LPG storage of the Group. Having experienced four years of endeavors, the Group achieved breakthroughs in all aspects of the LPG market. Meanwhile, after benefiting from the acquisition of equity interest in Southwest Panva and Yunnan Panva, the Group’s market share in the southwestern region of China, including Yunnan Province and Guizhou Province, has been increased. And our role in these regions has become increasingly important. In the future, the Group will extend its reputation among its vast customer base; and expand its market presence by intensively focusing on the construction of retailer market, expansion of retailer networks, and perfection of service quality.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Lottery agency business

Upon Completion, the results of the Target Group will be consolidated to the accounts of the Group. According to the statistics published by the Ministry of Finance of China, the nationwide lottery sales in 2010 rose by RMB33.770 billion or 25.5% to RMB166.248 billion, of which the welfare lottery sales increased by RMB21.197 billion or 28.0% to RMB96.802 billion. In the end of September 2010, the Ministry of Finance implemented “Interim Administrative Measures for Telephone Lottery Sales” and “Interim Administrative Measures for Internet Lottery Sales”, representing significant breakthrough in the marketing channel of the lotteries where telemarketing and internet marketing facilitate lottery purchase activities while promoting new types of lotteries suitable for telemarketing and internet marketing. The lottery business of Shenzhen Le Cai was approved by the Ministry of Finance and the Welfare Lottery Issuing Centre. Followed by the completion of the acquisition of Target Group, the Group will capture the great opportunities arising from the fast-growing lottery market in the PRC, and will promptly commence various lottery businesses of Shenzhen Le Cai, so as to explore the market share with our best effort. As we believed, the prospects of the Group’s lottery business will be very board in the future. The smooth beginning of various lottery businesses will generate sufficient cash flow and great investment returns for the Group.

Looking ahead, the Group will maintain the constant development of the piped gas fuel business, aggressively explore the of LPG market, and proactively commence various lottery businesses and expand the market share with our best effort, so as to maximize the investment returns for the shareholders and investors as a whole.

5. MATERIAL ADVERSE CHANGE

Save as disclosed in the annual report of the Company for the year ended 31 March 2011, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 March 2011 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

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APPENDIX III ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

The following is the text of a report, prepared for the purpose of inclusion in this circular, received from the independent reporting accountants of the Company, Shinewing (HK) CPA Limited, Certified Public Accountants.

==> picture [109 x 61] intentionally omitted <==

==> picture [104 x 51] intentionally omitted <==

12 August 2011

The Directors

Chinese People Holdings Company Limited Unit 2111, 21/F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong

Dear Sirs,

We set out below our report on the financial information regarding Grand Destiny Group Limited (“Target Company”) and its subsidiary (hereinafter collectively referred to as the “Grand Destiny Group”) which comprises the consolidated statements of financial position of Grand Destiny Group as at 31 March 2009, 31 March 2010 and 31 March 2011, the consolidated statements of comprehensive income, the consolidated statements of changes in equity and consolidated statements of cash flows for the years ended 31 March 2009, 31 March 2010 and 31 March 2011 (the “Relevant Periods”) and notes thereto (the “Financial Information”), for inclusion in the circular dated 12 August 2011 (the “Circular”) issued by Chinese People Holdings Company Limited (the “Company”) in connection with the proposed acquisition of the entire interests of Target Company (the “Proposed Acquisition”). Details of the Proposed Acquisition are set out in the Circular.

Target Company was incorporated in the British Virgin Islands (“BVI”) on 18 December 2007 with limited liability. Target Company acted as an investment holding company. The registered office of Target Company is Quastisky Building, P.O. box 4389, Road Town, Tortola, BVI.

Particulars of Target Company’s subsidiary are set out below:

	Place and date of
	establishment/				Fully paid	Principal
Name	Operation		31 March		registered capital	activities
		2009	2010	2011
北京中民永恒投資	The People’s Republic	–	100%	100%	RMB12,334,000	Not yet
咨詢有限公司	of China					commence
(Beijing Zhongmin	(the “PRC”),					business
Yongheng Investment	8 September 2009
Consultant Limited)*
(“Zhongmin Yongheng”)

– 78 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

Target Company has adopted 31 March as the financial year end date. No statutory audited financial statements have been prepared for Target Company since its date of incorporation as there are no statutory requirements for it to prepare the audited financial statements.

Zhongmin Yongheng has adopted 31 December as the financial year end date. The statutory financial statements of Zhongmin Yongheng for the two years ended 31 December 2009 and 2010 were prepared in accordance with the relevant accounting principles and financial regulations applicable to enterprises established in the PRC and were audited by the following certified public accountants registered in the PRC.

Name of the Company	Financial period	Name of auditor
Zhongmin Yongheng	For the period from 8 September	北京嘉潤會計師事務所
	2009 to 31 December 2009	有限公司
		Beijing Gentlewind Certified
		Public Accountants Co., Ltd.*
	For the year ended 31 December	北京中瑞誠會計師事務所
	2010	有限公司
		Beijing Zhong Rui Cheng
		Certified Public Accountants
		Co., Ltd.*

For identification purpose

For the purpose of this report, the directors of Target Company have prepared the consolidated financial statements of Grand Destiny Group for the Relevant Periods in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) for the Relevant Periods (the “Underlying Financial Statements”). We have carried out independent audit procedures on the Underlying Financial Statements in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information of Grand Destiny Group for the Relevant Periods as set out in this report have been prepared by the directors of Target Company based on the Underlying Financial Statements. No adjustments are considered necessary to adjust the Underlying Financial Statements for the Relevant Periods for the preparation of the Financial Information and we consider it is appropriate for the purpose of preparing our report for inclusion in the Circular. We have examined the Financial Information and have carried out such additional procedures as considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountants” issued by the HKICPA.

– 79 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

The directors of Target Company are responsible for the preparation of the Underlying Financial Statements and the Financial Information which give a true and fair view. It is fundamental that appropriate accounting policies are selected and applied consistently. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on examination, on the Financial Information and to report our opinion to you.

OPINION

In our opinion, the Financial Information, for the purpose of this report, give a true and fair view of Grand Destiny Group’s state of affairs as at 31 March 2009, 2010 and 2011 and of the results and cash flows for each of the Relevant Periods.

– 80 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

A. FINANCIAL INFORMATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

NOTES Turnover 8 Bank interest income Administrative expenses Loss before tax 10 Income tax expense 11 Loss for the year Exchange differences arising from retranslation and other comprehensive expense for the year Total comprehensive expense for the year	Years ended 31 March 2009 2010 2011 HK$’000 HK$’000 HK$’000 – – – – 1 7 – (295) (1,073) – (294) (1,066) – – – – (294) (1,066) – 50 534 – (244) (532)

– 81 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

A. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Notes CURRENT ASSETS Other receivables Bank balances and cash 13 CURRENT LIABILITIES Other payables 14 Amount due to immediate holding company 14 NET CURRENT LIABILITIES CAPITAL AND RESERVES Share capital 15 Reserves Capital deficiency	2009 HK$’000 – – – – – – – – – –	As at 31 March 2010 HK$’000 – 13,781 13,781 – 14,025 14,025 (244) – (244) (244)	2011 HK$’000 121 13,134 13,255 14,031 – 14,031 (776) – (776) (776)

– 82 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

A. FINANCIAL INFORMATION

STATEMENT OF FINANCIAL POSITION

NOTES NON-CURRENT ASSET Interests in a subsidiary 12 CURRENT ASSET Bank balance 13 CURRENT LIABILITIES Other payables 14 Amount due to immediate holding company 14 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES CAPITAL AND RESERVE Share capital 15 Reserve 16 Capital deficiency	2009 HK$’000 – – – – – – – – – –	As at 31 March 2010 HK$’000 14,000 1 – 14,025 14,025 (14,024) (24) – (24) (24)	2011 HK$’000 14,000 1 14,031 – 14,031 (14,030) (30) – (30) (30)

– 83 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

A. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

At 1 April 2008 Loss for the year and total comprehensive income for the year At 31 March 2009 and 1 April 2009 Loss for the year and total comprehensive income (expense) for the year At 31 March 2010 and 1 April 2010 Loss for the year and total comprehensive income (expense) for the year At 31 March 2011	Share capital HK$’000 – – – – – – –	Exchange reserve HK$’000 – – – 50 50 534 584	Accumulated losses HK$’000 – – – (294) (294) (1,066) (1,360)	Total HK$’000 – – – (244) (244) (532) (776)

– 84 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

A. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Operating activities
Loss before taxation
Adjustments for:
Interest income
Operating cash flows before
movements in working capital
Increase in other receivables
Increase in other payables
Net cash used in operating activities
Net cash generated from investing
activity
Interest received
Net cash generated from financing
activity
Increase in amount due to
immediate holding company
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents at the
beginning of the year
Effect of foreign currency rate
changes
Cash and cash equivalents at the
end of the year, represented by
bank balances and cash

Years ended 31 March
2009
2010
2011
HK$’000
HK$’000
HK$’000
–
(294)
(1,066)
–
(1)
(7)
–
(295)
(1,073)
–
–
(121)
–
–
6
–
(295)
(1,188)
–
1
7
–
14,025
–
–
13,731
(1,181)
–
–
13,781
–
50
534
–
13,781
13,134

– 85 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

B. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION

During the Relevant Periods, Target Company and its subsidiary (hereinafter collectively referred to as the “Grand Destiny Group”) did not commence business during the Relevant Periods.

In the opinion of the directors of Target Company, the parent and ultimate holding company of Target Company is the Company for the year ended 31 March 2009 and 2010. On 31 March 2011, the Company entered into an agreement to dispose of its entire interest in Target Company to Yongheng Development Corporation Limited (“Yongheng Development”) (the “Disposal”). Upon the completion of the Disposal and up to the date of this report, Yongheng Development became the parent and ultimate holding company of Target Company.

The registered office of the Company is situated at Quastisky Building, P.O. box 4389, Road Town, Tortola, British Virgin Islands and the principal of business of the Company is Unit 2, Tower A, 5/F, New Mandarin Plaza, No. 14 Science Museum Road, Tsimshatsui, Kowloon, Hong Kong.

The Financial Information is presented in Hong Kong dollars (“HK$”) and the directors of Target Company consider this presentation currency is more useful for the investor of the Company which presents its financial statements in HK$. The functional currency of Grand Destiny Group is Renminbi (“RMB”).

2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

In preparing the Financial Information of Target Company, the directors of Target Company has given careful consideration of the Target Company in light of its net current liabilities and net liabilities of approximately HK$776,000 as at 31 March 2011. Having considered the undertaking from Yongheng Development, the ultimate holding company of Target Company which has agreed to provide financial support in the foreseeable future, the directors of Target Company is satisfied that Target Company will be able to meet in full its financial obligations as they fall due for the foreseeable future. Accordingly, the Underlying Financial Statements have been prepared on a going concern basis.

– 86 –

APPENDIX III ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

3. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”)

Throughout the Relevant Periods, Grand Destiny Group has applied all of the HKFRSs issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are relevant to its operations and effective for the Relevant Periods.

At the date of this report, the HKICPA has issued the following new and revised standards, amendments and interpretations that have been issued but are not yet effective. Grand Destiny Group has not early applied these new and revised standards, amendments and interpretations.

HKFRSs (Amendments)	Improvements to HKFRSs 2010 except for the
	amendments to HKFRS 3 (Revised in 2008),
	HKFRS 7, HKAS 1 and HKAS 28_1_
HKFRS 1 (Amendments)	Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters_2_
HKFRS 1 (Amendment)	Severe Hyperinflation and Removal of Fixed
	Dates for First-time Adopters_4_
HKFRS 7 (Amendments)	Disclosures – Transfers of Financial Assets_4_
HKFRS 9	Financial Instruments_7_
HKFRS 10	Consolidated Financial Statements_7_
HKFRS 11	Joint Arrangements_7_
HKFRS 12	Disclosure of Interests in Other Entities_7_
HKFRS 13	Fair Value Measurement_7_
Hong Kong Accounting Standard	Presentation of Financial Statements_6_
(“HKAS”) 1 (Revised)
HKAS 12 (Amendments)	Deferred Tax: Recovery of Underlying Assets_5_
HKAS 19 (2011)	Employee Benefits_7_
HKAS 24 (Revised)	Related Party Disclosures_3_
HKAS 27 (2011)	Separate Financial Statements_7_
HKAS 28 (2011)	Investments in Associates and Joint Ventures_7_
HK(IFRIC) – Int 14 (Amendments)	Prepayments of a Minimum Funding
	Requirement_3_
HK(IFRIC) – Int 19	Extinguishing Financial Liabilities with Equity
	Instruments_2_

1 Effective for annual periods beginning on or after 1 July 2010 or 1 January 2011, as appropriate.
2 Effective for annual periods beginning on or after 1 July 2010.
3 Effective for annual periods beginning on or after 1 January 2011. 4 Effective for annual periods beginning on or after 1 July 2011.
5 Effective for annual periods beginning on or after 1 January 2012.
6 Effective for annual periods beginning on or after 1 July 2012.
7 Effective for annual periods beginning on or after 1 January 2013.

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ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

HKFRS 9 Financial Instruments issued in November 2009 and amended in October 2010 introduces new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition.

HKFRS 9 requires all recognised financial assets that are within the scope of HKAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.
The most significant effect of HKFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under HKFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under HKAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognised in profit or loss.

HKFRS 9 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted.

The directors of the Target Company anticipate that HKFRS 9 that will be adopted in the Grand Destiny Group’s consolidated financial statements for the annual period beginning 1 January 2013 and that the application of the new standard will have a significant impact on amounts reported in respect of the Grand Destiny Group’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

HKAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party and simplifies disclosures for government-related entities.

The disclosure exemptions introduced in HKAS 24 (as revised in 2009) do not affect Grand Destiny Group because Grand Destiny Group is not a government-related entity.

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ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

The directors of Target Company anticipate that the adoption of the other new and revised standards, amendments and interpretations will have no material impact on the results and the financial position of Grand Destiny Group.

4. SIGNIFICANT ACCOUNTING POLICIES

The Financial Information has been prepared on the historical cost basis, as explained in the accounting policies set out below.

The Financial Information has been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. These policies have been consistently applied throughout the Relevant Periods and are materially consistent with the accounting policies adopted by the Target Company.

Basis of consolidation

The Financial Information incorporates the financial statements of Target Company and entity controlled by Target Company (its subsidiary). Control is achieved where Target Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiary to bring their accounting policies into line with those used by other members of Grand Destiny Group.

All significant intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Investment in a subsidiary

Interests in a subsidiary is included in the statement of financial position of the Target Company at cost less any identified impairment loss. The result of the subsidiary is accounted on the basic of dividends received and receivable.

– 89 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Grand Destiny Group as lessee

Operating lease payments are recognised as an expense on a straight-line basis over the term of the relevant lease. Benefit received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease terms on a straight-line basis.

Cash and cash equivalents

Bank balances and cash in the consolidated statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits as defined above.

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction cost that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit and loss are recognised immediately in profit or loss.

Financial assets

Grand Destiny Group’s financial assets are loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

– 90 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the Relevant Periods. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including other receivables and bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).

Impairment loss on financial assets

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected.

For all other financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
breach of contract, default or delinquency in interest or principal payments; or
it is becoming probable that the borrower will enter bankruptcy or financial re-organisation; or
the disappearance of an active market for that financial market because of financial difficulties.

– 91 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity instruments

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.

Target Company’s financial liabilities are generally classified as other financial liabilities.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the Relevant Periods. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Interest expense is recognised on an effective interest basis.

Other financial liabilities

Other financial liabilities including amount due to immediate holding company and other payables are subsequently measured at amortised cost, using the effective interest method.

– 92 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

Equity instruments

Equity instruments issued by the Target Company are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Grand Destiny Group has transferred substantially all the risks and rewards of ownership of the financial assets.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit and loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes items that are never taxable or deductible. The Grand Destiny Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profit will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

– 93 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

Deferred tax liabilities are recognised for taxable temporary differences arising on investment in subsidiary, except where the Grand Destiny Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Grand Destiny Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively.

Revenue recognition

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period.

– 94 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Grand Destiny Group’s foreign operations are translated into the presentation currency of the Grand Destiny Group (i.e. Hong Kong dollars) at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at the average exchange rates for the year. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (the exchange reserve).

5. CRITICAL ACCOUNTING JUDGEMENTS

In the application of the Grand Destiny Group’s accounting policies, which are described in Note 4, the directors of Target Company are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The underlying assumptions are reviewed on an ongoing basis.

Critical judgements in applying the entity’s accounting policies

The followings are the critical judgements, apart from those involving estimations (see below), that the directors of the Target Company have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the Financial Information.

Going concern basis

The assessment of the going concern assumptions involve making judgement by the directors of the Target Company, at a particular point of time, about the future outcome of events or conditions which are inherently uncertain. The directors of Target Company consider that the Grand Destiny Group and Target Company have the ability to continue as going concern an the major events or conditions, which may rise to business risks, that individually or collectively may cast significant doubt about the going concern assumption set out in Note 2.

6. CAPITAL RISK MANAGEMENT

Grand Destiny Group manages its capital to ensure that Grand Destiny Group will be able to continue as a going concern while maximising the return to shareholders through optimisation of the debt and equity balance.

– 95 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

The capital structure of Grand Destiny Group consists of cash and cash equivalent and equity attributable to owners of Grand Destiny Group, comprising issued paid-up capital and accumulated losses as disclosed in Note 15 and the consolidated statement of change in equity respectively.

The directors of Grand Destiny Group review the capital structure on a regular basis. As a part of this review, the directors of Grand Destiny Group considers the cost of capital and the risks, and to adjust Grand Destiny Group’s capital structure through raise of new capital and new loans. No changes were made in the objective and overall strategy during the Relevant Periods.

7. FINANCIAL INSTRUMENTS

(a) Categories of financial instruments

The carrying amounts of each of the following categories of financial assets and financial liabilities at the end of each reporting period are set out as follows:

Grand Destiny Group

Financial assets Loans and receivables (including bank balances and cash) Financial liabilities Financial liabilities at amortised cost	2009 HK$’000 – –	As at 31 March 2010 HK$’000 13,781 14,025	2011 HK$’000 13,255

			14,031

– 96 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

Target Company

Financial assets Loans and receivables (including bank balance) Financial liabilities Financial liabilities at amortised cost	2009 HK$’000 – –	As at 31 March 2010 HK$’000 1 14,025	2011 HK$’000 1

			14,031

(b) Financial risk management objectives and policies

Grand Destiny Group’s major financial instruments include other receivables, bank balances and cash, amount due to immediate holding company and other payables. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (interest risk and foreign currency risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Interest rate risk

The Grand Destiny Group’s cash flow interest rate risk relates primarily to variable-rate bank deposits (see Note 13 for details of these deposits). It is Grand Destiny Group’s policy to keep its bank deposits at floating rate of interests so as to minimise the fair value interest rate risk.

The sensitivity analysis below has been determined based on the exposure to interest rates for non-derivative instruments at the end of the reporting period. A 50 basis point (2010: 50 basis point; 2009: 50 basis point) increase or decrease in interest rate is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

– 97 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

If interest rates had been 50 basis points (2010: 50 basis points; 2009: 50 basis points) higher/lower and all other variables were held constant, the Grand Destiny Group’s post-tax loss for the year ended 31 March 2011 would decrease/ increase by approximately HK$66,000 (2010: post-tax loss for the year decrease/ increase by approximately HK$69,000; 2009: Nil). This is mainly attributable to the Grand Destiny Group’s exposure to interest rates on its variable rate bank deposits.

Foreign currency risk

Foreign currency risk refers to the risk associated with movements in foreign currency rates which will affect the Grand Destiny Group and Target Company’s financial results and its cash flow. The management considers the Grand Destiny Group is not exposed to significant foreign currency risk as the majority of its operations and transactions are in the PRC with their functional currency of RMB. Grand Destiny Group and Target Company currently do not have a foreign currencies hedging policy in respect of foreign currency exposure. Management considers the Grand Destiny Group and Target Company’s exposure to currency risk is minimal. However, management monitors the related foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

Credit risk

For the Relevant Periods, the Grand Destiny Group’s maximum exposure to credit risk which will cause a financial loss to the Grand Destiny Group due to the failure to discharge an obligation by the Counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position.

The credit risk on liquid fund is limited because the counterparties are banks with high credit rating.

Liquidity risk

Grand Destiny Group and Target Company have net current liabilities and capital deficiency as at 31 March 2010 and 2011. Grand Destiny Group and Target Company are exposed to liquidity risk if this is not able to raise sufficient funds to meet its financial obligations when they fall due. To manage the liquidity risk, Grand Destiny Group and Target Company monitor cash level by providing a level of cash and cash equivalent considered adequate by the management to finance Grand Destiny Group and Target Company’s operations.

– 98 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

All financial liabilities are non-interest bearing and their maturity date are on demand or within one year.

(c) Fair value of financial instruments

The fair value of financial assets and financial liabilities with standard terms and conditions and traded in active liquid markets are determined with reference to quoted market bid prices and ask prices respectively.

The fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The directors of the Grand Destiny Group and Target Company consider that the fair values of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate to their corresponding carrying amounts due to their short-term maturities.

8. TURNOVER

Grand Destiny Group did not generate any turnover during the Relevant Periods.

No business analysis and segment reporting information such as segment revenue, results, assets, liabilities and other information are presented as the Grand Destiny Group did not commence business during the Relevant Periods.

9. DIRECTOR’S EMOLUMENTS AND EMPLOYEES’ EMOLUMENTS

(a) Director’s emoluments

During the Relevant Periods, no emoluments and no retirement benefit scheme contributions were paid or payable to or for the benefit of the director of the Grand Destiny Group. There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

(b) Employees’ emoluments

No staff was employed by Grand Destiny Group during the Relevant Periods.

(c) During the Relevant Periods, no emoluments were paid by the Grand Destiny Group to the director or employee as an inducement to join or upon joining the Grand Destiny Group or as compensation for loss of office.

– 99 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

10. LOSS FOR THE YEAR

Loss for the year has been arrived at after charging: Auditor’s remuneration_(Note)_ Operating lease rentals in respect of rented premises	Years ended 31 March 2009 2010 2011 HK$’000 HK$’000 HK$’000 – – – – 227 242

Note: Auditor’s remuneration for the Relevant Periods was borne by the ultimate holding company.

11. TAXATION

No provision for Hong Kong Profits Tax had been provided for the Relevant Periods as Grand Destiny Group had no assessable profits for the Relevant Periods.

Under the Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”) and Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries is 25% for both years.

Loss before tax Tax calculated at the statutory tax rate of 25% (2010: 25%; 2009: 25%) Tax effect of tax loss not recognised Income tax expense for the year	Years ended 31 March 2009 2010 2011 HK$’000 HK$’000 HK$’000 – (294) (1,066) – (74) (266) – 74 266 – – –	Years ended 31 March 2009 2010 2011 HK$’000 HK$’000 HK$’000 – (294) (1,066) – (74) (266) – 74 266 – – –

		(266) 266
		–

– 100 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

As at 31 March 2009, 2010 and 2011, Grand Destiny Group has unused tax losses of approximately nil, HK296,000 and HK$1,360,000 respectively available to offset against future profits. No deferred tax asset has been required in respect of such losses due to the unpredictability of future profit streams.

12. INTERESTS IN A SUBSIDIARY

Target Company

Unlisted shares, at cost	2009 HK$’000 –	As at 31 March 2010 HK$’000 14,000	2011 HK$’000 14,000

13. BANK BALANCES AND CASH

All the bank balances and cash are denominated in RMB and deposited with banks in the PRC. The conversion of these RMB denominated balances into foreign currencies is subject to the rules and regulations of foreign exchange control promulgated by the PRC government.

Bank balances bear interests at the prevailing market interest rate during the Relevant Periods.

14. AMOUNT DUE TO IMMEDIATE HOLDING COMPANY/OTHER PAYABLES

The balance represented the amount due to the Company and was unsecured, interest-fee and repayable on demand. Upon the completion of the Disposal, the balance was reclassified as other payables.

15. SHARE CAPITAL

	Number of
	shares	Amount
		HK$
Ordinary shares of USD1 each
Aurthorised, issued and fully paid:
On 1 April 2008, at 31 March 2009, at 1 April
2009, at 31 March 2010, at 1 April 2010, and
at 31 March 2011	1	8

– 101 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

16. RESERVE

At 1 April 2008 Loss for the year and total comprehensive expense for the year At 31 March 2009 and 1 April 2009 Loss for the year and total comprehensive expense for the year At 31 March 2010 and 1 April 2010 Loss for the year and total comprehensive expense for the year At 31 March 2011	Accumulated losses HK$’000 – – – (24) (24) (6) (30)

17. RELATED PARTY TRANSACTIONS

Besides the details disclosed elsewhere in the Financial Information, other transactions with related parties during the Relevant Periods are as follows:

Compensation to key management personnel

The directors consider they are the only key management personnel of Target Company and no remuneration has been paid to them during the Relevant Periods.

– 102 –

ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

18. OPERATING LEASE COMMITMENTS

As lessee

Grand Destiny Group leases certain of its office properties under operating lease arrangements. Leases for properties are negotiated for terms ranging from one to three years. At end of each reporting period, Grand Destiny Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	2009 HK$’000 – – –	As at 31 March 2010 HK$’000 – – –	2011 HK$’000 181 341
			522

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ACCOUNTANTS’ REPORT ON THE GRAND DESTINY GROUP

APPENDIX III

C. EVENTS AFTER THE REPORTING PERIOD

On 8 May 2011, Zhongmin Yongheng (being the wholly owned subsidiary of Target Company) and Yongheng Development, entered into a sale and purchase agreement, pursuant to which Yongheng Development agreed to dispose of 60% of equity interest of Shenzhen Yongheng Le Cai Technology Development Limited at a consideration of RMB42,000,000 (approximately to HK$49,770,000) to Zhongmin Yongheng. This transaction was completed on 8 May 2011. The transaction would be accounted for as combination of business under common control by applying the principles of merger accounting in accordance with the Accounting Guideline 5 “Merger Accounting under Common Control Combination” issued by the HKICPA since the directors of Target Company consider that Zhongmin Yongheng and Shenzhen Yongheng Le Cai Technology Development Limited are under common control of Yang Song Sheng. Details of the consideration transferred, the asset acquired and liabilities assumed, on the date of completion of the transaction, are set out below. The acquiree’s carrying amount at the date of acquisition which is extracted from the management account in respect of Shenzhen Yongheng Le Cai Technology Development Limited.

Net identifiable assets of the subsidiary acquired: Plant and equipment Other receivables and prepayments Amounts due from fellow subsidiaries Amount due from ultimate holding company Amount due from a director Bank balances and cash Other payables	Acquiree’s carrying amount at the date of acquisition HK$’000 2,870 638 65,576 20,721 6,171 33,530 (205) 129,301

D. SUBSEQUENT FINANCIAL STATEMENTS

No statutory audited financial statements have been prepared by Grand Destiny Group in respect of any period subsequent period to 31 March 2011.

SHINEWING (HK) CPA Limited

Certified Public Accountants

Pang Wai Hang

Practising Certificate Number: P05044

Hong Kong

– 104 –

APPENDIX IV ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

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==> picture [104 x 51] intentionally omitted <==

12 August 2011

The Directors

Chinese People Holdings Company Limited

Unit 2111, 21/F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong

Dear Sirs,

We set out below our report on the financial information regarding Shenzhen Yongheng Le Cai Technology Development Limited (“Shenzhen Le Cai”) which comprises the statements of financial position of Shenzhen Le Cai as at 31 March 2009, 31 March 2010 and 31 March 2011, the statements of comprehensive income, the statements of changes in equity and statements of cash flows for the period from 10 December 2008 (date of establishment) to 31 March 2009 and for two years ended 31 March 2011 (the “Relevant Periods”) and notes thereto (the “Financial Information”), for inclusion in the circular dated 12 August 2011 (the “Circular”) issued by Chinese People Holdings Company Limited (the “Company”) in connection with the proposed acquisition of the entire interests of Grand Destiny Group Limited (the “Proposed Acquisition”). Details of the Proposed Acquisition are set out in the Circular.

Shenzhen Le Cai was established in the People’s Republic of China (the “PRC”) on 10 December 2008 as a company with limited liability. The address of the registered office is at Room 4506, 45th Floor, Tower A, Shen Fang Square, Ren Min Nan Road, Lo Wu District, Shenzhen. Shenzhen Le Cai did not commence business during the Relevant Periods.

The statutory finanicial statements of Shenzhen Le Cai for the two years ended 31 December 2009 and 2010 were prepared in accordance with the relevant accounting principles and financial regulations applicable to enterprises established in the PRC and were audited by the following certified public accountants registered in the PRC.

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ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Financial periods

Name of auditor

For the year ended 31 December 2009

深圳市長城會計師事務所有限公司

Shenzhen Great Wall CPA Limited*

For the year ended 31 December 2010

中喜會計師事務所有限責任公司

Zhong Xi CPA Limited*

For identification purpose only

For the purpose of this report, the directors of Shenzhen Le Cai have prepared the financial statements of Shenzhen Le Cai for the Relevant Periods in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) for the Relevant Periods (the “Underlying Financial Statements”). We have carried out independent audit procedures on the Underlying Financial Statements in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information of Shenzhen Le Cai for the Relevant Periods as set out in this report have been prepared by the directors of Shenzhen Le Cai based on the Underlying Financial Statements. No adjustments are considered necessary to adjust the Underlying Financial Statements for the Relevant Periods for the preparation of the Financial Information and we consider it is appropriate for the purpose of preparing our report for inclusion in the Circular. We have examined Financial Information and have carried out such additional procedures as considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountants” issued by the HKICPA.

The directors of Shenzhen Le Cai are responsible for the preparation of the Underlying Financial Statements and the Financial Information which give a true and fair view. It is fundamental that appropriate accounting policies are selected and applied consistently. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on examination, on the Financial Information and to report our opinion to you.

OPINION

In our opinion, the Financial Information, for the purpose of this report, give a true and fair view of Shenzhen Le Cai’s state of affairs as at 31 March 2009, 2010, 2011 and of the results and cash flows for each of the Relevant Periods.

– 106 –

APPENDIX IV ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

A. FINANCIAL INFORMATION

STATEMENT OF COMPREHENSIVE INCOME

NOTES Turnover 7 Bank interest income Administrative expenses Loss before tax 8 Income tax expense 11 Loss for the period/year Exchange differences arising from retranslation and other comprehensive income for the period/year Total comprehensive expense for the period/year	10 December 2008 (date of establishment) to 31 March 2009 HK$’000 – 5 (2,064) (2,059) – (2,059) 58 (2,001)	Year ended 31 March 2010 2011 HK$’000 HK$’000 – – 493 496 (6,696) (10,381) (6,203) (9,885) – – (6,203) (9,885) 312 5,186 (5,891) (4,699)

– 107 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

STATEMENTS OF FINANCIAL POSITION

NOTES NON-CURRENT ASSET Plant and equipment 12 CURRENT ASSETS Other receivables and prepayments Amounts due from fellow subsidiaries 13 Amount due from ultimate holding company 13 Amount due from a director 14 Bank balances and cash 15 CURRENT LIABILITY Other payables NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITY CAPITAL AND RESERVES Paid-up capital 16 Reserves Total equity	2009 HK$’000 31 – 12,491 – 32 2,430 14,953 11 14,942 14,973 16,974 (2,001) 14,973	As at 31 March 2010 HK$’000 2,892 605 10,253 3,418 3,866 56,303 74,445 183 74,262 77,154 85,046 (7,892) 77,154	2011 HK$’000 2,917 638 65,576 20,721 6,171 33,530 126,636 205 126,431 129,348 141,939 (12,591) 129,348

– 108 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

STATEMENTS OF CHANGES IN EQUITY

Capital injection from shareholders on 10 December 2008 (date of establishment) Loss for the period and total comprehensive income (expense) for the period At 31 March 2009 and 1 April 2009 Capital injection Loss for the year and total comprehensive income (expense) for the year At 31 March 2010 and 1 April 2010 Capital injection Loss for the year and total comprehensive income (expense) for the year At 31 March 2011	Paid-up capital HK$’000 16,974 – 16,974 68,072 – 85,046 56,893 – 141,939	Exchange reserve HK$’000 – 58 58 – 312 370 – 5,186 5,556	Accumulated losses HK$’000 – (2,059) (2,059) – (6,203) (8,262) – (9,885) (18,147)	Total HK$’000 16,974 (2,001) 14,973 68,072 (5,891) 77,154 56,893 (4,699) 129,348

– 109 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

STATEMENTS OF CASH FLOW

Operating activities Loss before tax Adjustments for: Depreciation of plant and equipment Bank interest income Operating cash flows before movements in working capital Increase in other receivables and prepayments Increase in other payables Net cash used in operating activities Investing activities Interest received Purchase of plant and equipment (Increase) decrease in amounts due from fellow subsidiaries Increase in amount due from ultimate holding company Increase in amount due from a director Net cash used in investing activities Net increase in financing activity Capital injection Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period/year Effect of foreign currency retranslation Cash and cash equivalents at end of the period/year, represented by bank balances and cash	10 December 2008 (date of establishment) to 31 March 2009 HK$’000 (2,059) 1 (5) (2,063) – 11 (2,052) 5 (32) (12,491) – (32) (12,550) 16,974 2,372 – 58 2,430	Year ended 31 March 2010 2011 HK$’000 HK$’000 (6,203) (9,885) 84 568 (493) (496) (6,612) (9,813) (605) (33) 172 22 (7,045) (9,824) 493 496 (2,941) (489) 2,238 (55,323) (3,418) (17,303) (3,834) (2,305) (7,462) (74,924) 68,072 56,893 53,565 (27,855) 2,430 56,303 308 5,082 56,303 33,530

– 110 –

APPENDIX IV ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

B. NOTES TO THE FINANCIAL INFORMATION

1. Corporate information

Shenzhen Le Cai was established in the People’s Republic of China (the “PRC”) on 10 December 2008 as a company with limited liability.

At the date of this report, in the opinion of the directors of Shenzhen Le Cai, its ultimate holding company is Yongheng Development Corporation Limited, a company established in Hong Kong.

The Financial Information is presented in Hong Kong dollars (“HK$”) and the directors of Shenzhen Le Cai consider this presentation currency is more useful for the investor of the Company which presents its financial statements in HK$. The functional currency of Shenzhen Le Cai is Renminbi (“RMB”).

Shenzhen Le Cai did not commence business during the Relevant Periods.

2. Application of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

Throughout the Relevant Periods, Shenzhen Le Cai has applied all of the HKFRSs issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) that are relevant to its operations and effective for the Relevant Periods.

At the date of this report, the HKICPA has issued the following new and revised standards, amendments and interpretations that have been issued but are not yet effective. Shenzhen Le Cai has not early applied these new and revised standards, amendments and interpretations.

HKFRSs (Amendments)	Improvements to HKFRSs 2010 except for the
	amendments to HKFRS 3 (Revised in 2008),
	HKFRS 7, HKAS 1 and HKAS 28_1_
HKFRS 1 (Amendments)	Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters_2_
HKFRS 1 (Amendment)	Severe Hyperinflation and Removal of Fixed Dates for
	First-time Adopters_4_
HKFRS 7 (Amendments)	Disclosures – Transfers of Financial Assets_4_
HKFRS 9	Financial Instruments_7_
HKFRS 10	Consolidated Financial Statements_7_
HKFRS 11	Joint Arrangements_7_
HKFRS 12	Disclosure of Interests in Other Entities_7_

– 111 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

HKFRS 13 Fair Value Measurement [7] Hong Kong Accounting Presentation of Financial Statements [6] Standard (“HKAS”) 1 (Revised) HKAS 12 (Amendments) Deferred Tax: Recovery of Underlying Assets [5] HKAS-19 (2011) Employee Benefits [7] HKAS 24 (Revised) Related Party Disclosures [3] HKAS 27 (2011) Separate Financial Statements [7] HKAS 28 (2011) Investments in Associates and Joint Ventures [7] HK(IFRIC) – Int 14 Prepayments of a Minimum Funding Requirement [3] (Amendments) HK(IFRIC) – Int 19 Extinguishing Financial Liabilities with Equity Instruments [2]

1 Effective for annual periods beginning on or after 1 July 2010 or 1 January 2011, as appropriate.
2 Effective for annual periods beginning on or after 1 July 2010. 3 Effective for annual periods beginning on or after 1 January 2011. 4 Effective for annual periods beginning on or after 1 July 2011. 5 Effective for annual periods beginning on or after 1 January 2012. 6 Effective for annual periods beginning on or after 1 July 2012. 7 Effective for annual periods beginning on or after 1 January 2013.

HKFRS 9 requires all recognised financial assets that are within the scope of HKAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.

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ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

The most significant effect of HKFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under HKFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under HKAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognised in profit or loss.

HKFRS 9 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted.

The directors of the Shenzhen Le Cai anticipate that HKFRS 9 that will be adopted in the Shenzhen Le Cai’s consolidated financial statements for the annual period beginning 1 January 2013 and that the application of the new standard will have a significant impact on amounts reported in respect of the Shenzhen Le Cai’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

HKAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party and simplifies disclosures for government-related entities.

The disclosure exemptions introduced in HKAS 24 (as revised in 2009) do not affect Shenzhen Le Cai because Shenzhen Le Cai is not a government-related entity.

The directors of Shenzhen Le Cai anticipate that the adoption of the other new and revised standards, amendments and interpretations will have no material impact on the results and the financial position of Shenzhen Le Cai.

– 113 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

3. Significant accounting policies

The Financial Information has been prepared on the historical cost basis, as explained in the accounting policies set out below.

Plant and equipment

Plant and equipment are stated at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is provided to write off the cost of items of plant and equipment other than construction in progress over their estimated useful lives using the straight-line method.

Where parts of an item of plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at the end of each of the reporting date.

An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit and loss in the period in which the item is derecognised.

Leasing

– 114 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Shenzhen Le Cai as lessee

Impairment losses on tangible assets

At the end of the reporting period, Shenzhen Le Cai reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.

Where an impairment loss subsequently reverses, the carrying amount of the assets increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately in profit or loss.

Cash and cash equivalents

Bank balances and cash in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less. For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and short-term deposits as defined above.

Financial instruments

Financial assets and financial liabilities are recognised in the statement of financial position when a group entity becomes a party to the contractual provisions of the instrument.

– 115 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Financial assets

Shenzhen Le Cai’s financial assets are classified into loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including other receivables, amounts due from fellow subsidiaries, amount due from ultimate holding company, amount due from a director and bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).

Impairment loss on financial assets

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ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

For all other financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
breach of contract, default or delinquency in interest or principal payment; or
it is becoming probable that the borrower will enter bankruptcy or financial re-organisation; or
the disappear of an active market for that financial market because of financial difficulties.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets. Subsequent recoveries of amounts previously written off are credited to profit or loss.

Financial liabilities and equity

Financial liabilities and equity instruments issued by Shenzhen Le Cai are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Shenzhen Le Cai’s financial liabilities are generally classified into other financial liabilities.

– 117 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant periods. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Interest expense is recognised on an effective interest basis.

Other financial liabilities

Other financial liabilities including other payables are subsequently measured at amortised cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by Shenzhen Le Cai are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and Shenzhen Le Cai has transferred substantially all the risks and rewards of ownership of the financial assets.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

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ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes items that are never taxable or deductible. Shenzhen Le Cai’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantially enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which Shenzhen Le Cai expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively.

Revenue recognition

– 119 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Foreign currencies

In preparing the financial statements of Shenzhen Le Cai, transactions in currencies other than the functional currency of Shenzhen Le Cai (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the year in which they arise. Exchange differences arising on the translation of non-monetary items carried at fair value are included in profit or loss for the period.

For the purposes of presenting the financial statements, the assets and liabilities of the Shenzhen Le Cai are translated into the presentation currency of the Shenzhen Le Cai (i.e. Hong Kong dollars) at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at the average exchange rates for the year. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (the exchange reserve).

Retirement benefits costs

Payments to state-managed retirement benefit schemes are charged as an expense when employees have rendered service entitling them to the contributions.

4. Key sources of estimation uncertainty

In the application of Shenzhen Le Cai’s accounting policies which are described in note 3, the directors of Shenzhen Le Cai are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the relevant periods in which the estimate is revised if the revision affects only that relevant periods, or in the relevant periods of the revision and future periods if the revision affects both current and future relevant periods.

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ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Key sources of estimation uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Depreciation of plant and equipment

Plant and equipment are depreciated on a straight-line basis over their estimated useful lives and after taking into account the estimated residual value. The determination of the useful lives and residual values involve management’s estimation. Shenzhen Le Cai assesses annually the residual value and the useful lives of the plant and equipment and if the expectation differs from the original estimate, such a difference from the original estimates will impact the depreciation in the year and the estimate will be changed in the future period.

5. Capital risk management

Shenzhen Le Cai manages its capital to ensure that Shenzhen Le Cai will be able to continue as a going concern while maximising the return to shareholders through optimisation of the debt and equity balance.

The capital structure of Shenzhen Le Cai consists of cash and cash equivalent and equity attributable to owners of Shenzhen Le Cai, comprising issued paid-up capital and accumulated losses as disclosed in Note 16 and the statement of change in equity respectively.

The directors of Shenzhen Le Cai review the capital structure on a regular basis. As a part of this review, the directors of Shenzhen Le Cai considers the cost of capital and the risks, and to adjust Shenzhen Le Cai’s capital structure through raise of new capital and new loans. No changes were made in the objective and overall strategy during the Relevant Periods.

– 121 –

APPENDIX IV ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

6. Financial instruments

(a) Categories of financial instruments

The carrying amounts of each of the categories of financial instruments as at the end of each reporting period are as follows:

Financial assets Loan and receivables (including bank balances and cash) Financial liabilities Financial liabilities at amortised cost	2009 HK$’000 14,953 11	As at 31 March 2010 HK$’000 74,370 183	2011 HK$’000 126,407

			205

(b) Financial risk management objectives and policies

Shenzhen Le Cai’s major financial instruments comprise other receivables, amounts due from fellow subsidiaries, amount due from ultimate holding company, amount due from a director and bank balances and cash and other payables. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market (interest risk and foreign currency risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The directors of Shenzhen Le Cai manage and monitor these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Interest rate risk

Shenzhen Le Cai’s cash flow interest rate risk relates primarily to variablerate bank deposits (see Note 15 for details of these deposits). It is Shenzhen Le Cai’s policy to keep its bank deposits at floating rate of interests so as to minimise the fair value interest rate risk.

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ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

The sensitivity analysis below has been determined based on the exposure to interest rates for non-derivative instruments at the end of the reporting period. A 50 basis point (2010 and 2009: 50 basis point) increase or decrease in interest rate is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

If interest rates had been 50 basis points (2010 and 2009: 50 basis points) higher/lower and all other variables were held constant, Shenzhen Le Cai’s post-tax loss for the year ended 31 March 2011 would decrease/increase by approximately HK$168,000, post-tax loss for the year decrease/increase by approximately HK$281,000 for the year ended 31 March 2010 and post-tax loss for the year decrease/increase by approximately HK$12,000 for the period ended 31 March 2009. This is mainly attributable to Shenzhen Le Cai’s exposure to interest rates on its variable rate bank deposits.

Foreign currency risk

Foreign currency risk refers to the risk associated with movements in foreign currency rates which will affect Shenzhen Le Cai’s financial results and its cash flow. The management considers Shenzhen Le Cai is not exposed to significant foreign currency risk as the majority of its operations and transactions are in the PRC with their functional currency of RMB. Management considers the Shenzhen Le Cai’s exposure to currency risk is minimal. However, management monitors the related foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

Credit risk

For the Relevant Periods, Shenzhen Le Cai’s maximum exposure to credit risk which cause a financial loss to the Shenzhen Le Cai due to the failure to discharge an obligation by the counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the statement of financial position.

The credit risk on liquid fund is limited because the counterparties are banks with high credit rating.

– 123 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

Liquidity risk

In managing the liquidity risk, Shenzhen Le Cai monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance Shenzhen Le Cai’s operations and mitigate the effects of fluctuations in cash flows.

All financial liabilities are non-interest bearing and their maturity date are on demand or within one year.

(c) Fair value

The fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The directors of the Shenzhen Le Cai consider that the fair values of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate to their corresponding carrying amounts due to their short-term maturities.

7. Turnover

Shenzhen Le Cai did not generate any turnover during the Relevant Periods.

No business analysis and segment reporting information such as segment revenue, results, assets, liabilities and other information are presented as Shenzhen Le Cai did not commence business during the Relevant Periods.

– 124 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

8. Loss for the period/year

Wages and salaries Contributions to retirement benefits scheme Total staff costs (including directors’ remuneration) Depreciation of plant and equipment Auditor’s remuneration Minimum lease payment under operating leases of land and buildings	10 December 2008 (date of establishment) to 31 March 2009 HK$’000 33 1 34 1 – 92	Year ended 31 March 2010 2011 HK$’000 HK$’000 1,105 1,131 26 59 1,131 1,190 84 568 10 16 347 390	Year ended 31 March 2010 2011 HK$’000 HK$’000 1,105 1,131 26 59 1,131 1,190 84 568 10 16 347 390
			1,190 568 16 390

9. Director’s emoluments

The emoluments paid or payable to each of the directors of Shenzhen Le Cai during the Relevant Periods were as follows:

For the period ended 31 March 2009

No directors’ emoluments had been paid or payable to each of the directors for the period ended 31 March 2009.

– 125 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

For the year ended 31 March 2010

Name of the Directors Executive directors: Yang Song Sheng Yang Bai Qing Wang Jun Mo Shi Kang Jin Song*	Fee HK$’000 – – – – – –	Salaries and other benefits HK$’000 582 – 9 – – 591	Retirement benefits scheme contributions HK$’000 5 – 1 – – 6	Total HK$’000 587 – 10 – –
				597

For the year ended 31 March 2011

Name of the Directors Executive directors: Yang Song Sheng Yang Bai Qing Wang Jun Mo Shi Kang Jin Song*	Fee HK$’000 – – – – – –	Salaries and other benefits HK$’000 250 – 82 – – 332	Retirement benefits scheme contributions HK$’000 31 – 6 – – 37	Total HK$’000 281 – 88 – –
				369

For identification purpose only

– 126 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

No directors waived or agreed to waive any emolument paid by Shenzhen Le Cai during the Relevant Periods. No emoluments was paid by Shenzhen Le Cai to any directors as an incentive payment for joining Shenzhen Le Cai as compensation for loss of office during the Relevants Periods.

10. Employees’ emoluments

Of the five individuals with the highest emoluments in Shenzhen Le Cai, Shenzhen Le Cai has identified two (2010: one, 2009: nil) directors whose emoluments are set out in Note 9 above. The emoluments of the remaining three (2010: four, 2009: five) individuals were as follows:

Salaries and other benefits Contributions to retirement benefit scheme	10 December 2008 (date of establishment) to 31 March 2009 HK$’000 34 1 35	Year ended 31 March 2010 2011 HK$’000 HK$’000 356 402 3 2 359 404	Year ended 31 March 2010 2011 HK$’000 HK$’000 356 402 3 2 359 404
			404

The above individuals’ emoluments are within the following band:

Nil to HK$1,000,000	10 December 2008 (date of establishment) to 31 March 2009 HK$’000 5	Year ended 31 March 2010 2011 HK$’000 HK$’000 4 3

No emoluments have been paid by Shenzhen Le Cai to the five highest paid individuals as an inducement to join or upon joining Shenzhen Le Cai, or as compensation for loss of office during the Relevant Periods.

– 127 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

11. Income tax

No provision for Hong Kong Profits Tax had been provided for the Relevant Periods as Shenzhen Le Cai had no assessable profits for the Relevant Periods.

The income tax for the period/year can be reconciled to the loss before tax as follows:

Loss before tax Tax calculated at the statutory tax rate of 25% (2010 and 2009: 25%) Tax effect of tax loss not recognised Income tax expense for the period/year	10 December 2008 (date of establishment) to 31 March 2009 HK$’000 (2,059) (514) 514 –	Year ended 31 March 2010 2011 HK$’000 HK$’000 (6,203) (9,885) (1,551) (2,471) 1,551 2,471 – –

Shenzhen Le Cai had unrecognised tax losses of approximately HK$18,144,000 for the year ended 31 March 2011, approximately HK$8,260,000 for the year ended 31 March 2010 and approximately HK$2,056,000 for the period ended 31 March 2009 available to offset against future profits. No deferred tax asset has been recognised in respect of the unrecognised tax losses due to the unpredictability of future profit streams. Such unrecognised tax losses will be carried forward for five years from respective dates of origination.

– 128 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

12. Plant and equipment

*Cost:* Additions As at 31 March 2009 and 1 April 2009 Exchange realignment Additions As at 31 March 2010 and 1 April 2010 Exchange realignment Additions As at 31 March 2011 *Accumulated depreciation:* Charge for the period As at 31 March 2009 and 1 April 2009 Charge for the year Exchange realignment As at 31 March 2010 and 1 April 2010 Charge for the year Exchange realignment As at 31 March 2011 CARRYING VALUES At 31 March 2009 At 31 March 2010 At 31 March 2011	Leasehold improvement HK$’000 – – 1 138 139 6 283 428 – – 8 1 9 37 1 47 – 130 381	Furniture, fixtures and office equipments HK$’000 32 32 1 562 595 24 206 825 1 1 42 1 44 97 4 145 31 551 680	Motor vehicles HK$’000 – – 5 2,241 2,246 92 – 2,338 – – 34 1 35 434 13 482 – 2,211 1,856	Total HK$’000 32
				32 7 2,941
				2,980 122 489
				3,591
				1
				1 84 3
				88 568 18
				674
				31

				2,892

				2,917

– 129 –

APPENDIX IV ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

The above items of plant and equipment are depreciated at the following rates per annum on a straight-line basis:

Leasehold improvements 20% Furniture, fixtures and office equipments 2.5% – 20% Motor vehicles 12.25%

13. Amounts due from fellow subsidiaries/ultimate holding company

The amounts are unsecured, non-interest bearing and repayable on demand.

14. Amount due from a director

Particulars of amount due from a director disclosed in pursuant to Section 161B of the Hong Kong Companies Ordinance are as follows:

Amount due from a director is as follows:

		31 March
	2009	2010	2011
	HK$’000	HK$’000	HK$’000
Yang Song Sheng	32	3,866	6,171

Maximum amount outstanding during the Relevant Periods

	10 December
	2008 (date of
	establishment)
	to 31 March	Year ended 31 March
	2009	2010	2011
	HK$’000	HK$’000	HK$’000
Yang Song Sheng	278	3,920	6,171

The amount is unsecured, non-interest bearing and repayable on demand.

– 130 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

15. Bank balances and cash

Bank balances bear interests at the prevailing market interest rate during the Relevant Periods.

16. Paid-up capital

Registered capital: At 10 December 2008 (date of establishment), 31 March 2009 and 31 March 2010 Capital injection At 31 March 2011 Paid-up capital: At 10 December 2008 (date of establishment) and 31 March 2009 Capital injection At 31 March 2010 Capital injection At 31 March 2010 and at 31 March 2011	RMB’000 75,000 50,000 125,000 15,000 60,000 75,000 50,000 125,000	HK$’000 85,046 56,893
		141,939

		16,974 68,072
		85,046 56,893
		141,939

Shenzhen Le Cai was established on 10 December 2008 with a registered capital of RMB75,000,000 (equivalent to approximately HK$85,046,000) which has been fully paid up on 10 December 2008 of RMB15,000,000 (equivalent to approximately HK$16,974,000) and 20 July 2009 of RMB60,000,000 (equivalent to approximately to HK$68,072,000).

– 131 –

ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

APPENDIX IV

On 25 March 2010, an extraordinary shareholders’ meeting was held to approve the increase of Shenzhen Le Cai’s registered capital from RMB75,000,000 to RMB125,000,000 (equivalent to approximately HK$141,939,000). On 2 April 2010, the additional capital injection had been completed and verified by 深圳長城會計師事務所有限公司 (Shenzhen Great Wall CPA., Limited).

17. Operating lease commitment

As lessee

Shenzhen Le Cai lease certain of its office properties under operating lease arrangements. Leases of properties are negotiated for terms ranging from one to four years. At end of each reporting period, Shenzhen Le Cai had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	2009 HK$’000 340 – 340	As at 31 March 2010 HK$’000 132 – 132	2011 HK$’000 1,468 4,044
			5,512

18. Related party transactions

Besides the details disclosed elsewhere in the Financial Information, other transactions with related parties during the Relevant Periods are as follow:

Compensation to key management personnel

The remuneration of directors and other members of key management were disclosed in Notes 9 and 10 respectively.

– 132 –

APPENDIX IV ACCOUNTANTS’ REPORT ON SHENZHEN LE CAI

C. EVENTS AFTER THE REPORTING DATE

On 15 May 2011, Shenzhen Le Cai, Yang Song Sheng and Wang Jun entered into a sales and purchase agreement. Pursuant to which Yang Song Sheng and Wang Jun agreed to sell 90% and 10% of equity interest of Shenzhen Yongheng Jin Cai Technology Development Limited at a consideration of RMB49,925,500 (approximately HK$59,808,000) and RMB1,080,000 (approximately HK$1,294,000) respectively to Shenzhen Le Cai.

D. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Shenzhen Le Cai in respect of any period subsequent to 31 March 2011.

SHINEWING (HK) CPA Limited

Certified Public Accountants

Pang Wai Hang

Practising Certificate Number: P05044 Hong Kong

– 133 –

APPENDIX V ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

The following is the text of a letter, prepared for the purpose of inclusion in this circular, received from the independent reporting accountants of the Company, Shinewing (HK) CPA Limited, Certified Public Accountants.

==> picture [109 x 62] intentionally omitted <==

==> picture [104 x 51] intentionally omitted <==

12 August 2011

The Directors

Chinese People Holdings Company Limited

Unit 2111, 21/F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong

Dear Sirs,

We set out below our report on the financial information regarding Shenzhen Yongheng Jin Cai Technology Development Limited (“Shenzhen Jin Cai”) which comprises the statements of financial position of Shenzhen Jin Cai as at 31 March 2011, the statements of comprehensive income, the statements of changes in equity and statements of cash flows for the period from 1 November 2010 (date of establishment) to 31 March 2011 (the “Relevant Period”) and notes thereto (the “Financial Information”), for inclusion in the circular dated 12 August 2011 (the “Circular”) issued by Chinese People Holdings Company Limited (the “Company”) in connection with the proposed acquisition of the entire interests of Grand Destiny Group Limited (the “Proposed Acquisition”). Details of the Proposed Acquisition are set out in the Circular.

Shenzhen Jin Cai was established in the People Republic of China (the “PRC”) with limited liability on 1 November 2010 with a registered capital of RMB10,800,000. Shenzhen Jin Cai was established for the purpose of engaging in the business of computer software and hardware development. Shenzhen Jin Cai did not commence business during the Relevant Period.

The registered office of Shenzhen Jin Cai is Room 4511, 45th Floor, Tower A, Shen Fang Square, Ren Min Nan Road, Lo Wu District, Shenzhen.

– 134 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

Shenzhen Jin Cai has adopted 31 December as the financial year end date. No statutory audited financial statements have been prepared since Shenzhen Jin Cai was only established in 2010 and there are no statutory requirements for it to prepare the audited financial statements during the Relevant Period.

For the purpose of this report, the directors of Shenzhen Jin Cai have prepared the financial statements of Shenzhen Jin Cai for the Relevant Period in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) for the Relevant Period (the “Underlying Financial Statements”). We have carried out independent audit procedures on the Underlying Financial Statements in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information of Shenzhen Jin Cai for the Relevant Period as set out in this report have been prepared by the directors of Shenzhen Jin Cai based on the Underlying Financial Statements. No adjustments are considered necessary to adjust the Underlying Financial Statements for the Relevant Period for the preparation of the Financial Information and we consider it is appropriate for the purpose of preparing our report for inclusion in the Circular. We have examined the Financial Information and have carried out such additional procedures as considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountants” issued by the HKICPA.

The directors of Shenzhen Jin Cai are responsible for the preparation of the Underlying Financial Statements and the Financial Information which give a true and fair view. It is fundamental that appropriate accounting policies are selected and applied consistently. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on examination, on the Financial Information and to report our opinion to you.

OPINION

In our opinion, the Financial Information, for the purpose of this report, give a true and fair view of Shenzhen Jin Cai’s state of affairs as at 31 March 2011 and of the results and cash flows for the Relevant Period.

– 135 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

A. FINANCIAL INFORMATION

STATEMENT OF COMPREHENSIVE INCOME

NOTES Turnover 6 Bank interest income Administrative expenses Loss before tax Income tax expense 8 Loss for the period Exchange differences arising from retranslation and other comprehensive income for the period Total comprehensive income for the period	1 November 2010 (date of establishment) to 31 March 2011 HK$’000 – 59 (93) (34) – (34) 190 156

– 136 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

STATEMENTS OF FINANCIAL POSITION

NOTES CURRENT ASSET Bank balances and cash 9 CURRENT LIABILITY Other payables NET ASSETS CAPITAL AND RESERVES Paid-up capital 10 Reserves Total equity	2011 HK$’000 12,829
	65
	12,764

	12,608 156
	12,764

– 137 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

STATEMENTS OF CHANGES IN EQUITY

Capital injection on 1 November 2010 (date of incorporation) Loss for the period and total comprehensive income (expense) for the period At 31 March 2011	Paid-up capital HK$’000 12,608 – 12,608	Exchange reserve HK$’000 – 190 190	Accumulated loss HK$’000 – (34) (34)	Total HK$’000 12,608 156
				12,764

– 138 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

STATEMENTS OF CASH FLOWS

Operating activities
Loss before taxation
Adjustments for:
Interest income
Operating cash flows before movements in working capital
Increase in other payables
Net cash used in operating activities
Net cash generated from investing activity
Interest received
Net cash generated from financing activity
Capital injection
Net increase in cash and cash equivalents
Effect of foreign currency rate changes
Cash and cash equivalents at the end of the period,
represented by bank balances and cash

1 November
2010 (date of
establishment)
to 31 March
2011
HK$’000
(34)
(59)
(93)
65
(28)
59
12,608
12,639
190
12,829

– 139 –

APPENDIX V ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

B. NOTES TO THE FINANCIAL INFORMATION

1. Corporate information

At the date of this report, the ultimate holding company of Shenzhen Jin Cai is Yongheng Development Corporation Limited, a company incorporated in Hong Kong.

The Financial Information is presented in Hong Kong dollars (“HK$”) and the directors of Shenzhen Jin Cai consider this presentation currency is more useful for the investor of the Company which presents its financial statements in HK$. The functional currency of Shenzhen Jin Cai is Renminbi (“RMB”).

Shenzhen Jin Cai did not commence business during the Relevant Period.

2. Application of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

Throughout the Relevant Period, Shenzhen Jin Cai has applied all of the HKFRSs issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) that are relevant to its operations and effective for the Relevant Period.

At the date of this report, the HKICPA has issued the following new and revised standards, amendments and interpretations that have been issued but are not yet effective. Shenzhen Jin Cai has not early applied these new and revised standards, amendments and interpretations.

HKFRSs (Amendments)	Improvements to HKFRSs 2010 except for the
	amendments to HKFRS 3 (Revised in 2008),
	HKFRS 7, HKAS 1 and HKAS 28_1_
HKFRS 1 (Amendments)	Limited Exemption from Comparative HKFRS 7
	Disclosures for First-time Adopters_2_
HKFRS 1 (Amendment)	Severe Hyperinflation and Removal of Fixed Dates
	for First-time Adopters_4_
HKFRS 7 (Amendments)	Disclosures – Transfers of Financial Assets_4_
HKFRS 9	Financial Instruments_7_
HKFRS 10	Consolidated Financial Statements_7_
HKFRS 11	Joint Arrangements_7_
HKFRS 12	Disclosure of Interests in Other Entities_7_

– 140 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

HKFRS 13 Fair Value Measurement [7] Hong Kong Accounting Presentation of financial statement [6] Standard (“HKAS”) 1 (Revised) HKAS 12 (Amendments) Deferred Tax: Recovery of Underlying Assets [5] HKAS 19 (2011) Employee Benefit [7] HKAS 24 (Revised) Related Party Disclosures [3] HKAS 27 (2011) Separate Financial Statements [7] HKAS 28 (2011) Investments in Associates and Joint Ventures [7] HK(IFRIC) – Int 14 Prepayments of a Minimum Funding Requirement [3] (Amendments) HK(IFRIC) – Int 19 Extinguishing Financial Liabilities with Equity Instruments [2]

1 Effective for annual periods beginning on or after 1 July 2010 or 1 January 2011, as appropriate.
2 Effective for annual periods beginning on or after 1 July 2010. 3 Effective for annual periods beginning on or after 1 January 2011. 4 Effective for annual periods beginning on or after 1 July 2011. 5 Effective for annual periods beginning on or after 1 January 2012. 6 Effective for annual periods beginning on or after 1 July 2012. 7 Effective for annual periods beginning on or after 1 January 2013.

HKFRS 9 requires all recognised financial assets that are within the scope of HKAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods.

– 141 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

The most significant effect of HKFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. Specifically, under HKFRS 9, for financial liabilities that are designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Previously, under HKAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss was recognised in profit or loss.

HKFRS 9 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted.

The directors of the Shenzhen Jin Cai anticipate that HKFRS 9 that will be adopted in the Shenzhen Jin Cai’s financial statements for the annual period beginning 1 January 2013 and that the application of the new standard will have a significant impact on amounts reported in respect of the Shenzhen Jin Cai’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.

HKAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party and simplifies disclosures for government-related entities.

The disclosure exemptions introduced in HKAS 24 (as revised in 2009) do not affect Shenzhen Jin Cai because Shenzhen Jin Cai is not a government-related entity.

The directors of Shenzhen Jin Cai anticipate that the adoption of the other new and revised standards, amendments and interpretations will have no material impact on the results and the financial position of Shenzhen Jin Cai.

– 142 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

3. Significant accounting policies

The Financial Information has been prepared on the historical cost basis, as explained in the accounting policies set out below.

The Financial Information has been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. These policies have been consistently applied consistently applied throughout the Relevant Period and are materially consistent with the accounting policies adopted by the Company.

Leasing

Shenzhen Jin Cai as lessee

Cash and cash equivalents

Financial instruments

Financial assets and financial liabilities are recognised in the statement of financial position when a group entity becomes a party to the contractual provisions of the instrument.

– 143 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

Financial assets

Shenzhen Jin Cai’s financial assets are loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the Relevant Period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).

Impairment loss on financial assets

– 144 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

For all other financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
breach of contract, default or delinquency in interest or principal payments; or
it is becoming probable that the borrower will enter bankruptcy or financial re-organisation; or
the disappearance of an active market for that financial market because of financial difficulties.

Financial liabilities and equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.

Shenzhen Jin Cai’s financial liabilities are generally classified as other financial liabilities.

– 145 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the Relevant Period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Interest expense is recognised on an effective interest basis.

Other financial liabilities

Other financial liabilities including other payables are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by Shenzhen Jin Cai are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Shenzhen Jin Cai has transferred substantially all the risks and rewards of ownership of the financial assets.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred

tax.

– 146 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes items that are never taxable or deductible. Shenzhen Jin Cai’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profit will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Shenzhen Jin Cai expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively.

Revenue recognition

– 147 –

ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

Foreign currencies

For the purposes of presenting the financial statements, the assets and liabilities of the Shenzhen Jin Cai’s foreign operations are translated into the presentation currency of the Shenzhen Jin Cai (i.e. Hong Kong dollars) at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at the average exchange rates for the year. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (the exchange reserve).

4. Capital risk management

Shenzhen Jin Cai manages its capital to ensure that Shenzhen Jin Cai will be able to continue as a going concern while maximising the return to shareholders through optimisation of the debt and equity balance.

The capital structure of Shenzhen Jin Cai consists of cash and cash equivalent and equity attributable to owners of Shenzhen Jin Cai, comprising issued paid-up capital and accumulated losses as disclosed in Note 10 and the statement of change in equity respectively.

The directors of Shenzhen Jin Cai review the capital structure on a regular basis. As a part of this review, the directors of Shenzhen Jin Cai considers the cost of capital and the risks, and adjust Shenzhen Jin Cai’s capital structure through raise of new capital and new loans. No changes were made in the objective and overall strategy during the Relevant Period.

– 148 –

APPENDIX V ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

5. Financial instruments

(a) Categories of financial instruments

The carrying amounts of each of the following categories of financial assets and financial liabilities at the end of reporting period are set out as follows:

Financial assets Loans and receivables (including bank balances and cash) Financial liabilities Financial liabilities at amortised cost	2011 HK$’000 12,829

	65

(b) Financial risk management objectives and policies

Shenzhen Jin Cai’s major financial instruments include bank balances and cash and other payables. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (interest risk and foreign currency risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Interest rate risk

The Shenzhen Jin Cai’s cash flow interest rate risk relates primarily to variable-rate bank deposits (see Note 9 for details of these deposits). It is Shenzhen Jin Cai’s policy to keep its bank deposits at floating rate of interests so as to minimise the fair value interest rate risk.

The sensitivity analysis below has been determined based on the exposure to interest rates for non-derivative instruments at the end of the reporting period. A 50 basis point increase or decrease in interest rate is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

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APPENDIX V

If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Shenzhen Jin Cai’s post-tax loss for the period ended 31 March 2011 would decrease/increase by approximately HK$64,000. This is mainly attributable to the Shenzhen Jin Cai’s exposure to interest rates on its variable rate bank deposits.

Foreign currency risk

Foreign currency risk refers to the risk associated with movements in foreign currency rates which will affect the Shenzhen Jin Cai’s financial results and its cash flow. The management considers the Shenzhen Jin Cai is not exposed to significant foreign currency risk as the majority of its operations and transactions are in the PRC with their functional currency of RMB. Management considers the Shenzhen Jin Cai’s exposure to currency risk is minimal. However, management monitors the related foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise.

Credit risk

For the Relevant Period, Shenzhen Jin Cai’s maximum exposure to credit risk which will cause a financial loss to Shenzhen Jin Cai due to failure to discharge an obligation by the counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the statement of financial position.

The credit risk on liquid fund is limited because the counterparties are banks with high credit rating.

Liquidity risk

In managing the liquidity risk, Shenzhen Jin Cai monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Shenzhen Jin Cai’s operations and mitigate the effects of fluctuations in cash flows.

All financial liabilities are non-interest bearing and their maturity date are on demand or within one year.

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APPENDIX V

(c) Fair value

The fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The directors of the Shenzhen Jin Cai consider that the fair values of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate to their corresponding carrying amounts due to their short-term maturities.

6. Turnover

The Shenzhen Jin Cai did not generate any turnover during the Relevant Period.

No business analysis and segment reporting information such as segment revenue, results, assets, liabilities and other information are presented as Shenzhen Jin Cai did not commence business during the Relevant Period.

7. Director’s emoluments and employees’ emoluments

(a) Director’s emoluments

During the Relevant Period, no emoluments and no retirement benefit scheme contributions were paid or payable to or for the benefit of the director of the Shenzhen Jin Cai. There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Period.

(b) Employees’ emoluments

No staff was employed by Shenzhen Jin Cai during the Relevant Period.

(c) During the Relevant Period, no emoluments were paid by Shenzhen Jin Cai to the director or employee as an inducement to join or upon joining Shenzhen Jin Cai or as compensation for loss of office.

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ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

APPENDIX V

8. Taxation

No provision for Hong Kong Profits Tax had been provided for the Relevant Period as Shenzhen Jin Cai had no assessable profit for the Relevant Period.

Loss before tax Tax calculated at the statutory tax rate of 25% Tax effect of tax loss not recognised Income tax expense for the year	1 November 2010 (date of establishment) to 31 March 2011 HK$’000 (34) (9) 9 –

Shenzhen Jin Cai had unrecognised tax losses of approximately HK$36,000 for the period ended 31 March 2011 available to offset against future profits. No deferred tax asset has been recognised in respect of the unrecognised tax losses due to the unpredictability of future profit streams. Such unrecognised tax losses will be carried forward for five years from respective dates of origination.

9. Bank balances and cash

Bank balances bear interests at the prevailing market interest rate during the Relevant Period.

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APPENDIX V ACCOUNTANTS’ REPORT ON SHENZHEN JIN CAI

10. Paid-up capital

RMB’000 HK$’000

Registered and paid-up capital: At 1 November 2010 (date of incorporation) and 31 March 2011 10,800 12,608

Shenzhen Jin Cai was established on 1 November 2010 with a registered capital of RMB10,800,000 (equivalent to approximately HK$12,608,000) which has been fully paid up on 1 November 2010, as the initial working capital.

11. Related party transactions

Compensation to key management personnel

The directors consider they are the only key management personnel of Shenzhen Jin Cai and no remuneration has been paid to them during the Relevant Period.

C. SUBSEQUENT FINANCIAL STATEMENTS

No statutory audited financial statements have been prepared by Shenzhen Jin Cai in respect of any period subsequent period to 31 March 2011.

SHINEWING (HK) CPA Limited

Certified Public Accountants

Pang Wai Hang Practising Certificate Number: P05044 Hong Kong

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

I. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

1. INTRODUCTION

The unaudited pro forma statement of assets and liabilities of the Enlarged Group (the “Statement”) set out in section II below has been prepared by the Directors in accordance with paragraph 14.67 of the Listing Rules, for illustrative purpose only, to provide information about how the proposed Acquisition might have affected the financial position of the Group as if the Acquisition had been completed on 31 March 2011.

The Statement has been prepared based on the audited consolidated statement of financial position of the Group as at 31 March 2011 as set out in the Company’s annual report dated 30 June 2011 and the audited consolidated statement of financial position of the Target Company, statements of financial position of Shenzhen Le Cai and Shenzhen Jin Cai as at 31 March 2011 as set out in the respective Accountants’ Reports included in Appendices III , I V and V respectively to this Circular, after making certain pro forma adjustments that are (i) directly attributable to the Acquisition and (ii) factually supportable, as further described in the accompanying notes.

The Statement is prepared based on a number of assumptions, estimates, uncertainties and currently available information, and is provided for illustrative purposes only. Accordingly, as a result of the nature of the Statement, it may not give a true picture of the actual financial position of the Enlarged Group that would have been attained had the Acquisition been completed on 31 March 2011. Furthermore, the Statement does not purport to predict the Enlarged Group’s future financial position.

The Statement should be read in conjunction with the financial information of the Group, the Accountants Reports of the Target Company, Shenzhen Le Cai and Shenzhen Jin Cai as set out in Appendices III , I V and V respectively to this circular, respectively and other financial information included elsewhere in this circular.

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

II. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

Non-current assets Property, plant and equipment Investment properties Prepaid lease payments Goodwill Intangible assets Interests in associates Available-for-sale financial assets Deposit paid for acquisition of a jointly controlled entity Deposit paid for acquisition of property, plant and equipment and prepaid lease payments Current assets Inventories Trade and other receivables Other loan to a shareholder of an associate Amount due from a joint venturer Amount due from an associate Amount due from fellow subsidiaries Amount due from ultimate holding company Amount due from a director Prepaid lease payments Held-to-maturity investments Pledged bank deposits Bank balances and cash	Grand Destiny Group 31.3.2011 HK$’000 (Note 1) – – – – – – – – – – – 121 – – – – – – – – – 13,134 13,255	Shenzhen Le Cai 31.3.2011 HK$’000 (Note 2) 2, 917 – – – – – – – – 2,917 – 638 – – – 65,576 20,721 6,171 – – – 33,5 30 126,636	Shenzhen Jin Cai 31.3.2011 HK$’000 (Note 3) – – – – – – – – – – – – – – – – – – – – – 12,82 9 12,82 9	Total Pro forma adjustments 31.3.2011 HK$’000 HK$’000 HK$’000 (Note 4) (Note 5) 2, 917 – – – – – – – – 2,917 – 759 – – – – 65,576 (65,576) 20,721 (20,721) 6,171 (6,171) – – – 59,4 93 152,720	Adjusted Target Group The Group Pro forma adjustments Enlarged Group as if the Acquisition has been completed 31.3.2011 31.3.2011 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 6) (Note 7) (Note 8) 2, 917 738,370 741, 287 – 8,621 8,621 – 27,916 27,916 – 95,114 54, 244 149, 358 – 101,714 763,783 865,497 – 89,733 (51,774) 37,959 – 6,746 6,746 – 41,489 41,489 – 20,104 20,104 2,917 1,129,807 1,898,977 34,777 34,777 759 230,085 (1,911) 22 8, 933 – 43,050 (43,050) – – 24,230 24,230 – 474 474 – – – – – – – – – – 767 767 – 35,562 35,562 – 8,228 8,228 59,4 93 262,763 322,256 60,252 639,936 655,227	Adjusted Target Group The Group Pro forma adjustments Enlarged Group as if the Acquisition has been completed 31.3.2011 31.3.2011 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 6) (Note 7) (Note 8) 2, 917 738,370 741, 287 – 8,621 8,621 – 27,916 27,916 – 95,114 54, 244 149, 358 – 101,714 763,783 865,497 – 89,733 (51,774) 37,959 – 6,746 6,746 – 41,489 41,489 – 20,104 20,104 2,917 1,129,807 1,898,977 34,777 34,777 759 230,085 (1,911) 22 8, 933 – 43,050 (43,050) – – 24,230 24,230 – 474 474 – – – – – – – – – – 767 767 – 35,562 35,562 – 8,228 8,228 59,4 93 262,763 322,256 60,252 639,936 655,227
						1,898,977
						34,777 22 8, 933 – 24,230 474 – – – 767 35,562 8,228 322,256
						655,227

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

Current liabilities Trade and other payables Tax liabilities Amount due to a joint venturer Amounts due to associates Amount due to a shareholder of an associate Bank borrowings – due within one year Net current (liabilities) assets Total assets less current liabilities Non-current liabilities Bank borrowings – due after one year Amount due to a shareholder of an associate Deferred tax liabilities Net (liabilities) assets	Grand Destiny Group 31.3.2011 HK$’000 (Note 1) 14,03 1 – – – – – 14,03 1 (77 6) (77 6) – – – (77 6)	Shenzhen Le Cai 31.3.2011 HK$’000 (Note 2) 205 – – – – – 205 126,431 129,348 – – – 129, 348	Shenzhen Jin Cai 31.3.2011 HK$’000 (Note 3) 65 – – – – – 65 12,76 4 12,76 4 – – – 12,76 4	Total Pro forma adjustments 31.3.2011 HK$’000 HK$’000 HK$’000 (Note 4) (Note 5) 14, 301 110,872 (110,872) – – – – 18,404 – 14,301 138,419 141,336 – – – 141, 336	Adjusted Target Group The Group Pro forma adjustments Enlarged Group as if the Acquisition has been completed 31.3.2011 31.3.2011 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 6) (Note 7) (Note 8) 14, 301 277,575 291, 876 – 55,313 55,313 – 12,885 12,885 – 11,851 11,851 18,404 23,708 (37,901) 4,211 – 21,693 21,693 32,705 403,025 397,829 27,547 236,911 257,398 30,464 1,366,718 2,156,375 – 192,604 192,604 – – 27,766 27,766 – 19,559 190,946 210,505 – 212,163 430,875 30, 464 1,154,555 1,725,500	Adjusted Target Group The Group Pro forma adjustments Enlarged Group as if the Acquisition has been completed 31.3.2011 31.3.2011 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Note 6) (Note 7) (Note 8) 14, 301 277,575 291, 876 – 55,313 55,313 – 12,885 12,885 – 11,851 11,851 18,404 23,708 (37,901) 4,211 – 21,693 21,693 32,705 403,025 397,829 27,547 236,911 257,398 30,464 1,366,718 2,156,375 – 192,604 192,604 – – 27,766 27,766 – 19,559 190,946 210,505 – 212,163 430,875 30, 464 1,154,555 1,725,500
						397,829
						257,398
						2,156,375
						192,604 27,766 210,505
						430,875
						1,725,500

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

III. NOTES TO THE UNAUDITED PRO FORMA ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The audited consolidated statement of assets and liabilities of Target Company and Zhongming Yongheng is extracted from the accountants’ report as set out in Appendix III to this Circular.
The audited statement of assets and liabilities of Shenzhen Le Cai is extracted from the accountants’ report as set out in Appendix I V to this Circular.
The audited statement of assets and liabilities of Shenzhen Jin Cai is extracted from the accountants’ report as set out in Appendix V to this Circular.
The adjustment represents the Group reorganisation of the Target Group subsequent to 31 March 2011 (the “Target Group Reorganisation”):
a). Zhongmin Yongheng, a wholly-owned subsidiary of the Target Company entered into an agreement with the Vendor, pursuant to which, Zhongmin Yongheng agreed to acquire the 60% equity interest of Shenzhen Le Cai at a consideration of RMB42,000,000 (equivalent to approximately HK$49,770,000). This transaction was completed on 8 May 2011.
b). Shenzhen Le Cai, entered into agreements with Mr. Yang Songsheng (being the controlling shareholder of the Vendor) and M s. W ang Jun (being an independent third party of the Company and the Vendor), pursuant to which Shenzhen Le Cai agreed to acquire 90% and 10% of equity interest of Shenzhen Jin Cai at a consideration of approximately RMB49,926,000 (equivalent to approximately HK$59,808,000) and RMB1,080,000 (equivalent to approximately HK$1,294,000). These transactions were completed on 15 May 2011.

Upon the completion of the above transactions, the Target Company became the holding company of Shenzhen Le Cai and Shenzhen Jin Cai. The total consideration of acquiring Shenzhen Le Cai and Shenzhen Jin Cai amounting to approximately HK$110,872,000 is recognised as other payable of the Target Group.

As the Vendor’s controlling shareholder controlled the Target Company, Zhongmin Yongheng, Shenzhen Le Cai and Shenzhen Jin Cai (the “Combining Entities”) immediately before and after the Target Group Reorganisation, the Target Group Reorganisation has been prepared on the basis of reorganisation of business under common control which is in accordance with the principles of merger accounting. Accordingly, the relevant assets and liabilities of the Target Group have been recognised at historical cost. The unaudited pro forma consolidated statement of assets and liabilities of the adjusted Target Group

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

incorporate the financial statements items of the Combining Entities in which the common control combination occurs as if they had been combined from the date when they first came under the control of the Vendor’s controlling shareholder. The net assets of the Combining Entities are consolidated using the existing book values. No amount is recognised in respect of goodwill or excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the interest of Vendor’s controlling shareholder.

The adjustment represents the debts assignment between Shenzhen Le Cai and other respective parties. In May 2011, Shenzhen Le Cai signed several debt assignment agreements (the “Debt Assignment Agreements”) with its fellow subsidiaries, ultimate holding company, director, Mr. Yang Songsheng and M s. W ang Jun (who is the Vendor of disposing 10% equity interest of Shenzhen Jin Cai to the Target Group on 15 May 2011), pursuant to which all the amounts due from/to the respective parties were assigned to a beneficial owner of the Vendor. After setting off with the respective parties of the Debt Assignment Agreements, the remaining balance of approximately HK$18,404,000 due to a beneficial owner of the Vendor, and the amount of approximately HK$23,708,000 due to a beneficial owner of the Vendor by the Group as at 31 March 2011 will be settled by the Group in ten installments of approximately HK$4,211,000 per annum. Details are set out in Note 8.
The audited consolidated statement of assets and liabilities of the Group is extracted from the published annual report of the Company for the year ended 31 March 2011 dated 30 June 2011.
The adjustments represent the acquisition of the Target Group by the Company.

As described in the section headed “Letter from the Board” of this circular, the Company entered into the Agreement with the Vendor, pursuant to which the Company has conditionally agreed to purchase and the Vendor has conditionally agreed to sell the Sale Share. The total consideration shall be satisfied by the Company as to (i) the Company to allot and issue 1,727,729,582 shares of the Company to the Vendor credited as fully paid; and (ii) HK$45,388,271.50 by setting off against the Debt.

Upon the completion of the Acquisition, the Target Group will be accounted for as subsidiaries of the Group. Under Hong Kong Financial Reporting Standards 3 ( Revised) Business Combinations issued by Hong Kong Institute of Certified Public Accountants, the Group will apply the purchase method to account for the acquisition of the Target Group. In applying the purchase method, the identifiable assets, liabilities and contingent liabilities of the Target Group as at 31 March 2011 are recorded in the Unaudited Pro Forma Statement of Assets and Liabilities of the Enlarged Group at their fair values as if the Acquisition was completed on 31 March 2011.

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APPENDIX VI

The consideration transferred in the Acquisition is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owner of the Target Group and the equity interests issued by the Group in exchange for control of the Target Group. Where the consideration the Group transfers in the Acquisition includes assets or liabilities resulting from a contingent consideration arrangement (including the profit guarantee arrangement described below), the contingent consideration is measured at its acquisitiondate fair value and considered as part of the consideration transferred in the Acquisition.

Any goodwill arising on the Acquisition will be determined as the excess of the sum of the consideration transferred and over its interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the Target Group.

Since the fair value of the consideration transferred by the Group (including contingent consideration) and the fair values of net identifiable assets, liabilities and contingent liabilities of the Target Group at the date of Completion may be substantially different from the estimated fair values used in the preparation of this Unaudited Pro Forma Consolidated Statement of Assets and Liabilities, the amount of goodwill on Acquisition at the date of Completion may be different from that estimated amount presented.

An impairment testing conducted in accordance with Hong Kong Accounting Standard 36 (“HKAS 36”) “Impairment of Assets” involves the determination of the recoverable amount of the cash generating unit to which the goodwill has been allocated, being the higher of the cash generating unit’s fair value less costs to sell and its value in use.

For the purpose of the preparation of the unaudited pro formal statement of financial position, the Directors have estimated the value in use of Target Group and assessed that there was no indication of impairment of goodwill arising from the Acquisition and hence no impairment was required.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

Details of the identifiable assets and liabilities of the Target Group and the calculation of goodwill are as follows:

Intangible assets_(a) Property, plant and equipment Trade and other receivables Bank balance and cash Trade and other payables Amount due to a beneficial owner of the Vendor Deferred tax liabilities(b) Goodwill Total consideration Satisfied by: Interest in an associate Re-measurement of interest in an associate to fair value on business combination(c) The fair value of an associate Setting off of amount due from the Vendor( d) Consideration Shares( e)_	Carrying amounts of the identifiable assets and liabilities as at 31 March 2011 HK$’000 – 2,917 759 59,493 (14,301) (18,404) – 30,464	Fair value adjustments on the identifiable assets and liabilities HK$’000 763,783 (190,946) 572,837	Fair values of identifiable assets and liabilities HK$’000 763,783 2,917 759 59,493 (14,301) (18,404) (190,946) 603,301 54,244 657,545 51,774 232,541 284,315 44,961 328,269 657,545

Remarks:

(a) The adjustment on intangible assets of approximately HK$763,783,000 represents excess of fair values of intangible assets of the license of operating lottery business in Shenzhen, the PRC over its carrying amounts as at 31 March 2011. The fair value of the intangible assets as at 31 March 2011 are determined based on the valuation carried out by an independent valuer, Assets Appraisal Limited, where the basis of valuation adoption is the income approach with discounted cash flow modeling and its valuation report (the “Valuation Report”) is set out in Appendix I to this Circular. The reporting accountant of the Company has examined the consistency of accounting policies adopted and the calculation of the related profit forecast.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

The directors of the Company have assessed whether there is any indication that intangible assets of the Enlarged Group may be impaired as at 31 March 2011 on a pro forma basis, in accordance with HKAS 36 . The directors of the Company have concluded that there is no impairment indication in respect of the intangible assets of the Target Group with reference to the Valuation Report.

Upon completion of the Acquisition and in subsequent reporting periods, valuation of the intangible assets will be performed for the purpose of determining the fair value or recoverable amount of the intangible assets. The directors of the Company confirmed that they will apply consistent accounting policies and principal assumptions to assess impairment of intangible assets in subsequent reporting periods in accordance with the requirement of HKAS 36.

(b) The adjustment represents the deferred tax liabilities of approximately HK$190,946,000 provided at the applicable tax rate of 25%, after considering the accounting amounts as at 31 March 2011 and the estimated amounts of the tax base of the intangible assets of the Target Group in the sum of approximately HK$763,783,000 to reflect the deferred tax effect on such items as if the Acquisition had been taken place on 31 March 2011.
(c) The Group owned 40% equity interests of Shenzhen Le Cai and was classified as an associate of the Group before the Acquisition. Upon the Completion, the originally held 40% equity interests of Shenzhen Le Cai would be treated as if it were disposed of and reacquired at fair value on the date of Completion. Accordingly, it is remeasured with reference to the fair value and the respective deferred tax liabilities as set out in Remark (a) and (b) above respectively. The resulting gain will be recognised in profit of the Group. Since the fair value of the 40% equity interest of Shenzhen Le Cai at the date of Completion may be different from the estimated fair values used in the preparation of this Unaudited Pro Forma Consolidation Statement of Assets and Liabilities, the amount of gain at the date of Completion may be different from the estimated amount presented.
( d) The fair value of the debt owing by the Vendor to the Company and the respective interest payable amounting to approximately HK$43,050,000 and HK$1,911,000 is for illustrative purpose only and is based on the closing balance on 31 March 2011 as if the Acquisition had been completed on 31 March 2011. The actual amount to be set off will be based on the balance up to 31 May 2011 as agreed between the Company and the Vendor amounting to approximately HK$45,388,000.
( e) The fair value of HK$ 0.19 per share for the Consideration Shares is for illustrative purpose only and is based on the closing price on 31 March 2011 as if the Acquisition had been completed on 31 March 2011. The actual fair value will be based on the market price of the shares of the Company upon Completion which may be different from HK$ 0.19 per share. Accordingly, the actual goodwill at the date of completion may be different from the amount presented above.

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APPENDIX VI UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

( f) Pursuant to the Agreement, the Vendors have given a profit guarantee to the Company that the net profits after tax of the Target Group as shown in the audited consolidated financial statement of the Target Group for the period from the date of Completion to 31 March 2013 shall be not less than RMB60,000,000 (equivalent to approximately HK$72,330,000) (the “Profit Guarantee”) and will compensate the Company for any shortfall between the Profit Guarantee and the actual profits after tax as shown in the audited consolidated financial statements of the Target Group.

The above arrangement constitutes a contingent consideration. The Group shall classify a right to return of previously transferred consideration as an asset if specified conditions are met. No asset from the Profit Guarantee has been recognised in the Unaudited Pro Forma Financial Information as, after reviewed the business plan of the Target Group and with reference to the valuation report prepared by an independent professional valuer of the Company, the Directors of the Company are of the opinion that the estimated profit of the Target Group can meet the amount of the Profit Guarantee and the fair value of it is insignificant.

( g) No transaction costs have been taken into account as the directors of the Company considered that the cost of the Acquisition are insignificant.
Pursuant to the Debts Assignments Agreements, the amount due to a beneficial owner of the Vendor of approximately HK$42,112,000 (the “Outstanding Balance”) (including approximately HK$18,404,000 recorded in the books of the Target Group and approximately HK$23,708,000 recorded in the books of the Group) will be settled by the Group in ten installments of approximately HK$4,211,000 per annum. The Outstanding Balance is discounted with an effective interest rate of 5.31% per annum with reference to the market rate of comparable instruments and the credit risk of the Company. The total imputed interest is approximately HK$10,135,000. The analysis is as follows:

Principal amount due to a beneficial owner of the Vendor Less: total imputed interests Financial Iiabilities at amortised cost Analysed as: Current liabilities Non-current liabi1ities	HK$’000 42,112 (10,135) 31,977 4,211 27,766 31,977

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

2. REPORT ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION FROM THE REPORTING ACCOUNTANT

The following is the text of a report received from SHINEWING (HK) CPA Limited, Certified Public Accountant, in respect of the unaudited pro forma financial information of the Enlarged Group for the purpose of incorporation in this circular.

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

==> picture [109 x 62] intentionally omitted <==

==> picture [104 x 51] intentionally omitted <==

The Board of Directors

Chinese People Holdings Company Limited

Unit 2111, 21/F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong

Dear Sirs,

We report on the unaudited pro forma statement of assets and liabilities (the “Unaudited Pro Forma Financial Information”) of Chinese People Holdings Company Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), set out in Appendix VI of the circular dated 12 August 2011 (the “Circular”) in connection with the proposed acquisition (the “Acquisition”) of the entire equity interests in Grand Destiny Group Limited (together with the Group hereinafter referred to as the “Enlarged Group”), which has been prepared by the directors of the Company (the “Directors”), for illustrative purpose only, to provide information about how the Acquisition might have affected the financial information of the Group.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

RESPECTIVE RESPONSIBILITIES OF THE DIRECTORS AND REPORTING ACCOUNTANTS

It is the responsibility solely of the Directors to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

BASIS OF OPINION

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the Directors. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information have been properly compiled by the Directors on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purpose only, based on the judgments and assumptions of the Directors, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Enlarged Group had the acquisitions been completed as at 31 March 2011 or at any future date.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX VI

OPINION

In our opinion:

(a) the Unaudited Pro Forma Financial Information have been properly compiled by the Directors on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

SHINEWING (HK) CPA Limited

Certified Public Accountants

Pang Wai Hang

Practising Certificate Number: P05044

Hong Kong

12 August 2011

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GENERAL INFORMATION

APPENDIX VII

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. SHARE CAPITAL

*Authorised* 7,999,999,999 Shares *Issued and to be issued, fully paid or credited as fully paid* 4,082,224,554 Shares in issue as at the Latest Practicable Date 1,727,729,582 Consideration Shares to be allotted and issued upon Completion 5,809,954,136 Shares	HK$ 560,000,000

	285,755,718 120,941,071
	406,696,789

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GENERAL INFORMATION

APPENDIX VII

3. DISCLOSURE OF INTERESTS

Director’s interests and short positions in the securities of the Company and its associated corporations

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

	Number or			Approximate
	attributable			percentage or
	number of	Nature of	interests	attributable
	Shares held	Interests in		percentage of
	or short	controlled	Beneficial	shareholding
Name of Director	positions	corporation	owner	(%)
Mo Shikang	1,001,548,538 (L)	1,000,798,538	750,000	24.53
			(Note)
Zhang Hesheng	11,210,000 (L)	–	3,710,000	0.27
			7,500,000
			(Note)
Zhu Peifeng	10,100,000 (L)	–	2,600,000	0.25
			7,500,000
			(Note)
Jin Song	7,500,000 (L)	–	7,500,000	0.18
			(Note)
Chu Kin Wang Peleus	9,000,000 (L)	–	9,000,000	0.22
			(Note)
Liu Junmin	2,700,000 (L)	–	2,700,000	0.07
			(Note)
Sin Ka Man	2,700,000 (L)	–	2,700,000	0.07
			(Note)

L: Long Position

Note: This includes interests in share option held by the relevant Directors as beneficial owner to subscribe for the relevant underlying shares granted by the Company under the share option scheme adopted on 3 October 2006 (as amended on 28 August 2008).

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GENERAL INFORMATION

APPENDIX VII

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) (i) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules.

As at the Latest Practicable Date, the interests and short position of a company (in which a Director or a proposed Director is a director or employee of such company) in the shares, underlying shares or debentures of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, were as follows:

		Number or
		attributable		Approximate
Name of		number of		percentage or
Director/		Shares held		attributable
Proposed	Name of	or short	Nature of	percentage of
Director	Shareholder	positions	interests	shareholding
				(%)
Mo Shikang	Asian Allied	1,000,798,538	Interest of controlled	24.52
			corporation
Mo Shikang	Super Win	1,000,798,538	Beneficial owner	24.52

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GENERAL INFORMATION

APPENDIX VII

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or a proposed Director is a director or employee of a company which had, or was deemed to have, an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

4. MATERIAL CONTRACTS

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

(a) A new loan extension agreement of 11 May 2010 entered between the Company and the Vendor whereby the Company has agreed to further extend the repayment date of total outstanding loan amount of HK$43,050,000 to 11 May 2011.
(b) A cooperative agreement of 18 November 2010 (the “Cooperative Agreement”) entered between Beijing Zhongmin, a wholly owned subsidiary of the Company, the Vendor, 中科智控股集團有限公司 (Zhongke Zhikong Holding Group Company Limited) (“Zhongke Zhikong”), 惠州市新天健服裝有限公司 (Huizhou City Xintianjian Clothing Company Limited) (“Huizhou Xintiangjian”) and 深圳市裕華興印刷製品有限公司 (Shenzhen Yuhuaxing Printing Products Company Limited) (“Shenzhen Yuhuaxing”) for the formation of 中華永保福人壽保險投資有限公司 (Zhonghua Yongbaofu Life Insurance Investment Company Limited (“Zhonghua Yongbaofu”) in PRC. Pursuant to the terms of the Cooperative Agreement, the registered capital of Zhonghua Yongbaofu will be RMB380,000,000 (equivalent to approximately HK$458,090,000). RMB144,400,000 (equivalent to approximately HK$174,074,000), RMB133,000,000 (equivalent to approximately HK$160,332,000), RMB45,600,000 (equivalent to approximately HK$54,971,000), RMB28,500,000 (equivalent to approximately HK$34,357,000) and RMB28,500,000 (equivalent to approximately HK$34,357,000) will be contributed by the Vendor, Beijing Zhongmin, Zhongke Zhikong, Huizhou Xintianjian and Shenzhen Yuhuaxing by way of cash respectively.
(c) The Keno Games Agreement.
(d) An Agreement of 19 March 2011 entered between Guizhou Zhongmin Gas Co., Ltd (“Guizhou Zhongmin”), an indirectly wholly-owned subsidiary of the Company, and Guiyang Railway Construction Co., Ltd (“Guiyang Railway Construction”) whereby Guizhou Zhongmin has agreed to sell the assets to Guiyang Railway Construction at a total consideration of approximately RMB66,206,000 (equivalent to approximately HK$79,811,000).

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GENERAL INFORMATION

APPENDIX VII

(e) An agreement of 25 March 2011 entered between Beijing Zhonglian and Guizhou Gas (Group) Co., Ltd. (“Guizhou Gas”) whereby Beijing Zhonglian has agreed to purchase and Guizhou Gas has agreed to sell 49.9% of the registered and paid up capital of Pan River Gas (China Southwest) Co., Ltd for a total cash consideration of RMB35,000,000 (equivalent to approximately HK$42,193,000).
(f) The Lottery Agreement.
(g) A shares transfer agreement of 15 May 2011 entered between Shenzhen Le Cai and Ms. Wang Jun whereby Shenzhen Le Cai has agreed to purchase and Wang Jun has agreed to sell 10% of registered and paid up capital of Shenzhen Jin Cai for a total cash consideration of RMB1,080,000 (equivalent to approximately HK$1,302,000).
(h) A shares transfer agreement of 15 May 2011 entered between Shenzhen Le Cai and Mr. Yang whereby Shenzhen Le Cai has agreed to purchase and Mr. Yang has agreed to sell 90% of registered and paid up capital of Shenzhen Jin Cai for a total cash consideration of approximately RMB49,926,000 (equivalent to approximately HK$60,186,000).
(i) A new loan extension agreement of 23 May 2011 entered between the Company and the Vendor pursuant to which the Company has agreed to further extend the repayment date of total outstanding loan amount of approximately HK$45,203,000 to 11 May 2012.
(j) An agreement of 9 June 2011 entered between Beijing Zhonglian Huaan Investment Co., Ltd, (“Beijing Zhonglian”), an indirect wholly-owned subsidiary of the Company, and Yunnan Industrial Investment Holdings (Group) Co. Ltd (“Yunnan Industrial”) whereby Beijing Zhonglian has agreed to purchase and Yunnan Industrial has agreed to sell 20.12% of the registered and paid up capital of Panva Gas (Yunnan) Co., Ltd for a total cash consideration of RMB26,000,000 (equivalent to approximately HK$31,343,000).
(k) The Agreement.
(l) The Keno Games and Lottery Agreement.

5. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

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GENERAL INFORMATION

APPENDIX VII

6. EXPERTS

The following are the qualification of the experts who have given opinions or advice which are contained in this circular:

Name Qualifications

SHINEWING (HK) CPA Limited (“Shinewing”) Certified Public Accountants Asset Appraisal Ltd. (“Asset Appraisal”) Professional valuer

Each of Shinewing and Asset Appraisal has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter and report and references to its name in the form and context in which it appears.

As at the Latest Practicable Date, each of Shinewing and Asset Appraisal does not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

7. LITIGATION

No member of the Group is engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened against any member of the Group as at the Latest Practicable Date.

8. MATERIAL ADVERSE CHANGE

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

9. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors nor their respective associates had any business which competes or is likely to compete, either directly or indirectly, with the business of the Group.

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GENERAL INFORMATION

APPENDIX VII

10. MISCELLANEOUS

(a) There is no contract or arrangement entered into by any member of the Group subsisting at the date of this circular in which any Director is materially interested and which is significant to the business of the Enlarged Group.
(b) As at the Latest Practicable Date, neither Shinewing, Asset Appraisal nor any Directors had any direct or indirect interest in any assets which had been acquired, disposed of by or leased to, or which were proposed to be acquired, disposed of by or leased to, any member of the Enlarged Group since 31 March 2011, the date to which the latest published audited consolidated financial statements of the Group were made up.
(c) HSBC Bank Bermuda Limited, the principal share registrar and transfer office of the Company is located at 6 Front Street, Hamilton HM11, Bermuda and Tricor Tengis Limited, the branch share registrar and transfer office of the Company in Hong Kong is located at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong.
(d) The company secretary of the Company is Ms. Li Fun Replen, who is an associate member of both The Institute of Chartered Secretaries and Administrators and The Hong Kong Institute of Company Secretaries.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours on Business Days at the office of the Company at Unit 2111, 21/F., China Merchants Tower, 168-200 Connaught Road Central, Hong Kong from the date of this circular up to and including 29 August 2011 and at the SGM:

(a) the new bye-laws and memorandum of association of the Company;
(b) the valuation report on Shenzhen Le Cai, the text of which is set out in Appendix I to this circular;
(c) the accountants’ report on the Grand Destiny Group, the text of which is set out in Appendix III to this circular;
(d) the accountants’ report on Shengzhen Le Cai, the text of which is set out in Appendix IV to this circulart;
(e) the accountants’ report on Shenzhen Jin Cai, the text of which is set out in Appendix V to this circular;

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GENERAL INFORMATION

APPENDIX VII

(f) the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix VI to this circular;
(g) the annual reports of the Company for each of the two financial years ended 31 March 2011;
(h) the material contracts referred to in the paragraph headed “Material contracts” in this Appendix;
(i) the material contracts referred to in the paragraph headed “Directors service contracts” in this Appendix;
(j) the written consents referred to under the paragraph headed “Experts” in this Appendix; and
(k) this circular.

– 173 –

NOTICE OF SGM

**CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 681)

NOTICE IS HEREBY GIVEN that a special general meeting (the “ SGM ”) of the shareholders of Chinese People Holdings Company Limited (the “ Company ”) will be held at Function Room of Macau Jockey Club, 1st Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong immediately after the conclusion of the annual general meeting of the Company to be held on Monday, 29 August 2011 at 11:00 a.m., for the purpose of considering and, if thought fit, passing with or without amendments, the following resolution of the Company:

ORDINARY RESOLUTION

“ THAT

(a) the agreement (the “ Agreement ”) (a copy of which has been produced to the SGM marked “A” and signed by the chairman of the SGM for the purpose of identification) dated 13 June 2011 and entered into between the Company and Yongheng Development Corporation Limited (the “ Vendor ”) pursuant to which the Company has agreed to purchase and the Vendor has agreed to sell one ordinary Share of US$1.00 in the issued share capital of Grand Destiny Group Limited for a total consideration of HK$465,226,560 and the transactions contemplated thereunder, be and are hereby approved, confirmed and ratified;
(b) any one or more of the directors (the “ Directors ”) of the Company be and is/are hereby authorised to take all steps he/they consider necessary, desirable or expedient for the purpose of, or in connection with, the implementation of and giving effect to the Agreement and the transactions contemplated thereunder; and
(c) the allotment and issue of an aggregate of 1,727,729,582 shares (each a “ Consideration Share ”) of HK$0.07 each in the share capital of the Company credited as fully paid at an issue price of HK$0.243 per Consideration Share to the Vendor in accordance with the Agreement be and is hereby approved.”

By order of the Board Chinese People Holdings Company Limited Jin Song Managing and Executive Director

Beijing, 12 August 2011

For identification purpose only

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NOTICE OF SGM

Registered office: Canon’s Court 22 Victoria Street Hamilton HM 12 Bermuda

Head office: No. 36 BDA International Business Park No. 2 Jingyuan North Street Economic Technological Development Area Beijing, 100176, China

Principal place of business in Hong Kong: Unit 2111, 21st Floor China Merchants Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

Notes:

A member entitled to attend and vote at the SGM is entitled to appoint one or more than one proxy to attend and, subject to the provisions of the new bye-laws of the Company, to vote on his behalf. A proxy need not be a member of the Company but must be present in person at the SGM to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
A form of proxy for use at the SGM is enclosed. Whether or not you intend to attend the SGM in person, you are encouraged to complete and return the enclosed form of proxy in accordance with the instructions printed thereon. Completion and return of a form of proxy will not preclude a member from attending in person and voting at the SGM or any adjournment thereof, should he so wish.
In order to be valid, the form of proxy, together with a power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority must be deposited at Company’s branch share registrar in Hong Kong, Tricor Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong not less than 48 hours before the time appointed for holding the SGM or any adjournment thereof.
In the case of joint holders of shares, any one of such holders may vote at the SGM, either personally or by proxy, in respect of such share as if he was solely entitled thereto, but if more than one of such joint holder are present at the SGM personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.

– 175 –

AI assistant

CR Construction Group Holdings Limited — Proxy Solicitation & Information Statement 2011

50019_rns_2011-08-11_5952c50c-2fef-41ec-a099-943c624de2db.pdf

CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]

MAJOR TRANSACTION AND NOTICE OF SPECIAL GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]

(Stock Code: 681)

Executive Directors:

Independent non-executive Directors:

Registered office:

Head office:

To the Shareholders

MAJOR TRANSACTION AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

THE AGREEMENT

Assets to be acquired

Consideration

(1) The setting up of lottery betting branches

(2) Revenue and commission rates

Conditions precedent

Completion

Consideration Shares

Profit Guarantee and security

LETTER FROM THE BOARD

EFFECTS ON SHAREHOLDING STRUCTURE OF THE COMPANY

INFORMATION ON THE TARGET GROUP

The Target Company

Zhongmin Yongheng

LETTER FROM THE BOARD

Shenzhen Le Cai

The Keno Games Agreement

LETTER FROM THE BOARD

The Lottery Agreement

Shenzhen Jin Cai

MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE TARGET GROUP

Business Review

Grand Destiny Group

LETTER FROM THE BOARD

Shenzhen Le Cai

Shenzhen Jin Cai

Financial Resources and Liquidity

Investment, material acquisition and disposal of subsidiaries and affiliated companies

Employees and staff policy

Sufficiency of management expertise

LETTER FROM THE BOARD

Charges on the assets

Future plans for material investments or capital assets

Exposure to fluctuation in exchange rates

Contingent liabilities

Prospect of the Target Group

Shareholding structure of the Target Group

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Shenzhen Le Cai

Shenzhen Jin Cai

FINANCIAL EFFECTS OF THE ACQUISITION

Assets and liabilities

Earnings

OVERVIEW OF THE LOTTERY SALES INDUSTRY

Table 1: Top ten lottery markets in the world at 2008:

Table 2: Total lottery sales in the PRC from 2000 to 2010 and first five months of 2011:

LETTER FROM THE BOARD

Company name Stock code Business description

LETTER FROM THE BOARD

STRUCTURES AND REGULATIONS RELATING TO THE LOTTERY

LETTER FROM THE BOARD

LETTER FROM THE BOARD

MODE OF BUSINESS OPERATION OF SHENZHEN LE CAI

Revenue model and major customers

LETTER FROM THE BOARD

Comparative advantages of Shenzhen Le Cai

High commission rate

The sole agent of Keno Games Lottery in Shenzhen

Shenzhen Le Cai’s traditional computerized Welfare Lottery distribution business may develop scales of economies and brand strengths

CR Construction Group Holdings Limited Proxy Solicitation & Information Statement 2011

**CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]**

**CHINESE PEOPLE HOLDINGS COMPANY LIMITED 中民控股有限公司[*]**