CStone Pharmaceuticals - Proxy Solicitation & Information Statement 2018

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about any of the contents of this circular or as to what action to take in relation to this circular, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other appropriate independent professional advisers.

If you have sold or transferred all your shares in Yanzhou Coal Mining Company Limited , you should at once hand this circular and the enclosed form of proxy and reply slip to the purchaser(s) or transferee(s) or to the bank, or a licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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

兗州煤業股份有限公司 YANZHOU COAL MINING COMPANY LIMITED

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

(Stock Code: 1171)

CONTINUING CONNECTED TRANSACTIONS

Independent Financial Adviser to the Independent Board Committee and Independent Shareholders

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A letter from the Board is set out on pages 8 to 47 of this circular. A letter from the Independent Board Committee is set out on pages 48 to 49 of this circular. A letter from the Independent Financial Adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 50 to 88 of this circular.

The notice convening the EGM of the Company to be held at 9:00 a.m. on Friday, 26 January 2018 at the headquarters of the Company in Zoucheng city, Shandong Province, postal code 273500, the People’s Republic of China were published on 11 December 2017.

Shareholders who intend to appoint a proxy to attend the EGM shall complete and return the proxy form in accordance with the instructions printed thereon not less than 24 hours before the time fixed for holding the EGM or any adjournment thereof (as the case may be). Completion and return of the proxy form will not preclude you from attending the EGM and voting in person if you so wish.

11 January 2018

	Pages
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	44
EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	46
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	47
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	47
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
Letter from the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50
Appendix I – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	89

– i –

DEFINITIONS

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

“A Share(s)”
domestic shares in the ordinary share capital of the Company, with a nominal value of RMB1.00 each, which are listed on the Shanghai Stock Exchange
“Announcement” the announcement of the Company dated 27 November 2017 in relation to the Proposed Continuing Connected Transactions
“Articles of Association”
the articles of association of the Company
“associate(s)” has the meaning ascribed thereto under the Hong Kong Listing Rules
“Board”
the board of Directors of the Company
“Business Day”
a day which is not a Saturday, Sunday or a public holiday in the PRC or Hong Kong (as the case may be)
“Century Ruifeng”
Qingdao Century Ruifeng Group Company Limited*
（青島世紀瑞豐集團有限公司）, a limited liability company incorporated in the PRC
“Company”
兗州煤業股份有限公司, Yanzhou Coal Mining Company Limited, a joint stock limited company incorporated in the PRC and the H Shares and A Shares of which are listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange, respectively
“Company Law” Company Law of the People’s Republic of China
“connected person(s)”
has the meaning ascribed thereto under the Hong Kong Listing Rules
“controlling shareholder(s)”
has the meaning ascribed thereto under the Hong Kong Listing Rules
“Cost Price”
has the meaning ascribed thereto under the paragraph headed “The Proposed Mutual Provision of Labour and Services Agreement” under Section I of this circular
“Directors”
the directors of the Company

– 1 –

DEFINITIONS

“Donghua Heavy Industry”
“EGM”
“Existing Chemical Projects Entrusted Management Agreement”
“Existing Coal Train Convoy Service Contract”
“Existing Continuing Connected Transactions”
“Existing Continuing Connected Transaction Agreements”
“Existing Know-how Licensing Agreement”
“Existing Mutual Provision of Labour and Services Agreement”
“Existing Provision of Electricity and Heat Agreement”

Yankuang Donghua Heavy Industry Company Limited* （兗礦東華重工有限公司）, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company

the extraordinary general meeting of the Company to be held on Friday, 26 January 2018 or any adjournment thereof for the purpose of considering and, if appropriate, approving, among others, the Proposed Continuing Connected Transaction Agreements referred to in the announcement of the Company dated 27 November 2017 and the transactions contemplated thereunder

the chemical projects entrusted management agreement entered into between the Company and Yankuang Chemical on 28 October 2016
the coal train convoy service contract entered into between the Company and Yankuang Security on 17 February 2016
the transactions under the respective Existing Continuing Connected Transaction Agreements
the Existing Mutual Provision of Labour and Services Agreement, the Existing Coal Train Convoy Service Contract, the Existing Provision of Insurance Fund Administrative Services Agreement, the Existing Provision of Materials Supply Agreement, the Existing Provision of Products, Materials and Equipment Leasing Agreement, the Existing Provision of Electricity and Heat Agreement, the Existing Chemical Projects Entrusted Management Agreement, and the Existing Know-how Licensing Agreement
the know-how licensing agreement entered into between Yancoal Blue Sky and Yankuang Technology on 11 October 2016
the mutual provision of labour and services agreement entered into between the Company and Yankuang Group on 24 October 2014
the provision of electricity and heat agreement entered into between the Company and Yankuang Group on 24 October 2014

– 2 –

DEFINITIONS

“Existing Provision of Insurance the provision of insurance fund administrative services Fund Administrative Services agreement entered into between the Company and Agreement” Yankuang Group on 24 October 2014
“Existing Provision of Materials the provision of materials supply agreement entered Supply Agreement” into between the Company and Yankuang Group on 24 October 2014
“Existing Provision of Products, the provision of products, materials and equipment Materials and Equipment leasing agreement entered into between the Company Leasing Agreement” and Yankuang Group on 24 October 2014
“Group” the Company and its subsidiaries
“H Share(s)” overseas listed foreign invested shares in the ordinary share capital of the Company with a nominal value of RMB1.00 each, which are listed on the Hong Kong Stock Exchange
“Heze Neng Hua” Yanmei Heze Neng Hua Co., Ltd.*（兗煤荷澤能化有限公司）, a limited liability company incorporated in the PRC and a subsidiary of the Company
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Hong Kong Listing Rules” the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange
“Hong Kong Stock Exchange” The Stock Exchange of Hong Kong Limited
“Independent Board Committee” a committee of the Board comprising all independent non-executive Directors established for the purpose of considering the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement and their respective proposed annual caps as set out in this circular

– 3 –

DEFINITIONS

“Independent Financial Adviser” or “Donvex Capital”
“Independent Shareholders”
“independent third party(ies)”
“KWh”
“Latest Practicable Date”
“Market Price”
“Ordos Neng Hua”
“percentage ratios”
“PRC”
Donvex Capital Limited, a corporation licensed to carry on type 6 (advising on corporate finance) regulated activities under the SFO, being the independent financial adviser appointed by the Company to advise the Independent Board Committee and the Independent Shareholders in respect of the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement and the Proposed Bulk Commodities Sale and Purchase Agreement and their respective proposed annual caps
Shareholder(s) who are not required to abstain from voting on the resolutions to be proposed at the EGM regarding the Proposed Continuing Connected Transaction Agreements (other than Yankuang Group and its associates when voting on the resolutions regarding the proposed continuing connected transaction agreements entered into between the Company and Yankuang Group)
individual(s) or company(ies) who is not or are not a connected person(s) of the Company
Kilowatt-hour
8 January 2018, being the latest practicable date of ascertaining certain information contained in this circular prior to its publication
has the meaning ascribed thereto under the paragraph headed “1. The Proposed Mutual Provision of Labour and Services Agreement” under the section “II. Continuing Connected Transaction – A. Renewal of Existing Continuing Connected Transactions” in the Letter from the Board of this circular
Yanzhou Coal Ordos Neng Hua Company Limited*（兗州煤業鄂爾多斯能化有限公司）, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company
has the same meaning ascribed thereto under the Hong Kong Listing Rules

the People’s Republic of China

– 4 –

DEFINITIONS

“Proposed Bulk Commodities the bulk commodities mutual supply agreement entered Mutual Supply Agreement” into between the Company and Century Ruifeng on 27 November 2017 “Proposed Bulk Commodities the bulk commodities sale and purchases agreement Sale and Purchase Agreement” entered into between the Company and Yankuang Group on 27 November 2017 “Proposed Chemical Projects the chemical projects entrusted management agreement Entrusted Management entered into between the Company and Yankuang Agreement” Group on 27 November 2017 “Proposed Continuing Connected the proposed transactions under the Proposed Transactions” Continuing Connected Transaction Agreements “Proposed Continuing Connected the Proposed Mutual Provision of Labour and Services Transaction Agreements” Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement “Proposed Mutual Provision of the mutual provision of labour and services agreement Labour and Services entered into between the Company and Yankuang Agreement” Group on 27 November 2017 “Proposed Provision of Insurance the provision of insurance fund administrative services Fund Administrative Services agreement entered into between the Company and Agreement” Yankuang Group on 27 November 2017 “Proposed Provision of Materials the provision of materials supply agreement entered Supply Agreement” into between the Company and Yankuang Group on 27 November 2017 “Proposed Provision of Products, the provision of products, materials and equipment Materials and Equipment leasing agreement entered into between the Company Leasing Agreement” and Yankuang Group on 27 November 2017 “RMB” Renminbi, the lawful currency of the PRC “Rongxin Hua Gong” Inner Mongolia Rongxin Hua Gong Company Limited* （內蒙古榮信化工有限公司）, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of Ordos Neng Hua

– 5 –

DEFINITIONS

“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time
“Shangqi Capital” Shangqi Capital Management Co., Ltd.*（上期資本管理有限公司）, a limited liability company incorporated in the PRC and a holding subsidiary of Yankuang Group
“Shareholder(s)” shareholder(s) of the Company
“Shares” A Shares and H Shares
“Standard Sales Price” has the meaning ascribed thereto under the paragraph headed “5. The Proposed Chemical Projects Entrusted Management Agreement” under Section “II. Continuing Connected Transaction – A. Renewal of Existing Continuing Connected Transactions” in the Letter from the Board of this circular
“subsidiaries” has the meaning ascribed thereto under the Hong Kong Listing Rules
“substantial shareholder” has the meaning ascribed thereto under the Hong Kong Listing Rules
“Supervisor(s)” supervisors of the Company
“Target Company(ies)”
has the meaning ascribed thereto under the paragraph named “5. The Proposed Chemical Projects Entrusted Management Agreement” under the section “II. Continuing Connected Transaction – A. Renewal of Existing Continuing Connected Transactions” in the Letter from the Board of this circular, namely Yulin Neng Hua and Rongxin Hua Gong
“T/h” tonne per hour
“US$”
United States dollars, the lawful currency of the United States of America
“Wanfu Coal Mine”
a coal mine located in the southwest of Shandong Province, owned to Yanmei Heze Neng Hua Co., Ltd.*
（兗煤菏澤能化有限公司）, a subsidiary of the Company

“Yancoal Blue Sky” Yancoal Blue Sky Clean Energy Co. Ltd（兗煤藍天清潔能源有限公司）, a Sino-foreign equity joint venture established under the laws of the PRC and a 51% owned subsidiary of the Company

– 6 –

DEFINITIONS

“Yancoal Mining Construction”
Yancoal Mining Construction Co. Ltd.*（兗煤礦業工程有限公司）, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company
“Yankuang Group”
Yankuang Group Corporation Limited*（兗礦集團有限公司）, a wholly State-owned corporation and the controlling shareholder directly and indirectly holding approximately 53.96% of the total issued share capital of the Company as at the Latest Practicable Date
“Yankuang Security”
Shandong Yankuang Security Service Co., Ltd.*（山東兗礦保安服務有限公司）, a limited liability company incorporated in the PRC
“Yankuang Technology”
Yankuang Technology Co. Ltd* （兗礦科技有限公司）, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of Yankuang Group
“Yulin Neng Hua”
Yanzhou Coal Yulin Neng Hua Company Limited*, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company
“Zhongyin International Trade”
Shandong Zhongyin International Trade Co., Ltd.*（山東中垠國際貿易有限公司）, a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company
“Zhongyin Ruifeng”
Qingdao Zhongyin Ruifeng International Trade Co., Ltd.*（青島中垠瑞豐國際貿易有限公司）, a limited liability company incorporated in the PRC and a 51% owned subsidiary of the Company
“%” per cent.

Note: In this circular, the English names of the PRC entities are translation of their Chinese names and included herein for identification purpose only. In the event of any inconsistency, the Chinese names shall prevail.

– 7 –

LETTER FROM THE BOARD

兗州煤業股份有限公司 YANZHOU COAL MINING COMPANY LIMITED

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

(Stock Code: 1171)

Directors: Li Xiyong Li Wei Wu Xiangqian Wu Yuxiang Guo Dechun Zhao Qingchun Guo Jun

Independent non-executive Directors: Kong Xiangguo Cai Chang Poon Chiu Kwok Qi Anbang

Registered office: 298 South Fushan Road Zoucheng Shandong Province PRC Postal Code: 273500

Principal place of business in Hong Kong: Rooms 2008-12 20/F., The Center 99 Queen’s Road Central Hong Kong

11 January 2018

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

I. INTRODUCTION

Reference is made to the announcement of the Company dated 27 November 2017 and the notice of EGM of the Company dated 11 December 2017 in relation to the Proposed Continuing Connected Transactions.

The purpose of this circular is to provide you with information relating to the Proposed Continuing Connected Transactions.

II. CONTINUING CONNECTED TRANSACTIONS

Reference is made to the announcements of the Company dated 24 October 2014 and 29 March 2016 and the circulars of the Company dated 27 November 2014 and 25 April 2016, respectively, in relation to, among others, the Existing Continuing Connected

– 8 –

LETTER FROM THE BOARD

Transactions under the respective Existing Continuing Connected Transaction Agreements for the provision of goods and/or services between certain members of Yankuang Group and the Group.

In this circular, references to the Company and Yankuang Group in relation to the provision of products, materials or services in connection with continuing connected transactions shall include, in the case of the Company, its subsidiaries, or, in the case of Yankuang Group, its subsidiaries and its associates, excluding the Group.

The Existing Continuing Connected Transaction Agreements with Yankuang Group and other connected persons of the Company (as the case may be) include:

Existing Mutual Provision of Labour and Services Agreement
Existing Coal Train Convoy Service Contract
Existing Provision of Insurance Fund Administrative Services Agreement
Existing Provision of Materials Supply Agreement
Existing Provision of Products, Materials and Equipment Leasing Agreement
Existing Provision of Electricity and Heat Agreement
Existing Chemical Projects Entrusted Management Agreement
Existing Know-how Licensing Agreement

On 27 November 2017, the Company entered into the Proposed Continuing Connected Transaction Agreements with Yankuang Group and Century Ruifeng (as the case may be) relating to the renewal of certain Existing Continuing Connected Transaction Agreements and the entering into of several new continuing connected transaction agreements (as the case may be). The Existing Know-how Licensing Agreement will not expire until 31 December 2018 and will be renewed upon expiry. The Proposed Continuing Connected Transaction Agreements are subject to the Independent Shareholders’ approval at the EGM.

Yankuang Group is a controlling shareholder of the Company directly and indirectly holding approximately 53.96% of the issued share capital of the Company as at the Latest Practicable Date, and thus a connected person of the Company under the Hong Kong Listing Rules. Century Ruifeng is a substantial shareholder of Zhongyin Ruifeng, a subsidiary of the Company, and is therefore a connected person of the Company at the subsidiary level under the Hong Kong Listing Rules. Accordingly, the Proposed Continuing Connected Transaction Agreements and the transactions contemplated thereunder constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

– 9 –

LETTER FROM THE BOARD

A. RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS

1. The Proposed Mutual Provision of Labour and Services Agreement

On 24 October 2014, the Company entered into the Existing Mutual Provision of Labour and Services Agreement with Yankuang Group for a term of three years commencing from 1 January 2015 to 31 December 2017. On 17 February 2016, the Company entered into the Existing Coal Train Convoy Service Contract with Yankuang Security for a term of two years commencing from 1 January 2016 to 31 December 2017. Please refer to the announcements of the Company dated 24 October 2014 and 17 February 2016 and the circular of the Company dated 27 November 2014 for the details of the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract.

The Proposed Mutual Provision of Labour and Services Agreement

In order to better regulate the provision of labour and services between the Group and Yankuang Group under the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract, on 27 November 2017, the Company consolidated the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract and entered into the Proposed Mutual Provision of Labour and Services Agreement.

Date

27 November 2017

Parties

(1) the Company; and
(2) Yankuang Group

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major terms

Provision of labour and services by the Company to Yankuang Group:

Pursuant to the Proposed Mutual Provision of Labour and Services Agreement, the Company has agreed to provide Yankuang Group with services including transportation services, repair and maintenance services in relation to electromechanical equipment, such as hydraulic support, training services and consultancy services.

– 10 –

LETTER FROM THE BOARD

Provision of labour and services by Yankuang Group to the Company:

Pursuant to the Proposed Mutual Provision of Labour and Services Agreement, Yankuang Group has agreed to provide the Company with services including heat supply services, property management services, informationization and telecommunication services, repair and maintenance services in relation to housings and buildings as well as mining and factory equipment, construction engineering and management services, individual employee benefits, retiree benefits, asset leasing and relevant services, canteen operation services, guarantee services and security services (including security guard services and coal train convoy services).

On or before 30 November each year, the requesting party may provide to the supplying party an annual assessment of the labour or services that it requires in the coming year and the parties shall agree on an annual plan for the coming year before 31 December each year. The parties may enter into specific contracts in accordance with the terms of the Proposed Mutual Provision of Labour and Services Agreement.

Payment

(1) The payment of consideration of the Proposed Mutual Provision of Labour and Services Agreement can be settled on a one-off basis or by installment in accordance with paragraph (2) below.
(2) Each party shall record all items payable to or from the other party in a calendar month in relation to the transactions under the Proposed Mutual Provision of Labour and Services Agreement in its accounts on or before the last Business Day of that calendar month. Save for the payments made for non-completed transactions or disputed payments, all payments incurred in a calendar month shall be settled in full by the responsible party within the next calendar month.

Pricing

In respect of the provision of construction engineering and management services, informationization and telecommunication services, repair and maintenance services for constructions and equipment, canteen operation services, guarantee services, security guard services in security services and asset leasing and relevant services by Yankuang Group to the Company, the consideration shall be determined according to the Market Price (as defined below).

In respect of the provision of training services, transportation services, repair and maintenance services, and consultancy services by the Company to Yankuang Group, the consideration shall be determined according to the Market Price.

The Market Price shall in so far as possible be calculated and estimated before the commencement of each financial year.

– 11 –

LETTER FROM THE BOARD

“ Market Price ” shall be determined according to normal commercial terms based on the following:

(i) the price offered by independent third parties for provision of the same or similar type of services in the same or similar area or in the vicinity under normal commercial terms in the ordinary course of business of such independent third parties; or
(ii) if paragraph (i) above is not applicable, the price offered by independent third parties in the PRC for provision of the same or similar type of services under normal commercial terms in the ordinary course of business of such independent third parties.

To determine the Market Price, the sales department or purchase department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations from at least two independent third parties via emails, fax or phone or tenders by publishing tender notice through various media resources, such as local newspapers. The sales department or purchase department of the Company will update the relevant information from time to time based on the procurement demand and continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

With respect to the procurement Market Price, normally in each month, the purchase department of the Company collects market data, conducts analysis on bulk raw materials and materials and commodities which may experience significant price fluctuations during the month from various perspectives, including among others, price, production capacity, production volume, inventory, cost and profit and issues a purchase price information plan, which will be used to guide the purchase department in the procurement. This information provides a basis for monitoring the Market Price.

With respect to the sales Market Price, the sales department of the Company will determine the tender price of the relevant materials and commodities at the end of each month, in accordance with the market condition.

With respect to the labour and services provided or received by the Company to or from Yankuang Group according to the Market Price, the Company or the subsidiaries of the Company that provide or receive such labour and services would collect market data and conduct research on the market prices of similar labour and services when entering into the relevant transactions so as to ensure the price of which is fair and reasonable.

In respect of the provision of property management services, individual employee benefits, and retiree benefits by Yankuang Group to the Company, the consideration shall be determined according to the Cost Price (as defined below).

– 12 –

LETTER FROM THE BOARD

“ Cost Price ” is the transaction price determined based on the actual cost. The actual cost is the cost of providing the subject matter of the transaction by the providing party. For the purpose of computing the actual cost, Yankuang Group shall provide the Company with full account books and records in respect of the costs of such services.

The consideration for the provision of property management services by Yankuang Group shall be equal to the sum of the total costs for providing such services by Yankuang Group to the Company and itself multiplied by the proportion of the total number of employees in respect of the services received by the Company to the total number of employees in respect of the services received by Yankuang Group and the Company.

The individual employee benefits to be paid shall be equal to the actual cost incurred from the provision of such services by Yankuang Group.

The retiree benefits to be paid shall be equal to 18% of the total salaries of the employees of the Group at the relevant time, which are estimated based on the historical amounts of the previous provision of the services by Yankuang Group and taking into account changes in future. If the actual retiree benefits to be paid exceed the aforementioned estimate, Yankuang Group will pay the excess amount.

The consideration for the provision of heat supply by Yankuang Group to the Company shall be determined in accordance with the price approved by relevant government authorities and shall not be higher than the price prescribed by the local price bureau.

The consideration for the provision of coal train convoy services in security services by Yankuang Group to the Company shall be determined based on the Cost Price plus reasonable profit. Reasonable profit normally represents 5% of the Cost Price, which is determined through commercial negotiation between parties with reference to the general profit margin of the service industry. If the difference between the delivery weight and the arrival weight is within the range of natural and reasonable losses specified by or agreed on by the Company, the fees will be determined based on the delivery weight of the coal at RMB2.35 per tonne.

Yankuang Group has undertaken that the price of such labour and services would not be higher than the price offered by Yankuang Group to any independent third parties for the same type of labour and services under any circumstances.

Accordingly, the Directors believe that the above methods and procedures can ensure that the relevant continuing connected transactions will be conducted in accordance with the terms (including pricing policy) provided under the Proposed Mutual Provision of Labour and Services Agreement and such transactions will be conducted on normal commercial terms and in the interest of the Company and Shareholders as a whole.

– 13 –

LETTER FROM THE BOARD

The historical amount, proposed annual caps and reasons

Set out below are the historical annual amounts of the labour and services provided under the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract for the two financial years ended 31 December 2016 and the nine months ended 30 September 2017 (certain items reclassified by the categories set out in the Proposed Mutual Provision of Labour and Services Agreement):

Category Provision of labour and services by Yankuang Group to the Company: heat supply services property management services retiree benefits individual employee benefits informationization and telecommunication services repair and maintenance services for constructions and equipment construction engineering and management services asset leasing and relevant services guarantee services (Note 1) canteen operation services security services automobile transportation sub-total Provision of labour and services by the Company to Yankuang Group: training services transportation services repair and maintenance services consultancy services coal washing and processing services coal mine operation services sub-total Total	Year ended 31 December 2015 Annual cap Actual amount (RMB’000) (RMB’000) 50,600.0 43,751.8 140,000.0 137,200.0 630,000.0 539,989.0 56,000.0 27,681.3 258,000.0 10,164.3 400,000.0 74,378.3 900,000.0 687,234.3 50,000.0 22,027.6 – – – – 36,000.0 24,374.1 12,000.0 10,184.0 2,532,600.0 1,576,984.7 7,000.0 6.381.6 – – – – – – 107,640.0 6,730.0 197,000.0 300.0 311,640.0 13,411.6 2,844,240.0 1,590,396.3	Year ended 31 December 2016 Annual cap Actual amount (RMB’000) (RMB’000) 52,900.0 41,293.0 140,000.0 137,200.0 670,000.0 568,237.7 58,000.0 25,527.9 259,000.0 11,507.0 500,000.0 69,305.0 900,000.0 264,057.4 50,000.0 27,408.0 – – – – 30,000.0 26,669.0 12,000.0 –(Note 2,671,900.0 1,171,205.0 7,100.0 2,557.9 – – – – – – 192,600.0 9,272.0 215,000.0 –(Note 414,700.0 11,829.9 3,086,600.0 1,183,034.9	Year ending 31 December 2017 Period from 1 January 2017 to 30 September 2017 Annual cap Actual amount (RMB’000) (RMB’000) 55,200.0 42,172.4 140,000.0 106,270.0 700,000.0 455,751.8 60,000.0 6,768.1 260,000.0 35,063.2 600,000.0 41,983.2 900,000.0 336,665.2 50,000.0 19,735.8 – – – – 31,000.0 12,950.6 2) 12,000.0 –(Note 2) 2,808,200.0 1,057,360.3 7,300.0 2,621.2 – – – – – – 365,040.0_(Note 3) 77.0 _4) 232,000.0 –(Note 4) 604,340.0 2,698.2 3,412,540.0 1,060,058.5

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LETTER FROM THE BOARD

Notes:

Historically, the guarantee services were provided by Yankuang Group on a free-of-charge basis.
Due to the business restructuring of Yankuang Group, Yankuang Group has ceased to provide automobile transportation services since 2016.
Due to the business restructuring of the Company, Shengdi Fenlei Coal Engineering Technology (Tianjin) Co., Ltd.* （聖地芬雷選煤工程技術（天津）有限公司）, a subsidiary of the Company which provides coal washing and processing services to Yankuang Group, no longer carried out coal washing and processing businesses. Therefore, there was a significant decrease in the actual transaction amount of coal washing and processing services provided by the Company to Yankuang Group for the period ended 30 September 2017 as compared to the year ended 31 December 2016. For the three years ending 31 December 2020, the Company will no longer provide coal washing and processing services to Yankuang Group thus no annual cap is proposed.
Based on actual demand of Yankuang Group, the Company did not provide coal mine operation services to Yankuang Group in 2016 and 2017.

As at the Latest Practicable Date, the existing annual cap for the year 2017 has not been exceeded and, to the expectation of the Company, will not be exceeded as at the end of the year 2017.

Having considered the historical figures and the reasons set out below, the Board proposed that the total amounts of the service fees payable by the Company to Yankuang Group under the Proposed Mutual Provision of Labour and Services Agreement shall not exceed RMB2,907,000,000, RMB2,830,700,000 and RMB2,768,270,000 for the three financial years ending 31 December 2018, 2019 and 2020, respectively, and the total amounts of the service fees payable by Yankuang Group to the Company under the Proposed Mutual Provision of Labour and Services Agreement shall not exceed RMB177,100,000, RMB179,100,000 and RMB179,100,000 for the three financial years ending 31 December 2018, 2019 and 2020, respectively.

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LETTER FROM THE BOARD

Set out below are the proposed annual caps for each category of services under the Proposed Mutual Provision of Labour and Services Agreement for each of the three financial years ending 31 December 2020.

Category Provision of labour and services by Yankuang Group to the Company: heat supply services property management services retiree benefits individual employee benefits informationization and telecommunication services repair and maintenance services for constructions and equipment construction engineering and management services asset leasing and relevant services guarantee services canteen operation services security services sub-total Provision of labour and services by the Company to Yankuang Group: training services transportation services repair and maintenance services consultancy services sub-total Total	Annual cap for the year ending 31 December 2018 (RMB’000) 85,000 140,000 887,000 40,000 90,000 120,000 1,100,000 50,000 325,000 18,000 52,000 2,907,000 10,000 126,500 28,000 12,600 177,100 3,084,100	Annual cap for the year ending 31 December 2019 (RMB’000) 95,000 140,000 975,700 45,000 100,000 130,000 900,000 50,000 325,000 18,000 52,000 2,830,700 10,000 126,500 30,000 12,600 179,100 3,009,800	Annual cap for the year ending 31 December 2020 (RMB’000) 110,000 140,000 1,073,270 50,000 110,000 140,000 700,000 50,000 325,000 18,000 52,000
			2,768,270
			10,000 126,500 30,000 12,600
			179,100
			2,947,370

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LETTER FROM THE BOARD

The proposed annual caps for the transactions under the Proposed Mutual Provision of Labour and Services Agreement are determined mainly based on the following reasons:

Basis of the proposed caps for services provided by Yankuang Group to the Company

(1) Considering the increase in steam consumption for the new slime drying project of the Company’s headquarters, the heat required by the Group for the three years from 2018 to 2020 is expected to increase. It is expected that the annual expenses of the Group for heat supply services for the three financial years ending 31 December 2018, 2019 and 2020 would be RMB85 million, RMB95 million and RMB110 million, respectively;
(2) Since no significant change is expected in relation to operating premises of Company’s headquarters, the annual service fees for the property management services provided by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 would be calculated on the fixed price basis and remain at the same level as provided in the Existing Mutual Provision of Labour and Services Agreement, i.e. RMB140.00 million;
(3) In light of the expected increase in the number of retirees by approximately 23% and retirement pension per retiree in the three financial years ending 31 December 2020 as compared to the financial year ending 2017, it is expected that the annual expenses of the Group for retiree benefits for the three financial years ending 31 December 2018, 2019 and 2020 would increase to RMB887.00 million, RMB975.70 million and RMB1,073.27 million, respectively;
(4) Given the expansion of body check items and the increase of the medication cost, it is expected that the annual expenses of the Group for individual employee benefits for the three financial years ending 31 December 2018, 2019 and 2020 would be RMB40.00 million, RMB45.00 million and RMB50.00 million, respectively;
(5) Considering the increasing number of shared financial systems, the continuing establishment and improvement of the safety production dispatching system and database, the continuing expansion of service scope due to establishment and acquisition of new subsidiaries, the increase of service price and other factors, it is expected that the annual expenses of the Group for informationalization and telecommunication services for the three financial years ending 31 December 2018, 2019 and 2020 would be RMB90.00 million, RMB100.00 million and RMB110.00 million, respectively;
(6) Considering the aging of buildings and housings as well as mining and factory equipment, and the increase of repair costs year by year, according to the future plan for repair and maintenance of the Company, it is expected that the annual expenses of the Group for repair and maintenance services for the three financial years ending 31 December 2018, 2019 and 2020 would increase to RMB120.00 million, RMB130.00 million and RMB140.00 million, respectively;

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LETTER FROM THE BOARD

(7) In light of the second-phase construction works for the coal-to-chemical projects of Yulin Neng Hua and Ordos Neng Hua commencing from the second half of 2017, and the construction plan of Wanfu Coal Mine and washing plants targeted to be completed at the end of 2019, it is expected that the quantity of projects in construction that require construction engineering services from Yankuang Group would significantly increase and the annual expenses of the Group for construction engineering services for the three financial years ending 31 December 2018, 2019 and 2020 would increase to RMB1,100.00 million, RMB900.00 million and RMB700.00 million, respectively;
(8) Considering the increase of leasing of land, buildings, equipment, etc. of Yankuang Group by the Company’s new subsidiaries such as Yancoal Blue Sky and Yancoal Mining Construction and the increase of leasing costs, it is expected that the annual expenses of the Group for asset leasing and relevant services for each of the three financial years ending 31 December 2018, 2019 and 2020 would be RMB50.00 million;
(9) Since the current balance of guarantee provided by Yankuang Group to the Company is RMB26.6 billion and no significant change is expected to occur, for the three financial years ending 31 December 2018, 2019 and 2020, calculated on the basis of the standard guarantee fee at 1.22%, the annual expenses of the Group for guarantee services would be at the same level of the current amount, i.e. RMB325.00 million. The standard guarantee rate was determined after arm’s length negotiation between the Company and Yankuang Group after taking into account of the market price of the similar guarantee services and other factors, such as the credit rating of the Company;
(10) Considering the actual operation of the canteens of Ordos Neng Hua and Yulin Neng Hua, it is expected that the annual expenses of the Group for canteen operation services for each of the three financial years ending 31 December 2018, 2019 and 2020 would be RMB18.00 million; and
(11) Security services include train convoy services and security guard services. Considering (i) the restriction of automobile transportation due to the stringent environmental protection requirements and the Company’s strategy on sales structure in the future, the Company plans to increase the volume of coal transported by train in the next three financial years, and (ii) the cancellation of security department in the headquarters of the Company and the increasing demand for security guard services of new subsidiaries, the demand for security guard services of the Group is expected to significantly increase, it is expected that the annual expenses of the Group for security services for each of the three financial years ending 31 December 2018, 2019 and 2020 would increase to RMB52.00 million.

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LETTER FROM THE BOARD

Basis of the proposed caps for services provided by the Company to Yankuang Group

(1) Having considered the historical figures and the training plan of Anpei Centre, a branch of the Company, it is expected that the annual revenue of the Group for training services for each of the three financial years ending 31 December 2018, 2019 and 2020 would be RMB10.00 million;
(2) In accordance with the demands by Yankuang Group, the Railway Transportation Department of the Company and a subsidiary of the Company, namely Shandong Duanxin Supply Chain Management Co. Ltd.*（山東端信供應鏈管理有限公司）, will provide railway transportation and automobile transportation to Yankuang Group respectively. It is expected that the annual revenue of the Group for transportation services for each of the three financial years ending 31 December 2018, 2019 and 2020 would be RMB126.50 million;
(3) The Company acquired 100% equity interest in Donghua Heavy Industry previously held by Yankuang Group, in 2015. Donghua Heavy Industry will provide repair and maintenance services to Yankuang Group on needed basis. It is expected that the annual revenue of the Group for repair and maintenance services for the three financial years ending 31 December 2018, 2019 and 2020 would be RMB28.00 million, RMB30.00 million and RMB30.00 million, respectively; and
(4) Considering the cooperative hedging business carried out by Zhongyin International Trade with Shangqi Capital, Zhongyin International Trade will receive a fixed consulting services fee each year from Shangqi Capital for spot market analysis and spot trading pursuant to the relevant agreement, it is expected that the annual revenue of the Group for consultancy services for each of the three financial years ending 31 December 2018, 2019 and 2020 would be RMB12.6 million.

Reasons and benefits for entering into the Proposed Mutual Provision of Labour and Services Agreement

As regards the provision of labour and services by Yankuang Group, since both Yankuang Group and the Company are situated in Zoucheng, Shandong Province, the Company can obtain timely and reliable supply of labour and services from Yankuang Group, thereby reducing the operational costs and risks which helps to enhance the daily operation efficiency of the Company. With respect to canteen operation services, Shandong Yankuang Cinda Hotel Management Co., Ltd.*（山東兗礦信達酒店管理有限公司）, a subsidiary of Yankuang Group, has the qualification to provide canteen operation services and extensive operation experience, as such, the Company could enjoy a safe, stable and quality-assured canteen services by obtaining the relevant services from Yankuang Group under normal commercial terms.

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LETTER FROM THE BOARD

As regards the provision of labour and services by the Company to Yankuang Group, since the Company has professional qualification of and risk management experience in providing services such as training services, transportation services, repair and maintenance services and consultancy services, the Company can enjoy operating profits by providing such services to Yankuang Group at a fair price.

Implications of the Hong Kong Listing Rules

As the highest of the relevant percentage ratios in respect of the transactions under the Proposed Mutual Provision of Labour and Services Agreement exceeds 5% on an annual basis, the Proposed Mutual Provision of Labour and Services Agreement, the transactions contemplated thereunder and the proposed annual caps are subject to reporting, announcement and Independent Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

The Directors (including the independent non-executive Directors) consider that the Proposed Mutual Provision of Labour and Services Agreement, the transactions contemplated thereunder and the proposed annual caps are: (i) on normal commercial terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

2. The Proposed Provision of Insurance Fund Administrative Services Agreement

On 24 October 2014, the Company entered into the Existing Provision of Insurance Fund Administrative Services Agreement with Yankuang Group for a term of three years commencing from 1 January 2015 to 31 December 2017. Please refer to the announcement of the Company dated 24 October 2014 and the circular of the Company dated 27 November 2014 for the details of the Existing Provision of Insurance Fund Administrative Services Agreement.

The Proposed Provision of Insurance Fund Administrative Services Agreement

On 27 November 2017, the Company entered into the Proposed Provision of Insurance Fund Administrative Services Agreement with Yankuang Group to renew the Existing Provision of Insurance Fund Administrative Services Agreement on substantially the same terms.

Date

27 November 2017

Parties

(1) the Company; and
(2) Yankuang Group

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LETTER FROM THE BOARD

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major terms

Yankuang Group has undertaken to be responsible for the management of pension insurance payments, basic medical insurance payments, supplementary medical insurance payments, unemployment fund payments, maternity insurance payments and employment injury insurance payments to the employees of the Group on a free-of-charge basis.

The Company would pay to Yankuang Group each month an amount equivalent to (1) 18% of the total monthly salaries of the employees of the Group as pension; (2) 6% of the total monthly salaries of the employees of the Group as the basic medical insurance payments; (3) 4% of the total monthly salaries of the employees of the Group as the supplementary medical insurance payments; (4) 2% of the total monthly salaries of the employees of the Group as the unemployment fund payments; (5) 1% of the total monthly salaries of the employees of the Group as the maternity insurance payments; and (6) 2% of the total monthly salaries of the employees of the Group as the occupational injury insurance payments, to a designated account maintained by Yankuang Group, which would be transferred by Yankuang Group on behalf of the employees of the Group to the relevant social welfare authorities maintained by the local government on a free-of-charge basis. The respective proportion of the relevant insurance payments will be adjusted from time to time according to the changes of the respective proportion of the payments pursuant to the relevant laws and regulations.

Yankuang Group would provide the Company with a statement of the various insurance fund payments each year and the Company would be entitled to monitor and inspect the application of the moneys out of the insurance fund payments.

Pricing

The provision of insurance fund administrative services under the Proposed Provision of Insurance Fund Administrative Services Agreement is on a free-of-charge basis.

The historical amount, proposed annual caps and reasons

The historical amounts of the insurance fund transferred under the free transfer services provided by Yankuang Group to the Company for the financial years ended 31 December 2015, 2016 and the nine months ended 30 September 2017 were RMB1,119,279,000, RMB888,718,000 and RMB518,916,000, respectively. As the provision of insurance fund administrative services by Yankuang Group is on a free-of-charge basis under the Existing Provision of Insurance Fund Administrative Services Agreement, there is no historical amount and no annual cap is required to be set for the provision of such services.

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LETTER FROM THE BOARD

According to the applicable PRC regulations, the Company has to provide an annual estimate of the amounts of the insurance fund payments transferred by Yankuang Group on behalf of the employees of the Group to the relevant social welfare authorities maintained by the local government on a free-of-charge basis. Along with the growing prosperity of the industry and the expansion of business of the Company, the total amount of salaries linked to the performance of employees has been increasing. In addition, the newly-added payments of occupational injury insurance has also increased. Considering the above reasons, pursuant to the Proposed Provision of Insurance Fund Administrative Services Agreement, the Company estimates that the amounts of insurance fund of the free transfer services provided by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 will be RMB1,379,400,000, RMB1,517,340,000 and RMB1,669,080,000, respectively.

Reasons and benefits for entering into the Proposed Provision of Insurance Fund Administrative Services Agreement

The Company does not have the resources to provide social services. The social services such as medical insurance and social security under the Proposed Provision of Insurance Fund Administrative Services Agreement are essential to the Group and it would be the most efficient if the transfer services are provided by Yankuang Group on a free-of-charge basis.

Implications of the Hong Kong Listing Rules

As the insurance fund administrative services will be provided by Yankuang Group on a free-of-charge basis, the Proposed Provision of Insurance Fund Administrative Services Agreement and the transactions contemplated thereunder are exempt from all reporting, announcement and Independent Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules, and no annual cap is required to be set for the provision of such services.

According to the applicable PRC regulations, the Company will submit the resolution relating to the Proposed Provision of Insurance Fund Administrative Services Agreement and the transactions thereunder for the Independent Shareholders’ approval at the EGM.

The Directors (including the independent non-executive Directors) consider that the Proposed Provision of Insurance Fund Administrative Services Agreement and the transactions contemplated thereunder are: (i) on normal commercial terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

3. The Proposed Provision of Materials Supply Agreement

On 24 October 2014, the Company entered into the Existing Provision of Materials Supply Agreement with Yankuang Group for a term of three years commencing from 1 January 2015 to 31 December 2017. Please refer to the announcement of the Company dated 24 October 2014 and the circular of the Company dated 27 November 2014 for the details of the Existing Provision of Materials Supply Agreement.

The Proposed Provision of Materials Supply Agreement

On 27 November 2017, the Company entered into the Proposed Provision of Materials Supply Agreement with Yankuang Group to renew the Existing Provision of Materials Supply Agreement on substantially the same terms.

Date

27 November 2017

Parties

(1) the Company; and
(2) Yankuang Group

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major terms

Yankuang Group would provide the following materials to the Company: water pipes, magnetoelectric powders, anchor bars and other supporting products, carrier rollers and other similar materials.

On or before 30 November each year, the requesting party may provide to the supplying party an annual assessment of the supplies or services that it requires from the other in the coming year and the parties shall agree on the annual plan for the coming year before 31 December each year. The parties may enter into specific contracts in accordance with the terms of the Proposed Provision of Materials Supply Agreement.

Payment

(1) The payment of consideration of the Proposed Provision of Materials Supply Agreement can be settled on a one-off basis or by installment in accordance with paragraph (2) below.

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LETTER FROM THE BOARD

(2) Each party shall record all items payable to or from the other party in a calendar month in relation to the transactions under the Proposed Provision of Materials Supply Agreement in its accounts on or before the last Business Day of that calendar month. Save for the payments made for non-completed transactions or disputed payments, all payments incurred in a calendar month shall be settled in full by the responsible party within the next calendar month.

Pricing

All materials would be supplied at Market Price and such price shall in so far as possible be calculated and estimated before the commencement of each financial year.

To determine the Market Price, the purchase department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations from at least two independent third parties via emails, fax or phone or tenders by publishing tender notice through various media resources, such as local newspapers. The purchase department of the Company will update the relevant information from time to time based on the procurement demand and continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

For more relevant details in relation to the determination of the Market Price, please refer to the paragraph headed “1. Proposed Mutual Provision of Labour and Services Agreement” under the section “II. Continuing Connected Transaction – A. Renewal of Existing Continuing Connected Transactions” in the Letter from the Board of this circular.

Yankuang Group has undertaken that the price of such supplies would not be higher than the price offered by Yankuang Group to any independent third parties for the same type of materials under any circumstances.

In the event that the terms of provision of any materials by any third party are better than the terms offered by Yankuang Group or if the provision of such materials by Yankuang Group cannot meet the demand of the Company, the Company would be entitled to purchase any such materials from other third parties.

Accordingly, the Directors believe that the above methods and procedures can ensure that the relevant continuing connected transactions will be conducted in accordance with the terms (including pricing policy) provided under the Proposed Provision of Materials Supply Agreement and such transactions will be conducted on normal commercial terms and in the interest of the Company and Shareholders as a whole.

The historical amount, proposed annual caps and reasons

Set out below are the historical annual amounts of the Existing Provision of Materials Supply Agreement for the two financial years ended 31 December 2016 and the nine months ended 30 September 2017:

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LETTER FROM THE BOARD

					Period from 1
					January 2017 to
				Year ending 31	30 September
Year ended 31	December 2015	Year ended 31	December 2016	December 2017	2017
Annual cap	Actual amount	Annual cap	Actual amount	Annual cap	Actual amount
(RMB’000)	(RMB’000)	(RMB’000)	(RMB’000)	(RMB’000)	(RMB’000)
1,387,000.0	157,201.5	1,544,000.0	699,066.0	1,719,000.0	497,668.0

As at the Latest Practicable Date, the existing annual cap for the year 2017 has not been exceeded.

Considering the completion of construction and commencement of operation of the project of Yancoal Blue Sky, a subsidiary of the Company, as well as the coal mine project located in Inner Mongolia Autonomous Region, the materials provided by Yankuang Group to the Company is expected to decrease. In the meanwhile, the Company will reduce the procurement of materials from Yankuang Group by actively initiating repair of the used material and recycling of the waste as well as direct procurement from the market. Based on such, the Board proposed that the total annual amounts of the service fees payable by the Company to Yankuang Group under the Proposed Provision of Materials Supply Agreement shall not exceed RMB300,000,000, for each of the three financial years ending 31 December 2018, 2019 and 2020.

Reasons and benefits for entering into the Proposed Provision of Materials Supply Agreement

The materials provided by Yankuang Group to the Company are mining and factory tools and equipment used in ordinary mining production of the Company. The steady business expansion of the Company requires for stable suppliers of mining production materials. Certain materials provided by Yankuang Group are better in quality than those provided by external suppliers and it is rather difficult for the Company to source materials with comparable quality, specifications and value from other external suppliers. Furthermore, since Yankuang Group’s production sites are close to the Company’s coal mines, the transportation of such materials is convenient and at a relatively lower cost.

Implications of the Hong Kong Listing Rules

The transactions contemplated under the Proposed Provision of Materials Supply Agreement and the Proposed Bulk Commodities Sale and Purchase Agreement are aggregated pursuant to Rule 14A.82 of the Hong Kong Listing Rules for the purpose of calculating the applicable percentage ratios.

As the highest of the relevant percentage ratios for the transactions under the Proposed Provision of Materials Supply Agreement and the Proposed Bulk Commodities Sale and Purchase Agreement on aggregated basis exceeds 5% on an annual basis, the Proposed Provision of Materials Supply Agreement, the transactions contemplated thereunder and the proposed annual caps are subject to reporting, announcement and Independent Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

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LETTER FROM THE BOARD

The Directors (including the independent non-executive Directors) consider that the Proposed Provision of Materials Supply Agreement, the transactions contemplated thereunder and the proposed annual caps are: (i) on normal commercial terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

4. The Proposed Provision of Products, Materials and Equipment Leasing Agreement

On 24 October 2014, the Company entered into the Existing Provision of Products, Materials and Equipment Leasing Agreement and the Existing Provision of Electricity and Heat Agreement with Yankuang Group for a term of three years commencing from 1 January 2015 to 31 December 2017. The Existing Provision of Products, Materials and Equipment Leasing Agreement, the transactions thereunder and the annual caps were approved by the Independent Shareholders at the 2014 second extraordinary general meeting of the Company held on 12 December 2014. Please refer to the announcement of the Company dated 24 October 2014 and the circular of the Company dated 27 November 2014 for the details of the Existing Provision of Products, Materials and Equipment Leasing Agreement and the Existing Provision of Electricity and Heat Agreement.

The Proposed Provision of Products, Materials and Equipment Leasing Agreement

In order to better regulate the provision of products, materials and equipment leasing between the Group and Yankuang Group under the Existing Provision of Products, Materials and Equipment Leasing Agreement and the Existing Provision of Electricity and Heat Agreement, on 27 November 2017, the Company consolidated the Existing Provision of Products, Materials and Equipment Leasing Agreement and the Existing Provision of Electricity and Heat Agreement and entered into the Proposed Provision of Products, Materials and Equipment Leasing Agreement.

Date

27 November 2017

Parties

(1) the Company; and
(2) Yankuang Group

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major Terms

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LETTER FROM THE BOARD

timber, grease and oil products, axles, mining equipment and machineries such as hydraulic support and rubber conveyors, and other similar materials) and equipment leasing.

Payment

(1) The payment of consideration of the Provision of Products, Materials and Equipment Leasing Agreement can be settled on a one-off basis or by installment in accordance paragraph (2) below.
(2) Each party shall record all items payable to or from the other party in a calendar month in relation to the transactions under the Proposed Provision of Products, Materials and Equipment Leasing Agreement in its accounts on or before the last Business Day of that calendar month. Save for the payments made for non-completed transactions or disputed payments, all payments incurred in a calendar month shall be settled in full by the responsible party within the next calendar month.

Pricing

The price of coal products, methanol, supplies and equipment leasing shall be determined according to the Market Price.

The price of electricity and heat shall be determined based on the price approved by the relevant government authorities (including but not limited to Shandong Province Price Bureau and Jining Municipal Price Bureau) and would be settled according to the actual amounts used by Yankuang Group.

To determine the Market Price, the sales department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations from at least two independent third parties via emails, fax or phone or tenders by publishing tender notice through various media resources, such as local newspapers. The sales department of the Company will update the relevant information from time to time based on the procurement demand and continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

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LETTER FROM THE BOARD

Accordingly, the Directors believe that the above methods and procedures can ensure that the relevant continuing connected transactions will be conducted in accordance with the terms (including pricing policy) provided under the Proposed Provision of Products, Materials and Equipment Leasing Agreement and such transactions will be conducted on normal commercial terms and in the interest of the Company and Shareholders as a whole.

The historical amount, proposed annual caps and reasons

Set out below are the historical annual amounts of the Existing Provision of Products, Materials and Equipment Leasing Agreement and the Existing Provision of Electricity and Heat Agreement for the two financial years ended 31 December 2016 and the nine months ended 30 September 2017:

Category coal sales materials supply methanol sales equipment leasing electricity supply heat supply Total	Year ended 31 December 2015 Annual cap Actual amount (RMB’000) (RMB’000) 3,671,000.0 1,092,512.2 1,053,000.0 380,494.8 768,000.0 29,668.3 335,150.0 615.0 120,000.0 95,936.3 22,600.0 22,549.4 5,969,750.0 1,621,776.0	Year ended 31 December 2016 Annual cap Actual amount (RMB’000) (RMB’000) 3,881,000.0 1,103,442.4 1,247,000.0 457,954.7 768,000.0 48,353.1 664,700.0 391.3 120,000.0 83,022.0 23,700.0 15,913.0 6,704,400.0 1,709,076.6	Year ending 31 December 2017 Annual cap (RMB’000) 4,091,000.0 1,481,000.0 768,000.0 994,250.0 120,000.0 24,800.0 7,479,050.0	Period from 1 January 2017 to 30 September 2017 Actual amount (RMB’000) 760,779.8 242,506.4_(Note 1) 4,032.9(Note 2)_ 4,858.4 51,249.5 10,783.1 1,074,210.1

Notes:

Large transaction amounts of materials supply are expected to be recognized and settled collectively in the fourth quarter of 2017, thus the actual transaction amount of materials supply for the year ending 31 December 2017 is expected to be not lower than the actual transaction amount for the year ended 31 December 2016.
As a result of market demand and supply conditions and the increased raw material prices, the methanol products of the Company were sold at high prices in 2017, which resulted in decreased procurement amount of Yankuang Group and thus caused the significant decrease in actual transaction amount for the year ending 31 December 2017.

As at the Latest Practicable Date, the existing annual cap for the year 2017 has not been exceeded.

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LETTER FROM THE BOARD

The Board proposed that the annual amount payable by Yankuang Group to the Company under the Proposed Provision of Products, Materials and Equipment Leasing Agreement shall not exceed RMB3,837,300,000, RMB4,495,800,000 and RMB4,876,700,000 for the three financial years ending 31 December 2018, 2019 and 2020, respectively.

Set out below are the proposed annual caps for each transaction category under the Proposed Provision of Products, Materials and Equipment Leasing Agreement for each of the three financial years ending 31 December 2020.

Category coal sales materials supply methanol sales equipment leasing electricity supply heat supply Total	Annual cap for the year ending 31 December 2018 (RMB’000) 2,272,500 1,318,800 80,000 30,000 110,000 26,000 3,837,300	Annual cap for the year ending 31 December 2019 (RMB’000) 2,638,000 1,596,800 80,000 35,000 120,000 26,000 4,495,800	Annual cap for the year ending 31 December 2020 (RMB’000) 2,771,000 1,809,700 100,000 40,000 130,000 26,000
			4,876,700

(1) Considering the sales plan of the marketing centre of the Company and the subsidiaries of the Company, namely Ordos Neng Hua and Heze Neng Hua, and the demand of Yankuang Group, the Board proposed that the sales volume of coal of the Company to Yankuang Group for the three financial years ending 31 December 2018, 2019 and 2020 would be 4,500,000 tonnes, 5,060,000 tonnes and 5,230,000 tonnes, respectively. Taking into account of the average coal price in the first eight months of 2017, the Board proposed that the revenue of coal sales payable by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 shall be RMB2,272,500,000, RMB2,638,000,000 and RMB2,771,000,000, respectively;
(2) Considering (i) the commencement of operation of the new projects, such as the second phase of coal-to-liquid project of Yankuang Group, which is expected to result in an increase in the demand of Yankuang Group for materials, the transaction amount for the three financial years ending 31 December 2018, 2019 and 2020 is expected to be RMB787 million, RMB924 million and RMB1,089 million, respectively; (ii) the sales of electromechanical equipment, such as hydraulic support and rubber conveyors, by Donghua Heavy Industry to Yankuang Group, according to the need of Yankuang Group, the transaction amount for the three financial years

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ending 31 December 2018, 2019 and 2020 is expected to be RMB283 million, RMB385 million and RMB387 million, respectively; and (iii) the demand for materials of Yankuang Group to maintain simple reproduction and expand reproduction, the Board proposed that the revenue of provision of materials payable by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 shall be RMB1,318,800,000, RMB1,596,800,000 and RMB1,809,700,000, respectively;

(3) Considering the actual demand for methanol products of Yankuang Group, the current sales capability of the Company and the increasing capacity of the second-phase construction work of Yulin Neng Hua and Ordos Neng Hua, the Board proposed that the sales volume of methanol of the Company to Yankuang Group for the three financial years ending 31 December 2018, 2019 and 2020 would be 40,000 tonnes, 40,000 tonnes and 50,000 tonnes, respectively, thus the Board proposed that the revenue of sales of methanol payable by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 shall be RMB80,000,000, RMB80,000,000 and RMB100,000,000, respectively;
(4) Considering the increasing demand for asset leasing of Yankuang Group in the next three financial years, and the expected increase in the rental of the relevant equipment by 14% and 17% in 2019 and 2020 respectively, the Board proposed that the revenue of provision of asset leasing payable by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 shall be RMB30,000,000, RMB35,000,000 and RMB40,000,000, respectively;
(5) The provision of electricity and heat is adjusted from the Existing Provision of Electricity and Heat Agreement into the Proposed Provision of Products, Materials and Equipment Leasing Agreement. Considering the increasing demand for electricity and heat products of Yankuang Group, the Board proposed that (i) the sales volume of electricity of the Company to Yankuang Group for the three financial years ending 31 December 2018, 2019 and 2020 would be 198,000,000kWh, 216,000,000kWh and 234,000,000kWh, respectively, thus the revenue of sales of electricity payable by Yankuang Group to the Company for the three financial years ending 31 December 2018, 2019 and 2020 shall be RMB110,000,000, RMB120,000,000 and RMB130,000,000, respectively; and (ii) the supply volume of heat of the Company to Yankuang Group would be 100,000T/h in average for each of the three financial years ending 31 December 2018, 2019 and 2020, thus the revenue of sale of heat payable by Yankuang Group to the Company for each of the three financial years ending 31 December 2018, 2019 and 2020 shall be RMB26,000,000.

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Reasons and benefits for entering into the Proposed Provision of Products, Materials and Equipment Leasing Agreement

Due to the close proximity between Yankuang Group and the Company, the provision of products and materials by the Company to Yankuang Group at Market Price can reduce management and operational costs of the Group and can achieve a stable sales market for the Company. Meanwhile, the Company’s material supply centre has the qualification for materials and equipment distribution. Hence, it is able to purchase materials and equipment at a lower wholesale price, and subsequently resell to Yankuang Group at a higher Market Price, thereby increases the Company’s operating profit. Furthermore, the Company, through its equipment management centre and Zhongyin Finance Leasing provides equipment leasing to Yankuang Group under normal commercial terms based on its operation needs and thus could effectively control the risks of financial leasing business and achieve economic benefits.

Different source of supply and types of coal are to be provided by the Company to Yankuang Group under the Proposed Provision of Products, Materials and Equipment Leasing Agreement and by the Company to Yangkuang Group under the Proposed Bulk Commodities Sale and Purchase Agreement. The coal products provided by the Company to Yankuang Group under the Proposed Provision of Products, Materials and Equipment Leasing Agreement are self-produced coal of the Company, while the coal provided by the Company to Yangkuang Group under the Proposed Bulk Commodities Sale and Purchase Agreement are trade coal sourced by Zhongyin International Trade from the market. Please refer to the paragraph headed “B. Entering into of new continuing connected transactions agreements −1. The Proposed Bulk Commodities Sale and Purchase Agreement” below.

Implications of the Hong Kong Listing Rules

As the highest of the relevant percentage ratios for the transactions under the Proposed Provision of Products, Materials and Equipment Leasing Agreement exceeds 5% on an annual basis, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the transactions contemplated thereunder and the proposed annual caps are subject to reporting, announcement and Independent Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

The Directors (including the independent non-executive Directors) consider that the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the transactions contemplated thereunder and the proposed annual caps are: (i) on normal commercial terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

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5. The Proposed Chemical Projects Entrusted Management Agreement

On 28 October 2016, the Company entered into the Existing Chemical Projects Entrusted Management Agreement with Yankuang Chemical, a wholly-owned subsidiary of Yankuang Group, for a term commencing from 28 October 2016 to 31 December 2017. Please refer to the announcement of the Company dated 28 October 2016 for the details of the Existing Chemical Projects Entrusted Management Agreement.

The Proposed Chemical Projects Entrusted Management Agreement

On 27 November 2017, the Company entered into the Proposed Chemical Projects Entrusted Management Agreement with Yankuang Group, the terms of which are substantially the same as the Existing Chemical Projects Entrusted Management Agreement.

Date

27 November 2017

Parties

(1) the Company; and
(2) Yankuang Group

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major Terms

Pursuant to the Proposed Chemical Projects Entrusted Management Agreement, Yankuang Group has undertaken to be responsible for the strategy management, industrial development, significant safety technology management, related production and operation management, the sales of chemical products of the target companies (Yulin Neng Hua and Rongxin Hua Gong, both are subsidiaries of the Company, each the “ Target Company ” and collectively the “ Target Companies ”) as specified in the agreement, etc. Yankuang Group has undertaken the regulatory responsibility for significant issues related to safety and environmental protection of the Target Company.

Within thirty days prior to the expiration of the period of entrusted management, the parties may renew the management agreement upon negotiation.

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Payment

During the period of entrusted management, the Company shall pay the management fees by annual instalments. 70% of the annual management fees shall be paid before the end of January of the following year, and the remainder shall be paid within one month after the audit results under the operational target management responsibility system are verified.

During the period of entrusted management, pursuant to the terms of the agreement, when the Company is required to pay for the selling fees, the Company shall pay the corresponding fees to Yankuang Group within one month after the audit results of the operational target management responsibility system being verified each year.

During the period of entrusted management, if the Target Company has any safety or environmental incident (including unplanned production suspension) and, according to the investigation opinion confirmed by superior authorities, it is found that Yankuang Group shall take responsibility for such incident, the management fees paid by the Company to Yankuang Group shall be deducted proportionately according to the losses resulted from the incident until all the management fees are fully deducted.

Pricing

Management fees shall be accrued in accordance with the benchmark rate of RMB3 per tonne of methanol product produced by the Target Company which is determined based on the cost price of entrusted management services by Yankuang Group and the production evaluation target given by the Company to Yulin Neng Hua and Rongxin Hua Gong (a wholly-owned subsidiary of Ordos Neng Hua) after evaluating their designed annual capacity (600,000 tonnes and 900,000 tonnes, respectively) and subject to adjustment based on their actual operation status: (1) if the Target Company’s production volume falls below the production evaluation target, the management fees shall be accrued in accordance with the standard rate (i.e. completion rate of production evaluation target multiplied by RMB3 per tonne); (2) if the Target Company’s production volume is equal to the production evaluation target, the management fees shall be accrued in accordance with the standard rate of RMB3 per tonne; and (3) if the Target Company’s production volume is greater than the production evaluation target, the management fees shall be the sum of (i) the product of “production evaluation target multiplied by RMB3 per tonne” and (ii) the product of “volume of product in excess of the production evaluation target multiplied by RMB3.5 per tonne”. The benchmark rate of RMB3.5 per tonne is determined based on the cost price of entrusted management services by Yankuang Group plus incentive rewards given by the Company with reference to the general gross profit margin of sales in domestic chemical industry.

Chemical products produced by the Target Companies are sold by Yankuang Group at 99% of the published price of a third-party website: www.icis-china.com (the “ Standard Sales Price ”). Specific pricing mechanism is subject to further amendments of the agreement to be made upon mutual agreement by both parties from time to time.

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Where the actual sales price is higher than the Standard Sales Price, the surplus will be paid by the Company to Yankuang Group as sales expenses; where the actual price is lower than the Standard Sales Price, the deficit will be deducted from the management fees payable by the Company to Yankuang Group. If all the management fees are deducted, Yankuang Group shall pay the outstanding deficit by cash.

Accordingly, the Directors believe that the above methods and procedures can ensure that the relevant continuing connected transactions will be conducted in accordance with the terms (including pricing policy) provided under the Proposed Chemical Projects Entrusted Management Agreement and such transactions will be conducted on normal commercial terms and in the interest of the Company and Shareholders as a whole.

The historical amount, proposed annual caps and reasons

The annual caps of the Existing Chemical Projects Entrusted Management Agreement for the two financial years ended 31 December 2016 and 31 December 2017, were RMB5,500,000 and RMB5,500,000, respectively. Due to the relatively small scale of production of the Target Companies in the past two years, after negotiation between the Company and Yankuang Chemical, no transaction has been carried out under the Existing Chemical Projects Entrusted Management Agreement during the relevant periods. Therefore, as at the Latest Practicable Date, the existing annual cap for the year 2017 has not been exceeded. The combined designed annual production capacity of coal chemical products of Yulin Neng Hua and Ordos Neng Hua was 1.6 million tonnes. After the completion of their respective second-phase construction works, the combined annual production capacity of coal chemical products of Yulin Neng Hua and Ordos Neng Hua is expected to reach 3 million tonnes. Considering the increase in production of coal chemical products and the rise in the price of coal chemical products, the Board proposed that the annual amount payable by the Company to Yankuang Group under the Proposed Chemical Projects Entrusted Management Agreement for the three financial years ending 31 December 2018, 2019 and 2020 shall not exceed RMB20,000,000, RMB25,000,000 and RMB40,000,000, respectively.

Reasons and benefits for entering into the Proposed Chemical Projects Entrusted Management Agreement

Considering the fact that the second-phase construction works for the coal-to-chemical projects of Yulin Neng Hua and Ordos Neng Hua will enter into completion of construction phase and commence operation in the next three years, the Company renews the Proposed Chemical Projects Entrusted Management Agreement.

Through the Proposed Chemical Projects Entrusted Management Agreement, the Company can make full use of Yankuang Group’s extensive experience in coal chemical management, resources in marketing network and advantages in professional expertise, so as to achieve a synergy effect with Yankuang Group to improve the production efficiency and operating results, and reduce the relevant management costs

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of the Company. The Proposed Chemical Projects Entrusted Management Agreement also helps to resource sharing and synergistic development of the chemical industry branch and the coal production branch, which enhances economic benefits and strengthens the competitiveness of the Company, thereby achieving long-term development.

Implications of the Hong Kong Listing Rules

As the highest of the relevant percentage ratio for the transactions under the Proposed Chemical Projects Entrusted Management Agreement exceeds 0.1% but is less than 5% on an annual basis, the Proposed Chemical Projects Entrusted Management Agreement, the transactions contemplated thereunder and the proposed annual caps are subject to reporting and announcement requirements but are exempt from Independent Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

According to the applicable PRC regulations, the Company will submit the resolution relating to the Proposed Chemical Projects Entrusted Management Agreement and the transactions thereunder for the Independent Shareholders’ approval at the EGM.

The Directors (including the independent non-executive Directors) consider that the Proposed Chemical Projects Entrusted Management Agreement, the transactions contemplated thereunder and the proposed annual caps are: (i) on normal commercial terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

B. ENTERING INTO OF NEW CONTINUING CONNECTED TRANSACTION AGREEMENTS

In order to alleviate the impact of cycle fluctuations of coal mining and related business on the overall performance of the Company, the Company has been adjusting and upgrading its industrial structure in recent years and gradually established the industrial development strategy of “trilateral support” i.e. the business development support from industrial business, logistics trade and financial business. As an important part of this development strategy, the Company plans to carry out logistics trade business operation within the requirement of risk control, so as to enlarge the overall operating scale and improve the profitability of the overall business of the Company. However, the Company does not expect the logistics trade business to be a new business segment of the Company at the current stage. Therefore, the Company entered into the Proposed Bulk Commodities Sale and Purchase Agreement with Yankuang Group and the Proposed Bulk Commodities Mutual Supply Agreement with Century Ruifeng.

1. The Proposed Bulk Commodities Sale and Purchase Agreement

On 27 November 2017, the Company entered into the Proposed Bulk Commodities Sale and Purchase Agreement with Yankuang Group.

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Date

27 November 2017

Parties

(1) the Company; and
(2) Yankuang Group

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major terms

Pursuant to the Proposed Bulk Commodities Sale and Purchase Agreement, the Company and Yankuang Group may, from time to time, sell or purchase coal, soybean and iron ore from each other.

On or before 30 November each year, the requesting party may provide to the supplying party an annual assessment of the supplies that it requires from the other in the coming year and the parties shall agree on the annual plan for the coming year before 31 December each year. The parties may enter into specific contracts in accordance with the terms of the Proposed Bulk Commodities Sale and Purchase Agreement.

Payment

(1) The payment of consideration of the Proposed Bulk Commodities Sale and Purchase Agreement can be settled on a one-off basis or by installment in accordance with paragraph (2) below.
(2) Each party shall record all items payable to or from the other party in a calendar month in relation to the transactions under the Proposed Bulk Commodities Sale and Purchase Agreement in its accounts on or before the last Business Day of that calendar month. Save for the payments made for non-completed transactions or disputed payments, all payments incurred in a calendar month shall be settled in full by the responsible party within the next calendar month.

Pricing

The price of coal, soybean and iron ore shall be determined according to the Market Price.

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by obtaining quotation fee from at least two independent third parties via emails, fax or phone or tenders by publishing tender notice through various media resources such as local newspapers to determine the Market Price. The sales department or purchase department of the Company will update the relevant information from time to time based on the procurement demand and will continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

Yankuang Group has undertaken that the price of such bulk commodities shall not be higher than the price offered by Yankuang Group to any independent third parties for the same type of bulk commodities under any circumstances.

In the event that the terms or conditions of the provision or procurement of any bulk commodities by any third party are better than the terms or conditions offered by Yankuang Group or if the provision of such bulk commodities by Yankuang Group cannot meet the demand of the Company, the Company would be entitled to purchase any such bulk commodities from or sell such bulk commodities to other third parties.

Accordingly, the Directors believe that the above methods and procedures can ensure that the relevant continuing connected transactions will be conducted in accordance with the terms (including pricing policy) provided under the Proposed Bulk Commodities Sale and Purchase Agreement and such transactions will be conducted on normal commercial terms and in the interest of the Company and Shareholders as a whole.

Proposed annual caps and reasons

There is no historical transaction amount of the Company and Yankuang Group selling and purchasing coal, soybean and iron ore with each other.

In terms of the sales of bulk commodities from the Company to Yankuang Group, taking into account of (i) the average price of the relevant commodities in the first eight months of 2017, (ii) the sales plan of Zhongyin International Trade for selling coal, soybean and iron ore to Yankuang Group for the year 2018 which is formulated based on the procurement demand of Yankuang Group and the intended business development scale (which provides an indication of approximate trading volume for 2018) of Zhongyin International Trade determined based on its operating status and the market conditions (i.e., to keep an unchanged trade volume of coal and gradually expand the trade volume of soybean and iron ore for the next three financial years), and (iii) in 2019 and 2020, the sales volume of coal is expected to remain unchanged, and the sales volume of bulk commodities such as soybean and iron ore is expected to expand with an annual increase rate of 10% and 20%, respectively, the Board proposed

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that the annual fees payable by Yankuang Group to the Company under the Proposed Bulk Commodities Sale and Purchase Agreement shall not exceed RMB3,641,000,000, RMB3,841,000,000 and RMB4,281,000,000 for the three financial years ending 31 December 2018, 2019 and 2020, respectively.

In terms of the purchase of bulk commodities by the Company from Yankuang Group, taking into account of (i) the average price of the relevant commodities in the first eight months of 2017, (ii) the procurement plan of Zhongyin International Trade for purchasing coal, soybean and iron ore from Yankuang Group for the year 2018 which is formulated based on the development demand of Zhongyin International Trade and the sales intention of Yankuang Group (i.e., to keep an unchanged trade volume of coal and gradually expand the trade volume of soybean and iron ore for the next three financial years), and (iii) in 2019 and 2020, the purchase scale of coal is expected to remain unchanged, and the purchase scale of soybean and iron ore is expected to expand with an annual increase rate of 10% and 20% (as compared to the previous year) respectively, the Board proposed that the annual fees payable by the Company to Yankuang Group under the Proposed Bulk Commodities Sale and Purchase Agreement shall not exceed RMB4,500,000,000, RMB4,700,000,000 and RMB5,140,000,000 for the three financial years ending 31 December 2018, 2019 and 2020, respectively.

The proposed annual increase rates of 10% and 20% for sales volume and purchase scale as stated in the paragraph above are determined based on the development trend of the bulk commodities trade industry, the development strategy of the Company to effectively promote trade scale under the requirement of risk control and the trade development goals of the Company.

The Company refers to the average price of the relevant commodities in the first eight months of 2017 with reference to the quotations set out in several domestic information websites of bulk commodities, including but not limited to Zhuochuang Information (卓創資訊, http://www.sci99.com/) and Wind Information (Wind資訊, http:// www.wind.com.cn/), when estimating the annual caps for the purchase or sales of the bulk commodities, as this average price is the most recent average price which is available to the Company to provide an indication of the price trend for the next three years. Despite the fluctuation of the average price from time to time, the Company believes that the average price of the relevant bulk commodities for each of the financial year ending 31 December 2018, 2019 and 2020 would not significantly deviate from the average price in the first eight months of 2017. The average price of the relevant bulk commodities under the Proposed Bulk Commodities Sale and Purchase Agreement in the first eight months of 2017 is (i) RMB533 per tonne for the relevant coal; (ii) RMB3,988 per tonne for the relevant soybean; (iii) RMB897 per tonne for the relevant premium iron ore of the similar quality procured by the Company from Yankuang Group; and (iv) RMB471 per tonne for the relevant iron ore of the similar quality sold by the Company to Yankuang Group.

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Reasons and benefits for entering into the Proposed Bulk Commodities Sale and Purchase Agreement

As disclosed above, the entering into of the Proposed Bulk Commodities Sale and Purchase Agreement will help to alleviate the impact of cycle fluctuations on the business performance of the Company, enlarge the overall operating scale and improve the profitability of the Company. Furthermore, the Proposed Bulk Commodities Sale and Purchase Agreement will enable the Company and Yankuang Group to share the suppliers and customers in their respective resourcing and distribution channels which cover different areas, and thus bring the advantages of both the Company and Yankuang Group in their resourcing and distribution channels into full play, thereby creates a synergistic effect that could expand the trading size, improve the sales volume and improve the revenue of both parties.

In addition, as the Company has a better understanding in the operation and reputation of Yankuang Group, the Company believes that the risk of trading with Yankuang Group is lower than trading with third parties. By purchasing bulk commodities from Yankuang Group, the Company could secure a long-term and stable sources of supply. By selling bulk commodities to Yankuang Group, the Company could ensure the safety of the transactions, including payment recoveries. Collectively, this could reduce the operational risks of the entire trading business of the Company.

No cross selling will be made under the Proposed Bulk Commodities Sale and Purchase Agreement. Under the Proposed Bulk Commodities Sale and Purchase Agreement, the coal, soybean or iron ore purchased by the Company from Yankuang Group will be further sold to independent third party customers, and the coal, soybean or iron ore sold by the Company to Yankuang Group will source from independent third party suppliers. Coal, soybean or iron ore are of different sources, batches, types or models in sale transactions and purchase transactions.

Implications of the Hong Kong Listing Rules

As the highest of the relevant percentage ratios in respect of the transactions under the Proposed Provision of Materials Supply Agreement and the Proposed Bulk Commodities Sale and Purchase Agreement on aggregated basis exceeds 5% on an annual basis, the Proposed Bulk Commodities Sale and Purchase Agreement, the transactions contemplated thereunder and the proposed annual caps are subject to reporting, announcement and Independent Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.

The Directors (including the independent non-executive Directors) consider that the Proposed Bulk Commodities Sale and Purchase Agreement, the transactions contemplated thereunder and the proposed annual caps are: (i) on normal commercial

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terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

2. The Proposed Bulk Commodities Mutual Supply Agreement

On 27 November 2017, the Company entered into the Proposed Bulk Commodities Mutual Supply Agreement with Century Ruifeng.

Date

27 November 2017

Parties

(1) the Company; and
(2) Century Ruifeng

Term

Three years commencing from 1 January 2018 and expiring on 31 December 2020

Major terms

Pursuant to the Proposed Bulk Commodities Mutual Supply Agreement, the Company and Century Ruifeng agreed to, from time to time, sell or purchase bulk commodities including iron ore, coal and steel to or from each other.

The commodities to be purchased from Century Ruifeng are to be sold to independent third parties. The commodity for selling to Century Ruifeng only includes coal, which is sourced from the domestic self-produced coal of the Company and the overseas self-produced coal of the Company’s subsidiary in Australia, i.e. Yancoal Australia Limited.

Payment

(1) The payment of consideration of the Proposed Bulk Commodities Mutual Supply Agreement can be settled on a one-off basis or by installment in accordance with paragraph (2) below.

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(2) Each party shall record all items payable to or from the other party in a calendar month in relation to the transactions under the Proposed Bulk Commodities Mutual Supply Agreement in its accounts on or before the last Business Day of that calendar month. Save for the payments made for non-completed transactions or disputable payments, all payments incurred in a calendar month shall be settled in full by the responsible party within the next calendar month.

Pricing

The price of iron ore, coal, steel and other bulk commodities shall be determined according to the Market Price.

Century Ruifeng has undertaken that the price of such bulk commodities shall not be higher than the price offered by Century Ruifeng to any independent third parties for the same type of bulk commodities under any circumstances.

In the event that the terms or conditions of the provision or procurement of any bulk commodities by any third party are better than the terms or conditions offered by Century Ruifeng or if the provision of such bulk commodities by Century Ruifeng cannot meet the demand of the Company, the Company would be entitled to purchase any such bulk commodities from or sell such bulk commodities to other third parties.

Accordingly, the Directors believe that the above methods and procedures can ensure that the relevant continuing connected transactions will be conducted in accordance with the terms (including pricing policy) provided under the Proposed Bulk Commodities Mutual Supply Agreement and such transactions will be conducted on normal commercial terms and in the interest of the Company and Shareholders as a whole.

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Proposed annual caps and reasons

There is no historical transaction amount of the Company and Century Ruifeng selling and purchasing iron ore, coal and steel with each other.

In terms of the sales of bulk commodities by the Company to Century Ruifeng, taking into account of (i) the average price of the relevant coal in the first eight months of 2017 and (ii) the sales plan of the Company’s domestic and overseas subsidiaries for selling coal to Century Ruifeng which is formulated based on the procurement demand of Century Ruifeng and the intended business development scale (which provides an indication of approximate trading volume) of the Company and the subsidiaries for the next three financial years determined based on their operating status and the market conditions (i.e., to keep an unchanged sales volume of coal produced by domestic subsidiaries of the Company and gradually expand the sales volume of coal produced by Yancoal Australia Limited for the next three financial years), the Board proposed that the annual fees payable by Century Ruifeng to the Company under the Proposed Bulk Commodities Mutual Supply Agreement shall not exceed RMB1,733,000,000, RMB2,195,000,000 and RMB3,119,000,000 for the three financial years ending 31 December 2018, 2019 and 2020, respectively.

In terms of the purchase of bulk commodities by the Company from Century Ruifeng, taking into account of (i) the average price of the relevant bulk commodities in the first eight months of 2017, (ii) the procurement plan of Zhongyin Ruifeng for purchasing bulk commodities from Century Ruifeng for the next three financial years which is formulated based on the intended business development scale (which provides an indication of approximate trading volume) of the Company determined based on its operating status and the market conditions, and (iii) the sales intention of Century Ruifeng, the trade volume of iron ore, coal and steel is supposed to gradually decrease for the next three financial years, and steel will not be traded in 2019 to 2020. Therefore, the Board proposed that the annual fees payable by the Company to Century Ruifeng to under the Proposed Bulk Commodities Mutual Supply Agreement for the three financial years ending 31 December 2018, 2019 and 2020 shall not exceed RMB1,315,000,000, RMB1,100,000,000 and RMB900,000,000, respectively.

The Company refers to the average price of the relevant commodities in the first eight months of 2017 with reference to primarily the quotations set out in several domestic information websites of bulk commodities, including but not limited to Zhuochuang Information (卓創資訊, http://www.sci99.com/) and Wind Information (Wind資訊, http://www.wind.com.cn/), and in case of coal procured by Yancoal Australia Limited, several overseas indices, when estimating the annual caps for the purchase or sale of the bulk commodities, as this average price is the most recent average price which is available to the Company to provide an indication of the price trend for the next three years. Despite the fluctuation of the average price from time to time, the Company believes that the average price of the relevant bulk commodities for each of the financial year ending 31 December 2018, 2019 and 2020 would not significantly deviate from the average price in the first eight months of 2017. The average price of the relevant bulk commodities under the Proposed Bulk Commodities Mutual Supply Agreement in the first eight months of 2017 is, respectively, (i) US$74

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per tonne for the relevant iron ore; (ii) RMB640 per tonne for the relevant coal sold by the domestic subsidiaries of the Company to Century Ruifeng or procured by the Company from Century Fuifeng; (iii) US$68 per tonne for the relevant coal sold by Yancoal Australia Limited to Century Ruifeng; and (iv) RMB3,166 per tonne for the relevant steel.

Reasons and benefits for entering into the Proposed Bulk Commodities Mutual Supply Agreement

As disclosed above, the entering into of the Proposed Bulk Commodities Mutual Supply Agreement will help to alleviate the impact of cycle fluctuations on the business performance of the Company, enlarge the overall operating scale and improve the profitability of the Company. Furthermore, the trading activities conducted by the domestic subsidiaries of the Company and Yancoal Australia Limited, an overseas subsidiary of the Company with Century Ruifeng on normal commercial terms pursuant to their business qualifications will allow those subsidiaries of the Company to share the existing source of supply and distribution channel of bulk commodity trade of Century Ruifeng, and eventually be beneficial to the Company as a whole. The Proposed Bulk Commodities Mutual Supply Agreement will bring the advantages of both Century Ruifeng and the Company in their resourcing and distribution channels into full play, thereby results in a synergistic effect that could expand the trading size, improve the sales volume and improve the revenue of both parties.

In addition, Century Ruifeng is the other substantial shareholder of Zhongyin Ruifeng, a subsidiary of the Company. Compared with independent third parties, it is easier for the Company to obtain the information (such as the status of operation and the credit rating of Century Ruifeng) which is important to secure a long-term and stable sources of supply and ensure the safety of the transactions, including payment recoveries, thus could reduce the operating risks of the entire trading business of the Company.

The coal and the iron ore to be provided under the Proposed Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement are of different sources of supply, different thermal value and different types. Please refer to the paragraph headed “B. Entering into of new continuing connected transactions agreements −1. The Proposed Bulk Commodities Sale and Purchase Agreement” above.

No cross selling will be made under the Proposed Bulk Commodities Mutual Supply Agreement. Under the Proposed Bulk Commodities Mutual Supply Agreement, the iron ore, coal and steel purchased by the Company from Century Ruifeng and the iron ore, coal and steel sold by the Company to Century Ruifeng are of different sources, types or models.

Furthermore, no cross-selling will be made between Yankuang Group and Century Ruifeng through the Company as intermediate. The transactions of the Company with Yankuang Group and Century Ruifeng under the Proposed Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement,

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respectively, are to be carried out by two different subsidiaries of the Company, namely, Zhongyin International Trade and Zhongyin Ruifeng, respectively, and there will be no transaction between Zhongyin International Trade and Zhongyin Ruifeng.

Implications of the Hong Kong Listing Rules

As Century Ruifeng is a substantial shareholder of Zhongyin Ruifeng, a subsidiary of the Company, it is therefore a connected person at the subsidiary level of the Company, and the Proposed Bulk Commodities Mutual Supply Agreement and the transactions contemplated thereunder constitute a continuing connected transaction with a connected person at the subsidiary level of the Company.

The Directors (including the independent non-executive Directors) consider that the Proposed Bulk Commodities Mutual Supply Agreement, the transactions contemplated thereunder and the proposed annual caps are: (i) on normal commercial terms or better and in the ordinary and usual course of business of the Group; (ii) fair and reasonable; and (iii) in the interests of the Company and the Shareholders as a whole.

As the Directors have approved the Proposed Bulk Commodities Mutual Supply Agreement and the transactions contemplated thereunder and the independent non-executive Directors have confirmed that the terms of the Proposed Bulk Commodities Mutual Supply Agreement are fair and reasonable, on normal commercial terms or better and in the interests of the Company and the Shareholders as a whole, pursuant to Rule 14A.101 of the Hong Kong Listing Rules, the Proposed Bulk Commodities Mutual Supply Agreement and the transactions contemplated thereunder are subject to reporting and announcement requirements and are exempt from the circular, independent financial advice and shareholders’ approval requirements.

According to the applicable PRC regulations, the Company will submit the resolution relating to the Proposed Bulk Commodities Mutual Supply Agreement and the transactions thereunder for the Independent Shareholders’ approval at the EGM.

III. GENERAL

As at the Latest Practicable Date, Yankuang Group is the controlling shareholder of the Company holding, directly and indirectly through its subsidiary in Hong Kong, approximately 53.96% of the issued share capital of the Company. Yankuang Group and its associates will abstain from voting at the EGM on the ordinary resolutions approving the Proposed Continuing Connected Transaction Agreements (except the Proposed Bulk Commodities Mutual Supply Agreement), the transactions contemplated thereunder and their respective proposed annual caps which will be taken by poll as required under the Hong Kong Listing Rules. As at the Latest Practicable Date, so far as the Directors are aware, other than the aforesaid subsidiary of Yankuang Group, there is no other associate of Yankuang Group that held shares of the Company and therefore is required to abstain from voting on such ordinary resolutions.

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LETTER FROM THE BOARD

The Proposed Continuing Connected Transaction Agreements, the transactions contemplated thereunder and the respective proposed annual caps were approved at the seventh meeting of the seventh session of the Board held on 27 November 2017.

At the aforesaid Board meeting, three Directors, Mr. Li Xiyong, Mr. Li Wei and Mr. Wu Yuxiang, being also directors or senior management of Yankuang Group, were regarded to have a material interest in the abovementioned continuing connected transactions (except the Proposed Bulk Commodities Mutual Supply Agreement) and therefore, they have abstained from voting at the aforesaid Board meeting convened for the purpose of approving such transactions. Save as disclosed above, none of the Directors has a material interest in such transactions.

The Board has approved (1) the establishment of the Independent Board Committee to consider and advise the Independent Shareholders in respect of the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Bulk Commodities Sale and Purchase Agreement, the Proposed Bulk Commodities Mutual Supply Agreement and their respective proposed annual caps; and (2) the appointment of an independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement and the Proposed Bulk Commodities Sale and Purchase Agreement and their respective proposed annual caps.

According to the applicable PRC regulations, the Company also submits the resolutions relating to the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Bulk Commodities Sale and Purchase Agreement, the Proposed Bulk Commodities Mutual Supply Agreement, the transactions contemplated thereunder the transactions contemplated thereunder and their respective proposed annual caps, for the Independent Shareholders’ approval at the EGM.

The Board hereby confirms that the applicable percentage ratios for the actual transactions occurred in 2018 under each of the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement and the Proposed Bulk Commodities Mutual Supply Agreement are not expected to exceed 5% before the Independent Shareholders’ approval at the EGM, and the applicable percentage ratios for the actual transactions occurred in 2018 under the Proposed provision of Material Supply Agreement and the proposed Bulk Commodities Sale and Purchase Agreement, on aggregated basis, are not expected to exceed 5% before the Independent Shareholders’ approval at the EGM.

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LETTER FROM THE BOARD

Information of the parties

The Company

The Company is principally engaged in the business of mining, preparation, processing and sales of coal and coal chemicals. The Company’s main products are steam coal for use in large-scale power plants, coking coal for metallurgical production and prime quality low sulphur coal for use in pulverized coal injection.

Yankuang Group

Yankuang Group is a wholly State-owned corporation with a registered capital of RMB3,353.388 million and is principally engaged in businesses such as production and sales of coal, coal chemicals, coal aluminium, complete sets of electromechanical equipment manufacture and financial investment. As at the Latest Practicable Date, Yankuang Group is the controlling shareholder of the Company, holding directly and indirectly approximately 53.96% of the issued share capital of the Company, and is hence a connected person of the Company.

Century Ruifeng

Century Ruifeng is a limited liability company incorporated in the PRC. Its main scope of business includes international freight forwarders, self-operation and agency business of importation and exportation of various types of goods and technologies, transport consultancy; wholesale and retail of metal materials (excluding rare and dilute metals), construction materials, iron ore, daily sundries, garments, machinery and equipment, chemical products (excluding dangerous products), electrical equipment and relevant agency business, coke; domestic shipping agency, commodities water transport agency.

IV. EGM

The following resolutions will be proposed to the Shareholders at the EGM:

As ordinary resolutions:

To consider and approve each of the following Proposed Continuing Connected Transaction Agreements for the years from 2018 to 2020 with Yankuang Group and their respective annual caps.
(1) Approve the entering into of the Proposed Mutual Provision of Labour and Services Agreement by the Company with Yankuang Group for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps;
(2) Approve the entering into of the Proposed Provision of Insurance Fund Administrative Services Agreement by the Company with Yankuang Group for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps;

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LETTER FROM THE BOARD

(3) Approve the entering into of the Proposed Provision of Materials Supply Agreement by the Company with Yankuang Group for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps;
(4) Approve the entering into of the Proposed Provision of Products, Materials and Equipment Leasing Agreement by the Company with Yankuang Group for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps;
(5) Approve the entering into of the Proposed Chemical Projects Entrusted Management Agreement by the Company with Yankuang Group for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps; and
(6) Approve the entering into of the Proposed Bulk Commodities Sale and Purchase Agreement by the Company with Yankuang Group for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps.
To consider and approve the following Proposed Continuing Connected Transaction Agreement for the years from 2018 to 2020 with other connected person and the annual caps.
(1) Approve the entering into of the Proposed Bulk Commodities Mutual Supply Agreement by the Company with Century Ruifeng for a term of three years, the continuing connected transactions contemplated thereunder and the relevant annual caps.

V. RECOMMENDATION

The Directors consider that the proposals relating to the Proposed Continuing Connected Transactions are in the best interests of the Company and its Shareholders and accordingly recommend that all Shareholders to vote in favour of the aforesaid resolutions to be proposed at the EGM.

VI. ADDITIONAL INFORMATION

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

By order of the Board Yanzhou Coal Mining Company Limited Li Xiyong Chairman of the Board

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

兗州煤業股份有限公司 YANZHOU COAL MINING COMPANY LIMITED

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

(Stock Code: 1171)

Registered office: 298 South Fushan Road Zoucheng Shandong Province PRC Postal Code: 273500

Principal place of business in Hong Kong: Rooms 2008-12 20/F., The Center 99 Queen’s Road Central Hong Kong

11 January 2018

To Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 11 January 2018 (“ Circular ”), of which this letter forms part. Terms defined therein shall have the same meanings when used in this letter unless the context otherwise requires. We have been appointed by the Board as the Independent Board Committee to advise you as to whether, in our opinion, the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Provision of Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement and their respective proposed annual caps for the three years ending 31 December 2018, 2019 and 2020 are fair and reasonable in so far as the Independent Shareholders are concerned.

Donvex Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee in respect of the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Bulk

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Commodities Sale and Purchase Agreement and their respective proposed annual caps. The letter from Donvex Capital, which contains its advice, together with the principal factors taken into consideration in arriving at such advice, are set out on pages 50 to 88 of this Circular.

Your attention is also drawn to the “Letter from the Board” set out on pages 8 to 47 of this Circular and the additional information set out in the Appendix I to this Circular. Having taken into account the terms of the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Provision of Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement and having considered the interests of the Independent Shareholders and the advice from Donvex Capital, we consider that the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Provision of Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement and their respective proposed annual caps are (i) fair and reasonable; (ii) on normal commercial terms or better and in the ordinary and usual course of business of the Group; and (iii) in the interests of the Company and the Shareholders as a whole.

Accordingly, we recommend that the Independent Shareholders vote in favour of the resolutions to approve the Proposed Mutual Provision of Labour and Services Agreement, the Proposed Provision of Insurance Fund Administrative Services Agreement, the Proposed Provision of Materials Supply Agreement, the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Proposed Chemical Projects Entrusted Management Agreement, the Proposed Provision of Bulk Commodities Sale and Purchase Agreement and the Proposed Bulk Commodities Mutual Supply Agreement and their respective proposed annual caps.

Yours faithfully,

Yanzhou Coal Mining Company Limited Kong Xiangguo, Cai Chang, Poon Chiu Kwok, Qi Anbang Independent Board Committee

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

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

==> picture [98 x 60] intentionally omitted <==

Unit 1305, 13th Floor Carpo Commercial Building 18-20 Lyndhurst Terrace Central Hong Kong 11 January 2018

The Independent Board Committee and the Independent Shareholders of Yanzhou Coal Mining Company Limited

Dear Sir/Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in relation to (i) the renewal of Existing Mutual Provision of Labour and Services Agreement, Existing Provision of Products, Materials and Equipment Leasing Agreement and Existing Provision of Materials Supply Agreement; and (ii) the entering into of the Proposed Bulk Commodities Sale and Purchase Agreement, respectively, and the relevant proposed annual caps. Details of which are set out in the letter from the Board (the “ Letter from the Board ”) contained in the circular of the Company dated 11 January 2018 to the Shareholders (the “ Circular ”), of which this letter forms part. Terms used herein have the same meanings as those defined in the Circular unless otherwise stated.

Reference is made to the announcement of the Company dated 27 November 2017. On 27 November 2017, the Company entered into the Proposed Continuing Connected Transaction Agreements with Yankuang Group and Century Ruifeng (as the case may be). The Proposed Continuing Connected Transaction Agreements include:

Renewal of Existing Continuing Connected Transaction Agreements

Proposed Mutual Provision of Labour and Services Agreement
Proposed Provision of Insurance Fund Administrative Services Agreement
Proposed Provision of Materials Supply Agreement
Proposed Provision of Products, Materials and Equipment Leasing Agreement
Proposed Chemical Projects Entrusted Management Agreement

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Entering into of new continuing connected transaction agreements

Proposed Bulk Commodities Sale and Purchase Agreement
Proposed Bulk Commodities Mutual Supply Agreement

As at the Latest Practicable Date, Yankuang Group is a controlling shareholder of the Company holding, directly and indirectly through its subsidiary in Hong Kong, approximately 53.96% of the total number of shares in issue of the Company, and thus a connected person of the Company under the Hong Kong Listing Rules. As Century Ruifeng is a substantial shareholder of Zhongyin Ruifeng, a subsidiary of the Company, Century Ruifeng is a connected person of the Company at the subsidiary level under the Hong Kong Listing Rules. Accordingly, the Proposed Continuing Connected Transaction Agreements and the transactions contemplated thereunder constitute continuing connected transactions of the Company under Chapter 14A of the Hong Kong Listing Rules.

Due to the similar nature of the transactions contemplated under the Proposed Provision of Materials Supply Agreement and the Proposed Bulk Commodities Sale and Purchase Agreement, the abovementioned agreements shall be aggregated for the purpose of calculating the applicable percentage ratios pursuant to Chapter 14A of the Listing Rules.

As the respective highest of the relevant percentage ratios in relation to the Proposed Mutual Provision of Labour and Services Agreement, Proposed Provision of Products, Materials and Equipment Leasing Agreement and the aggregate of the Proposed Materials Supply Agreement and Proposed Bulk Commodities Sale and Purchase Agreement (together the “ Agreements ”) exceeds 5% on an annual basis, the continuing connected transactions under the Agreements (the “ Transactions ”) and the relevant proposed annual caps (the “ Proposed Annual Caps ”) are subject to reporting, announcement, and independent shareholders’ approval requirement under Chapter 14A of the Listing Rules.

Mr. Kong Xiangguo, Mr. Cai Chang, Mr. Poon Chiu Kwok and Mr. Qi Anbang, the independent non-executive Directors, have been appointed as members of the Independent Board Committee to advise the Independent Shareholders on (i) whether the terms of the Agreement are on normal commercial terms, fair and reasonable and in the interest of the Company and the Independent Shareholders as a whole; (ii) whether the Transactions including the Proposed Annual Caps are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and (iii) how the Independent Shareholders should vote in respect to the relevant resolution(s) to approve the Agreements and the Proposed Annual Caps. We, Donvex Capital Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

Mr. Li Xiyong, Mr. Li Wei and Mr. Wu Yuxiang, being also directors or senior management of Yankuang Group, were regarded to have a material interest in the Transactions and therefore, they have abstained from voting at the Board meeting convened for the purpose of approving the Agreements and Proposed Annual Caps. Save as disclosed above, none of the Directors has a material interest in the Transactions.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As Yankuang Group is a controlling shareholder of the Company holding, directly and indirectly through its subsidiary in Hong Kong, approximately 53.96% of the total number of shares in issue of the Company, Yankuang Group and its associates will abstain from voting at the EGM on the ordinary resolution(s) for the purpose of approving the Agreements and the Proposed Annual Caps. As at the Latest Practicable Date, so far as the Directors are aware, other than the aforesaid subsidiary of the Yankuang Group, there is no other associate of Yankuang Group that held shares of the Company and therefore is required to abstain from voting on such ordinary resolution(s).

OUR INDEPENDENCE

As at the Latest Practicable Date, we did not have any relationship with or interest in the Company or any other parties that could reasonably be regarded as relevant to our independence. In addition to our engagement as the Independent Financial Adviser, Donvex Capital Limited has also acted as an independent financial adviser to the then independent board committee and independent shareholders of the Company in relation to (i) the Wanfu mining right transfer agreement, the equity transfer agreement and new financial services agreement (details of which were set out in the circular of the Company dated 25 April 2016); and (ii) the equity transfer agreement and new financial services agreement (details of which were set out in the circular of the Company dated 2 June 2017) respectively, in the last two years.

We are independent from and not connected with the Group pursuant to Rule 13.84 of the Listing Rules and, accordingly, are qualified to advise the Independent Board Committee and the Independent Shareholders in respect of the Agreements and transactions contemplated thereunder. Apart from the normal advisory fee payable to us in connection with our appointment as the Independent Financial Adviser, no arrangement exists whereby we shall receive any other fees or benefits from the Company.

BASIS OF OUR OPINION

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

The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, which to the best of their knowledge and belief, that the information

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

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

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company, or its subsidiaries or associates, nor have we carried out independent verification on the information supplied.

Our opinion is based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note that subsequent developments (including any material change in market and economic conditions) may affect and/or change our opinion and we have no obligation to update this opinion to take into account events occurring after the Latest Practicable Date or to update, revise or reaffirm our opinion. In addition, nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

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

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the Agreements including the Proposed Annual Caps, we have taken into consideration the following principal factors and reasons:

(a) BACKGROUND OF THE PARTIES

Information on the Group

The Group is principally engaged in the business of mining, preparation, processing and sales of coal and coal chemicals. The Group’s main products are steam coals for use in large-scale power plants, coking coals for metallurgical production and prime quality low sulphur coals for use in pulverized coal injection.

Information on Yankuang Group

Yankuang Group is a wholly state-owned corporation with a registered capital of RMB3,353,388,000 and is principally engaged in business of production of coal, coal chemicals, coal aluminum, complete sets of electromechanical equipment manufacture and financial investment. As at the Latest Practicable Date, Yankuang Group is the controlling shareholder of the Company holding, directly and indirectly through its subsidiary in Hong Kong, approximately 53.96% of the number of Shares in issue of the Company, and therefore is a connected person of the Company.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS

(i) The Proposed Mutual Provision of Labour and Services Agreement

Background

On 17 February 2016, the Company entered into the Existing Coal Train Convoy Service Contract with Yankuang Security for a term of two years commencing from 1 January 2016 to 31 December 2017.

In order to better regulate the provision of labour and services between the Group and the Yankuang Group under the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract, on 27 November 2017, the Company consolidated the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract and entered into the Proposed Mutual Provision of Labour and Services Agreement.

The table below summarise the principal terms of the Proposed Mutual Provision of Labour and Services Agreement.

Date

27 November 2017

Parties

(a) the Company; and
(b) Yankuang Group

Term

Three years commencing from 1 January 2018 to 31 December 2020

Major terms

Provision of labour and services from the Company to Yankuang Group

Pursuant to the Proposed Mutual Provision of Labour and Services Agreement, the Company has agreed to provide Yankuang Group with services, including transportation services, repair and maintenance services, training services and consultancy services.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Provision of labour and services from Yankuang Group to the Company

Pursuant to the Proposed Mutual Provision of Labour and Services Agreement, Yankuang Group has agreed to provide the Company with the services, including heat supply services, property management services, informationization and telecommunication services, repair and maintenance services, construction engineering and management services, individual employee benefits, retiree benefits, asset leasing and relevant services, canteen operation services, guarantee services and security services (including security guard services and coal train convoy services).

On or before 30 November each year, the requesting party may provide to the supplying party an annual assessment of the labour or the services that it requires in the coming year and the parties shall agree on an annual plan for the coming year before 31 December each year. The parties may enter into specific contracts in accordance with the terms of the Proposed Mutual Provision of Labour and Services Agreement.

Payment terms

(1) The payment of consideration under the Proposed Mutual Provision of Labour and Services Agreement shall be settled on the one-off basis or by instalment in accordance with paragraph (2) below; and
(2) Each party shall record all amounts payable to or from the other party under the Proposed Mutual Provision of Labour and Services Agreement on or before the last Business Day of that calendar month. Save for the on-going transactions or the amount in dispute, all payments of the completed transactions under the Proposed Mutual Provision of Labour and Services Agreement shall be settled in full within the following calendar month.

Pricing

The pricing for the labour or services to be provided by/to the Company under the Proposed Mutual Provision of Labour and Services Agreement shall be determined based on the following pricing methods:

1. Market price

“ Market Price ” shall be determined according to normal commercial terms based on:

a. the price to be offered by independent third parties for provision of the same or similar type of services in the same or similar area or in the vicinity under normal commercial terms in the ordinary course of business of such independent third parties; or

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

b. if paragraph (a) is not applicable, the price to be offered by independent third parties in the PRC for provision of the same or similar type of services under normal commercial terms in the ordinary course of business of such independent third parties.

The Market Price shall be calculated and estimated before the commencement of each financial year.

2. Cost price

“ Cost Price ” is the transaction price determined based on the actual cost. The actual cost is the cost of providing the subject matters of the transaction by the providing party. For the purpose of computing the actual cost, Yankuang Group shall provide the Company with full account books and records in respect of the costs of such services.

3. The price approved by the relevant government authorities (the “ Approved Price ”).

4. The costs incurred by Yankuang Group, such as remuneration, consumption and depreciation of materials and equipment, plus reasonable profit (the “ Costs plus Profit ”).

Set out below is the table illustrating the different pricing methods to be applied for each transaction under the Proposed Mutual Provision of Labour and Services Agreement.

Pricing Method

Transactions under the Proposed Mutual Provision of Labour and Services Agreement

1. Market Price:

for the provision of labour and services provided by Yankuang Group to the Company:
(i) construction engineering and management services;
(ii) informationization and telecommunication services;
(iii) repair and maintenance services for construction and equipment;
(iv) canteen operation services;
(v) guarantee services;
(vi) security guard services in security services; and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(vii) asset leasing and relevant services.

for the provision of labour and services provided by the Company to Yankuang Group:

(viii) training services;

(ix) transportation services;

(x) repair and maintenance services; and

(xi) consultancy services.

To determine the Market Price, the sales department or purchase department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations from at least two independent third parties via emails, fax or phone or tenders. The sales department or purchase department of the Company will update the relevant information on a monthly basis based on the procurement demand and continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

2. Cost Price:

(i) property management services

The price for the provision of property management services by Yankuang Group shall equal to the sum of the total costs for providing such services by Yankuang Group to the Company and itself multiplied by the proportion of the total number of employees in respect of the services received by the Company to the total number of employees in respect of the services received by Yankuang Group and the Company.

(ii) individual employee benefits

The individual employee benefits to be paid shall equal to the actual cost incurred from the provision of such services by Yankuang Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) retiree benefits

The retiree benefits to be paid shall equal to 18% of the total salaries of the employees of the Group at the relevant time, which is estimated based on the historical amounts of the previous provision of the services by Yankuang Group and after taking into account changes in future. If the actual retiree benefits to be paid exceed the aforementioned estimate, Yankuang Group will pay the excess amount.

3. Approved Price:

Provision of heat supply

4. Costs plus Profit: Provision of coal train convoy services

The price for the provision of coal train convoy services by Yankuang Group to the Company shall be determined based on the costs incurred by Yankuang Group, such as remuneration, consumption and depreciation of materials and equipment, plus reasonable profit i.e. 5% of the cost. As coals may experience dust losses in windy conditions during transit, loading and unloading, in the event that the difference between the delivery weight and the arrival weight is within the range of natural and reasonable losses from approximately 0.8% to 1.0% as specified by or agreed on by the Company, the fees will be determined based on the delivery weight of the coal at RMB2.35 per ton.

Yankuang Group has undertaken that the price of such labour and services shall not be higher than the price offered by Yankuang Group to any independent third parties for the same type of labour and services under any circumstances.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Assessment on internal control procedures of pricing and payment terms

In order to assess the fairness and reasonableness of the pricing policy and payment terms, we have obtained and reviewed the invoices of three historical transactions in relation to the training services provided to (i) Yankuang Group under the Existing Mutual Provision of Labour and Services Agreement; and (ii) the independent third parties (the “ Services Comparables ”), respectively as the Company has not requested/provided the same or similar labour or services in the Existing Mutual Provision of Labour and Services Agreement from/to independent third parties save for the training services.

Pricing

Based on the review, we note that:

(i) For the labour and services provided by the Company to Yankuang Group

The prices offered to Yankuang Group for the labour and services under the Existing Mutual Provision of Labour and Services Agreement are similar with and no less favourable than those offered to the Services Comparables.

(ii) For the labour and services provide by Yankuang Group to the Company

The prices offered by Yankuang Group for the labour and services under the Existing Mutual Provision of Labour and Services Agreement are similar with and no more favourable to those offered by the Services Comparables.

Payment terms

We have also compared the payment terms under the Existing Mutual Provision of Labour and Services Agreement with those offered by/to the Services Comparables for the same or similar type of labour and services. We note that the payments terms under the Existing Mutual Provision of Labour and Services Agreement are in line with those offered by/to the Services Comparables.

To further assess the pricing policy applied for the labour and services to be included in the Proposed Mutual Provision of Labour and Services Agreement, we have further obtained (i) the invoices of the historical transactions in relation to relevant labour and services under the Existing Mutual Provision of Labour and Services Agreement; and (ii) the pricing reference provided by the Company with respect to the four different pricing methods as stated above. Based on the review, we note that:

Market Price

The prices adopted in the provision of (i) informationisation and telecommunication services; (ii) construction engineering and management services; (iii) repair and maintenance services for construction and equipment; (iv)

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

asset leasing and relevant services and (v) training services under the Existing Mutual Provision of Labour and Services were similar and in line with the Market Price.

Cost Price

The prices adopted in the provision of (i) property management services; (ii) individual employee benefits; and (iii) retiree benefits were equal to the costs provided by Yankuang Group to the Company.

Approved Price

The unit price adopted in the provision of heat supply was within the price range as stipulated by the local price bureau in Jining, Shandong Province.

Costs plus Profit

The prices adopted in the provision of security services (coal train convoy services) were determined based on the actual costs provided by Yankuang Group plus the reasonable profit of 5%.

As such, we consider that the pricing policy under the Existing Mutual Provision of Labour and Services Agreement has been properly conducted and the prices for the labour and services are determined based on the corresponding pricing methods as set out in the Existing Mutual Provision of Labour and Services Agreement.

Views

Having considered that (i) the prices offered to Yankuang Group are no less favourable than those offered to the independent third parties; (ii) the prices offered by Yankuang Group are no more favourable to those offered by the independent third parties; (iii) the prices adopted for the relevant transactions under the Existing Mutual Provision of Labour and Services Agreement are determined based on the proper pricing methods; (iv) the payment terms under the Existing Mutual Provision of Labour and Services Agreement are in line with those offered by/to the independent third parties; and (v) the Company will collect quotations from at least two independent third parties in the market to be the pricing reference for the Proposed Mutual Provision of Labour and Services Agreement, we consider that the pricing and payment terms under the Proposed Mutual Provision of Labour and Services Agreement are (i) on normal commercial terms after arms’ length negotiation; and (ii) fair and reasonable so far as the Company and the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Historical Transaction Amounts

Set out below are the historical annual amounts of the Existing Mutual Provision of Labour and Services Agreement and the Existing Coal Train Convoy Service Contract for the two financial years ended 31 December 2016 and nine months ended 30 September 2017 (certain items have been reclassified by the categories setting out in the Proposed Mutual Provision of Labour and Services Agreement):

Category Year ended 31 December 2015 Annual cap Actual amount (RMB’000) (RMB’000) Provision of labour and services from Yankuang Group to the Company: heat supply services 50,600.0 43,751.8 property management services 140,000.0 137,200.0 retiree benefits 630,000.0 539,989.0 individual employee benefits 56,000.0 27,681.3 informationisation and Telecommunication services 258,000.0 10,164.3 repair and maintenance services for construction and equipment 400,000.0 74,378.3 construction engineering and management services 900,000.0 687,234.3 asset leasing and relevant services 50,000.0 22,027.6 guarantee services – – canteen operation services – – security services (Note 1) 36,000.0 24,374.1 automobile transportation 12,000.0 10,184.0 Sub-total 2,532,600.0 1,576,984.7 Ultilisation Rate 62.3% Provision of labour and services from the Company to Yankuang Group: training services 7,000.0 6,381.6 transportation services – – repair and maintenance services – – consultancy services – – coal washing and processing services 107,640.0 6,730.0 coal mine operation services 197,000.0 300.0 Sub-total 311,640.0 13,411.6 Ultilisation Rate 4.3%	Year ended 31 December 2016 Annual cap Actual amount (RMB’000) (RMB’000) 52,900.0 41,293.0 140,000.0 137,200.0 670,000.0 568,237.7 58,000.0 25,527.9 259,000.0 11,507.0 500,000.0 69,305.0 900,000.0 264,057.4 50,000.0 27,408.0 – – – – 30,000.0 26,669.0 12,000.0 – 2,671,900.0 1,171,205.0 43.8% 7,100.0 2,557.9 – – – – – – 192,600.0 9,272.0 215,000.0 – 414,700.0 11,829.9 2.9%	Year ending 31 December 2017 Annual cap (RMB’000) 55,200.0 140,000.0 700,000.0 60,000.0 260,000.0 600,000.0 900,000.0 50,000.0 – – 31,000.0 12,000.0 2,808,200.0 7,300.0 – – – 365,040.0 232,000.0 604,340.0	Nine months ended 30 September 2017 Actual amount (RMB’000) 42,172.4 106,270.0 455,751.8 6,768.1 35,063.2 41,983.2 336,665.2 19,735.8 – – 12,950.6 – 1,057,360.3
			37.7% (Note 2)
			2,621.2 – – – 77.0 – 2,698.2
			0.4% (Note 2)

Note:

The security services under the Existing Mutual Provision of Labour and Services Agreement merely includes the coal train convoy services;
The utilization rate for the nine months ended 30 September 2017 is calculated based on the historical transactions amounts for the nine months ended 30 September 2017 against the annual caps for the year ended 31 December 2017.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As illustrated in the above table, we have noticed that that the utilisation rates of the annual caps under the Existing Mutual Provision of Labour and Services Agreement for the two years ended 31 December 2016 range from approximately 2.9% to 62.3%. As discussed with the management of the Company, we understand that the main reasons for the low ultilisation rates of the annual caps of Existing Mutual Provision of Labour and Services Agreement are as follows:

For the labour and services provided by Yankuang Group to the Company

1. construction engineering and management services

The Company has decreased the investment in the construction projects due to the negative economic situation in the PRC since 2015. As such, the amount of construction engineering and management services provided by Yankuang Group had decreased accordingly in 2016 and 2017;

repair and maintenance services

Donghua Heavy Industry, a wholly-owned subsidiary of Yankuang Group providing the repair and maintenance services for mining equipment to the Company, was acquired by the Company in late 2015. Therefore Donghua Heavy Industry is no longer a connected person of the Company. In this regard, the amount of such transactions decreased in the year 2016 and 2017.

3. automobile transportation services

In order to improve the operational efficiency of the Group, the Company established a wholly-owned subsidiary to provide automobile transportation services for the Group in 2015. As such, the demand in automobile transportation services to be requested from Yankuang Group has decreased since 2015.

4. individual employee benefits

In order to improve the cost control, the Company reduced the coverage of the individual employee benefits, i.e. medication plan and medical check plan, provided by Yankuang Group to the Company, in 2015, 2016 and 2017 respectively. As such, the amount of individual employee benefits paid by the Company decreased dramatically during 2015 to 2017 accordingly, resulting in a low utilisation rate for the corresponding period.

5. informationisation and telecommunication services

Due to the enhancement in cost control, the Company has decreased or terminated a portion of informationisation and telecommunication services for the Group, such as the shared financial system, during 2015 to 2017. Therefore, the expense in such services of the Group dropped significantly in 2015, 2016 and 2017 respectively, resulting in a low utilisation rate for the corresponding period.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For the labour and services provided by the Company to Yankuang Group

training services

Due to the enhancement in cost control, Yankuang Group had decreased its expense in the training since 2016. In this regard, the amounts of training service provided by the Company to Yankuang Group dropped significantly in 2016 and 2017 as compared to that in the year 2015;

coal washing and processing services

Yankuang Group has developed and upgraded its technology of coal washing and processing since 2015 to improve the operations of the coal processing business. As a result, the demand in coal washing and processing services from Yankuang Group has declined since 2015; and

3. coal mine operation services

Since the management for the operation of coal mines has been improved by Yankuang Group since 2015, the amount received from the provision of coal mine operation services by the Company dropped substantially in 2015 and, subsequently, such services were terminated for the year 2016 and for the nine months ended 30 September 2017.

As confirmed by the management of the Company, as at the Latest Practicable Date, the transaction amounts of heat supply services and property management services for the year ending 31 December 2017 did not exceed the annual cap for the year ending 31 December 2017 (“ 2017 Annual Caps ”).

With a proper internal control adopted to monitor each transaction amount under the Existing Mutual Provision of Labour and Services Agreement, the Board is of the view that the 2017 Annual Caps of the heat supply services and property management services will not be exceeded despite that their annualised amounts based on the nine months ended 30 September 2017 exceed the 2017 Annual Caps.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Proposed Annual Caps

			Existing
			Annual
			Caps
			For the
			year
			ending 31		Proposed Annual			Caps
			December		For the	year ending		31 December
Category			2017		2018		2019	2020
			(RMB’000)		(RMB’000)		(RMB’000)	(RMB’000)
_Provision of labour and services by _		Yankuang Group to the Company:
(i)	heat supply services		55,200		85,000		95,000	110,000
(ii)	property management services		140,000		140,000		140,000	140,000
(iii)	retiree benefits		700,000		887,000		975,700	1,073,270
(iv)	individual employee benefits		60,000		40,000		45,000	50,000
(v)	informationization and		260,000		90,000		100,000	110,000
	telecommunication services
(vi)	repair and maintenance		600,000		120,000		130,000	140,000
	services for construction
	and equipment
(vii)	construction engineering and		900,000		1,100,000		900,000	700,000
	management services
(viii)asset leasing and relevant			50,000		50,000		50,000	50,000
	services
(ix)	guarantee services		–		325,000		325,000	325,000
(x)	canteen operation services		–		18,000		18,000	18,000
(xi)	coal train convoy services		31,000		47,000		47,000	47,000
(xii)	security guard services		–		5,000		5,000	5,000
Sub-total			2,796,200		2,907,000		2,830,700	2,768,270

_Provision of labour and services by _		_the Company _		to Yankuang Group:
(xiii)training services			7,300		10,000		10,000	10,000
(xiv)	transportation services		–		126,500		126,500	126,500
(xv)	repair and maintenance		–		28,000		30,000	30,000
	services
(xvi)	consultancy services		–		12,600		12,600	12,600
Sub-total			7,300		177,100		179,100	179,100

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Basis of determination of the Proposed Annual Caps

In assessing the fairness and reasonableness of the Proposed Annual Caps, we have reviewed a comprehensive summary of estimation for each transaction under the Proposed Mutual Provision of Labour and Services Agreement as follows:

(i) heat supply services

Based on the review, we note that the estimated consumption of the heat will be approximately 390,000 steam tons, 430,000 steam tons and 500,000 steam tons for each of the three years ending 31 December 2018, 2019 and 2020 with an estimated unit price of approximately RMB222 per ton in order to satisfy the anticipated increase in the demand from the new slime drying project of the Company where the slimes will be dried out by the heat.

(ii) property management services

It is noted that the properties to be managed by Yankuang Group for the three years ending 31 December 2020 remain unchanged. The management fee to be charged by Yankuang Group for the foresaid properties will also remain unchanged within a range from approximately RMB38 per square metre to RMB49 per square metre.

(iii) retiree benefits

Based on the estimation of the Group, we note that the number of retirees has been increased to 29,612 for each of the three years ending 31 December 2020 from 24,144 for the year 2017. The retiree expense per head per annum will be RMB30,000, RMB32,900 and RMB36,200 for the years ending 31 December 2018, 2019 and 2020 respectively.

(iv) individual employee benefits

We note that, for the year ending 31 December 2018, Yankuang Group provides a medication plan to 10,000 employees at a cost of RMB3,000 per head and a medical check plan to 50,000 employees at a cost of RMB200 per head respectively. The Company also expects an increase of approximately 13% and 11% in the both aforesaid plans for the years 2019 and 2020 respectively mainly due to the increase in the cost per head as a result of the expected expansion in the coverage of the medication plan and medical check plan in 2019 and 2020 respectively.

(v) informationisation and telecommunication services

We understand that the informationisation and telecommunication services include network and communication, delivery systems, shared financial systems, ERP systems and informationisation technology. After taking into account the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

increasing number of such services to be scheduled for the new subsidiaries, i.e. Yancoal Blue Sky and Yancoal Mining Construction (“ New Subsidiaries ”), and new projects, i.e. the second-phase of the coal-to-chemical projects in Yulin Nenghua and Ordos Nenghua (“ New Projects ”), of the Group in 2018, the Company estimates that the annual service fee for each abovementioned service will be approximately RMB20.0 million, RMB6.5 million, RMB6.6 million, RMB9.0 million and RMB47.9 million for the year ending 31 December 2018 respectively, with an aggregate of RMB90.0 million, representing a significant increase as compared to the annualised amount for the year ending 31 December 2017.

With the expected continuing expansion in the service scope of informationisation and telecommunication for the years 2019 and 2020, an increase of approximately 10% in the annual expense has been applied for 2019 and 2020, respectively. (vi) repair and maintenance services for construction and equipment Based on the estimation, there are 84 types of equipment or machineries and buildings of the Group scheduled to be maintained or repaired by Yankuang Group in 2018. Due to the increase in (a) the quantity of the ageing equipment or machineries and buildings to be repaired and maintained; and (b) the repair and maintenance cost for the ageing equipment or machines and buildings, respectively in 2018, the annual service fee of RMB120 million for the year ending 31 December 2018 represents a significant increase as compared to the annualised amount for the year ending 31 December 2017.

Due to the continuous aging of the equipment and machineries, the Company estimates that the cost of maintenance and repair will be increased by approximately 8% for the years ending 31 December 2019 and 2020 respectively.

(vii) construction engineering and management services

As a result of the further development of (i) the New Projects and (ii) Wanfu Coal Mine and coal washing plant as planned by the Group in 2018, we note that there are 138 constructions for the New Projects and Wanfu Coal Mine to be scheduled in 2018 with an aggregate cost of approximately RMB1.1 billion for the year ending 31 December 2018, representing a significant increase as compared to the annualised amount for the year ending 31 December 2017. As certain projects of the Group are expected to be completed during 2019 to 2020, the estimated costs of construction engineering and management services will be decreased to approximately RMB900.0 million and RMB700.0 million for the two years ending 31 December 2020 respectively.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(viii) asset leasing and relevant services

The assets to be leased by the Company include equipment and machineries, plants and lands. We note that the fixed annual rentals for the equipment and machineries, plants and lands are RMB23.8 million, RMB25.6 million and RMB0.6 million respectively, in an aggregate of RMB50.0 million, for each of the three years ending 31 December 2020, which represents a significant increase as compared to the annualised amount for the year ending 31 December 2017 as a result of the increase in the assets leased by the Company for the New Subsidiaries for the three years ending 31 December 2020.

(ix) guarantee services

Given that (a) the balance of guarantee provided by Yankuang Group to the Company is RMB26.6 billion for each of the three years ending 31 December 2020; and (b) the standard guarantee fee is 1.22% after taking into account the market price of the similar guarantee services offered by other parties and the credit rating of the Company of “AAA”, the fixed annual guarantee service charged to the Company is RMB325.0 million for each of the three years ending 31 December 2020.

(x) canteen operation services

We understand that Yankuang Group will provide the canteen operation services to 7 mine sites of the Group, such as Ordos project, Zhuan Long Wan coal mine, Ying Pan Hao coal mine, Rongxin Chemicals, An Yuan coal mine, Shi La Wu Su mine and Yulin Neng Hua, with a fixed annual fee of RMB1.82 million, RMB3.65 million, RMB3.69 million, RMB1.91 million, RMB0.91 million, RMB3.12 million and 3.00 million respectively, in an aggregate of RMB18.0 million, for each of the three years ending 31 December 2020.

(xi) coal train convoy services

In order to satisfy the environmental protection requirements in the PRC, the Company plans to transfer certain coal volumes from automobile transportation to train transportation in 2018, 2019 and 2020 respectively. We note that the annual expense of coal train convoy services is estimated based on the volume of coal to be convoyed. The Company estimates that the total volume of coal to be convoyed is 20 million tons for each of the three years ending 31 December 2020. With the unit price of RMB2.35 per ton, being the 5% of the cost as stated above, stipulated in the Proposed Mutual Provision of Labour and Services Agreement, the total annual expense will be RMB47.0 million for the each of the three years ending 31 December 2020, representing a significant increase as compared to the annualised amount for the year ending 31 December 2017.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(xii) security guard services

We understand that the security guard service is a new item that has been added in the Proposed Mutual Provision of Labour and Services Agreement due to the cancellation of the security department in the headquarters of the Company. To satisfy the increase in the demand of security guard services from the New Subsidiaries and New Projects of the Group in 2018, 2019 and 2020, there are 65 security staffs for the security services to be provided by Yankuang Group for the security guard services. Having considered that costs of relevant security equipment and the salary standards for security staffs stipulated by the local government, the estimation on the annual security services fess is approximately RMB76,620 per head, in an aggregate of RMB5.0 million for each of the three years ending 31 December 2020.

(xiii) training services

We note that the estimated number of participators of the training mainly provided for the technicians of Yankuang Group will be 12,500 for each of the three years ending 31 December 2020 and the budget per head of approximately RMB800 mainly including (i) RMB200 for the cost of theory courses; (ii) RMB300 for the cost of practical operations; (iii) RMB180 for the cost of training books; and (iv) RMB120 for the accommodation cost.

As such, the annual training services fee is RMB10.0 million for each of the three years ending 31 December 2020.

(xiv) transportation services

We note that the Group will provide transportation services of coals for Yankuang Group, including railway transportation and automobile transportation, to the branches of Yankuang Group in four different locations in the PRC with the estimated fixed volumes of approximately 0.22 million tons, 2.14 million tons, 0.44 million tons and 3.5 million tons respectively for each year from 2018 to 2020. With the unit prices of approximately RMB22 per ton, RMB4.45 per ton, RMB16 per ton and RMB30 per ton as determined based on the delivery cost for each branch respectively, it is expected that the transportation services fee will be RMB126.5 million for each of the three years ending 31 December 2020.

(xv) repair and maintenance services

We have noticed that Donghua Heavy Industry, a wholly-owned subsidiary of the Company, is responsible for providing the repair and maintenance services for the hydraulic supports of equipment and machineries to Yankuang Group on needed basis. It is estimated that the annual expense of the repair and maintenance services will be RMB28.0 million for the year ending 31 December 2018. Subsequently the annual expense will be increased to RMB30.0 million for 2019 and 2020 after taking into account the completion of second phase of construction works of Weilai Nengyuan project.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(xvi) consultancy services

We note that the cooperative hedging business will be conducted between Zhongyi International Trade, a wholly-owned subsidiary of the Company, and Shangqi Capital, a wholly-owned subsidiary of Yankuang Group with a total amount of RMB1.0 billion for each of the three years ending 31 December 2020. In this regard, Zhongyi International Trade will charge Shangqi Capital a fixed consulting services fee for the spot market analysis and trading, at 1.26% of the annual amount, i.e. RMB12.6 million for each of the three years ending 31 December 2020.

Views

Having considered all the factors as mentioned above, we are of the view that the Proposed Annual Caps for the continuing connected transactions under the Proposed Mutual Provision of Labour and Services Agreement are justifiable, fair and reasonable and in the interests of the Company and Independent Shareholders as a whole.

Reasons for and benefits of entering into the Proposed Mutual Provision of Labour and Services Agreement

To justify the reasons for and benefits of entering into the Proposed Mutual Provision of Labour and Services Agreement, we have considered the factors as below:

(i) Due to the close proximity between Yankuang Group and the Company, the Company could obtain a reliable response in sourcing the labour and services from Yankuang Group, reducing the operational risks of any default in delivering labour and services in a timely manner; and
(ii) As a subsidiary of Yankuang Group, the Company have been familiar with the operation requirements or demands of Yankuang Group, and accordingly could provide the labour and services based on different demands from Yankuang Group in a cost-effective manner.

In view of the above, we concur with the Directors that the entering into of the Proposed Mutual Provision of Labour and Services Agreement will help strengthen the Group’s ability to carry out stable and sustainable business and therefore it is the interest of the Company and the Independent Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(ii) The Proposed Provision of Products, Materials and Equipment Leasing Agreement

Background

The table below summarise the principal terms of the Proposed Provision of Products, Materials and Equipment Leasing Agreement.

Date

27 November 2017

Parties

(a) the Company; and
(b) Yankuang Group

Term

Three years commencing from 1 January 2018 to 31 December 2020

Major terms

Pursuant to the Proposed Provision of Products, Materials and Equipment Leasing Agreement, the Company would provide the followings to Yankuang Group: coal products, methanol, electricity, heat, materials (including steel, non-ferrous metal, timber, grease and oil products, axles, mining equipment and machineries such as hydraulic support and rubber conveyors, and other similar materials) and equipment leasing.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

annual plan for the coming year before 31 December each year. The parties may enter into specific contracts in accordance with the terms of the Proposed Provision of Products, Materials and Equipment Leasing Agreement.

Payment terms

(1) The payment of consideration under the Proposed Provision of Products, Materials and Equipment Leasing Agreement shall be settled on the one-off basis or by instalment in accordance with paragraph (2) below; and
(2) Each party shall record all amounts payable to or from the other party under the Proposed Provision of Products, Materials and Equipment Leasing Agreement on or before the last Business Day of that calendar month. Save for the on-going transactions or the amount in dispute, all payments of the completed transactions under the Proposed Provision of Products, Materials and Equipment Leasing Agreement shall be settled in full within the following calendar month.

Pricing

Set out below is the table illustrating the different pricing methods to be applied for each transaction under the Proposed Provision of Products, Materials and Equipment Leasing Agreement.

Pricing Method Transactions under the Proposed Provision of Products, Materials and Equipment Leasing Agreement

1. Market Price: (i) coal sales;

(ii) methanol sales;

(iii) materials supply; and

(iv) equipment leasing

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

To determine the Market Price, the sales department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations from at least two independent third parties via emails, fax or phone or tenders. The sales department of the Company will update the relevant information on a monthly basis based on the procurement demand and continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

2. Approved Price: (i) heat supply; and

(ii) electricity supply

Assessment on internal control procedures of pricing and payment terms

In order to assess the fairness and reasonableness of the pricing policy and payment terms, we have obtained and reviewed the invoices of three historical sales transactions in relation to the coal sales, materials supply and electricity supply sold to (i) Yankuang Group under the Existing Provision of Products, Materials and Equipment Leasing Agreement; and (ii) the independent third parties (the “ Products Comparables ”), respectively as the aforesaid three types of supply contributed the largest three transaction amounts under the Existing Provision of Products, Materials and Equipment Leasing Agreement for the two years ended 31 December 2016.

Pricing

Based on the review, we note that the prices offered to Yankuang Group for the products under the Existing Provision of Products, Materials and Equipment Leasing Agreement were similar with and no less favourable than those offered to the Products Comparables.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Payment terms

We have also compared the payment terms under the Existing Provision of Products, Materials and Equipment Leasing Agreement with those offered to the Products Comparables for the same or similar type of labour and services. We note that the payments terms under the Existing Provision of Products, Materials and Equipment Leasing Agreement are in line with and no less favourable than those offered to the Products Comparables.

Views

Having considered that (i) the prices offered to Yankuang Group under the Existing Provision of Products, Materials and Equipment Leasing Agreement are no less favourable than those offered to the independent third parties; (ii) the payment terms under the Existing Provision of Products, Materials and Equipment Leasing Agreement are in line with and no less favourable those offered to the independent third parties; and (iii) the Company will collect quotations from at least two independent third parties in the market as the pricing reference for the transactions under the Proposed Provision of Products, Materials and Equipment Leasing Agreement, we consider that the pricing and payment terms under the Proposed Provision of Products, Materials and Equipment Leasing Agreement are (i) on normal commercial terms after arms’ length negotiation; and (ii) fair and reasonable so far as the Company and the Independent Shareholders are concerned.

Historical Transaction Amounts

Category coal sales materials supply methanol sales equipment leasing Electricity supply heat supply Total Ultilisation rate	Year ended 31 December 2015 Annual cap Actual amount (RMB’000) (RMB’000) 3,671,000.0 1,092,512.2 1,053,000.0 380,494.8 768,000.0 29,668.3 335,150.0 615.0 120,000.0 95,936.3 22,600.0 22,549.4 5,969,750.0 1,621,776.0 27.2%	Year ended 31 December 2016 Annual cap Actual amount (RMB’000) (RMB’000) 3,881,000.0 1,103,442.4 1,247,000.0 457,954.7 768,000.0 48,353.1 664,700.0 391.3 120,000.0 83,022.0 23,700.0 15,913.0 6,704,400.0 1,709,076.6 25.5%	Year ending 31 December 2017 Annual cap (RMB’000) 4,091,000.0 1,481,000.0 768,000.0 994,250.0 120,000.0 24,800.0 7,479,050.0	Nine months ended 30 September 2017 Actual amount (RMB’000) 760,779.8 242,506.4 4,032.9 4,858.4 51,249.5 10,783.1
				1,074,210.1
				14.4% (Note)

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Note: The utilization rate for the nine months ended 30 September 2017 is calculated based on the historical transactions amounts for the nine months ended 30 September 2017 against the annual caps for the year ended 31 December 2017.

As illustrated in the above table, we have noticed that that the utilisation rates of the annual caps under the Existing Provision of Products, Materials and Equipment Leasing Agreement are (i) 27.2% and 25.5% for the year ended 31 December 2015 and 2016 respectively; and (ii) 14.4% for the nine months ended 30 September 2017. As confirmed with the management of the Company, we understand that the reasons for the low ultilisation rates are as follows:

1. coal sales

The orders of coals from Yankuang Group decreased significantly from 2015 to 2016 due to the downturn in the coal market in the PRC from 2015 to the first half of 2016. As the production of Yankuang Group’s coal mine, i.e. Jinjitan Coal Mine in Shanxi, the PRC, has been increased in order to meet Yankuang Group’s partial demand since 2017, the amount of coals sold to Yankuang Group further decreased in 2017 which would result in a lower utilisation rate as compared to that in 2015 and 2016 respectively.

2. materials supply and methanol sales

Due to the enhancement in cost control, Yankuang Group has decreased the investments in the mining projects in Xinjiang and Guizhou of the PRC since 2015. Accordingly, the demand of the materials and methanol products to be applied for the mining projects of Yankuang Group decreased significantly in 2016 and 2017 respectively, which results in a low utilisation rate for the corresponding period respectively.

3. equipment leasing

As stated above, Yankuang Group has decreased the investments in the mining projects in Xinjiang and Guizhou of the PRC since 2015. As such, the demand of the mining equipment and machines to be leased from the Company decreased accordingly in 2016 and 2017 respectively. Due to the higher annual cap of equipment leasing in 2017, the utilisation rate would be lower for the year ending 31 December 2017 as compared to that in 2015 and 2016 respectively.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Proposed Annual Caps

Category (i) coal sales (ii) materials supply (iii) methanol sales (iv) equipment leasing (v) electricity supply (vi) heat supply Total	Existing Annual Caps For the year ending 31 December 2017 (RMB’000) 4,091,000 1,481,000 768,000 994,250 120,000 24,800 7,479,050	Proposed Annual Caps For the year ending 31 December 2018 2019 2020 (RMB’000) (RMB’000) (RMB’000) 2,272,500 2,638,000 2,771,000 1,318,800 1,596,800 1,809,700 80,000 80,000 100,000 30,000 35,000 40,000 110,000 120,000 130,000 26,000 26,000 26,000 3,837,300 4,495,800 4,876,700	Proposed Annual Caps For the year ending 31 December 2018 2019 2020 (RMB’000) (RMB’000) (RMB’000) 2,272,500 2,638,000 2,771,000 1,318,800 1,596,800 1,809,700 80,000 80,000 100,000 30,000 35,000 40,000 110,000 120,000 130,000 26,000 26,000 26,000 3,837,300 4,495,800 4,876,700
			4,876,700

Basis of determination of the Proposed Annual Caps

In assessing the fairness and reasonableness of the Proposed Annual Caps under the Proposed Provision of Products, Materials and Equipment Leasing Agreement, we have reviewed a comprehensive summary of estimation for each transaction under the Proposed Provision of Products, Materials and Equipment Leasing Agreement as follows:

(i) coal sales

We note that, due to the turnaround and expected upturn in the PRC coal market, Yankuang Group plans to increase its purchase of coals from the Company gradually in 2018, 2019 and 2020 respectively. Based on the purchase plan, the total volumes of the different types of coal to be sold to Yankuang Group are 4.50 million tons, 5.06 million tons and 5.23 million tons respectively at the average price of approximately RMB505 per ton, RMB521 per ton and RMB529 per ton which have been estimated with reference to the average prices of different types of coal for the first 8 months in 2017 based on the coal sales records of the Company, representing the total revenue of approximately RMB2.3 billion, RMB2.6 billion and RMB2.8 billion for each of the three years ending 31 December 2020.

(ii) materials supply

There are more than 100 types of materials, mainly parts and components for machineries, steels, timber, rubbers, to be supplied for the different projects of Yankuang Group for each of the three years ending 31 December 2020. Given that

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(i) the second phase of coal-to-liquid project of Yankuang Group has commenced; and (ii) the new sales of electromechanical equipment i.e. hydraulic support and rubber conveyors to Yankuang Group,, the total revenue from the material supply are RMB1.3 billion, RMB1.6 billion and RMB1.8 billion for the three years ending 31 December 2020 respectively.

(iii) methanol sales

Having considered that (i) Yankuang Group will have an increasing number of projects in operation for the years 2018, 2019 and 2020 respectively, the actual demand for methanol products of Yankuang Group will increase accordingly; and (ii) the Group’s production capacity of methanol products is expected to be enhanced, the estimated annual volumes of methanol to be sold to Yankuang Group are 40,000 tons, 40,000 tons and 50,000 tons for the three years ending 31 December 2020 respectively at the estimated average price of RMB2,000 per ton which have been estimated with reference to the average price of the methanol for the first 8 months in 2017 based on the methanol sales records of the Company.

(iv) equipment leasing

A total of 13 types of equipment will be be leased by Yankuang Group for each of the three years ending 31 December 2020 mainly including the machineries for large construction or mining projects. As an increase of approximately 15% in the rental of the mining equipment is expected to be applied in the year 2019 and 2020 respectively, the annual rental to be received from equipment leasing are RMB30 million, RMB35 million and RMB40 million for the three years ending 31 December 2020 respectively.

(v) electricity supply

Based on the assumption that the electricity demand of Yankuang Group will be increased as a result of the increase in the projects to be developed, it is estimated the annual consumption of electricity for Yankuang Group is 198 million kilowatt-hours, 216 million kilowatt-hours and 234 million kilowatt-hours for each of the three years ending 31 December 2020. With the estimated unit price of electricity of RMB0.56 per kilowatt-hour for each year, the total amounts charged to Yankuang Group for electricity supply are RMB110 million, RMB120 million and RMB130 million for each of the three years ending 31 December 2020 respectively.

(vi) heat supply

In view of the actual demands from the projects of Yankuang Group, the estimated annual consumption of heat for requested by Yankuang Group is 100,000 steam tons at a unit price of heat of RMB260 for each of the three years ending 31 December 2020 respectively. Thus, the total amount charged to Yankuang Group for heat supply is RMB26 million for each of the three years ending 31 December 2020 respectively.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Views

Having considered all the factors as mentioned above, we are of the view that the Proposed Annual Caps for the continuing connected transactions under the Proposed Provision of Products, Materials and Equipment Leasing Agreement are justifiable, fair and reasonable and in the interests of the Company and Independent Shareholders as a whole.

Reasons for and benefits of entering into the Proposed Provision of Products, Materials and Equipment Leasing Agreement

To justify the reasons for and benefits of entering into the Proposed Provision of Products, Materials and Equipment Leasing Agreement, we have considered the factors as below:

(i) Due to the close proximity between Yankuang Group and the Company, the provision of products and materials by the Company to Yankuang Group at market price minimise the management and operational costs in the logistics of the Group; and
(ii) As the Company has a business relationship with Yankuang Group for years, both parties have been familiar with the requirements of each other. Therefore, the Company could effectively manage the risks of any default in finance lease business and achieve economic benefits through the provision of equipment leasing to Yankuang Group based on its operation needs.

In view of the above, we concur with the Directors that the entering into of the Proposed Provision of Products, Materials and Equipment Leasing Agreement is fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole.

(iii) The Proposed Provision of Materials Supply Agreement

Background

On 24 October 2014, the Company entered into the Existing Provision of Materials Supply Agreement with Yankuang Group for a term of three years commencing from 1 January 2015 to 31 December 2017. On 27 November 2017, the Company entered into the Proposed Provision of Materials Supply Agreement with Yankuang Group to renew the Existing Provision of Materials Supply Agreement on substantially the same terms.

The table below summarise the principal terms of the Proposed Provision of Materials Supply Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Date

27 November 2017

Parties

(c) the Company; and
(d) Yankuang Group

Term

Three years commencing from 1 January 2018 to 31 December 2020

Major terms

Pursuant to the Proposed Provision of Materials Supply Agreement, Yankuang Group would provide the followings to the Company: water pipes, magnetoelectric powders, anchor bars and other supporting products, carrier rollers and other similar materials.

Payment terms

(3) The payment of consideration under the Proposed Provision of Materials Supply Agreement shall be settled on the one-off basis or by instalment in accordance with paragraph (2) below; and
(4) Each party shall record all amounts payable to or from the other party under the Proposed Provision of Materials Supply Agreement on or before the last Business Day of that calendar month. Save for the on-going transactions or the amount in dispute, all payments of the completed transactions under the Proposed Provision of Materials Supply Agreement shall be settled in full within the following calendar month.

Pricing

The prices of the materials to be purchased by the Company under the Proposed Provision of Materials Supply Agreement shall be determined based on the Market Price.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

To determine the Market Price, the purchase department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations from at least two independent third parties via emails, fax or phone or tenders by publishing tender notice through various media resources, such as local newspapers. The purchase department of the Company would update the relevant information on a monthly basis based on the procurement demand and continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

Yankuang Group has undertaken that the price of the materials to be supplied would not be higher than the price offered by Yankuang Group to any independent third parties for the same type of materials under any circumstances.

Assessment on internal control procedures of pricing and payment terms

In order to assess the fairness and reasonableness of the pricing policy and payment terms, we have obtained and reviewed the invoices of three historical sales transactions in relation to the three different types of gasket ring purchased from (i) Yankuang Group under the Existing Provision of Materials Supply Agreement; and (ii) the independent third parties (the “ Materials Comparables ”), respectively as gasket rings are frequently ordered by the Group under the Existing Provision of Materials Supply Agreement from time to time.

Pricing

Based on the review, we note that the prices offered by Yankuang Group for the materials under the Existing Provision of Materials Supply Agreement were similar with and no more favourable than those offered by the Materials Comparables.

Payment terms

We have also compared the payment terms under the Existing Provision of Materials Supply Agreement with those offered by the Materials Comparables for the same or similar type of materials. We note that the payments terms under the Existing Provision of Materials Supply Agreement are in line with and no more favourable than those offered by the Materials Comparables.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Views

Having considered that (i) the prices offered by Yankuang Group under the Existing Provision of Materials Supply Agreement are no more favourable than those offered by the independent third parties; (ii) the payment terms under the Existing Provision of Materials Supply Agreement are in line with and no less favourable than those offered by the independent third parties; and (iii) the Company will collect quotations from at least two independent third parties in the market as the pricing reference for the transactions under the Proposed Provision of Materials Supply Agreement, we consider that the pricing and payment terms under the Proposed Provision of Materials Supply Agreement are (i) on normal commercial terms after arms’ length negotiation; and (ii) fair and reasonable so far as the Company and the Independent Shareholders are concerned.

Historical Transaction Amounts

Set out below are the historical annual amounts of the Existing Provision of Materials Supply Agreement for the two financial years ended 31 December 2016 and nine months ended 30 September 2017:

Provision of material supply by Yankuang Group to the Company Ultilisation rate	Year ended 31 December 2015 Annual cap Actual amount (RMB’000) (RMB’000) 1,387,000.0 157,201.5 11.3%	Year ended 31 December 2016 Annual cap Actual amount (RMB’000) (RMB’000) 1,544,000.0 699,066.0 45.3%	Year ending 31 December 2017 Annual cap (RMB’000) 1,719,000.0	Nine months ended 30 September 2017 Actual amount (RMB’000) 497,668.0
				29.0% (Note)

As illustrated in the above table, we have noticed that that the utilisation rates of the annual caps under the Existing Provision of Materials Supply Agreement are 11.3% and 45.3% for the year ended 31 December 2015 and 2016 respectively. As confirmed with the management of the Company, we understand that such low ultilisation rates are mainly due to the aforesaid acquisition of Donghua Heavy Industry by the Company in late 2015.

As confirmed by the management, the annual caps under the Existing Provision of Materials Supply Agreement for three years ending 31 December 2017 were determined in 2014, which include the amounts of material to be supplied by Donghua Heavy Industry representing over 50% of the existing annual caps for the three years ending 31 December 2017. After the completion of acquisition, Donghua Heavy Industry is no longer a connected person of the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Company. In this regard, the amount of materials supply had a significant decrease since 2015, leading to a low utilisation rate for 2016 and 2017 respectively.

Proposed Annual Caps

Existing Annual Caps For the year ending 31 Proposed Annual Caps December For the year ending 31 December 2017 2018 2019 2020 (RMB’000) (RMB’000) (RMB’000) (RMB’000) Proposed provision of material supply by Yankuang Group to the Company 1,719,000 300,000 300,000 300,000

Basis of determination of the Proposed Annual Caps

In assessing the fairness and reasonableness of the Proposed Annual Caps under the Proposed Provision of Materials Supply Agreement, we have reviewed a comprehensive summary of estimation for each transaction under the Proposed Provision of Materials Supply Agreement.

We note that the Company will purchase materials, mainly including parts and components for equipment, steels, magnetoelectric powders, and other supporting products, from different subsidiaries of Yankuang Group for each of the three years ending 31 December 2020.

Based on the annual purchasing costs charged by different subsidiaries of Yankuang Group ranging from approximately RMB1.48 million to approximately RMB69.3 million, the aggregate of purchasing costs of the Company is estimated to be RMB300.0 million for each of the three years ending 31 December 2020.

Views

Having considered all the factors as mentioned above, we are of the view that the Proposed Annual Caps for the continuing connected transactions under the Proposed Provision of Materials Supply Agreement are justifiable, fair and reasonable and in the interests of the Company and Independent Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Reasons for and benefits of entering into the Proposed Provision of Materials Supply Agreement

To justify the reasons for and benefits of entering into the Proposed Provision of Materials Supply Agreement, we have considered the factors as below:

(i) As the Company has a long-term business relationship with Yankuang Group, Yankuang Group has been familiar with the requirements of the Group. Therefore, the Group could obtain a quickly and reliable responses from Yankuang Group in the supply of materials; and
(ii) Due to the close proximity between Yankuang Group and the Company, the provision of materials supply by Yankuang Group to the Group could minimise the operational costs in the transportation for the Group.

In view of the above, we concur with the Directors that the entering into of the Proposed Provision of Materials Supply Agreement is fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole.

(c) ENTERING INTO OF NEW CONTINUING CONNECTED TRANSACTIONS AGREEMENT

The Proposed Bulk Commodities Sale and Purchase Agreement

Background

On 27 November 2017, the Company entered into the Proposed Bulk Commodities Sale and Purchase Agreement with Yankuang Group.

The table below summarise the principal terms of the Proposed Bulk Commodities Sale and Purchase Agreement.

Date

27 November 2017

Parties

(a) the Company; and
(b) Yankuang Group

Term

Three years commencing from 1 January 2018 to 31 December 2020

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Major terms

Pursuant to the Proposed Bulk Commodities Sale and Purchase Agreement, the Company and Yankuang Group may, from time to time, sell or purchase coal, soybean, iron ore from each other.

Payment terms

(1) The payment of consideration under the Proposed Bulk Commodities Sale and Purchase Agreement shall be settled on the one-off basis or by instalment in accordance with paragraph (2) below; and
(2) Each party shall record all amounts payable to or from the other party under the Proposed Bulk Commodities Sale and Purchase Agreement on or before the last Business Day of that calendar month. Save for the on-going transactions or the amount in dispute, all payments of the completed transactions under the Proposed Bulk Commodities Sale and Purchase Agreement shall be settled in full within the following calendar month.

Pricing

The price of coal, soybean, iron ore shall be determined according to the Market Price.

To determine the Market Price, the sales department or purchase department of the Company and its designated personnel are mainly responsible for checking the prices offered by other independent third parties generally through obtaining quotations by obtaining quotation fee from at least two independent third parties via emails, fax or phone or tenders to determine the Market Price. The sales department or purchase department of the Company will update the relevant information on a monthly basis based on the procurement demand and will continue to monitor the Market Price to ensure that each transaction is conducted in accordance with the pricing policy set out above.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have reviewed the relevant document provided by the Company in relation to the internal control procedures on the pricing under the Proposed Bulk Commodities Sale and Purchase Agreement. Based on the review, we note that the Company has established sufficient internal control procedures as follows:

(i) The sales department or purchase department of the Company would collect the quotations from at least two independent third parties for different types of bulk commodities, i.e. coal, soybean and iron ore, as the market benchmark from time to time;
(ii) With the market quotations, the sales department or purchase department would update the market price database at a monthly basis;
(iii) The price of coal, soybean and iron ore under each transaction between the Company and Yankuang Group would be closely monitored whether it is determined based on the Market Price; and
(iv) The audit committee of the Company would review the continuing connected transaction to ensure that they are conducted in accordance with the terms in the Proposed Bulk Commodities Sale and Purchase Agreement.

Views

Having considered that (i) the Company has established an internal control procedure to ensure that the pricing for each transaction under the Proposed Bulk Commodities Sale and Purchase Agreement will be consistent with the Market Price; (ii) the Company will collect the quotations from at least two independent third parties in the market, at a regular basis, to keep its database of Market Price up to date; and (iii) the audit committee of the Company will quarterly review the continuing connected transactions under at a regular basis, we are of the view that the pricing policy under the Proposed Bulk Commodities Sale and Purchase Agreement is fair and reasonable and in the interest of the Company and Independent Shareholders as a whole.

Proposed Annual Caps

Category for sales of bulk commodities to Yankuang Group for purchase of bulk commodities from Yankuang Group	Proposed Annual Caps For the year ending 31 December 2018 2019 2020 (RMB’000) (RMB’000) (RMB’000) 3,641,000 3,841,000 4,281,000 4,500,000 4,700,000 5,140,000	Proposed Annual Caps For the year ending 31 December 2018 2019 2020 (RMB’000) (RMB’000) (RMB’000) 3,641,000 3,841,000 4,281,000 4,500,000 4,700,000 5,140,000
		5,140,000

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Basis of determination of the Proposed Annual Caps

As advised by the management, there is no historical transaction amount of the Company and Yankuang Group selling and purchasing coal, soybean and iron ore to and from each other.

In assessing the fairness and reasonableness of the Proposed Annual Caps, we have reviewed a comprehensive summary of estimation for each transaction under the Proposed Bulk Commodities Sale and Purchase Agreement provided by the Company as follows:

For sales of bulk commodities to Yankuang Group

Based on the actual demand in bulk commodities of Yankuang Group, the sales volumes of premium coal, soybean and iron ore to Yankuang Group are approximately 2.4 million tons, 277,400 tons and 2.38 million tons, at the average price of RMB683.7 per ton, RMB3,650.0 per ton and RMB420.0 per ton for the year ending 31 December 2018 respectively, which have been determined with reference to the average price of relevant commodities in the first 8 months of 2017.

Due to the anticipated growth in the global bulk commodities market in 2019 and 2020, the Group estimates that the sales volumes of soybean and iron ore will be increased by approximately 10% and 20% in 2019 and 2020 respectively, representing (i) approximately 301,400 tons and 2.62 million tons for the year ending 31 December 2019 respectively; and (ii) approximately 361,700 tons and 3.14 million tons for the year ending 31 December 2020 respectively.

For purchase of bulk commodities from Yankuang Group

Based on the actual demand in bulk commodities of the Group, the estimated purchase volumes of coal, soybean and premium iron ore are approximately 5.0 million tons, 277,800 tons and 1.0 million tons at the average price of RMB500.0 per ton, RMB3,600 per ton and RMB1,000 per ton for the year ending 31 December 2018 respectively which have been determined with reference to the average price of relevant commodities in the first 8 months of 2017.

Due to the anticipated growth in global bulk commodities market in 2019 and 2020, the Group estimates that the purchase volumes of soybean and premium iron ore will be increased by approximately 10% and 20% in 2019 and 2020 respectively, representing (i) approximately 305,600 tons and 1.1 million tons for the year ending 31 December 2019 respectively; and (ii) approximately 367,700 tons and 1.32 million tons for the year ending 31 December 2020 respectively.

In order to assess the prices of the commodities to be sold and purchased between the Company and Yankuang Group under the Proposed Bulk Commodities Sale and Purchase Agreement, we have reviewed the websites of Zhuochuang Information (卓創

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

咨詢: http://www.sci99.com/) and Wind Information (Wind資訊: http:// www.wind.com.cn/) which are specialised in publishing professional information of global bulk commodities including the pricing index.

Based on the review, we understand that, during the first 8 months in 2017,

(i) the price of coal ranges from approximately RMB491 per ton to RMB579 per ton with the average of RMB533 per ton;
(ii) the price of premium coal has been adjusted based on (i) above in accordance with the different specifications;
(iii) the price of soybean ranges from approximately RMB3,781 per ton to RMB4,310 per ton with the average of RMB3,988 per ton;
(iv) the price of iron ore ranges from approximately RMB403 per ton to RMB574 per ton with the average of RMB471 per ton; and
(v) the price of premium iron ore ranges from approximately RMB765 per ton to RMB1,055 per ton with the average of RMB897 per ton.

As such, we are of the view that the prices of the coal, soybean and iron ore to be sold and purchased between the Company and Yankuang Group for 2018 under the Proposed Bulk Commodities Sale and Purchase Agreement are (i) within the price range of the relevant commodities during the first 8 months in 2017; and (ii) close to the average of respective pricing ranges as stated above.

To further assess the fairness and reasonableness of the price of the commodities, i.e. coal, soybean and iron ore, adopted for the estimation of the Proposed Annual Caps under the Proposed Bulk Commodities Sale and Purchase Agreement, we have reviewed the report “Commodity Markets Outlook” published by the World Bank, an international financial organisation dedicated in provision of financing, advice and research, in October 2017. Based on such report, we note that the global commodity prices index, including agriculture, metals and energy, are forecasted to be relatively stable during the period from 2017 to 2020. As such, we concur with the Company that it is fair and reasonable to adopt the average commodity prices in the first 8 months of 2017 to estimate the Proposed Annual Caps for coal, soybean and iron ore for three years ending 31 December 2020.

Views

Having considered all the factors as mentioned above and after taking into account that all selling and purchasing prices of bulk commodities are in line the Market Price, we are of the view that the Proposed Annual Caps for the continuing connected transactions under the Proposed Bulk Commodities Sale and Purchase Agreement are justifiable, fair and reasonable and in the interests of the Company and Independent Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Reasons for and benefits of entering into the Proposed Bulk Commodities Sale and Purchase Agreement

Having considered that the Company and Yankuang Group have been familiar with each other in particular for specifications of the bulk commodities required by either party, the entering into of the Proposed Bulk Commodities Sale and Purchase Agreement could (a) reduce the operational risks in any default in payment terms of the transactions; and (b) expand the Group’s trading scale of bulk commodities by sharing Yankuang Group’s extensive distribution networks in different areas of the PRC.

In view of the above, we concur with the Directors that the entering into of the Proposed Bulk Commodities Sale and Purchase Agreement will help strengthen the Group’s ability to carry out stable and sustainable business and therefore it is the interest of the Company and the Independent Shareholders as a whole.

RECOMMENDATION

Having considered the abovementioned principal factors and reasons, we are of the view that:

(a) the terms under the Proposed Mutual Provision of Labour and Services Agreement, including the Proposed Annual Caps, and the transactions contemplated thereunder are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole and in the ordinary and usual course of business of the Group;
(b) the terms under the Proposed Provision of Products, Materials and Equipment Leasing Agreement, including the Proposed Annual Caps, and the transactions contemplated thereunder are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole and in the ordinary and usual course of business of the Group;
(c) the terms under the Proposed Provision of Materials Supply Agreement, including the Proposed Annual Caps, and the transactions contemplated thereunder are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole and in the ordinary and usual course of business of the Group; and
(d) the terms under the Proposed Bulk Commodities Sale and Purchase Agreement, including the Proposed Annual Caps, and the transactions contemplated thereunder are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole and in the ordinary and usual course of business of the Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders, and we also recommend the Independent Shareholders, to vote in favour of the ordinary resolution(s) to be proposed at the EGM to approve the Transactions and the Proposed Annual Caps.

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

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

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GENERAL INFORMATION

APPENDIX I

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTEREST

Shareholding of Directors, chief executive and Supervisors

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

		Number of A
		Shares held as at
		the Latest
Name	Title	Practicable Date
		(Shares)
Li Xiyong	Director, Chairman of the Board	10,000
Li Wei	Director, Vice Chairman of the Board	10,000
Wu Xiangqian	Director, General Manager	10,000
Wu Yuxiang	Director	30,000
Guo Jun	Employee Director	10,000
Gu Shisheng	Supervisor, Chairman of the	10,000
	Supervisory Committee
Jiang Qingquan	Employee Supervisor	10,000
Wang Fuqi	Chief Engineer	10,000
Zhao Honggang	Deputy General Manager	10,000

All the interests disclosed above represent long position in the A Shares.

As at the Latest Practicable Date, Mr. Li Xiyong, Mr. Li Wei and Mr. Wu Yuxiang are directors/employees of Yankuang Group, which is a company having an interest in the Company’s Shares required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

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GENERAL INFORMATION

APPENDIX I

3. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2016, being the date to which the latest published audited consolidated financial statements of the Group were made up.

4. CONSENT AND QUALIFICATION OF EXPERT

The following expert has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter or statements and references to its name in the form and context in which it appear:

Name			Qualifications
Donvex	Capital	Limited	a corporation licensed under the SFO to engage in
			type 6 (advising on corporate finance) regulated
			activity

As at the Latest Practicable Date, the above expert was not beneficially interested in the share capital of any member of the Group nor did it has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, the above expert did not have any direct or indirect interest in any assets which have been, since 31 December 2016 (being the date to which the latest published audited financial statements of the Group were made up) acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

5. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors or Supervisors had any existing or proposed service contract with any member of the Group which will not expire or is not determinable by the Group within one year without payment of compensation (other than statutory compensation).

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GENERAL INFORMATION

APPENDIX I

6. DIRECTORS’ INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS

As at the Latest Practicable Date, none of the Directors or Supervisors had any interest in any assets which have been, since 31 December 2016 (being the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

As at the Latest Practicable Date, none of the Directors or Supervisors is materially interested in any contract or arrangement subsisting at the Latest Practicable Date which is significant in relation to the business of the Group.

7. DIRECTORS’ INTERESTS IN COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors or their respective close associates (as defined under the Hong Kong Listing Rules) had any interests in the businesses, other then being a Director, which compete or are likely to compete, either directly or indirectly, with the businesses of the Group (as would be required to be disclosed under Rule 8.10 of the Hong Kong Listing Rules if each of them were a controlling shareholder).

8. MISCELLANEOUS

The English text of this circular shall prevail over the Chinese text, in case of any inconsistency.

9. DOCUMENTS FOR INSPECTION

Copies of the following documents will be available for inspection at the office of Baker & McKenzie at 14th Floor, Hutchison House, 10 Harcourt Road, Hong Kong during normal business hours on any weekday (except public holidays) from the date of this circular up to and including 26 January 2018:

(a) the Proposed Continuing Connected Transaction Agreements;
(b) the letter from the Board, the text of which is set out in the section headed “Letter from the Board” in this circular;
(c) the letter of recommendation from the Independent Board Committee of the Company to the Independent Shareholders as set out in this circular;
(d) the letter of advice from Donvex Capital to the Independent Board Committee and the Independent Shareholders as set out in this circular;
(e) the written consent from Donvex Capital referred to in paragraph 4 of this appendix;
(f) annual reports of the Group for the financial years 2015 and 2016;

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GENERAL INFORMATION

APPENDIX I

(g) a copy of each circular issued pursuant to the requirements set out in Chapter 14 and/or Chapter 14A which has been issued since 31 December 2016, being the date of the latest published audited accounts; and
(h) the Articles of Association.

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AI assistant

CStone Pharmaceuticals — Proxy Solicitation & Information Statement 2018

50715_rns_2018-01-10_a9b5799f-5d2e-44dc-bf28-59849441bfc4.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

兗州煤業股份有限公司 YANZHOU COAL MINING COMPANY LIMITED

CONTINUING CONNECTED TRANSACTIONS

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

兗州煤業股份有限公司 YANZHOU COAL MINING COMPANY LIMITED

CONTINUING CONNECTED TRANSACTIONS

I. INTRODUCTION

II. CONTINUING CONNECTED TRANSACTIONS

A. RENEWAL OF EXISTING CONTINUING CONNECTED TRANSACTIONS

1. The Proposed Mutual Provision of Labour and Services Agreement

The Proposed Mutual Provision of Labour and Services Agreement

Date

Parties

Term

Major terms

Payment

Pricing

The historical amount, proposed annual caps and reasons

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Basis of the proposed caps for services provided by Yankuang Group to the Company

LETTER FROM THE BOARD

Basis of the proposed caps for services provided by the Company to Yankuang Group

Reasons and benefits for entering into the Proposed Mutual Provision of Labour and Services Agreement

LETTER FROM THE BOARD

Implications of the Hong Kong Listing Rules

2. The Proposed Provision of Insurance Fund Administrative Services Agreement

The Proposed Provision of Insurance Fund Administrative Services Agreement

Date

Parties

Term

Major terms

Pricing

The historical amount, proposed annual caps and reasons

LETTER FROM THE BOARD

Reasons and benefits for entering into the Proposed Provision of Insurance Fund Administrative Services Agreement

Implications of the Hong Kong Listing Rules

3. The Proposed Provision of Materials Supply Agreement

The Proposed Provision of Materials Supply Agreement

Date

Parties

Term

Major terms

Payment

Pricing

The historical amount, proposed annual caps and reasons

LETTER FROM THE BOARD

Reasons and benefits for entering into the Proposed Provision of Materials Supply Agreement

Implications of the Hong Kong Listing Rules

LETTER FROM THE BOARD

4. The Proposed Provision of Products, Materials and Equipment Leasing Agreement

The Proposed Provision of Products, Materials and Equipment Leasing Agreement

Date

Parties

Term

Major Terms

Payment

Pricing

The historical amount, proposed annual caps and reasons

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Reasons and benefits for entering into the Proposed Provision of Products, Materials and Equipment Leasing Agreement

Implications of the Hong Kong Listing Rules

5. The Proposed Chemical Projects Entrusted Management Agreement

The Proposed Chemical Projects Entrusted Management Agreement

Date

Parties

Term

Major Terms

Payment

CStone Pharmaceuticals Proxy Solicitation & Information Statement 2018