CWT International Limited - Proxy Solicitation & Information Statement 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Sinochem Hong Kong Holdings Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited, the Hong Kong Securities and Futures Commission and Hong Kong Securities Clearing Company 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.

This circular is for the sole purpose of a special general meeting of Sinochem Hong Kong Holdings Limited. This circular does not constitute nor is it intended to constitute an offer to sell or a solicitation of an offer to buy any securities.

This circular does not constitute an offer of securities into the United States and may not be sent to any person in the United States, or any other jurisdiction where its use would be prohibited, nor should this document be forwarded to any such person.

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SINOCHEM HONG KONG HOLDINGS LIMITED

*

(Incorporated in Bermuda with limited liability)

Stock code: 297

ACQUISITION FROM SINOCHEM HONG KONG (GROUP) COMPANY LIMITED OF THE FERTILIZER GROUP

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REVERSE TAKEOVER INVOLVING AN APPLICATION FOR NEW LISTING AND AN APPLICATION FOR THE WHITEWASH WAIVER CAPITAL REORGANISATION

Financial Adviser to Sinochem Corporation

Joint Sponsors to Sinochem Hong Kong Holdings Limited

Financial Adviser to Sinochem Hong Kong (Group) Company Limited

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

SOMERLEY LIMITED

A letter from the Independent Board Committee (as defined in this circular) is set out on pages 112 to 113 of this circular and a letter from the Independent Financial Adviser (as defined in this circular), containing its advice to the Independent Board Committee and the Independent Shareholders (as defined in this circular) is set out on pages 114 to 151 of this circular.

A notice convening the SGM (as defined in this circular) to be held at 8: 30 a.m. on Tuesday, 5 July 2005, at Atrium Room, Level 39, Island Shangri-La Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong is set out on pages N-1 to N-7 of this circular. Whether or not you are able to attend and vote at the SGM in person, please complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM should you so wish.

For identification purposes only

13 June 2005

		Page
Expected timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	iii
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	1
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	13
Glossary and technical terms . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	24
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	26
Corporate information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	47
Directors and parties involved . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	49
Fertilizer industry and regulatory overview . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	53
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	69
The Acquisition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	71
Shareholding structure before and after the Acquisition	. . . . . . . . . . . . . . . . . . . . . .	77
Particulars of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	78
Particulars of the Fertilizer Group . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	81
Reasons for and benefits of the Acquisition . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	81
Pro forma financial information of the Enlarged Group	. . . . . . . . . . . . . . . . . . . . . . .	83
Profit forecast of the Enlarged Group for the year ending 31 December 2005		83
Future intentions regarding the Group . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	84
Maintaining the listing status and public float . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	84
Relevant Listing Rules requirements . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	92
Implications of the Takeovers Code and Whitewash Waiver . . . . . . . . . . . . . . . . . .		92
Relationship with Sinochem HK, Sinochem Corporation	and
Non-exempt Continuing Connected Transactions . . . .	. . . . . . . . . . . . . . . . . . . . . . .	93
Capital Reorganisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	94
General mandate to issue shares and the Repurchase	Mandate . . . . . . . . . . . . . .	100
Change of financial year end . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	101
SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	102
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	104
Further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	105
Letter from Sinochem HK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . .	106

— i —

		Page
Letter from the Independent Board Committee . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	112
Letter from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	114
Information on the Fertilizer Group
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	152
Key strengths and strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	155
Product portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	159
SINOCHEM Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	163
SINOCHEM Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	170
SINOCHEM Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	180
History and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	191
Relationship between the Enlarged Group and the Sinochem	Group . . . . . . . . . .	197
Directors and senior management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	225
Financial information — The Fertilizer Group . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	231
— The Group . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	265
— The Enlarged Group . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	273
Appendix I — Accountants’ Report on the Fertilizer Group	. . . . . . . . . . . . . . . . .	I-1
Appendix II — Financial Information of the Group . . . . . . . . . .	. . . . . . . . . . . . . . . . .	II-1
Appendix III — Unaudited Pro Forma Financial Information
of the Enlarged Group . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	III-1
Appendix IV — Profit Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	IV-1
Appendix V — Property Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	V-1
Appendix VI — Summary of the Constitution of the Company
and Bermuda Company Law . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	VI-1
Appendix VII — Statutory and General Information . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	VII-1
Appendix VIII — Documents Available for Inspection . . . . . . . . .	. . . . . . . . . . . . . . . . .	VIII-1
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . .	N-1

— ii —

EXPECTED TIMETABLE

Expected timetable and trading arrangements

The following expected timetable is indicative only and is subject to change:

2005 Announcement relating to the despatch of this circular and the notice of the SGM to be published . . . . . . . . . . . . . . . . . . . Monday, 13 June Despatch of this circular to Shareholders . . . . . . . . . . . . . . . . . . . . . Monday, 13 June Last day for dealing in Ordinary Shares cum-entitlement to the Preferential Offer. . . . . . . . . . . . . . . . . . . Wednesday, 22 June Latest time for lodging transfer of Ordinary Shares to qualify for the Preferential Offer . . . . . . . . . . . . . . . . 4: 00 p.m. on Friday, 24 June Register of members of the Company closes (both days inclusive) . . . . . . . . . . . . . . . . . . . . .Monday, 27 June to Tuesday, 5 July Latest time for lodging forms of proxy for the SGM . . . . . . . .8: 30 a.m. on Sunday, 3 July Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 5 July SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8: 30 a.m. on Tuesday, 5 July Register of members of the Company re-opens . . . . . . . . . . . . . . . . Wednesday, 6 July Announcement of the results of the SGM to be published in newspaper . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 6 July Effective time and date of the Capital Reduction and Share Consolidation . . . . . . . . . . . . . . . . . . . . . 9: 30 a.m. on Wednesday, 6 July Original counter for trading in Ordinary Shares in board lots of 2,000 Ordinary Shares closes . . . . . . . . . 9: 30 a.m. on Wednesday, 6 July Temporary counter for trading in New Shares in board lots of 200 New Shares opens (in the form of existing share certificates) . . . . . . . . . . 9: 30 a.m. on Wednesday, 6 July First day for free exchange of existing share certificates for new share certificates . . . . . . . . . . . . . . . . . . . . . . Wednesday, 6 July Prospectus and application forms in relation to the Preferential Offer to be despatched . . . . . . . . . . .on or around Thursday, 7 July Latest time for lodging application forms in relation to the Preferential Offer . . . . . . . . . . . . . . . . . . . . . . . . on or around Friday, 15 July

— iii —

EXPECTED TIMETABLE

2005 Original counter for trading in New Shares in board lots of 2,000 New Shares re-opens (in the form of new share certificates) . . . . . . . . . . . 9: 30 a.m. on Wednesday, 20 July Parallel trading in New Shares commences . . . . . . . . . 9: 30 a.m. on Wednesday, 20 July First day of operation of odd lot trading facility . . . . . . 9: 30 a.m. on Wednesday, 20 July Issue of the Consideration Shares. . . . . . . . . . . . . . . . .not later than Thursday, 28 July Announcement of completion of the Acquisition to be published in newspaper . . . . . . . . . . . . . . . . . .not later than Thursday, 28 July Completion, date of listing of, and commencement of dealing in, the Consideration Shares and shares issued pursuant to the Offering. . . . . . . . . . . . .not later than Thursday, 28 July Temporary counter for trading in New Shares in board lots of 200 New Shares closes (in the form of existing share certificates) . . . . . . . 4: 00 p.m. on Wednesday, 10 August Parallel trading ends . . . . . . . . . . . . . . . . . . . . . 4: 00 p.m. on Wednesday, 10 August Last day of operation of odd lot trading facility. . . . . 4: 00 p.m. on Wednesday, 10 August Latest time for lodging certificates for Ordinary Shares in exchange for certificates for New Shares free of charge . . . . . . . . Monday, 15 August

— iv —

SUMMARY

This summary aims at giving you an overview of the information contained in this circular. As it is a summary, it does not contain all the information that may be important to you. You should read the whole document before making a decision on the Proposals and the appropriate course of action for yourself.

There are risks associated with any business. You should read the section headed ‘‘Risk Factors’’ carefully before making a decision on the Proposals.

SUMMARY

The Acquisition

The Company and Sinochem HK jointly announced that on 28 January 2005, the Company (as purchaser) entered into the Acquisition Agreement with Sinochem HK (as vendor) for the acquisition of the entire issued share capital of the Fertilizer Company. The consideration for the Acquisition of HK$5,050 million (equivalent to RMB5,353 million) will be satisfied in full by the allotment and issue of 5,050,000,000 Consideration Shares to Sinochem HK at the Issue Price of HK$1.00 per Consideration Share. If the Capital Reorganisation has not been given effect to on or before Completion, the parties have agreed that the number of Consideration Shares shall be adjusted to 50,500,000,000 new Ordinary Shares and the Issue Price shall be HK$0.10 per Ordinary Share. In either case, the Consideration Shares represent approximately 93.21% of the enlarged issued ordinary share capital of the Company following the issue of the Consideration Shares (on the basis that no Offering has taken place). The consideration for the Acquisition has been arrived at after arms’ length negotiation between the parties.

Implications of the Acquisition

Upon Completion:

. Sinochem HK and its concert parties will become the controlling shareholder of the Company owning approximately 94.65% of the enlarged issued ordinary share capital of the Company (on the basis that no Offering has taken place), resulting in a change of control of the Company;
. The Company will become a leading vertically-integrated fertilizer enterprise in the PRC. The Fertilizer Group had an audited turnover and net profit of approximately RMB12,591.2 million and RMB543.4 million respectively for the year ended 31 December 2004;
. The Directors expect that going forward, the Company’s resources will be focused on the PRC fertilizer industry and agricultural-related products sector; and
. The composition of the Board is expected to change through the intended appointment of two new Directors.

Shareholders should be aware that Completion is subject to the fulfilment of the Conditions which are set out in the paragraph headed ‘‘Conditions’’ in the ‘‘Letter from the Board’’ in this circular. The Acquisition may or may not proceed.

— 1 —

SUMMARY

INFORMATION ON THE FERTILIZER GROUP

Overview

The Fertilizer Group is a leading fertilizer enterprise in the PRC offering a comprehensive range of fertilizer and agricultural-related products. It is the largest importer of fertilizer products in the PRC in terms of import volume prior to Completion. The Management of the Fertilizer Group believes that the Fertilizer Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after the Completion. The Fertilizer Group is the fertilizer flagship of Sinochem Corporation. Sinochem Corporation was established in 1950 and is one of the largest state-owned enterprises in the PRC in terms of turnover. It is also a Fortune Global company with global operations in the petroleum refining, chemicals and fertilizer industries.

At present, the Fertilizer Group has three principal divisions, namely SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, which together form a vertically-integrated business operation across the fertilizer supply chain: SINOCHEM Procurement — sources a variety of fertilizer products and certain principal raw materials from both overseas and domestic suppliers for sales by SINOCHEM Distribution and production by SINOCHEM Production respectively.

SINOCHEM Production — produces phosphate-based fertilizers and compound fertilizers with high nutrient content. As at the Latest Practicable Date, the Fertilizer Group had interests in seven production enterprises for the production of phosphatebased fertilizers and compound fertilizers.

SINOCHEM Distribution — distributes products sourced by SINOCHEM Procurement and products produced by SINOCHEM Production. Such products are principally sold in the PRC with a small proportion being exported to overseas customers. Products are sold through the Fertilizer Group’s own extensive sales and distribution network (which comprises branch companies and regional and local sales centres) in the PRC as well as through independent distributors.

The Fertilizer Group has developed a centrally co-ordinated operation model to facilitate the integration of the three principal divisions. Under such operation model, the flow of products, information and funds, as well as resources deployments are managed and coordinated centrally. To ensure operational efficiency for its large-scale operations, the Fertilizer Group also deploys a structured logistics network and a proprietary ERP system.

Principal strengths

The Management of the Fertilizer Group considers the principal strengths of the Fertilizer Group include the following:

. Vertically-integrated, large-scale operation model
. Strong upstream capability to secure supplies of fertilizer products
. Strong downstream sales and distribution capabilities

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SUMMARY

. Comprehensive product portfolio
. Strong brand recognition among customers and end-users
. Experienced management team

For details of the Fertilizer Business carried on by, and the financial information of, the Fertilizer Group, please refer to the sections headed ‘‘Information on the Fertilizer Group’’ and ‘‘Financial Information — the Fertilizer Group’’ in this circular and the accountants’ report on the Fertilizer Group, the text of which is set out in Appendix I to this circular.

SUMMARY OF FINANCIAL INFORMATION

The following is a summary of the results of the Fertilizer Group for the Track Record Period and the pro forma results of the Enlarged Group. This summary should be read in conjunction with the accountants’ report on the Fertilizer Group in Appendix I and the pro forma financial information of the Enlarged Group in Appendix III to this circular.

Audited results of the Fertilizer Group during the Track Record Period

Turnover Cost of Sales Gross profit Other revenues Distribution costs Administrative expenses Other operating (expenses)/income, net Operating profit Finance costs Share of profits less losses of jointly controlled entities Profit before taxation Taxation Profit after taxation Minority interests Profit attributable to shareholders Distribution to owner	Year 2002 RMB’000 7,800,847 (7,390,221) 410,626 44,131 (69,219) (54,474) (1,627) 329,437 (32,154) (222) 297,061 (57,012) 240,049 303 240,352 106,236	ended 31 December 2003 2004 RMB’000 RMB’000 10,371,472 12,591,214 (9,523,785) (11,500,845) 847,687 1,090,369 42,018 44,909 (257,590) (336,267) (74,043) (126,367) 2,419 43,828 560,491 716,472 (45,381) (50,116) 7,995 44,265 523,105 710,621 (105,321) (150,252) 417,784 560,369 (1,938) (17,005) 415,846 543,364 — —

— 3 —

SUMMARY

Pro forma results of the Enlarged Group

Pro forma profit and loss account of the Enlarged Group

Turnover Gross profit Net (loss)/profit attributable to shareholders	Year ended 31 March 2004 Group HK$’000 99,483 46,698 (101,873)	Year ended 31 December 2004 Fertilizer Group HK$’000 11,878,504 1,028,650 512,606	Aggregated Pro forma adjustments HK$’000 HK$’000 11,977,987 — 1,075,348 — 410,733 (25,932)	Pro forma Enlarged Group HK$’000 11,977,987 1,075,348 384,801

Pro forma balance sheet of the Enlarged Group

Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets	30 September 2004 Group HK$’000 65,717 88,843 154,560 87,847 20,673 108,520 46,040	31 December 2004 Fertilizer Group HK$’000 919,747 5,928,589 6,848,336 289,250 4,651,586 4,940,836 1,907,500	Aggregated HK$’000 985,464 6,017,432 7,002,896 377,097 4,672,259 5,049,356 1,953,540	Pro forma adjustments HK$’000 259,323 — 259,323 — 20,000 20,000 239,323	Pro forma Enlarged Group HK$’000 1,244,787 6,017,432
					7,262,219 377,097 4,692,259
					5,069,356 2,192,863

PROFIT FORECAST OF THE ENLARGED GROUP FOR THE YEAR ENDING 31 DECEMBER 2005

Forecast consolidated profit of the Enlarged Group attributable to Shareholders[(Note)] . . . . . . . . . . . . . . . . . . not less than RMB671 million (equivalent to approximately HK$633 million)

(Note) The profit forecast of the Enlarged Group for which the Directors and the directors of Sinochem HK are solely responsible, has been prepared on the bases and assumptions set out in Appendix IV to this circular.

Sinochem HK has covenanted with the Company that, subject to Completion having occurred, the consolidated profit of the Enlarged Group attributable to shareholders of the Company for the year ending 31 December 2005 will not be less than RMB671,000,000 (equivalent to approximately HK$633 million) and, if the consolidated profit attributable to shareholders of the Company following Completion as reflected in its audited consolidated financial statements for the year ending 31 December 2005 is less than RMB671,000,000 (equivalent to approximately HK$633 million), it will pay or procure to be paid to the Company a cash sum equal to the shortfall within thirty business days of the date on which such audited consolidated financial statements are published. Please refer to the paragraph headed ‘‘Profit Forecast’’ in the section headed ‘‘Financial Information — The Enlarged Group’’ and Appendix IV to this circular for details of the profit forecast of the Enlarged Group for the year ending 31 December 2005.

— 4 —

SUMMARY

REGULATORY IMPLICATIONS OF THE ACQUISITION

Listing Rules

Very substantial acquisition and connected transaction

The Acquisition constitutes a very substantial acquisition and a connected transaction of the Company under Chapters 14 and 14A of the Listing Rules and is therefore subject to the approval of the Independent Shareholders by poll at the SGM.

Reverse takeover and new listing

In addition, as the Acquisition will result in a change of control of the Company, the Acquisition also constitutes a reverse takeover of the Company under Rule 14.06(6) of the Listing Rules and will result in the Company being treated as a new listing applicant under Rule 14.54 of the Listing Rules. As such, the Acquisition is subject to the approval of the Company’s new listing application by the Listing Committee of the Stock Exchange and the application must comply with all the requirements under the Listing Rules, including the requirements under Chapters 8 and 9 of the Listing Rules. The Fertilizer Group meets the requirements under Rule 8.05(1) of the Listing Rules and the Enlarged Group meets all the other conditions set out in Chapter 8 of the Listing Rules. The Company has made a new listing application to the Stock Exchange and the Listing Committee of the Stock Exchange has given its in-principle approval for the new listing application of the Company.

Public float requirement

After the issue of the Consideration Shares and prior to the Offering, Sinochem HK will be interested in approximately 94.65% of the enlarged issued ordinary share capital of the Company. In addition, approximately 0.69% of the enlarged issued ordinary share capital of the Company will be held by Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, who are executive Directors. The public float of the Company will be approximately 4.66% and will therefore be less than the minimum 25% public float required under Rule 8.08 of the Listing Rules. The Company and Sinochem HK have undertaken to the Stock Exchange to ensure that not less than 25% of the ordinary shares of the Company then in issue will be held in public hands upon Completion. The Company and Sinochem HK are considering an offering structure which includes the Strategic Placing, the Preferential Offer and the Placing to maintain the minimum public float requirement under the Listing Rules. For details, please refer to the section headed ‘‘Maintaining the listing status and public float’’ in the ‘‘Letter from the Board’’ and the paragraphs headed ‘‘The Preferential Offer’’ and ‘‘The Strategic Placing’’ in the ‘‘Letter from Sinochem HK’’ in this circular.

Continuing connected transactions

Upon Completion, various companies within the Fertilizer Group will become subsidiaries of the Company. On-going provision of services, sale and purchase of products, and leasing and trademark licencing arrangements are expected to take place between members (and their Associates) of the Sinochem Group (other than the Enlarged Group) and members of the Enlarged Group, which will constitute continuing connected transactions of the Company under the Listing Rules. Also, various joint venture partners of the Fertilizer Group’s joint venture companies will become connected persons (as defined in the Listing Rules) and any transaction between the joint venture companies and such connected persons will become

— 5 —

SUMMARY

connected transactions under the Listing Rules. Some of these transactions constitute Nonexempt Continuing Connected Transactions and are subject to the approval of the Independent Shareholders.

The Acquisition is conditional on, among other things, the approval of the Non-exempt Continuing Connected Transactions by the Independent Shareholders at the SGM. Voting will also be conducted by poll and Sinochem HK, Mr. Chu Yu Lin, David and their respective Associates will abstain from voting.

Takeovers Code

As at the Latest Practicable Date, Sinochem HK and its concert parties owned approximately 21.16% of the existing issued Ordinary Shares. Following the issue of the Consideration Shares (on the basis that no Offering has taken place), the interests of Sinochem HK and its concert parties will increase to approximately 94.65% of the enlarged issued ordinary share capital of the Company. Accordingly, upon Completion, Sinochem HK and its concert parties will be obliged to make an unconditional mandatory general offer for all the issued shares of the Company not already owned or agreed to be acquired by Sinochem HK and parties acting in concert with it under Rule 26.1 of the Takeovers Code unless a waiver from strict compliance with Rule 26.1 of the Takeovers Code has been obtained from the Executive.

If the Whitewash Waiver is granted by the Executive, Sinochem HK and parties acting in concert with it would not be required to make a mandatory offer which would otherwise be required as a result of the allotment and issue of the Consideration Shares pursuant to the Acquisition Agreement.

The Executive has indicated that it will grant the Whitewash Waiver to Sinochem HK and parties acting in concert with it subject to the approval of the Independent Shareholders on a vote taken by way of poll. As a result, if the Whitewash Waiver is approved by the Independent Shareholders, no general offer will be required to be made by Sinochem HK and its concert parties under the Takeovers Code as a result of the allotment and issue of the Consideration Shares.

If the Whitewash Waiver is not granted, the Acquisition Agreement will lapse and the Acquisition will not proceed.

— 6 —

SUMMARY

Capital Reorganisation

The Board also proposes the Capital Reorganisation for approval by the Shareholders at the SGM. The Capital Reorganisation will comprise:

(i) the Capital Reduction — the nominal value of each of the issued Ordinary Shares will be reduced by HK$0.09 by cancelling an equivalent amount of paid-up capital per Ordinary Share so that the nominal value of each Ordinary Share will be reduced from HK$0.10 to HK$0.01 and the entire credit arising from the Capital Reduction will be transferred to the contributed surplus account of the Company;
(ii) the Share Consolidation — subject to and immediately upon the Capital Reduction taking effect, every 10 Reduced Shares of HK$0.01 each then in issue will be consolidated into one New Share of HK$0.10;
(iii) an increase in authorised share capital — the authorised share capital of the Company will be increased to HK$8,316,000,000, comprising 80,000,000,000 ordinary shares of HK$0.10 each and 316 Preference Shares of HK$1,000,000 each;
(iv) the Existing Share Premium Cancellation — the entire balance standing to the credit of the share premium account of the Company as at 31 March 2004 will be cancelled, and the credit arising from the Existing Share Premium Cancellation will be transferred to the contributed surplus account of the Company; and
(v) the Further Share Premium Cancellation — if Completion occurs following the implementation of the matters referred to in (i) to (iv) above, a further amount of HK$131,625,200 representing part of the share premium arising from the issue of the Consideration Shares will be cancelled, and the credit arising from the Further Share Premium Cancellation will be transferred to the contributed surplus account of the Company.

The Directors intend to utilise the entire balance standing to the credit of the Company’s contributed surplus account as at 31 March 2004, as well as all sums credited to that account as described above, to set off against an equivalent amount of the accumulated losses of the Company as at 31 March 2004. Further details in this regard are set out in the paragraph headed ‘‘Capital Reorganisation’’ in the ‘‘Letter from the Board’’ in this circular.

Other matters

. General mandate to issue shares and the Repurchase Mandate — It is proposed that (a) a general mandate be granted to the Directors to repurchase ordinary shares representing up to 10% of the issued ordinary share capital of the Company as enlarged by the issue of the Consideration Shares; (b) a general mandate be granted to the Directors to allot, issue and deal with additional ordinary shares with an aggregate nominal value not exceeding 20% of the aggregate nominal amount of the issued ordinary share capital of the Company, as enlarged by the issue of the Consideration Shares; and (c) the general mandate to issue ordinary shares as described in (b) be extended by adding to it the aggregate number of ordinary shares repurchased under the Repurchase Mandate. Ordinary resolutions will be proposed at the SGM for the granting of the General Mandates. Under Rule 13.36(4) of the Listing Rules, the proposed

— 7 —

SUMMARY

granting of the general mandate to issue shares on terms described in (b) and (c) constitutes a refreshment of the existing general mandate to issue shares granted to the Directors at the annual general meeting of the Company held on 30 August 2004. In accordance with Rule 13.36(4) of the Listing Rules, voting on the resolutions relating to the proposed general mandate to issue shares and extension of that mandate will be conducted by poll and the Directors and their respective Associates will abstain from voting on these resolutions.

. Specific mandate to issue shares — It is proposed that a specific mandate be granted to the Directors to issue up to 3,900,000,000 new Ordinary Shares (subject to adjustment to take into account the effect of the Capital Reorganisation) pursuant to the Placing to maintain the public float of the Company on or prior to Completion. An ordinary resolution will be proposed at the SGM for the granting of the specific mandate. Since the Placing is an integral part of the Company’s plan to maintain the public float of the ordinary shares of the Company as a result of the Acquisition, Sinochem HK, Mr. Chu Yu Lin, David, and their respective Associates, being parties interested or taken to be interested in the Acquisition, are therefore required to abstain from voting on the resolution approving the specific mandate to issue new ordinary shares pursuant to the Placing.
. Change of financial year end — Upon Completion, it is the Company’s intention to change the financial year end of the Enlarged Group to 31 December going forward to conform with the financial year end of the Fertilizer Group, to provide a consistent accounting period for the Enlarged Group in order to consolidate the results of the Fertilizer Group with those of the Group. A resolution will be proposed at the SGM for approval of this change by the Shareholders. A waiver application has been made to the Stock Exchange in respect of Rule 8.21 of the Listing Rules, which prohibits a change of financial year end for a new listing applicant.

Advice and recommendation

The Independent Board Committee has been formed to advise the Independent Shareholders in relation to the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares. Somerley has been appointed as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in this connection. Accordingly, your attention is drawn to the letter of advice from the Independent Board Committee set out on pages 112 to 113 of this circular, which contains its recommendation to the Independent Shareholders, and the letter from Somerley set out on pages 114 to 151 of this circular, which contains its advice to the Independent Board Committee and the Independent Shareholders.

The Independent Board Committee, having taken into account the advice of Somerley, considers that the terms of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions, including the related annual caps, and the proposed grant of general mandate to issue shares are fair and reasonable so far as the Independent Shareholders are concerned and the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the grant of the proposed general mandate to issue shares are in the interests of the Company and the Shareholders as a whole. The Independent Board Committee also considers the Non-exempt Continuing Connected Transactions are on normal commercial terms and in the ordinary course of business of the Enlarged Group. Accordingly, the Independent Board Committee recommends that the

— 8 —

SUMMARY

Independent Shareholders vote in favour of the resolutions to be proposed at the SGM to approve the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed grant of general mandate to issue shares.

On the basis of the information set out in this circular, the Directors consider that the passing of the proposed resolutions for (a) the implementation of the Capital Reorganisation; (b) granting to the Directors of the General Mandates as described in the paragraph headed ‘‘General mandate to issue shares and the Repurchase Mandate’’ in the ‘‘Letter from the Board’’ in this circular; (c) the change of financial year end of the Enlarged Group to 31 December; and (d) the grant of a specific mandate to authorise the Directors to issue any new ordinary shares of the Company under the Placing, are in the interests of the Company and the Shareholders as a whole. The Directors therefore recommend the Shareholders to vote in favour of these resolutions as set out in the notice of the SGM.

RISK FACTORS

There are risks associated with the Acquisition and the Fertilizer Group. You should read the section headed ‘‘Risk Factors’’ in this circular carefully before making a decision on the Proposals. These risks can be categorised into (i) risks relating to the failure to complete the Acquisition; (ii) risks relating to the Acquisition; (iii) risks relating to the Enlarged Group; (iv) risks relating to the Group; (v) risks relating to the Fertilizer Group; (vi) risks relating to the PRC fertilizer industry; (vii) risks relating to the PRC; and (viii) other risks relating to this circular, and are summarised below:

Risks relating to the failure to complete the Acquisition

. If the Acquisition does not occur, there is no assurance that the Company will have sufficient financial resources to meet its financial obligations in the immediate future, which could affect the ability of the Group to continue its operations

Risks relating to the Acquisition

. Completion of the Acquisition is subject to the fulfilment of the Conditions and there is no assurance that the Acquisition will be completed as contemplated
. The shareholding interest in the Company held by the existing Shareholders will be substantially diluted upon Completion
. The Company’s controlling shareholder can exert influence on the Company and could cause the Company to make decisions that may not be in the best interests of the other Shareholders

Risks relating to the Enlarged Group

. The principal business of the Enlarged Group will be substantially different from that of the Group at present
. The Enlarged Group may face competition from the Remaining Fertilizer Business
. Failure to enforce the Non-competition Undertaking may adversely affect the business and results of operations of the Enlarged Group

— 9 —

SUMMARY

. The Enlarged Group may not be able to obtain additional financing it may require

Risks relating to the Group

. As at 30 April 2005, the date of the Group’s indebtedness statement, the Group had a net liability position of approximately HK$53.6 million and for the three years ended 31 March 2002, 2003 and 2004, the Group incurred a net loss of approximately HK$174.6 million, HK$129.9 million and HK$101.9 million, respectively
. If the Capital Reorganisation is not approved, the Company’s accumulated losses will remain outstanding and the Company may be unable to pay dividends

Risks relating to the Fertilizer Group

. There can be no assurance that the expansion plans of the Fertilizer Group can be achieved as contemplated or that increased capacity will be matched by increased customer demand
. The Fertilizer Group’s production and distribution may be affected by external factors, including interruptions in electricity supply and rail transport
. The Fertilizer Group’s substantial leverage could have a material adverse effect on the financial health of the Fertilizer Group
. Failure to secure and maintain long-term and stable relationships for obtaining products and raw materials from suppliers may adversely affect the business of the Fertilizer Group
. The Fertilizer Group relies on Sinochem Corporation to import fertilizer products from overseas suppliers; there can be no assurance that Sinochem Corporation will not alter the import service framework agreement in a manner that would be adverse to the Fertilizer Group
. The loss of any of the Fertilizer Group’s significant customers could have an adverse effect on the Fertilizer Group’s business
. Ammonia and other fertilizer components and products that are manufactured, processed, stored, handled, distributed and transported by the Fertilizer Group may be very volatile. Accidents involving these substances could cause severe damage or injury to property, the environment and human health and the Fertilizer Group is not insured against such damage
. Failure to establish sales centres at suitable and convenient locations or failure to renew the existing leases of the sales centres may adversely affect the future growth of the Fertilizer Group
. The Fertilizer Group may not possess clear leasehold title or clear right of possession in respect of certain leased properties occupied by it
. The Fertilizer Group may incur significant costs and expenses in order to cure the lack of relevant title documents corresponding to certain PRC properties used by Sinochem Fuling

— 10 —

SUMMARY

. If the Fertilizer Group’s relationships with its joint venture partners deteriorate, its profitability and return on assets may be adversely affected
. If the existing credit terms granted by suppliers are no longer available, the financial position of the Fertilizer Group may be adversely affected
. The Fertilizer Group relies on independent distributors for sales to certain customers
. A large proportion of the Fertilizer Group’s revenue has been derived from potash fertilizers during the Track Record Period
. Failure by the Fertilizer Group to secure renewal of certain key trademark licencing agreements may have an adverse effect on the Fertilizer Group
. The trademark ‘‘ (Sinochem)’’ licensed to the Fertilizer Group may be infringed
. The Fertilizer Group could become involved in intellectual property or other similar disputes
. Failure to maintain an optimal level of inventory may adversely affect the financial position and profitability of the Fertilizer Group
. Failure of the information technology systems or material inefficiency of information management of the Fertilizer Group may adversely affect its operations and production and distribution activities
. Any resignation or departure of key management staff could have material adverse impact on the operation of the Fertilizer Group
. Failure to recruit, train and retain additional qualified employees may adversely affect the Fertilizer Business
. The Fertilizer Group does not maintain any product liability insurance to cover any liability of the Fertilizer Group arising from the quality of its products
. There is no assurance that members of the Fertilizer Group will continue to benefit from preferential tax treatment
. Negative operating cashflow could adversely impact the liquidity and cash position of the Fertilizer Group
. Dividend distributions made by the Fertilizer Group in the past may not be indicative of the Fertilizer Group’s or the Company’s future dividend policy
. The fertilizer business is cyclical, which will expose the Fertilizer Group to significant fluctuations in its cost structure, profitability and business growth
. The Fertilizer Group’s results of operations could be negatively impacted by seasonality
. The Fertilizer Group is subject to risks related to weather conditions

— 11 —

SUMMARY

. The Fertilizer Group is not insured against potential losses and could be seriously harmed by natural disasters, catastrophes or deliberate sabotage
. Acts of war or terrorism could negatively affect the Fertilizer Business

Risks relating to the PRC fertilizer industry

. The prices of fertilizer products in the PRC are subject to price controls imposed by the State, which limit the Fertilizer Group’s flexibility to raise or set prices and pass along cost increases
. Competition may intensify as a result of China’s accession to the WTO and the increasing number of domestic and foreign enterprises engaged in the fertilizer business in the PRC, which may lead to reduced prices, gross profit and market share
. Substantial fluctuations in the price of nitrogen-based fertilizer products in the international market may have a material adverse effect on the profitability of the Fertilizer Group
. The Fertilizer Group is vulnerable to raw material shortages in the PRC
. The Fertilizer Group may incur significant costs to comply with, or as a result of, existing or future PRC health, safety, environmental and other laws and regulations

Risks relating to the PRC

. Adverse changes in the PRC’s economic, political and social conditions and government policies could have a material adverse effect on the overall economic growth of the PRC, which could adversely affect the results of operations and financial condition of the Fertilizer Group
. Macroeconomic measures taken by the PRC Government may cause the Chinese economy to slow down
. There are uncertainties regarding interpretation and enforcement of the PRC laws and regulations
. The Fertilizer Group has exposure to PRC economic policies and fluctuations in the value of the Renminbi against the U.S. dollar
. Government control of foreign currency conversion may limit the Fertilizer Group’s foreign exchange transactions

Other risks relating to this circular

. Statistics contained in this circular were derived from various official sources and have not been independently verified

— 12 —

DEFINITIONS

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

‘‘Acquisition’’ the proposed acquisition of the entire issued share capital of the Fertilizer Company
‘‘Acquisition Agreement’’ the conditional sale and purchase agreement dated 28 January 2005, as supplemented by an agreement made on 6 June 2005, between the Company (as purchaser) and Sinochem HK (as vendor) in relation to the Acquisition
‘‘Announcement’’ the joint announcement of the Company and Sinochem HK dated 28 January 2005
‘‘Associate(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Assured Entitlement’’ the entitlement of Qualifying Shareholders to apply for Reserved Shares under the Preferential Offer on the basis described in the section headed ‘‘Maintaining the listing status and public float’’ in the ‘‘Letter from the Board’’ and ‘‘The Preferential Offer’’ in the ‘‘Letter from Sinochem HK’’ in this circular

‘‘Board’’	the board of Directors
‘‘BOCI Asia’’	BOCI Asia Limited, a licensed corporation holding a licence to
	conduct type 1 (dealing in securities) and type 6 (advising on
	corporate finance) regulated activities under the SFO
‘‘BVI’’	the British Virgin Islands
‘‘Bye-laws’’	the bye-laws of the Company
‘‘Capital Reduction’’	the reduction of the nominal value of each Ordinary Share in issue
	as described in the paragraph headed ‘‘Capital Reorganisation’’ in
	the ‘‘Letter from the Board’’ in this circular
‘‘Capital Reorganisation’’	the Capital Reduction, the Share Consolidation, an increase in the
	authorised share capital of the Company, the Existing Share
	Premium Cancellation and the Further Share Premium
	Cancellation
‘‘Cazenove Asia’’	Cazenove Asia Limited, a licensed corporation to carry out type 1
	(dealing in securities), type 4 (advising on securities), type 6
	(advising on corporate finance) and type 9 (asset management)
	regulated activities under the SFO, and the financial adviser to
	Sinochem Corporation in respect of the Acquisition and one of the
	Sponsors
‘‘CCASS’’	the Central Clearing and Settlement System established and
	operated by HKSCC
‘‘Companies Act’’	the Companies Act 1981 of Bermuda

— 13 —

DEFINITIONS

‘‘Company’’ Sinochem Hong Kong Holdings Limited (formerly known as Wah Tak Fung Holdings Limited), a company incorporated on 26 May 1994 in Bermuda with limited liability, the Ordinary Shares of which are listed on the Stock Exchange
‘‘Completion’’ completion of the Acquisition pursuant to the terms and conditions of the Acquisition Agreement
‘‘concert party’’ or ‘‘party means parties who under the Takeovers Code are regarded as acting in concert’’ ‘‘acting in concert’’, as defined in the Takeovers Code
‘‘Conditions’’ conditions precedent to Completion as set out in the Acquisition Agreement and summarised in the paragraph headed ‘‘Conditions’’ in the ‘‘Letter from the Board’’ in this circular
‘‘Continuing Connected the continuing transactions between members of the Enlarged Transactions’’ Group and the connected persons (as defined in the Listing Rules) of the Company which will constitute continuing connected transactions (as defined in the Listing Rules) of the Company immediately following Completion
‘‘Consideration Shares’’ the New Shares to be allotted and issued to Sinochem HK in accordance with the Acquisition Agreement (subject to the adjustment as described in the sub-paragraph headed ‘‘Payment method’’ in the ‘‘Letter from the Board’’ in this circular)
‘‘Directors’’ the directors of the Company (including its independent nonexecutive directors)
‘‘Dohigh Trading’’ Dohigh Trading Limited, a company incorporated under the laws of Hong Kong on 30 October 1987 with limited liability, and a member of the Fertilizer Group
‘‘Enlarged Group’’ the Company and its subsidiaries following the Completion
‘‘Executive’’ the executive director of the Corporate Finance Division of the SFC from time to time and any delegate of such executive director
‘‘Existing Share the cancellation of the entire balance standing to the credit of the Premium Cancellation’’ share premium account of the Company as at 31 March 2004 as described in the paragraph headed ‘‘Capital Reorganisation’’ in the ‘‘Letter from the Board’’ in this circular
‘‘Fertilizer Business’’ the fertilizer business carried on by the Fertilizer Group
‘‘Fertilizer Company’’ China Fertilizer (Holdings) Company Limited, a company incorporated in the BVI with limited liability on 16 December 2004 and which is wholly-owned by Sinochem HK

— 14 —

DEFINITIONS

‘‘Fertilizer Group’’ Fertilizer Company and its various subsidiaries and interests in companies incorporated in the PRC and elsewhere which, except for various companies as stated in the Non-competition Undertaking, comprise the entire fertilizer business of Sinochem Corporation prior to Reorganisation
‘‘Further Share Premium the cancellation of the further share premium to the extent of Cancellation’’ HK$131,625,200 arising from the issue of the Consideration Shares as described in the paragraph headed ‘‘Capital Reorganisation’’ in the ‘‘Letter from the Board’’ in this circular
‘‘General Mandates’’ the general mandate to issue ordinary shares of the Company; the Repurchase Mandate and the extension of the general mandate to issue shares by the amount of shares repurchased to be proposed at the SGM, details of which are set out in the paragraph headed ‘‘General mandate to issue shares and the Repurchase Mandate’’ in the ‘‘Letter from the Board’’ in this circular
‘‘Goldman Sachs’’ Goldman Sachs (Asia) L.L.C., a licensed person holding a licence to conduct type 1 (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities under the SFO and one of the Sponsors
‘‘Group’’ the Company and its subsidiaries ‘‘HK$’’ or ‘‘HKD’’ Hong Kong dollars, the lawful currency of Hong Kong ‘‘HK GAAP’’ generally accepted accounting principles in Hong Kong ‘‘HKSCC’’ Hong Kong Securities Clearing Company Limited ‘‘Hong Kong’’ the Hong Kong Special Administrative Region of the People’s Republic of China

‘‘Independent Board the independent committee of the Board, consisting of all the Committee’’ independent non-executive Directors, being Mr. KO Ming Tung, Edward, Dr. LI Ka Cheung, Eric and Dr. TANG Tin Sek, who have been appointed to advise the Independent Shareholders in respect of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares

‘‘Independent Financial Somerley Limited, a licensed corporation to carry out type 1 Adviser’’ or (dealing in securities), type 4 (advising on securities), type 6 ‘‘Somerley’’ (advising on corporate finance) and type 9 (asset management) regulated activities as defined under the SFO ‘‘Independent Shareholders who are not interested or involved in the Acquisition Shareholders’’ and the Whitewash Waiver, being Shareholders other than Sinochem HK, Mr. Chu Yu Lin, David and their respective Associates and concert parties

— 15 —

DEFINITIONS

‘‘Independent Third	party(ies) which are not connected persons (as defined in the
Party(ies)’’	Listing Rules) of the Company and are independent of and not
	connected with such connected persons (as defined in the Listing
	Rules)
‘‘Investor’’	Potash Corporation of Saskatchewan Inc., an Independent Third
	Party, is a corporation incorporated in Canada with shares listed
	on the Toronto Stock Exchange and the New York Stock
	Exchange. The Investor is one of the world’s largest integrated
	fertilizer and related industrial and feed products companies, and
	the world’s largest producer of potash fertilizer by capacity
‘‘Issue Price’’	the price of HK$1.00 per Consideration Share (subject to
	adjustment as described in the sub-paragraph headed ‘‘Payment
	method’’ in the ‘‘Letter from the Board’’ in this circular)
‘‘Latest Practicable	8 June 2005, being the latest practicable date for the purpose of
Date’’	ascertaining certain information contained in this circular
‘‘Listing Rules’’	the Rules Governing the Listing of Securities on the Stock
	Exchange
‘‘Macao’’	the Macao Special Administrative Region of the People’s Republic
	of China
‘‘Management of the	the directors of Fertilizer Company and the senior management of
Fertilizer Group’’	the Fertilizer Group
‘‘Manzhouli Kaiming’’	(Manzhouli Kaiming Fertilizer Company
	Limited), a limited liability company established in the PRC on
	17 February 2005, a member of the Fertilizer Group in which
	Sinochem Fertilizer holds a direct 90% equity interest
‘‘NDRC’’	National Development and Reform Commission of the PRC
‘‘New Share(s)’’	ordinary share(s) of HK$0.10 each in the capital of the Company
	upon the Capital Reduction and Share Consolidation becoming
	effective
‘‘Non-competition	the non-competition undertaking dated 6 June 2005 entered into
Undertaking’’	by Sinochem Corporation in favour of the Company
‘‘Non-exempt Continuing	Continuing Connected Transactions which will not be exempt from
Connected	the reporting, announcement and independent shareholders’
Transactions’’	approval requirements under Chapter 14A of the Listing Rules
‘‘Offering’’	the proposed offering of new and existing ordinary shares in the
	Company by the Company and Sinochem HK comprising (i) the
	Strategic Placing; (ii) the Preferential Offer; and (iii) the Placing,
	to maintain the minimum public float required under the Listing
	Rules

— 16 —

DEFINITIONS

‘‘Old Share Option	the old share option scheme of the Company adopted on 11
Scheme’’	September 1996 and terminated on 26 August 2002
‘‘Option’’	the option granted by Sinochem HK to the Investor on 7 June
	2005 to acquire from Sinochem HK up to 5,813,757,778 ordinary
	shares (subject to adjustment to take into account the effect of the
	Capital Reorganisation) details of which are set out in the
	paragraphs headed ‘‘Maintaining the listing status and public
	float — The Offering — The Strategic Placing’’ of the ‘‘Letter
	from the Board’’ and ‘‘The Strategic Placing’’ of the ‘‘Letter from
	Sinochem HK’’ in this circular
‘‘Ordinary Share(s)’’	ordinary share(s) of HK$0.10 each in the capital of the Company
	prior to the Capital Reduction and Share Consolidation
‘‘Overseas	registered holders of Ordinary Shares whose addresses on the
Shareholders’’	register of members of the Company are outside Hong Kong on
	the close of business on the Record Date
‘‘PBOC’’	People’s Bank of China
‘‘Placing’’	proposed placing of new ordinary shares of the Company by the
	Company as part of the Offering to maintain the public float as
	described in the section headed ‘‘Maintaining the listing status and
	public float’’ in the ‘‘Letter from the Board’’ in this circular
‘‘PRC’’ or ‘‘China’’	the People’s Republic of China, which for the purposes of this
	circular excludes Hong Kong, Macao and Taiwan
‘‘PRC GAAP’’	generally accepted accounting principles in the PRC
‘‘Preference Shares’’	unlisted convertible redeemable non-voting preference shares with
	a nominal value of HK$1,000,000 each in the capital of the
	Company
‘‘Preferential Offer’’	the preferential offer to the Qualifying Shareholders to purchase
	the Reserved Shares on an assured basis, subject to the approval
	of the Proposals by the Independent Shareholders and on and
	subject to the terms and conditions stated in a separate offering
	document and application form, as further described in the
	sections headed ‘‘Maintaining the listing status and public float’’
	in the ‘‘Letter from the Board’’ and ‘‘The Preferential Offer’’ in the
	‘‘Letter from Sinochem HK’’ in this circular
‘‘Proposals’’	the Acquisition, the Whitewash Waiver, the Non-exempt
	Continuing Connected Transactions, the Capital Reorganisation,
	the grant of a specific mandate to issue new ordinary shares
	pursuant to the Placing, the General Mandates and change of
	financial year end of the Group

— 17 —

DEFINITIONS

‘‘Qinghai Salt Lake’’ (Qinghai Salt Lake Potash Co. Ltd.), a joint stock limited liability company established in the PRC whose shares are listed on the Shenzhen Stock Exchange, and Sinochem Corporation holds a 20% shareholding, other shareholders, including the public shareholders, are all Independent Third Parties
’’Qualifying holders of Ordinary Shares, whose names appear on the register Shareholders’’ of members of the Company as holding Ordinary Shares at the close of business on the Record Date, other than Overseas Shareholders and Shareholders who would not constitute members of the public for the purposes of Rule 8.08 of the Listing Rules
‘‘Record Date’’ 5 July 2005, being the date of the SGM and any adjournment thereof, as the record date for ascertaining Assured Entitlements
‘‘Reduced Share(s)’’ ordinary share(s) of HK$0.01 each in the capital of the Company upon the Capital Reduction becoming effective and prior to the Share Consolidation
‘‘Remaining Fertilizer those members of the Sinochem Group that continue to be Business’’ engaged in the production of fertilizers after Completion as described in the section headed ‘‘Information on the Fertilizer Group — Relationship Between the Enlarged Group and the Sinochem Group’’ in this circular
‘‘Reorganisation’’ the reorganisation of the Fertilizer Group whereby Sinochem Corporation injected the Fertilizer Group into the Fertilizer Company, which is more particularly described in the section headed ‘‘Information on the Fertilizer Group — History and Development — Reorganisation’’ in this circular
‘‘Repurchase Mandate’’ a general mandate proposed to be granted to the Directors at the SGM to repurchase ordinary shares of the Company not exceeding 10% of the aggregate of (a) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of the relevant resolution granting this mandate and, subject to the Share Consolidation taking effect, as adjusted to reflect the effects of the Share Consolidation; and (b) the nominal amount of the ordinary shares of the Company to be issued pursuant to the Acquisition Agreement, details of which are set out in the paragraph headed ‘‘General mandate to issue shares and the Repurchase Mandate’’ in the ‘‘Letter from the Board’’ in this circular

— 18 —

DEFINITIONS

‘‘Reserved Shares’’
‘‘RMB’’
‘‘SAFE’’
‘‘SAIC’’
‘‘Sanhuan Sinochem
Jiaji’’
‘‘SASAC’’
‘‘SFC’’
‘‘SFO’’
‘‘SGM’’
‘‘Shandong Xinhongri’’
‘‘Share Consolidation’’
‘‘Shareholder(s)’’
‘‘Share Option Scheme’’
‘‘Share Options’’

the 7,571,521,062 ordinary shares (subject to adjustment to take
into account the effect of the Capital Reorganisation), representing
approximately
13.04%
of
the
enlarged
issued
ordinary
share
capital of the Company on Completion and completion of the
Placing, offered pursuant to the Preferential Offer and which are
to be allocated out of the Consideration Shares
Renminbi, the lawful currency of the PRC
State Administration of Foreign Exchange of the PRC
State Administration For Industry and Commerce of the PRC
(Yunan
Sanhuan
Sinochem
Jiaji
Chemical Fertilizer Company Limited), a limited liability company
established in the PRC on 22 May 2001, and a member of the
Fertilizer Group in which Sinochem Fertilizer holds a direct 25%
equity interest
State-owned Assets Supervision and Administration Commission
of the State Council of the PRC
the Hong Kong Securities and Futures Commission
the Securities and Futures Ordinance (Chapter 571 of the Laws of
Hong Kong)
the special general meeting of the Company to be convened to
consider and approve the Proposals, the notice of which is set out
at the end of this circular
(Shandong
Xinhongri
New
Fertilizer
Company Limited), a limited liability company established in the
PRC on 7 August 2003 and an Independent Third Party with a
20% equity interest in Sinochem Shandong
the consolidation of 10 Reduced Shares of HK$0.01 each in issue
immediately following the Capital Reduction into one New Share of
HK$0.10
as
described
in
the
paragraph
headed
‘‘Capital
Reorganisation’’ in the ‘‘Letter from the Board’’ in this circular
the holder(s) of the Ordinary Shares or New Shares (as the case
may be)
the existing share option scheme of the Company adopted by
resolution of the Shareholders on 26 August 2002
share options granted pursuant to the Old Share Option Scheme

— 19 —

DEFINITIONS

‘‘Sichuan Chuanhua’’ (Sichuan Chuanhua Xintianfe Chemical Company Limited), a company established in the PRC on 12 March 2004, and a member of the Fertilizer Group in which Sinochem Fertilizer holds a direct 10% equity interest
‘‘Sinochem Bahamas’’ Sinochem Fertilizer (Overseas) Holdings Ltd., a company incorporated in the Bahamas with limited liability on 1 October 2000, which is wholly owned by the Fertilizer Company, and has recently been dissolved on 15 April 2005
‘‘Sinochem BVI’’ Sinochem Fertilizer (Overseas) Holdings Ltd., a company incorporated in the BVI with limited liability on 1 July 2004 , a member of the Fertilizer Group and is wholly-owned by Fertilizer Company
‘‘Sinochem Corporation’’ (Sinochem Corporation), a state-owned enterprise established in the PRC formerly known as China National Chemicals Import & Export Corporation which operates globally mainly in the petroleum, fertilizer and chemicals business
‘‘SINOCHEM the distribution and sales operation of the Fertilizer Business Distribution’’ carried on by the Fertilizer Group
‘‘Sinochem Dongfang’’ (Hubei Sinochem Dongfang Chemical Fertilizer Company Limited), a limited liability company established in the PRC on 20 March 2002, and a member of the Fertilizer Group in which Sinochem Fertilizer holds a direct 55% equity interest
‘‘Sinochem Erlianhaote’’ (Sinochem Chemical Fertilizer Erlianhaote Company) (formerly known as (Sinochem International Fertilizer Trading Corporation
Erlianhaote Company), a limited liability company established in the PRC on 3 November 2003, and a member of the Fertilizer Group in which Sinochem Fertilizer holds an aggregate of 100% direct and indirect equity interests
‘‘Sinochem Fertilizer’’ (Sinochem Fertilizer Company Limited), (formerly known as (Sinochem International Fertilizer Trading Corporation), a limited liability company established in the PRC on 15 December 1992, a member of the Fertilizer Group and is wholly-owned by Fertilizer Company
‘‘Sinochem Fuling’’ (Sinochem Chongqing Fuling Chemical Engineering Company Limited), a limited liability company established in the PRC on 16 February 2000, and a member of the Fertilizer Group in which Sinochem Fertilizer holds a direct 60% equity interest
‘‘Sinochem Group’’ Sinochem Corporation and its subsidiaries (other than the Enlarged Group)

— 20 —

DEFINITIONS

‘‘Sinochem HK’’ Sinochem Hong Kong (Group) Company Limited (formerly known as Sinochem Hong Kong (Holdings) Company Limited), a company incorporated in Hong Kong with limited liability which is whollyowned by Sinochem Corporation
‘‘Sinochem Kailin’’ (Guiyang Sinochem Kailin Chemical Fertilizer Company Limited), a limited liability company established in the PRC on 29 July 2003, and a member of the Fertilizer Group in which Sinochem Fertilizer holds a direct 41% equity interest
‘‘Sinochem Logistics’’ (Sinochem Logistics Management Taicang Company Limited), a limited liability company established in the PRC on 12 December 2003, and a member of the Fertilizer Group, in which Sinochem Fertilizer holds a direct 10% equity interest
‘‘Sinochem Macao’’ Sinochem Fertilizer Macao Commercial Offshore Limited, a company incorporated in Macao on 16 November 2004, a member of the Fertilizer Group and is wholly-owned by Sinochem BVI
‘‘SINOCHEM the sourcing operation of the Fertilizer Business carried on by the Procurement’’ Fertilizer Group
‘‘SINOCHEM the manufacturing operation of the Fertilizer Business carried on Production’’ by the Fertilizer Group
‘‘Sinochem Sanhuan’’ (Yunnan Sanhuan Sinochem Chemical Fertilizer Company Limited), a company established in the PRC on 5 April 2005 and a member of the Fertilizer Group in which Sinochem Fertilizer holds a direct 40% equity interest
‘‘Sinochem Shandong’’ (Sinochem Shandong Chemical Fertilizer Company Limited), a limited liability company established in the PRC on 31 March 2004 in which Sinochem Corporation holds a direct 60% equity interest
‘‘Sinochem Suifenhe’’ (Suifenhe Xinkaiyuan Trading Company Limited), formerly known as (Sinochem Fertilizer Suifenhe Company Limited), a limited liability company established in the PRC on 29 November 2002 and a member of the Fertilizer Group in which Sinochem Fertilizer holds an aggregate of 100% direct and indirect equity interests
‘‘Sinochem UK’’ Sinochem (United Kingdom) Limited, a company incorporated in the United Kingdom on 30 July 1986, an indirect wholly-owned subsidiary of Sinochem Corporation

— 21 —

DEFINITIONS

==> picture [454 x 650] intentionally omitted <==

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

||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|‘‘Sinochem|Yantai’’|(Sinochem|Yantai|Crop|Nutrition|Co.,|
|Ltd.),|a|limited|liability|company|established|in|the|PRC|on|15|
|September|2004|and|a|member|of|the|Fertilizer|Group|in|which|
|Sinochem|Fertilizer|holds|a|direct|26%|equity|interest|
|‘‘Sinochem|Zhisheng’’|(Fujian|Sinochem|Zhisheng|Chemical|
|Fertilizer|Company|Limited),|a|limited|liability|company|
|established|in|the|PRC|on|5|August|2002|and|a|member|of|the|
|Fertilizer|Group|in|which|Sinochem|Fertilizer|holds|a|direct|
|53.19%|equity|interest|
|‘‘Sponsors’’|Cazenove|Asia|and|Goldman|Sachs|
|‘‘State’’|the|central|government|of|the|PRC|including|all|governmental|
|subdivisions|(including|provincial,|municipal|and|other|regional|or|
|local|government|entities)|
|‘‘Stock|Exchange’’|The|Stock|Exchange|of|Hong|Kong|Limited|
|‘‘Strategic|Placing’’|the|strategic|placing|of|5,802,141,879|existing|ordinary|shares|
|(subject|to|adjustment|to|take|account|of|the|effect|of|the|Capital|
|Reorganisation),|representing|9.99%|of|the|enlarged|issued|
|ordinary|share|capital|of|the|Company|on|Completion|and|
|completion|of|the|Placing,|by|Sinochem|HK|to|the|Investor|as|
|further|described|in|the|paragraphs|headed|‘‘Strategic|Placing’’|in|
|the|‘‘Letter|from|the|Board’’|and|the|‘‘Letter|from|Sinochem|HK’’|in|
|this|circular|
|‘‘Takeovers|Code’’|the|Hong|Kong|Code|on|Takeovers|and|Mergers|
|‘‘Tianji|Coal’’|(Tianji|Coal|and|Chemical|Engineering|
|Group|Company|Limited),|a|limited|liability|company|established|
|in|the|PRC|on|29|September|1988,|and|an|Independent|Third|
|Party|with|a|60%|equity|interest|in|Tianji|JV|
|‘‘Tianji|JV’’|(Tianji|Sinochem|Gaoping|Chemical|
|Engineering|Company|Ltd.),|a|limited|liability|company|
|established|in|the|PRC|on|1|November|2004|in|which|Sinochem|
|Corporation|holds|a|direct|40%|equity|interest|
|‘‘Tianjin|Beifang’’|(Tianjin|Beifang|Chemical|Fertilizer|
|Logistics|and|Delivery|Company|Limited),|a|limited|liability|
|company|established|in|the|PRC|on|17|November|2003|and|a|
|member|of|the|Fertilizer|Group|in|which|Sinochem|Fertilizer|holds|
|a|direct|60%|equity|interest|
|‘‘Tianjin|Beihai’’|(Tianjin|North|Sea|Industry|Company|
|Limited),|a|limited|liability|company|established|in|the|PRC|on|
|25|April|2002,|and|a|member|of|the|Fertilizer|Group|in|which|
|Sinochem|Fertilizer|holds|a|direct|5.90%|equity|interest|
|‘‘Track|Record|Period’’|the|three|financial|years|ended|31|December|2004|

----- End of picture text -----

— 22 —

DEFINITIONS

‘‘US’’ or ‘‘USA’’ or the United States of America ‘‘United States’’
‘‘US$’’ or ‘‘USD’’ US dollars, the lawful currency of the United States
‘‘US Agri-Chemicals’’ US Agri-Chemicals Corporation, a company established in the State of Florida of the United States with limited liability on 8 March 1989, an indirect wholly-owned subsidiary of Sinochem Corporation
‘‘US Chem Resources’’ US Chem Resources, Inc., a company established in the State of Delaware of the United States on 27 November 1991, an indirect wholly-owned subsidiary of Sinochem Corporation
‘‘Whitewash Waiver’’ a waiver in respect of the obligation of Sinochem HK to make a mandatory offer to Shareholders in respect of the issued shares of the Company not already owned or agreed to be acquired by Sinochem HK as a result of the issue of the Consideration Shares in accordance with Note 1 on Dispensations from Rule 26 of the Takeovers Code
‘‘Yongan Zhisheng’’ (Yongan Zhisheng Chemical Company Limited), an Independent Third Party and a shareholder of Sinochem Zhisheng with a 48.61% equity interest
‘‘Yingkou Shunda’’ (Yingkou Shunda Packaging Company Limited), a limited liability company established in the PRC on 27 September 2000, and a member of the Fertilizer Group in which Sinochem BVI holds an indirect 30% equity interest
‘‘sq.m.’’ square metre ‘‘%’’ per cent.

For the purpose of this circular, unless otherwise stated, translation of Renminbi into Hong Kong dollars and US dollars have been made at the rate of RMB1.06 to HK$1.00 and RMB8.27 to US$1.00, respectively. Such exchange rate is for the purpose of illustration only and does not constitute a representation that any amounts in US$ or HK$ or RMB have been, could have been or may be converted at such or any other rates.

Any discrepancies in any table between totals and sums of amounts listed therein are due to rounding.

— 23 —

GLOSSARY AND TECHNICAL TERMS

The glossary contains explanations and definitions of certain terms used in this circular in connection with the Fertilizer Business and the Fertilizer Group. The terms and their meanings may not correspond to standard industry meanings or usage of these terms:

‘‘BB fertilizers’’ bulk blended fertilizers, according to the PRC national standard, being a chemical compound containing at least two primary plant nutrients among N, P and K

‘‘CAGR’’

compound annual growth rate

‘‘CFIN’’ China Fertiliser Information Net, an information database developed by the Fertiliser Information Department of China National Chemical Information Center. China National Chemical Information Center is a comprehensive national center of information research, information service and computer application and development of chemical sector. It is also one of the eight units with the principal supports from the Ministry of Science and Technology of China in the development of scientific and technological documents and information resources
‘‘CIF’’ Cost, insurance and freight
‘‘complex fertilizers’’ chemically obtained fertilizers containing at least two of the primary plant nutrients. It can also contain secondary nutrients
‘‘diammonium phosphate a fertilizer containing nitrogen and phosphorus for crops and (DAP)’’ horticulture
‘‘ERP system’’ enterprise resource planning — a business management system that helps an enterprise integrate all facets of its business, including planning, manufacturing, sales and marketing
‘‘FAO’’ the Food and Agricultural Organisation of the United Nations ‘‘FAOSTAT Data’’ the FAO Statistical Database, a statistical database maintained by the Food and Agricultural Organisation of the United Nations
‘‘IFA’’ International Fertiliser Industry Association, a trade association whose members include 150 companies in approximately 80 countries in the world
‘‘Kt’’ thousand metric tonnes ‘‘monoammonium NP fertilizer containing two primary plant nutrients, nitrogen and phosphate (MAP)’’ phosphate
‘‘Mt’’ million metric tonnes ‘‘Mt nutrient’’ million tonnes of nutrient, quantity of consumption and production of fertilizers are expressed in weight containing 100% effective nutrient

— 24 —

GLOSSARY AND TECHNICAL TERMS

‘‘multi-nutrient fertilizer’’ a chemically made fertilizer containing at least two of the primary or ‘‘compound plant nutrients. It can also contain secondary nutrients fertilizer’’
‘‘N fertilizer’’ or a fertilizer containing only nitrogen (N) as the main nutrient, ‘‘nitrogen-based common examples include ammonia, urea, ammonium nitrate and fertilizer’’ ammonium sulphate
‘‘nitrogen (N)’’
one of the primary plant nutrients that is essential for plant growth
‘‘NK fertilizer’’ a fertilizer containing two primary nutrients, nitrogen (N) and potassium (K)
‘‘NP fertilizer’’ a fertilizer containing two primary nutrients, nitrogen (N) and phosphorus (P), common examples are DAP and MAP
‘‘NPK fertilizer’’
a fertilizer containing the three primary plant nutrients, nitrogen (N), phosphorus (P) and potassium (K). It can also contain secondary nutrients
‘‘NPK ratio’’
the ratio of the contents of N, P and K nutrients in a fertilizer
‘‘P fertilizer’’ or ‘‘phosphate-based fertilizer’’
a fertilizer containing only phosphorus (P) as the main nutrient, common examples include SSP and TSP
‘‘phosphorus (P)’’
one of the primary plant nutrients that is essential for plant growth. It occurs in natural geological deposits, known as phosphorus rocks
‘‘potassium (K)’’
one of the primary plant nutrients that is essential for plant growth. It is excavated mainly in salt as muriate of potash
‘‘potassium based fertilizer’’ or ‘‘potash fertilizer’’
a fertilizer containing only potassium (K) as the main nutrient, common examples include potassium chloride (KCl)
‘‘potassium chloride a chemical compound composed of potassium and chlorine (KCl)’’ or ‘‘MOP’’
‘‘primary plant nutrients’’ nitrogen (N), phosphorus (P) and potassium (K)
‘‘secondary nutrients’’ Calcium (Ca), magnesium (Mg), sodium (Na) and sulphur (S)
‘‘SSP’’ single superphosphate
‘‘straight fertilizer’’ a fertilizer contains only one of the three primary plant nutrients
‘‘t’’ metric tonne
‘‘TSP’’ triple superphosphate

— 25 —

RISK FACTORS

In addition to the other information contained in this circular, you should take into account the following risks in considering the Acquisition. If any of the possible events described below occurs, the business, financial condition or operating results of the Enlarged Group could be adversely affected.

RISKS RELATING TO THE FAILURE TO COMPLETE THE ACQUISITION

The Acquisition is an integral part of the Company’s plan to develop an alternative business opportunity. The Acquisition should enable the Group to enhance its earnings capability, as the Fertilizer Group has a profitable track record during the Track Record Period. For the year ended 31 December 2004, the pro forma combined profit of the Enlarged Group would be approximately HK$384.8 million compared to an audited net loss for the Group of approximately HK$101.9 million for the year ended 31 March 2004.

If the Acquisition does not occur, there is no assurance that the Company will have sufficient financial resources to meet its financial obligations in the immediate future, which could affect the ability of the Group to continue its operations.

RISKS RELATING TO THE ACQUISITION

Completion of the Acquisition is subject to the fulfilment of the Conditions and there is no assurance that the Acquisition will be completed as contemplated.

Completion of the Acquisition is subject to the fulfilment of the Conditions, details of which are set out in the paragraph entitled ‘‘Conditions’’ in the ‘‘Letter from the Board’’ in this circular. A number of such Conditions involve the decisions of third parties, including approvals by the Independent Shareholders at the SGM, the approval by the Listing Committee of the Stock Exchange of the Company’s new listing application and for the listing of, and permission to deal in, the Consideration Shares and the granting of the Whitewash Waiver by the Executive. In particular, the Stock Exchange may not grant approval for the Company’s new listing application in respect of the Acquisition if the Company is unable to comply with the requirements of Rules 8.08(2) and 8.08(3) of the Listing Rules at the time of Completion, in which case the Acquisition would not become unconditional. Because the fulfilment of such Conditions is not within the control of the parties to the Acquisition, there is no assurance that the Acquisition will be completed as contemplated.

The shareholding interest in the Company held by the existing Shareholders will be substantially diluted upon Completion.

Pursuant to the Acquisition Agreement, the Company will issue an aggregate of 5,050,000,000 Consideration Shares to Sinochem HK at the Issue Price of HK$1.00 per Consideration Share. If the Capital Reorganisation has not occurred on or before Completion, the parties to the Acquisition Agreement have agreed that the number of Consideration Shares will be adjusted to 50,500,000,000 new Ordinary Shares and the Issue Price will be HK$0.10 per Ordinary Share. In either case, the Consideration Shares would represent approximately 93.21% of the enlarged issued ordinary share capital of the Company following the issue of the Consideration Shares (on the basis that no Offering has taken place). As a result, the shareholding interest in the Company held by the existing Shareholders would be

— 26 —

RISK FACTORS

substantially diluted. Any value enhancement of the Company’s ordinary shares as a result of the Acquisition may not necessarily be reflected in their market price and may not offset the dilution effect to Shareholders.

The Company’s controlling shareholder can exert influence on the Company and could cause the Company to make decisions that may not be in the best interests of the other Shareholders.

Following the issue of the Consideration Shares, Sinochem Corporation will be the ultimate controlling shareholder of the Company, holding an aggregate of approximately 94.65% of the enlarged issued ordinary share capital of the Company assuming that no Offering occurs, or approximately 65.26% upon completion of the Offering (assuming Assured Entitlements are taken up in full under the Preferential Offer and the maximum number of new Ordinary Shares are issued under the Placing). As the Company’s controlling shareholder, subject to the Bye-laws and relevant laws and regulations, Sinochem Corporation will be able to influence the Company’s major policy decisions, including, but not limited to, those relating to the Group’s overall strategy and investment, by, among other things:

. controlling the Board and thereby influencing the selection of the Company’s senior management and the Company’s major business decisions;
. approving the Group’s annual budgets; and
. effecting corporate transactions which do not require the approval of the Company’s minority shareholders.

To the extent that Sinochem Corporation has interests that conflict with those of the Company and the Company’s other Shareholders, it may take actions that favour its own interests, but which may not be in the best interests of other Shareholders. For examples of potential conflicts of interest between Sinochem Corporation and the Company, see the section headed ‘‘Risks Relating to the Enlarged Group’’ below.

RISKS RELATING TO THE ENLARGED GROUP

The principal business of the Enlarged Group will be substantially different from that of the Group at present.

Upon Completion, the Enlarged Group will be principally engaged in the sale and distribution of fertilizer products and in related businesses in the PRC, the risks and business profiles of which are substantially different from those of the Group at present. This means that, after Completion, Shareholders will own an investment in, and have related risk exposure to, the PRC fertilizer industry and agricultural sector. There is no assurance that the Fertilizer Group’s profitable track record during the Track Record Period will continue in the future. In the event that the general performance of the PRC fertilizer industry and agricultural sector is not satisfactory and as a result, the performance of the Enlarged Group is adversely affected, the value of the investments held by the Shareholders may be reduced.

— 27 —

RISK FACTORS

The Enlarged Group may face competition from the Remaining Fertilizer Business.

Sinochem Corporation has and, following Completion, will continue to have, interests in the Remaining Fertilizer Business, details of which are set out in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group — Remaining Fertilizer Business’’ in this circular. In order to limit the competition between the Enlarged Group and the Sinochem Group, the Company has been granted an option to purchase the Remaining Fertilizer Business (except US Agri-Chemicals) at a fair market price at any time as the Company deems appropriate. One of the companies in the Remaining Fertilizer Business, Qinghai Salt Lake, is a state-owned enterprise and a company listed on the Shenzhen Stock Exchange in the PRC and thus any proposed acquisition of Qinghai Salt Lake would require compliance with the relevant PRC regulations in relation to state-owned enterprises and the requirements of the Shenzhen Stock Exchange. There can be no assurance that a transaction can be structured to comply with such regulations and be satisfactory to each of the Company and the Sinochem Group. If the Company is unable to negotiate and enter into legally binding agreements with the Sinochem Group on terms that are satisfactory to the Company, the Enlarged Group may face competition from the Remaining Fertilizer Business which may have an adverse impact on its business and results of operations.

Failure to enforce the Non-competition Undertaking may adversely affect the business and results of operations of the Enlarged Group.

Sinochem Corporation has entered into the Non-competition Undertaking in favour of the Company. There can be no assurance that the Non-competition Undertaking will be effective in protecting the interests of the Independent Shareholders. In the event that Sinochem Corporation fails to comply with the undertakings applicable to it in the Non-competition Undertaking, or in the event that the Enlarged Group is unwilling or unable to enforce the Non-competition Undertaking or exercise the option granted to it by Sinochem Corporation to acquire the Remaining Fertilizer Business, any resulting competition between the Remaining Fertilizer Business and the Enlarged Group may adversely affect the business and results of operations of the Enlarged Group.

The Enlarged Group may not be able to obtain additional financing it may require.

The Enlarged Group’s operations and development may require additional financing from external sources and/or internally generated cash. There can be no assurance that internally generated cash or external sources of funds will be adequate or available to meet the Enlarged Group’s needs, or that the Enlarged Group will be able to obtain additional external financing on terms that are acceptable to the Enlarged Group or at all. In the event that the Enlarged Group cannot raise sufficient funds to meet its financial needs, its development, financial condition and results of operations may be materially and adversely affected.

— 28 —

RISK FACTORS

RISKS RELATING TO THE GROUP

As at 30 April 2005, the date of the Group’s indebtedness statement, the Group had a net liability position of approximately HK$53.6 million and for the three years ended 31 March 2002, 2003 and 2004, the Group incurred a net loss of approximately HK$174.6 million, HK$129.9 million and HK$101.9 million, respectively.

As at 30 April 2005, the date of the Group’s indebtedness statement, the Group’s liabilities exceeded its assets, resulting in a net liability position. This is primarily due to the existence and proposed redemption of the Preference Shares held by Sinochem HK.

As at the Latest Practicable Date, Sinochem HK held 103 Preference Shares, representing all of the outstanding Preference Shares in the capital of the Company. Each Preference Share has a nominal value of HK$1 million. Pursuant to the terms of the Preference Shares, unless previously converted into Ordinary Shares, all but not part of the Preference Shares may be redeemed at their aggregate nominal value of HK$103 million on the maturity date. Sinochem HK issued a redemption notice on 23 February 2005, requesting the redemption of all of the outstanding Preference Shares. The redemption amount of HK$103 million will be fully settled upon Completion from internal resources following the consolidation of the Fertilizer Group in the Enlarged Group. The HK$103 million due to Sinochem HK is an existing obligation and a balance sheet liability of the Group. As a result, based on the unaudited management accounts as at 30 April 2005, the Group carried a net liability of approximately HK$53.6 million.

In addition, for the three years ended 31 March 2002, 2003 and 2004, the Group incurred a net loss of approximately HK$174.6 million, HK$129.9 million and HK$101.9 million, respectively.

In the event that the Group is unable to recover from its net liability financial position as set forth above, it is possible that the Group may not be able to meet its present or future financial obligations and may find itself unable to continue as a going concern.

If the Capital Reorganisation is not approved, the Company’s accumulated losses will remain outstanding and the Company may be unable to pay dividends.

As at 31 March 2004, accumulated losses of the Company stood at approximately HK$2,326.6 million. If the Capital Reorganisation is approved, such accumulated losses are expected to be eliminated in full following Completion. It is possible, however, that the Capital Reorganisation will not be approved by Shareholders, even if the Acquisition and other matters are approved. If the Capital Reorganisation is not approved, the approximately HK$2,326.6 million accumulated losses will remain outstanding. If this happens, the Company will not have distributable reserves. According to Bermuda law, the Company cannot pay dividends if there are reasonable grounds for believing that the Company at the time of payment, or after payment, of a dividend will be unable to pay its liabilities as they become due or the realisable value of the Company’s assets would be less than the aggregate of its liabilities and its issued share capital and share premium accounts. As a result, there is a risk that the Company’s outstanding net losses of approximately HK$2,326.6 million could affect the Company such that it cannot pay dividends under Bermuda law until it can recover from its accumulated loss position.

— 29 —

RISK FACTORS

RISKS RELATING TO THE FERTILIZER GROUP

There can be no assurance that the expansion plans of the Fertilizer Group can be achieved as contemplated or that increased capacity will be matched by increased customer demand.

The Fertilizer Group intends to enhance and strengthen its upstream procurement and production operations by maintaining a steady supply of fertilizer products and an increase in production capacity, respectively, and to continuously expand its sales and distribution network across the PRC for its downstream operations. The Management of the Fertilizer Group believes that the success of the Fertilizer Group in the future depends on its ability to implement these plans. In the event that any of the Fertilizer Group’s expansion plans is not successfully implemented, the future prospects and growth of the Fertilizer Group may be adversely affected. Furthermore, even if the expansion plans are successfully implemented, there can be no assurance that demand for the Fertilizer Group’s products will be sufficient to justify the Fertilizer Group’s investment in increased production capacity or its expanded sales and distribution network.

The Fertilizer Group’s production and distribution may be affected by external factors, including interruptions in electricity supply and rail transport.

The Fertilizer Group’s production facilities rely heavily on sufficient and uninterrupted supplies of electricity to its production plants. During the Track Record Period, certain of the Fertilizer Group’s production plants, including Sinochem Fuling, Sinochem Kailin, Sanhuan Sinochem Jiaji and Sinochem Zhisheng, encountered a power supply shortage and were required to suspend production or to reduce production during peak seasons. During the year ended 31 December 2004, Sinochem Fuling, Sinochem Kailin and Sinochem Zhisheng suffered interruptions in production due to power shortages lasting a total duration of approximately 178 hours, 369 hours and 491 hours, respectively. Any future shortage or interruption in the supply of electricity may adversely affect the Fertilizer Group’s operations.

In addition, the Fertilizer Group’s production facilities and distribution activities rely on public transportation networks, and in particular the rail network in the PRC, for the supply of raw materials and the dispatch of finished products. During the Track Record Period, production at certain of the Fertilizer Group’s production facilities, including Sinochem Zhisheng, Sinochem Dongfong and Sanhuan Sinochem Jiaji, experienced disruptions in the delivery of raw materials due to interruptions in the operations of local rail networks. There is no assurance that railway accidents will not occur, that railway workers will not strike or that the railway will not have to suspend operations of rail networks due to technical problems, among other possible causes of rail network disruption. Any interruptions in the operations of the relevant rail transport connections may require the Fertilizer Group to arrange alternative transportation and may disrupt the Fertilizer Group’s production and distribution activities, which may have an adverse effect on the Fertilizer Group’s results of operations.

The Fertilizer Group’s substantial leverage could have a material adverse effect on the financial health of the Fertilizer Group.

The Fertilizer Group relies to a significant extent on borrowings to finance its working capital, capital expenditures and other capital needs. As at 31 December 2004, the gearing ratio of the Fertilizer Group, calculated by dividing consolidated bank borrowings and finance lease payables by equity, was approximately 93.1%. This gearing ratio represents a high level

— 30 —

RISK FACTORS

of risk for the Fertilizer Group’s financial position. As at 30 April 2005, the Fertilizer Group had total outstanding borrowings of approximately RMB2,398.9 million. This substantial indebtedness could:

. increase the Fertilizer Group’s vulnerability to general adverse economic and industry conditions;
. limit the Fertilizer Group’s ability to fund future working capital requirements, capital expenditures, investments and acquisitions;
. require the Fertilizer Group to dedicate a substantial portion of cash flow from operations to payments on its indebtedness;
. place the Fertilizer Group at a competitive disadvantage compared to competitors that have less indebtedness; and
. limit the Fertilizer Group’s ability to borrow additional funds and subject the Fertilizer Group to financial and other restrictive covenants which, if the Fertilizer Group fails to comply with them, could result in an event of default which, if not cured or waived, would have a material adverse effect on the business and operations of the Fertilizer Group.

In addition, except for other loans disclosed separately in Appendix I which bear interest at a fixed rate, all of the Fertilizer Group’s indebtedness bears interest at a variable rate that is based on PBOC’s rate plus an agreed margin. Fluctuations in PBOC’s rate may therefore increase the overall interest rate expense incurred by the Fertilizer Group, and such increase in interest expense could have a material adverse effect on the ability of the Fertilizer Group to service its debt obligations or otherwise fund operation of the business or the Fertilizer Group’s strategic plans.

See the discussion in the section headed ‘‘Financial Information — the Fertilizer Group — Liquidity and Capital Resources’’ in this circular.

Failure to secure and maintain long-term and stable relationships for obtaining products and raw materials from suppliers may adversely affect the business of the Fertilizer Group.

SINOCHEM Procurement sources a wide variety of products and certain principal raw materials from both overseas and domestic suppliers for sales and production by SINOCHEM Distribution and SINOCHEM Production, respectively. For the three years ended 31 December 2004, purchases from the five largest suppliers of the Fertilizer Group accounted for approximately 68.78%, 45.10% and 39.04% of the cost of sales of the Fertilizer Group, respectively. Approximately thirty of the Fertilizer Group’s suppliers, including three of the Fertilizer Group’s five largest suppliers during the Track Record Period, have entered into exclusive supply arrangements with the Fertilizer Group. The Management of the Fertilizer Group believes that such relationships with suppliers provide the Fertilizer Group with stable supplies of a variety of fertilizer products and raw materials. In the event that the Fertilizer Group’s relationship with any of its major suppliers deteriorate, or for any reason the Fertilizer Group is unable to secure a long-term or stable supply of fertilizer products and raw materials on acceptable terms, the business and operation of the Fertilizer Group may be adversely affected.

— 31 —

RISK FACTORS

The Fertilizer Group relies on Sinochem Corporation to import fertilizer products from overseas suppliers; there can be no assurance that Sinochem Corporation will not alter the import service framework agreement in a manner that would be adverse to the Fertilizer Group.

Sinochem Corporation, the ultimate holding company of the Fertilizer Group, is one of the four PRC entities permitted under PRC law to import fertilizer products into the PRC. Sinochem Fertilizer, Sinochem Corporation and Sinochem Macao have entered into an import service framework agreement, pursuant to which Sinochem Corporation has agreed to provide import services to the Fertilizer Group for the purpose of importing fertilizer products from overseas suppliers. Pursuant to PRC law, in order for fertilizer products to be imported into the PRC, overseas suppliers must sell their products to a PRC company possessing the right to import such products into the PRC which in turn may sell the fertilizer products to the domestic distribution company that arranged for their delivery from the overseas suppliers.

Under the import service framework agreement, Sinochem Macao, the international procurement arm of the Fertilizer Group, will source fertilizer products from overseas suppliers and sell them to Sinochem Corporation. Sinochem Corporation, as an approved importer of fertilizer products in the PRC, will import the products and sell them all (except for any such products imported by Sinochem Corporation on behalf of its other customers) to Sinochem Fertilizer. Under this arrangement, (1) Sinochem Macao will enter into contracts with Sinochem Corporation for the sale to Sinochem Corporation of the products it purchased from overseas suppliers at the prevailing international market price; (2) Sinochem Corporation will then pay the agreed purchase price to Sinochem Macao and arrange for import declaration and pay all related charges; and (3) Sinochem Corporation will then sell the products (except for those imported by it on behalf of its other customers) to Sinochem Fertilizer pursuant to separate contracts between Sinochem Fertilizer and Sinochem Corporation. The amount will be paid in RMB by Sinochem Fertilizer to Sinochem Corporation and will be set on a cost basis, equalling the purchase price paid by Sinochem Corporation to Sinochem Macao plus product inspection costs, customs and excise handling charges, import duties, value-added tax and the administration cost incurred by Sinochem Corporation in relation to the import of the fertilizer products (such administration cost is estimated to be approximately RMB0.10 per tonne of fertilizer product).

Pursuant to the import service framework agreement, Sinochem Corporation has undertaken that, except for any fertilizer products imported by it for other customers which engage it to provide import service, it will sell all of the fertilizer products that it imports to Sinochem Fertilizer exclusively. There can be no assurance that the import arrangement will continue as currently contemplated. If the Fertilizer Group were to lose the benefit of the import service framework agreement, it would be unable to import fertilizer products from overseas suppliers because it is not permitted to do so under PRC law. The loss of such a benefit could have a material adverse effect on SINOCHEM Procurement and the business, financial condition and results of operations of the Fertilizer Group.

See the discussion in the section headed ‘‘Information on the Fertilizer Group — SINOCHEM Procurement — International sourcing’’ in this circular.

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The loss of any of the Fertilizer Group’s significant customers could have an adverse effect on the Fertilizer Group’s business.

The Fertilizer Group’s customers include small distributors and retailers as well as largescale wholesale customers such as large agricultural companies. The turnover attributable to the Fertilizer Group’s five largest customers for the years ended 31 December 2002, 2003 and 2004, was approximately 22.71%, 25.76% and 23.21% of the Fertilizer Group’s total turnover for each of those years, respectively. The turnover attributable to the Fertilizer Group’s single largest customer, (Shandong Yantai City Agricultural Production Information and Supply Center), was approximately 6.60%, 8.58% and 8.91% of the Fertilizer Group’s total turnover for each respective year during the same period. There can be no assurance that the Fertilizer Group will maintain or improve the relationships with these customers, or that the Fertilizer Group will be able to continue to supply these customers or any of its other customers at current levels or at all. The loss of a significant portion of the Fertilizer Group’s sales to these major customers could have a material adverse effect on its business, financial condition and results of operations.

Ammonia and other fertilizer components and products that are manufactured, processed, stored, handled, distributed and transported by the Fertilizer Group may be very volatile. Accidents involving these substances could cause severe damage or injury to property, the environment and human health and the Fertilizer Group is not insured against such damage.

The Fertilizer Group manufactures, processes, stores, handles, distributes and transports ammonia and other fertilizer components and products, which are very volatile. See the section headed ‘‘Information on the Fertilizer Group — SINOCHEM Production — Raw Materials’’ in this circular. Accidents involving or the mishandling of these substances could cause severe damage or injury to property, the environment and human health, as well as a possible disruption of the operations of the Fertilizer Group and damage to the Fertilizer Group’s reputation. The Fertilizer Group is not insured against such damage or injury to property, the environment or human health, which may result in civil lawsuits, environmental claims and regulatory enforcement proceedings, any of which could lead to significant liabilities for the Fertilizer Group. Any damage to persons, equipment or property or other disruption of the Fertilizer Group’s ability to produce or distribute its products could result in a significant decrease in operating results and significant additional cost to replace or repair and insure the Fertilizer Group’s assets, which could adversely affect the profitability of the Fertilizer Group.

Failure to establish sales centres at suitable and convenient locations or failure to renew the existing leases of the sales centres may adversely affect the future growth of the Fertilizer Group.

One of the key factors to the success of the Fertilizer Group is its ability to establish its sales centres at suitable and convenient locations. As at 30 April 2005, the Fertilizer Group had 838 sales centres in 15 major agricultural provinces across China, almost all of which were situated at premises leased by the Fertilizer Group for a term of 3 months to 5 years. There is no assurance that the Fertilizer Group will be able to continue using such premises by renewing the existing lease of its sales centres or to establish new sales centres at suitable and convenient locations and on commercially acceptable terms. Furthermore, the Fertilizer Group may not be able to achieve its targeted sales through its sales centres because of inconvenient locations. In the event that there is any material difficulty in finding

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retail premises at suitable locations or in securing the leasing of such premises on commercially acceptable terms, the expansion plans for SINOCHEM Distribution and the business performance of the Fertilizer Group may be adversely affected.

The Fertilizer Group may not possess clear leasehold title or clear right of possession in respect of certain leased properties occupied by it.

As at 30 April 2005, the Fertilizer Group had a total of 1,423 leased properties (with an aggregate gross floor area of approximately 3.05 million sq.m.) for retail, office and warehouse purposes in the PRC. 968 of these leased properties (with an aggregate gross floor area of approximately 2.24 million sq.m., representing approximately 74% of the total number of leased properties of the Fertilizer Group) appear to have certain defects in title in respect of the lease. All of the defective leases pertain to properties used as sales centres of the Fertilizer Group. The defects in title concerning such leased properties include: (i) the Fertilizer Group is unable to ascertain whether certain landlords have title to their respective properties or the right or authorization to lease their respective properties to the Fertilizer Group; (ii) certain leases have expired; and/or (iii) no formal lease agreements have been entered into in respect of certain properties.

Due to the locations of these properties in rural areas of the PRC and as most of them are small in size, there are considerable practical difficulties in rectifying the above defects in title. If the landlord of any of the leased properties does not have title to that property or the right or authorization to lease that property, the relevant lease agreement entered into by the Fertilizer Group may be invalid and unenforceable against third parties. In such event, the rightful owner of the property in question would have the right to take possession of and evict the Fertilizer Group from such premises. Where the leases have expired, the landlord may terminate the lease in question at any time and the Fertilizer Group may be evicted from such premises. In such circumstances, the Fertilizer Group may suffer losses and would have to incur additional costs and expenses for relocation and the operations of the Fertilizer Group may be adversely affected.

The Fertilizer Group may incur significant costs and expenses in order to cure the lack of relevant title documents corresponding to certain PRC properties used by Sinochem Fuling.

As at 30 April 2005, Sinochem Fuling did not hold the land use rights certificates corresponding to 22 plots of land, with a total area of approximately 64,461 sq.m., located in Nan An Pu, Fuling District, Chongqing in the PRC.

In addition, as at 30 April 2005, Sinochem Fuling had constructed 140 buildings on its Fuling site, but held the relevant building ownership certificates to only 83 of them. The 57 buildings on the Fuling site for which Sinochem Fuling does not have relevant ownership certificates have a total gross floor area of approximately 63,220 sq.m., compared to the total gross floor area of approximately 92,848.03 sq.m. for those buildings with corresponding building ownership certificates.

There can be no assurance that obtaining the relevant land use rights certificates for Sinochem Fuling’s land in the PRC and the relevant building ownership certificates for Sinochem Fuling’s buildings in the PRC will not create significant expenses. If the Fertilizer

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Group incurs additional costs and expenses in order to cure the lack of title documents for certain PRC properties used by Sinochem Fuling, such costs and expenses could adversely affect the profitability of the Fertilizer Group.

If the Fertilizer Group’s relationships with its joint venture partners deteriorate, its profitability and return on assets may be adversely affected.

As at the Latest Practicable Date, the Fertilizer Group had interests in seven PRC joint venture enterprises engaged in the production of phosphate-based fertilizers and compound fertilizers. The percentage of the Fertilizer Group’s total turnover attributable to these PRC joint ventures is insignificant, but this percentage may rise in the future as the Fertilizer Group increases its production capacity or invest in additional joint ventures. PRC joint ventures may involve special risks associated with the possibility that the Fertilizer Group’s joint venture partners may (i) have economic or business interests or goals which differ from those of the Fertilizer Group, (ii) take actions contrary to the instructions, requests, policies or objectives of the Fertilizer Group, (iii) be unable or unwilling to fulfil their obligations under the relevant joint venture agreements, (iv) suffer financial difficulties that adversely affect the relevant joint ventures, or (v) have disputes with the Fertilizer Group.

There can be no assurance that good relationships between the Fertilizer Group and the joint venture partners will be maintained in the future. Should the Fertilizer Group’s relationship with any of the joint venture partners deteriorate, the operation of the respective joint venture enterprises may be adversely affected. This may in turn adversely affect investments of the Fertilizer Group in these joint venture enterprises, the supply of fertilizer products to the Fertilizer Group, and the Fertilizer Group’s profitability and return on assets.

If the existing credit terms granted by suppliers are no longer available, the financial position of the Fertilizer Group may be adversely affected.

Pursuant to certain of the supply agreements entered into with its suppliers, the Fertilizer Group is, in general, granted credit terms ranging from 30 to 90 days in exchange for, among other things, the receipt of acceptance drafts from the Fertilizer Group’s banks in satisfaction of the respective invoices. The credit terms granted by the suppliers, therefore, have a significant effect on the liquidity and cashflow position of the Fertilizer Group. If such credit were no longer available to the Fertilizer Group on favourable terms, or at all, the results of operations and financial position of the Fertilizer Group may be adversely affected.

The Fertilizer Group relies on independent distributors for sales to certain customers.

In addition to sales through the Fertilizer Group’s own sales and distribution network, the Fertilizer Group sells products through independent distributors to certain domestic customers, usually in remote areas that the Fertilizer Group cannot yet access economically through its own network. For the years ended 31 December 2002, 2003 and 2004, sales through the sales and distribution network of SINOCHEM Distribution (which comprises branch companies and regional and local sales centres) represented approximately 21.4%, 42.3% and 43.8%, respectively of the Fertilizer Group’s total turnover for the respective period. In respect of the remaining sales during these periods, a substantial portion were mainly made by Sinochem Fertilizer’s head office to independent distributors as well as other customers. There are no restrictions in the distribution agreements which the Fertilizer Group has entered into with such independent distributors preventing the Fertilizer

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Group’s independent distributors from also supplying products produced by the Fertilizer Group’s competitors. In addition, during the Track Record Period, the Fertilizer Group did not enter into a long-term sales contract with any of such independent distributors. There can be no assurance that the Fertilizer Group will be able to maintain its relationships with its independent distributors or to directly control their sales and marketing activities. If the Fertilizer Group cannot maintain long-term relationships with its independent distributors, or if the independent distributors do not perform well in their own sales and marketing, this could, in turn, have a material adverse effect on the Fertilizer Group’s financial position and results of operations.

A large proportion of the Fertilizer Group’s revenue has been derived from sales of potash fertilizers during the Track Record Period.

The turnover derived from sales of potash fertilizers constituted approximately 41.1%, 46.4% and 46.1% of the Fertilizer Group’s total turnover for the years ended 31 December 2002, 2003 and 2004, respectively. In the event that the market demand for potash fertilizers declines in the future, and the Fertilizer Group is unable to shift its production, importation and sales to other fertilizer products for which demand in such future period is more robust, the Fertilizer Group’s turnover and profitability may be adversely affected. The ability to shift production to other fertilizer products may be impacted by the availability of certain raw materials. If key raw materials are unavailable on economically reasonable terms, the Fertilizer Group may be unable to shift its production and sales from potash fertilizers to other fertilizer products.

Failure by the Fertilizer Group to secure renewal of certain key trademark licencing agreements may have an adverse effect on the Fertilizer Group.

Sinochem Corporation entered into various trademark license agreements on 6 June 2005 with each of the licensees who include the Company and various members of the Fertilizer Group, namely Sinochem Fertilizer, Sinochem Suifenhe, Sinochem Erlianhaote, Sinochem Zhisheng, Sinochem Dongfang, Sinochem Fuling, Sinochem Yantai, Tianjin Beifang, Manzhouli Kaiming, Sinochem Kailin, Sinochem Sanhuan, Sinochem Logistics, Sichuan Chuanhua, Tianjin Beihai and Yingkou Shunda. Pursuant to these trademark license agreements, Sinochem Corporation has granted a licence, on a non-exclusive and nontransferable basis, to each licensee to use in the PRC certain trademarks registered in Sinochem Corporation’s name, including the trademark ‘‘ (Sinochem)’’. Each of the licenses granted under the trademark license agreements has an initial term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007. Upon expiration, each trademark license agreement will be automatically renewed on the same terms for successive periods of three years unless otherwise agreed by the relevant parties to the agreements. The failure by the Fertilizer Group or any of its members to secure the renewal of such licences, following expiration of the renewal terms for such licences, on terms no less beneficial to the Fertilizer Group or such members, by effectively depriving them of the ability to use the Sinochem trademarks described above, could have an adverse effect on the Fertilizer Group’s business, financial condition and results of operations.

The trademark ‘‘ (Sinochem)’’ licensed to the Fertilizer Group may be infringed.

The Fertilizer Group maintains a unified branding strategy by adopting the trademark ‘‘ (Sinochem)’’ for all of the sales centres within its sales and distribution network as well as for most of the Fertilizer Group’s products. The unified trademark was recognised as a

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(China Well-Known Trademark) by the Trademark Office of SAIC in 2004. The trademark was licensed to the Fertilizer Group by Sinochem Corporation for a nominal consideration for a term of three years until 31 December 2007 and will be automatically renewed for another three years unless otherwise agreed. The Management of the Fertilizer Group considers that one of the competitive strengths of the Fertilizer Group is its brand equity with good brand recognition and customer loyalty among customers and end users.

Like other well-known trademarks in China, the trademark used by the Fertilizer Group could be infringed by other parties. During the Track Record Period, legal proceedings were brought by Sinochem Corporation against an enterprise in Hangzhou, an Independent Third Party in 2003, in respect of an infringement of the trademark ‘‘ (Sinochem)’’. A judgement was made in favour of Sinochem Corporation by the Beijing People’s High Court in May 2004. There is no assurance that infringement of the trademark or the creation of counterfeit products will not occur in the future. Should there be any infringement of the trademark ‘‘ (Sinochem)’’ or counterfeiting of the Fertilizer Group’s products in the future, including the sale of low quality counterfeit fertilizer products under Sinochem’s brand, the Fertilizer Group’s reputation and sales may be adversely affected.

The Fertilizer Group could become involved in intellectual property or other similar disputes.

There is no assurance that the Fertilizer Group will not be involved in intellectual property disputes in the future, even if the allegations are frivolous and without merit. If there is an allegation of infringement against the Fertilizer Group, it may have to incur costs and devote resources to defend against the allegations. If there is a successful claim of infringement, the Fertilizer Group may be required to pay substantial damages to the party claiming infringement, develop a non-infringing product or technology or enter into royalty or licence agreements that may not be available on favourable terms, if at all. The failure by the Fertilizer Group to develop non-infringing products or technologies or to obtain licences of the proprietary rights on a timely basis would harm the Fertilizer Group’s business. Parties asserting infringement claims may be able to obtain an injunction, which could prevent the Fertilizer Group from using a product or technology that contains the allegedly infringing intellectual property. Any intellectual property rights litigation or dispute resolution could result in substantial costs and diversion of resources and materially and adversely affect the Fertilizer Group’s business and operations.

Failure to maintain an optimal level of inventory may adversely affect the financial position and profitability of the Fertilizer Group.

As at 31 December 2004, the Fertilizer Group had a total stock value of approximately RMB4,102 million, representing approximately 32.58% of its turnover for the same year. The Management of the Fertilizer Group recognises that excessive inventory ties up cash which could otherwise be utilized for more productive purposes, while inadequate inventory levels could adversely affect sales (for example if demand increased suddenly). In the event that the Fertilizer Group fails to maintain its inventories at optimal levels, the operations and financial position of the Fertilizer Group may be adversely affected.

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Failure of the information technology systems or material inefficiency of information management of the Fertilizer Group may adversely affect its operations and production and distribution activities.

The operations of the Fertilizer Group depend, to a large extent, on the efficient, adequate and uninterrupted operation of the information technology systems in place or to be implemented at the Fertilizer Group. For example, the ERP system currently used by the Fertilizer Group is crucial to its business operations as the system enables the exchange of a vast quantity of information among the sales centres, the branch companies and all of the departments located at the head office in Beijing. The information technology systems of the Fertilizer Group are vulnerable to damage or interruption from floods, fires, power shortages, telecommunications hardware and software failures, computer viruses or worms and similar events. In the event the information technology systems of any member of the Fertilizer Group suffers serious interruptions or damage, including any malfunction of the ERP system for any extended period of time, the Fertilizer Group’s operations may be interrupted and its financial condition and results of operations may be materially and adversely affected. Any material inefficiency in the Fertilizer Group’s information management may adversely affect its operations and manufacturing activities.

Any resignation or departure of key management staff could have material adverse impact on the operation of the Fertilizer Group.

The success of the Fertilizer Group in expanding its operations and maintaining growth in its profitability relies on the strategies, vision and the efforts of its key management personnel, including Mr. Du Ke Ping, the General Manager of Sinochem Fertilizer and a proposed executive Director and Chief Executive Officer of the Company upon Completion, as well as other skilled managers, and their respective experience in the PRC fertilizer and agricultural product markets. The resignation or departure of any of these key management personnel could have a material adverse impact on the operations and future prospects of the Fertilizer Group.

Failure to recruit, train and retain additional qualified employees may adversely affect the Fertilizer Business.

As the Fertilizer Business continues to grow, the Fertilizer Group will need to recruit, train and retain additional qualified employees. If the Fertilizer Group fails to attract and retain qualified personnel, the Fertilizer Business and its prospects would be adversely affected.

The Fertilizer Group does not maintain any product liability insurance to cover any liability of the Fertilizer Group arising from the quality of its products.

The Fertilizer Group does not maintain any product liability insurance. There may be circumstances in which the Fertilizer Group will be held liable for any product liabilities arising from or in connection with defective products produced and/or sold by the Fertilizer Group. Any such claim may result in costly litigation and may adversely affect the results of operation and profitability of the Fertilizer Group.

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There is no assurance that members of the Fertilizer Group will continue to benefit from preferential tax treatment.

The normal corporate income tax rate for domestic enterprises in the PRC is 33%. Certain members of the Fertilizer Group, however, namely Sinochem Fuling, Sinochem Kailin, Sanhuan Sinochem Jiaji, Sinochem Zhisheng and Sinochem Dongfang, are subject to certain preferential tax treatments.

The Fertilizer Group acquired its 60% equity interest in Sinochem Fuling from Sinochem Corporation in September 2004. Sinochem Fuling is currently subject to a preferential corporate income tax rate of 15% accorded by the local tax bureau of Chongqing in July 2001 pursuant to the policy of the development of the western region of the PRC promulgated by the State Council. For the year ended 31 December 2004, Sinochem Fuling enjoyed a tax saving of RMB7.9 million because of the preferential tax rate applicable to it.

Sinochem Kailin, in which Sinochem Fertilizer owns a 41% interest, is subject to a preferential enterprise income tax rate of 15% from 2003 to 2010 according to an approval issued by the State Bureau of Guiyang under the policy for development of the western region of the PRC.

Sanhuan Sinochem Jiaji, in which Sinochem Fertilizer owns a 25% equity interest, was exempt from enterprise income tax for the two years ended 31 December 2004 according to the approval granted by the State Tax Bureau of Kunming. The tax savings enjoyed by Sanhuan Sinochem Jiaji for the two years ended 31 December 2004 amounted to approximately RMB7.5 million and RMB54.6 million, respectively. However, any further preferential tax treatment is subject to annual review and approval from the State Tax Bureau of Kunming.

Sinochem Zhisheng, a member of the Fertilizer Group in which Sinochem Fertilizer has a 53.19% equity interest, is principally engaged in the production of compound fertilizers in the PRC. In 2003, Sinochem Zhisheng obtained a preferential income tax treatment accorded by the State Tax Bureau of Fujian province. Pursuant to such preferential income tax treatment, 40% of the amount invested in domestically made machinery by Sinochem Zhisheng in a particular year can be applied to set off against Sinochem Zhisheng’s income tax liability for the preceding year. For the two years ended 31 December 2004, the tax savings of Sinochem Zhisheng as a result of such preferential income treatment amounted to RMB1.3 million and RMB1.9 million, respectively.

Sinochem Dongfang, a jointly controlled entity, has been recognized by the relevant PRC authority as a high-technology enterprise and, as such, is entitled to a preferential income tax treatment of a ‘‘two-year exemption and three-year 50% reduction’’ since the commencement of its production operation. It was therefore exempt from PRC enterprise income tax for the two years ended 31 December 2004. Such preferential income tax treatment was accorded Sinochem Dongfang by the State Tax Bureau of Wuhan City in accordance with Provisional Regulations on Preferential Tax Treatments for High-Technology Enterprises and HighTechnology Products in Hubei Province. The tax savings enjoyed by Sinochem Dongfang amounted to RMB0.2 million and RMB0.4 million, respectively for the two years ended 31 December 2004.

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There can be no assurance that the government authorities will not modify or revoke the preferential tax treatments described above. In the event that any such preferential treatment is cancelled or changed or that any member of the Fertilizer Group ceases to be entitled to such preferential income tax treatment, the Fertilizer Group’s tax liability will increase, which would have a negative impact on the net profits of the Fertilizer Group.

Negative operating cashflow could adversely impact the liquidity and cash position of the Fertilizer Group.

In 2002, the Fertilizer Group had a net cash outflow from operating activities of approximately RMB1,332.4 million. Net cash outflow from operations, especially in significant amounts, can have an adverse impact on a company’s liquidity and cash position, and by extension on its ability to make interest payments on its outstanding indebtedness and to meet its other cash obligations. There is a possibility that the Enlarged Group will experience significant cash outflows from operations in the future, in order to finance the build up of inventory or for other reasons. Such significant outflows may negatively impact the Enlarged Group’s liquidity and leave it vulnerable to default on its cash obligations, especially if the Enlarged Group is unable to obtain cash from alternative sources such as bank loans or other financing or investing activities.

Dividend distributions made by the Fertilizer Group in the past may not be indicative of the Fertilizer Group’s or the Company’s future dividend policy.

The Fertilizer Group declared and paid dividends in the amount of RMB106.2 million to its shareholder during the year ended 31 December 2002. Details of the Company’s dividend policy following completion of the Acquisition are set out in the section headed ‘‘Financial Information — the Enlarged Group — Dividend Policy and Distributable Reserves’’ in this circular. Neither the Fertilizer Group nor the Company can guarantee when and if dividends will be paid in the future. The declaration, payment and amount of any future dividends of the Company will be subject to the discretion of the Directors and will depend on, among other things, the Company’s earnings, financial condition, cash requirements, and availability of profits, the provisions of the Bye-laws and the Companies Act, distributions to the Company from the Company’s subsidiaries and other relevant factors. In addition, PRC regulations permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations.

The fertilizer business is cyclical, which will expose the Fertilizer Group to significant fluctuations in its cost structure, profitability and business growth.

The prices of fertilizer products depend on a number of factors, including general economic conditions, periodic trends in end-user markets, and supply and demand equilibrium. Changes in supply result from increases or decreases in capacity and from changes in inventory levels. Demand for fertilizer products is dependent, in part, on demand for crop nutrients by the global agricultural industry. Periods of high demand, high capacity utilization and increasing operating margins often result in new plant investment and increased production, which may result in a cyclical excessive supply followed by periods of declining prices and declining capacity utilization until the cycle is repeated. Such a cyclical dynamic may have a significant impact on prices of fertilizer products and materials. The cost structure, profitability and business growth of the Fertilizer Group is therefore significantly affected by the price movements in the international market place.

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The Fertilizer Group’s results of operations could be negatively impacted by seasonality.

Sales of fertilizer products to end-users are seasonal in nature. In general, the Fertilizer Group generates a greater amount of net sales and revenue during spring and autumn than during the summer and winter seasons. The variance in sales is, generally, more significant in northern China where there are fewer planting seasons than in southern China. Because of fluctuations in net sales to end users, demand for the Fertilizer Group’s products also follows these sales patterns. Accordingly, the Fertilizer Group’s turnover and its results of operations may be affected by seasonal variations in demand for its fertilizer products.

The Fertilizer Group is subject to risks related to weather conditions.

Quarterly results may vary significantly from one year to the next primarily due to weather related shifts in planting schedules and purchase patterns. Adverse weather conditions affecting the agricultural industry in China, including, but not limited to, floods or droughts, may have a significant effect on demand for the Fertilizer Group’s fertilizer products. Weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the autumn. Weather can also have an adverse effect on crop yields, which lowers the income of growers and could impair their ability to pay for fertilizer products. Additionally, weather conditions that delay or intermittently disrupt fieldwork during the planting and growing season may cause agricultural customers to use different forms of fertilizer, which may adversely affect demand for the forms sold by the Fertilizer Group.

The Fertilizer Group is not insured against potential losses and could be seriously harmed by natural disasters, catastrophes or deliberate sabotage.

Many of the Fertilizer Business activities are characterized by substantial investments in complex production facilities, manufacturing and transportation equipment. The equipment, facilities, inventories, and nearby properties could be materially damaged by tornadoes, hurricanes and other natural disasters, catastrophes, deliberate sabotage or other catastrophic circumstances. In addition to the direct damage to facilities, inventory and the Fertilizer Group’s infrastructure, costs from natural disasters could include, for example, expenses relating to the handling and treatment of water resulting from massive rainfall, damage to properties that are not owned by the Fertilizer Group, potential enforcement actions from government authorities, or claims from private parties.

In addition, many of the production processes, raw materials and certain finished products of the Fertilizer Group are potentially destructive and dangerous in uncontrolled or catastrophic circumstances, including fires, explosions, accidents, major equipment failures, or deliberate sabotage. Despite insurance coverage, the Fertilizer Group could incur uninsured losses and liabilities arising from such events, including damage to its reputation, and/or suffer substantial losses in operational capacity, which could negatively affect the operating results and profitability of the Fertilizer Group.

Acts of war or terrorism could negatively affect the Fertilizer Business.

Any military strikes or sustained military campaign in areas or regions of the world where the Fertilizer Group conducts business operations may affect the Fertilizer Business in unpredictable ways, including forcing the Fertilizer Group to increase security measures and causing disruptions of supplies and markets, loss of property, and incapacitation of

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employees. Instability in the financial markets as a result of war may also affect the Fertilizer Group’s ability to raise capital or significantly affect foreign exchange markets. Many of the Fertilizer Group’s plants and facilities store significant quantities of ammonia products and other items, which can be volatile if mishandled. Any damage to infrastructure facilities, such as electricity generation, transmission and distribution facilities, or injury to employees, that could be direct targets of, or indirect casualties of, an act of war, may negatively affect the Fertilizer Group’s operations. Any disruption of the ability of the Fertilizer Group to produce or distribute its products could result in a significant decrease in revenues and significant additional costs to replace or repair and insure its assets, which could negatively affect the operating results and profitability of the Fertilizer Group.

RISKS RELATING TO THE PRC FERTILIZER INDUSTRY

The prices of fertilizer products in the PRC are subject to price controls imposed by the State, which limit the Fertilizer Group’s flexibility to raise or set prices and pass along cost increases.

The prices of fertilizer products sold in the PRC are subject to controls imposed by the relevant State and provincial price administration authorities. At present, wholesale prices of imported fertilizers as well as ex-factory prices of locally made fertilizers are all subject to various price control measures imposed by the State. For details, please refer to the section headed ‘‘Fertilizer Industry and Regulatory Overview’’. Accordingly, the Fertilizer Group cannot adjust the price of its fertilizer products based on market demand and supply beyond the price range set by the government authorities without prior governmental approval. Additionally, there is no assurance that the price ceilings for fertilizer products in the PRC will be adjusted by the relevant pricing bureaus to match any cost increase relating to the production of fertilizer products. In the event that the relevant price administration authorities do not approve any application by the Fertilizer Group for a price increase beyond the price ceiling, and should the Fertilizer Group be unable to raise the selling prices of fertilizer products according to cost increases in a timely manner, the profitability of the Fertilizer Group may be adversely affected.

Competition may intensify as a result of China’s accession to the WTO and the increasing number of domestic and foreign enterprises engaged in the fertilizer business in the PRC, which may lead to reduced prices, gross profit and market share.

The fertilizer industry in the PRC is highly competitive. With China’s accession to the WTO, the PRC government has undertaken to open up the domestic market to foreign companies. China reduced its average import tariff rate overall to 11.50% in 2003 and has further reduced it to 9.90% in 2005. It is expected that by December 2006, the restrictions on foreign companies for the operation of fertilizer retail businesses will be lifted. Foreign competitors may form alliances with or acquire companies to set up fertilizer retail businesses in the PRC. Such foreign competitors may have certain competitive advantages over the Fertilizer Group in terms of access to abundant financial resources, brand recognition and management know-how. Intensified competition from these foreign competitors may lead to lower profit margins for the Fertilizer Group due to price competition, loss of customers and slow growth.

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RISK FACTORS

Aside from foreign entrants to the PRC market, the Fertilizer Group also faces competition from domestic players, which include both state-owned and privately-owned enterprises. An increasing number of privately-owned enterprises are engaged in the manufacture and sale of fertilizer products in the PRC.

There is no assurance that further competition in the PRC fertilizer industry will not erode the profit margins or market share of the Fertilizer Group. In the event that the Fertilizer Group is forced to lower its prices due to competition or the prices of fertilizer or raw material supplies increase as a result of increased demand from competitors, the profitability of the Fertilizer Group may be adversely affected.

Substantial fluctuations in the price of nitrogen-based fertilizer products in the international market may have a material adverse effect on the profitability of the Fertilizer Group.

The Fertilizer Group plans to further expand the product range produced by SINOCHEM Production to include nitrogen-based fertilizers, which requires an increased supply of raw materials used in the production of such products. Some of the raw materials that are generally used to produce nitrogen-based fertilizers, such as urea, are also used in the production of phosphate-based fertilizers, as well as compound fertilizers. Due to frequent variations in supply and demand, prices of certain raw materials used to produce nitrogenbased fertilizers fluctuate significantly in the international market. Because of these price fluctuations, suppliers of raw materials for nitrogen-based fertilizer products are generally unwilling to enter into long-term contracts with the Fertilizer Group that would establish a fixed price for such raw materials over a certain period of time. If the price of raw materials used in the production of nitrogen-based fertilizers increases, the profit margin for the sale of nitrogen-based fertilizers and other products may decrease, which may have a material adverse effect on the Fertilizer Group’s profitability and financial condition.

The Fertilizer Group is vulnerable to raw material shortages in the PRC.

The Fertilizer Group is one of the major producers of phosphate-based fertilizers in the PRC in terms of production output for 2004. In addition to other raw materials, the four SINOCHEM Production enterprises dedicated to the production of phosphate-based fertilizers rely on a stable supply of phosphorous rocks, the fundamental raw materials for the production of such fertilizers. Such phosphorous rocks are not readily available throughout the PRC and are found mainly in Yunnan province. There can be no assurance that the stability of the current supply of such resources can be maintained. The failure of the Fertilizer Group to maintain a stable supply of phosphorous rocks at competitive prices with low transportation costs could have a material adverse effect on the production of phosphatebased fertilizers and the Fertilizer Group’s fertilizer production generally.

In addition, during the Track Record Period, Sinochem Zhisheng faced the threat of a potential shortage of urea. Urea is a fundamental raw material for the production of fertilizers. Limitations on SINOCHEM Production’s ability to obtain any such key raw materials could have a material adverse effect on the Fertilizer Group’s fertilizer production.

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RISK FACTORS

The Fertilizer Group may incur significant costs to comply with, or as a result of, existing or future PRC health, safety, environmental and other laws and regulations.

The operation of the Fertilizer Group involves production of fertilizer products in the PRC. Sewage, exhaust gas and solid wastes are discharged and noise is created during the production process. Consequently, the Fertilizer Group’s operations are subject to numerous environmental and health and safety and other laws and regulations of the PRC.

Additionally, there is no assurance that changes, if any, in the relevant environmental laws and regulations will not result in the Fertilizer Group incurring substantial capital expenditures to replace, upgrade or supplement its existing facilities. Any such change may have a material adverse impact on the Fertilizer Group and its profitability.

RISKS RELATING TO THE PRC

Adverse changes in the PRC’s economic, political and social conditions and government policies could have a material adverse effect on the overall economic growth of the PRC, which could adversely affect the results of operations and financial condition of the Fertilizer Group.

A substantial portion of the Fertilizer Group is located in the PRC. Changes in the economic and political situation in the PRC and the economic, financial, fiscal and other policies adopted by the PRC government may affect the operations, performance and profitability of the Fertilizer Group. The economy of the PRC differs from the economies of most developed countries in many respects, including:

. structure
. extent of government involvement;
. level of development;
. growth rate;
. control of foreign exchange; and
. allocation of resources.

The PRC’s economy has traditionally been subject to central planning, with a series of economic plans promulgated and implemented by the PRC government. Over the past 25 years, the PRC government has been reforming the economic and political systems in the PRC. Such reforms have resulted in significant economic and social advancements. Many of these reforms were unprecedented and are expected to continue while political, economic and social factors may also lead to further adjustments to the PRC’s reform measures. Such reforms and adjustments may not always have a positive effect on the operations of the Fertilizer Group. Accordingly, there can be no assurance that the performance and profitability of the Fertilizer Group will not be adversely affected due to changes in political, economic and social conditions in the PRC or due to changes in the PRC government policies such as changes in laws and regulations (or the interpretation thereof), the introduction of measures to control inflation from time to time, changes in the rate or types of taxation and

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RISK FACTORS

the imposition of additional restrictions on currency conversion and overseas remittances. In addition, there can be no guarantee that the PRC government will continue to pursue economic liberalisation and other reforms.

Macroeconomic measures taken by the PRC Government may cause the Chinese economy to slow down.

In response to concerns relating to China’s high rate of growth in industrial production, bank credit, fixed investment and money supply and growing inflationary pressures, the PRC Government has taken measures to slow economic growth to a more manageable level. Among the measures that the PRC Government has taken are restrictions on bank loans in certain sectors and the increase of interest rates. There can be no assurance that those measures will not result in a slowdown in economic growth and hence a reduction in demand for consumer products in China. These measures and any additional such measures could contribute to a slowdown in the Chinese economy and could potentially cause the economy to enter an economic recession. Such a development could have an adverse impact on demand for a wide range of products in the PRC, including the products of the Fertilizer Group.

There are uncertainties regarding interpretation and enforcement of PRC laws and regulations.

The PRC’s legal system is a civil law system based on statutory law. Prior legal decisions and judgments have little precedential value. The PRC is still in the process of developing a comprehensive statutory framework and its legal system is still considered to be underdeveloped in comparison with the legal systems in some western countries. Since 1979, the PRC government has formulated and enacted a large number of laws and regulations governing economic matters, securities activities and foreign investments.

Despite significant development in its legal system, the PRC does not have a comprehensive system of laws. The interpretation of the PRC law by courts and tribunals may be inconsistent and influenced by government policies and other considerations. In addition, the enforcement of existing laws and regulations, including those governing the retail industry in the PRC, can be uncertain and unpredictable. Judgments and arbitration rulings may be unenforceable. The promulgation of new laws, changes to existing laws and the inconsistency between local regulations and national laws could have a negative impact on the business and prospects of the Fertilizer Group.

The Fertilizer Group has exposure to PRC economic policies and fluctuations in the value of the Renminbi against the US dollar.

Substantially all of the Fertilizer Group’s turnover is denominated in Renminbi. The value of Renminbi is subject to changes in the PRC government’s policies and depends to a large extent on China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the US dollar has generally been stable. However, the Renminbi is still not a freely convertible currency. In addition, given the economic instability and currency fluctuations in Asia in recent years, there is no assurance that the value of the appreciation of the Renminbi will continue to remain stable against the US dollar or any other foreign currency. Any appreciation of the Renminbi may subject the Fertilizer Group to increased competition from imported fertilizer products. Conversely, any devaluation of the Renminbi may adversely affect the value of the assets of the Fertilizer Group and any dividends

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RISK FACTORS

payable on the ordinary shares of the Company after the Completion in foreign currency since the Fertilizer Group to be acquired by the Company receives most of its revenue and expresses its profits in Renminbi.

Government control of foreign currency conversion may limit the Fertilizer Group’s foreign exchange transactions.

Under the existing foreign exchange regulations in China, the Fertilizer Group may undertake current account foreign exchange transactions, including payment of dividends, without prior approval from SAFE, by complying with certain procedural requirements. However, foreign exchange transactions for capital account purposes, which may include overseas investment and various international loans, require the prior approval of SAFE. If the Fertilizer Group is unable to obtain SAFE’s consent to convert Renminbi into foreign currencies for such purposes, the Fertilizer Group’s possible capital expenditure plan and, consequently, the Fertilizer Group’s ability to grow its business could be negatively affected.

OTHER RISKS RELATING TO THIS CIRCULAR

Statistics contained in this circular were derived from various official sources and have not been independently verified.

The statistical and other information contained in the sections headed ‘‘Fertilizer Industry and Regulatory Overview’’ and ‘‘Information on the Fertilizer Group’’ of this circular which relate to the PRC and the fertilizer industry is derived from various official sources as referred to in this circular. The quality and accuracy of such sources cannot be guaranteed. Moreover, statistics derived from multiple sources may not be prepared on a comparable basis. None of the Company, Sinochem HK, the Sponsors or their respective advisers have verified the accuracy of the information contained in such sources. The Company makes no representation as to the correctness or accuracy of such information and, accordingly, such information should not be unduly relied upon.

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CORPORATE INFORMATION

Registered office	Clarendon House
	2 Church Street
	Hamilton HM 11
	Bermuda
Head office and principal place of	Unit 4603, 46th Floor
business in Hong Kong	Office Tower
	Convention Plaza
	1 Harbour Road
	Wanchai
	Hong Kong
Company secretary	Mr. Navin Aggarwal, Solicitor	of Hong Kong
Qualified accountant	Ms. Tse Yin Hung, Bonnie, an	associate member of
	the Hong Kong Institute	of	Certified	Public
	Accountants
Authorised representatives	Mr. Song Yu Qing
	Mr. Chu Yu Lin, David
Audit committee	Dr. Li Ka Cheung, Eric
	Chairman of the audit committee
	Mr. Ko Ming Tung, Edward
	Dr. Tang Tin Sek
Compliance Adviser	Cazenove Asia Limited
	5001 One Exchange Square
	Central
	Hong Kong
Auditors	Deloitte Touche Tohmatsu
	Certified Public Accountants
	26th Floor, Wing On Centre
	111 Connaught Road Central
	Hong Kong
Principal bankers	Bank of America (Asia) Limited
	G/F., 56 Hoi Yuen Road
	Kowloon
	Hong Kong
	Dah Sing Bank, Limited
	36/F., Dah Sing Financial Centre
	108 Gloucester Road
	Wanchai
	Hong Kong

— 47 —

CORPORATE INFORMATION

Principal share registrar The Bank of Bermuda Limited 6 Front Street Hamilton HM11 Bermuda Branch share registrar Secretaries Limited and transfer office Ground Floor BEA Harbour View Centre 56 Gloucester Road Wanchai Hong Kong

Principal share registrar

— 48 —

Nationality

DIRECTORS AND PARTIES INVOLVED

Name

Name Address Nationality Existing Executive Directors Mr. LIU De Shu[] (Chairman) 1002, Block 22 PRC Hai Dian Dao Xiang Gard Hai Dian District Beijing China Mr. SONG Yu Qing (Deputy 3306, 33/F. PRC Chairman and Chief Executive Convention Plaza Apartments Officer) 1 Harbour Road Wanchai Hong Kong Ms. CHEN Hao 1607, 16/F. PRC Convention Plaza Apartments 1 Harbour Road Wanchai Hong Kong Mr. CHU Yu Lin, David Apartment 14A Chinese Twin Brook 43 Repulse Bay Road Hong Kong Mrs. CHU Ho Miu Hing Apartment 14A British (HK) Twin Brook 43 Repulse Bay Road Hong Kong Existing Independent Non-executive Directors Mr. KO Ming Tung, Edward Unit C, 3rd Floor Chinese Kam Fai Mansion 68A MacDonnell Road Hong Kong Dr. LI Ka Cheung, Eric Suite 19A, Tower 6 British Leighton Hill 2B Broadwood Road Happy Valley Hong Kong

Will be re-designated as non-executive Director

— 49 —

DIRECTORS AND PARTIES INVOLVED

Name

Address

Nationality

Existing Independent Non-executive Directors

Dr. TANG Tin Sek

16C, Tower 10 Pacific Palisades 1 Braemar Hill Hong Kong

Australian

Proposed Executive Director

Mr. DU Ke Ping

Room 10A PRC Building 3 Mei Lin Gong Yu No. 33 Zi Zhu Yuan Lu Haidian District Beijing PRC

Proposed Non-Executive Director

Dr. CHEN Guo Guang

Room 1605 PRC Building 38 An Wai Shang Long Xi Li East District Beijing PRC

It is expected that the Investor will have a representative on the Board upon completion of the Strategic Placing and will have another representative on the Board upon full exercise of the Option referred to in the paragraph headed ‘‘Maintaining the listing status and public float’’ in the ‘‘Letter from the Board’’ and ‘‘The Strategic Placing’’ in the ‘‘Letter from Sinochem HK’’ in this circular.

— 50 —

DIRECTORS AND PARTIES INVOLVED

Financial Adviser to Sinochem Cazenove Asia Limited Corporation 5001 One Exchange Square Central Hong Kong Financial Adviser to Sinochem HK BOCI Asia Limited 26th Floor, Bank of China Tower 1 Garden Road Hong Kong Sponsors Cazenove Asia Limited 5001 One Exchange Square Central Hong Kong Goldman Sachs (Asia) L.L.C. 68th Floor, Cheung Kong Center 2 Queen’s Road Central Hong Kong Independent Financial Adviser to the Somerley Limited Independent Board Committee and Suite 2201, 22nd Floor the Independent Shareholders Two International Finance Centre 8 Finance Street Central Hong Kong

Legal Advisers to the Company

As to Hong Kong law: Preston Gates & Ellis 35th Floor Two International Finance Centre 8 Finance Street Central Hong Kong As to Bermuda law: Conyers Dill & Pearman Room 2901, One Exchange Square 8 Connaught Place Central Hong Kong

— 51 —

DIRECTORS AND PARTIES INVOLVED

As to PRC law: Tianyuan Law Firm 11th Floor Tower C Corporate Square No. 35 Financial Street Xicheng District Beijing PRC

Legal Adviser to the Sponsors As to Hong Kong law: Herbert Smith 23/F Gloucester Tower 11 Pedder Street Central Hong Kong Legal Adviser to Sinochem As to Hong Kong law: Corporation and Sinochem HK Allen & Overy 9/F Three Exchange Square Central Hong Kong Reporting Accountants PricewaterhouseCoopers Certified Public Accountants 22nd Floor, Prince’s Building Central Hong Kong Property Valuer Chesterton Petty Limited 16/F Citic Tower 1 Tim Mei Avenue Central Hong Kong

— 52 —

FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

The information in the section below has been derived from various government official sources. Reasonable care has been exercised by the Directors in extracting such information from the sources referred to herein. This information has not been independently verified by the Company, the Sponsors or any of their respective affiliates or advisers. The information may not be consistent with other information compiled within or outside the PRC.

INDUSTRY OVERVIEW

Overview of The Most Common Types of Fertilizer Products

Plant nutrition fundamentals

Plants need nutrients to grow. The primary nutrients required by plants are nitrogen (N), phosphorus (P) and potassium (K). Other nutrients including sulphur, calcium, magnesium and other minerals, which are usually referred to as secondary nutrients, are also required by plants but in small quantities. Apart from land and water, fertilizers are probably the next most important input for farming. According to the FAO Fertilizer programme, it has been proven that fertilizers are the most effective and efficient way to increase crop yields no matter in developed or developing countries. According to one study organised by FAO, the yields of crops can be increased by 40%–50% solely by using fertilizers.

Classification of fertilizers

Fertilizers can be broadly classified into (i) natural organic fertilizers which are derived from either plant or animal materials that are essential for plant growth (such as manure and compost); and (ii) chemical fertilizers (also known as mineral fertilizers) which are commercially produced to provide plants with the nutrients in a form which can be absorbed easily. Unless the context provided otherwise, the term ‘‘fertilizer’’ used in this circular refers to chemical fertilizers.

There are two major classes of chemical fertilizers, namely compound fertilizers (also known as multi-nutrient fertilizers) and straight fertilizers. Compound fertilizers contain more than one (or all three) primary nutrients. In general, compound fertilizers are referred to by using their primary plant nutrients (e.g. NK fertilizers, NP fertilizers or NPK fertilizers etc.). Straight fertilizers contain only one of the three primary plant nutrients.

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Straight fertilizers

Nitrogen-based fertilizers

Nitrogen-based fertilizers refer to fertilizers containing nitrogen as the main nutrient. Nitrogen is essential for plant growth. It is an important component of proteins and chlorophyll. It is taken up in larger amount than in the case of other nutrients and is usually most responsible for yield increases. Today, the principal nitrogen-based fertilizers are:

. Ammonia (NH3) — used as a fertilizer and as a building block for other nitrogen products. Ammonia consists of approximately 82% nitrogen. It is usually stored in liquid form under pressure or refrigerated and can be directly applied to plants.
. Urea ((NH2)2CO) — formed by reacting ammonia with carbon dioxide (CO2) at high pressure. It contains approximately 46% nitrogen and the finished product is usually in solid form. It can be applied to soil or combined with ammonium nitrate.
. Ammonium nitrate (AN) (NH4NO3) — produced from ammonia by reacting with nitric acid. Ammonium nitrate is a solid fertilizer containing approximately 34% nitrogen. It is water soluble and used in various fertilizer solutions.
. Ammonium sulphate (AS) — has a relatively low nitrogen content (only 21%). It contains approximately 24% sulphur. It is usually applied to soil which lacks sulphur.

Phosphate-based fertilizers

Phosphate-based fertilizers refer to fertilizers containing phosphorus as the main nutrient. Phosphorus occurs in natural geological deposits known as phosphorus rock. To make the phosphorus rock soluble and available to plants, phosphate rock is reacted with sulphuric acid to produce phosphoric acid, an intermediate product for processing different kinds of phosphate-based fertilizers. Phosphorus is primarily responsible for all processes in plant life in which energy is stored and utilized. It encourages rooting, blooming and fruit production in plants.

The principal phosphate-based fertilizer are:

. Single superphosphate (SSP) — produced by treating phosphorus rocks with phosphoric acid. SSP contains around 16% to 20% phosphate.
. Triple superphosphate (TSP) — produced by treating phosphorus rocks with phosphoric acid. TSP is a highly concentrated form of phosphate — based fertilizer with almost 46% phosphate. It is usually produced in both granular and nongranular form.

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Potassium-based fertilizers or potash fertilizers

Potash fertilizers refer to fertilizers containing potassium as the main nutrient. Potassium is involved in the production, transportation and accumulation of sugars in the plant. It maintains electrical balance within the plant cell. It also assists the hardiness of plants and their resistance to water stress, pests and diseases. The principal potash fertilizers include:

. Potassium Chloride (KCl) (also known as muriate of potash or MOP) — contains 40–60% potash.
. Potassium sulphate (SOP) (K2SO4) — contains approximately 50% potash, usually used for plants that are particularly sensitive to chlorine, such as potatoes, fruits, vegetables and tobacco.

Compound fertilizers

Compound fertilizers can be sub-divided into two classes, namely complex fertilizers and blended fertilizers.

Complex fertilizers are compound fertilizers resulted from chemical reactions between chemical raw materials and intermediates. Complex fertilizers are the most effective way to achieve balanced nutrition since they contain an engineered amount of primary nutrients in each granule and permit an even application of nutrient. Major examples of complex fertilizers include:

. Mono-ammonium phosphate (MAP) and Diammonium phosphate (DAP) — refers to ammoniated phosphates as phosphoric acid is treated with ammonia to form these products. MAP and DAP contain approximately 52% and 46% phosphate respectively. Both of them are a kind of NP fertilizer and are usually produced in granular form and can be used either directly or for blending with other types of fertilizers. In the PRC, MAP and DAP are usually classified as phosphate-based fertilizers.

Blended fertilizers are obtained by the drying and mixing of several materials without the involvement of chemical actions. The major example of blended fertilizer is BB fertilizers.

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

The global fertilizer market

Global fertilizer supply

Fertilizer production is a minerals and energy consuming industry. Production is concentrated in countries which are rich in different natural mineral resources. Set out below is the list of the main countries where nitrogen-based fertilizers, phosphate-based fertilizers and/or potash fertilizers are produced:

Main production countries and production output (Mt nutrient) in 2002

Nitrogen-based	fertilizers	Phosphate-based	Phosphate-based	fertilizers Potash fertilizers	fertilizers Potash fertilizers	fertilizers Potash fertilizers
	Mt			Mt		Mt
Countries	nutrient	% Countries	nutrient		% Countries	nutrient	%
PRC	23.64	27.1 USA		7.97	23.5 Canada	8.03	31.1
USA	9.44	10.8 PRC		7.91	23.3 Russia Federation	4.38	16.9
Russia Federation	6.01	6.9 India		3.90	11.5 Belarus	3.79	14.7
Aggregate output	39.09	44.8 Aggregate output		19.78	58.3 Aggregate output	16.2	62.7
Total global		Total global			Total global
production		production			production
output	87.21	output		33.90	output	25.85

Source: FAOSTAT Data, 2004

The global production output of fertilizers is relatively stable. The table below sets out the global production output of the three major types of fertilizers from 1993 to 2002.

		Nitrogen-	Phosphate-
		based	based	Potash
Year		fertilizers	fertilizers	fertilizers	Total
		(Mt nutrient)	(Mt nutrient)	(Mt nutrient)	(Mt nutrient)
1993		80.30	31.96	19.80	132.06
1994		80.01	32.13	22.88	135.02
1995		84.49	33.50	22.70	140.69
1996		90.42	33.61	22.86	146.89
1997		87.57	33.08	25.51	146.16
1998		88.39	33.33	25.60	147.32
1999		89.17	33.09	25.36	147.62
2000		86.02	32.20	26.16	144.38
2001		85.56	33.99	25.96	145.51
2002		87.21	33.91	25.85	146.97
CAGR	(93–02)%	0.92%	0.66%	3.01%	1.20%

Source: FAOSTAT Data, 2004

Global consumption of fertilizers

Global consumption of fertilizers has increased nearly five times since 1960s. The main reason for the growth was the increasing world population and the decline in arable land available per person dedicated for crop production as a result of industrialization. The decline

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

in arable land makes fertilizers more important as it enhances productivity. In 1961, developed countries accounted for approximately 88% of the global fertilizer consumption. By 2001, their share had fallen to 37%. According to FAO’s data, the largest increase in consumption in the developing countries has taken place in South Asia and China, which accounted for an aggregate of approximately 43% of the global consumption during the fertilizer season 2002.

The following table illustrates the three largest consumers of nitrogen-based fertilizers, phosphate-based fertilizers and potash fertilizers by country in 2002:

Major consuming countries and consumption Mt nutrient in 2002

Nitrogen-based	fertilizers		Phosphate-based	Phosphate-based	fertilizers	fertilizers	Potash	fertilizers
	Mt				Mt			Mt
Country	nutrient	%	Country	nutrient		%	Country	nutrient	%
PRC	25.43	30.0	PRC		9.92	29.6	USA	4.55	19.6
USA	10.88	12.8	India		4.00	11.9	PRC	4.25	18.3
India	10.47	12.4	USA		3.87	11.5	Brazil	3.06	13.1
Aggregate			Aggregate				Aggregate
consumption	46.78	55.2	consumption		17.79	53.0	consumption	11.86	51.0
Total global			Total global				Total global
consumption	84.76		consumption		33.55		consumption	23.27

Source: FAOSTAT data, 2004

The table below shows the global consumption of nitrogen-based fertilizers, phosphatebased fertilizers and potash fertilizers for the fertilizer seasons from 1993/94 through 2002/ 03:

	Nitrogen-	Phosphate-
	based	based	Potash
Year	fertilizers	fertilizers	fertilizers	Total
	(Mt nutrient)	(Mt nutrient)	(Mt nutrient)	(Mt nutrient)
1993/94	72.44	28.89	19.08	120.41
1994/95	72.84	29.48	19.87	122.19
1995/96	78.07	30.94	20.55	129.56
1996/97	82.94	31.20	20.73	134.87
1997/98	81.34	33.37	22.42	137.13
1998/99	82.83	33.33	21.94	138.10
1999/00	84.70	33.47	22.21	140.38
2000/01	81.19	32.48	21.86	135.53
2001/02	82.89	33.35	23.02	139.26
2002/03	85.11	34.08	24.69	143.88
CAGR (94–03)%	1.81%	1.85%	2.91%	2.00%

Source: IFA, updated in October 2004

According to the IFA, the recovery in growth of fertilizer consumption that started in 2001 is projected to accelerate and continue at an annual average rate of approximately 2.1% until the fertilizer season 2008/09, at which point it will slow down again.

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Thirty-year outlook projected by IFA

Going forward, demand for fertilizers will be driven largely by population growth and demand for farm products. Since the end of the 1970s, the FAO has prepared forecasts of worldwide yields. The latest projected absolute incremental growth in world crop production from 1995/97 to 2030 is 57%. The rate of increase will be greater in developing countries than in developed countries. The developing countries will account for 72% of the world production in 2030 according to this projection as compared to 53% in 1961/63. According to the IFA, fertilizer consumption will have to increase from the present level of 138 Mt nutrient in 2001 to between 167 and 199 Mt nutrient per year by 2030 in order to accommodate this growth. Most of the increase will be in Asia and in America.

Pricing of fertilizers

The fertilizer industry is generally cyclical, reflecting the commodity nature of finished fertilizer products. The market price of fertilizers is determined by the simple demand and supply principle. Demand for fertilizers largely depends on the demand for crop nutrients by the global agricultural regions. Periods of high demand, high capacity utilization and increasing operating margins tend to result in new plant investment and increased production until supply exceeds demand, which is then followed by periods of declining prices and declining capacity utilization until the cycle is repeated. The following chart illustrates the historical price movement of various popular fertilizer products:

Average spot prices of urea and ammonium sulphate between 1996 and 2003

==> picture [40 x 91] intentionally omitted <==

==> picture [359 x 50] intentionally omitted <==

Source: Food Outlook published by FAO in 1997, 1998, 1999, 2000, 2001, 2002 and 2003

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Average spot prices of DAP and TSP between 1996 and 2003

==> picture [359 x 52] intentionally omitted <==

Average spot prices of MOP between 1996 and 2003

==> picture [359 x 50] intentionally omitted <==

Source: Food Outlook published by FAO in 1997, 1998, 1999, 2000, 2001, 2002 and 2003

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

The fertilizer industry in the PRC

China needs to boost its agricultural productivity to feed its large and growing population with limited available farmland. China has approximately 7% of the world’s arable land and approximately 22% of the world population, of whom approximately 71% are engaged in the agricultural industry. As a result, the use of fertilizers is crucial to agricultural productivity in the PRC.

Consumption of fertilizers in the PRC

Consumption of fertilizers in the PRC has increased over 50 times since the 1960s from 0.73 Mt nutrient in 1961 to 39.60 Mt nutrient in 2002, growing at a CAGR of 10.23%. The following table illustrates the total consumption of fertilizers in the PRC as compared to the total world consumption from 1961 to 2002:

						Year	Year
	1961		1971		1981		1991		2001		2002
	Mt		Mt		Mt		Mt		Mt		Mt
Countries	nutrient	%	nutrient	%	nutrient	%	nutrient	%	nutrient	%	nutrient	%
World	31.18		73.30		115.15		134.61		138.12		141.57
PRC	0.73	2.34	4.57	6.23	15.15	13.16	29.66	22.03	35.35	25.59	39.60	27.97

Source: FAOSTAT data, 2004

Since the 1990s, the total consumption of fertilizers in the PRC maintained a steady growth from 33.18 Mt in 1994 to 44.12 Mt in 2003, growing at a CAGR of 3.22% (see the table below). The amount of consumption for each type of fertilizer is different. The following chart shows the consumption of nitrogen-based fertilizers, phosphate-based fertilizers, potash fertilizers and compound fertilizers in the PRC during the period from 1994 to 2003:

Consumption of Fertilizers in the PRC from 1994 to 2003 (Mt nutrient)

		Nitrogen-	Phosphate-
		based	based	Potash	Compound
Year		fertilizers	fertilizers	fertilizers	fertilizers	Total
1994		18.82	6.00	2.35	6.01	33.18
1995		20.22	6.32	2.69	6.71	35.94
1996		21.45	6.58	2.90	7.35	38.28
1997		21.72	6.89	3.22	7.98	39.81
1998		22.33	6.83	3.46	8.22	40.84
1999		21.81	6.98	3.66	8.80	41.25
2000		21.62	6.91	3.77	9.18	41.48
2001		21.64	7.06	4.00	9.84	42.54
2002		21.57	7.12	4.22	10.40	43.31
2003		21.50	7.14	4.38	11.10	44.12
CAGR	(94–03)%	1.49%	1.95%	7.16%	7.05%	3.22%

Source: China Statistical Yearbook 2004

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

As shown in the table above, the consumption of potash fertilizers and compound fertilizers in the PRC grew faster than other types of fertilizers. In general, the soil in the PRC lacks potassium due to the exclusive use of nitrogen-based fertilizers for a prolonged period, making potash fertilizers very useful in the PRC. As a result, the demand for potash fertilizers experienced the sharpest increase among the four major types of fertilizers. The increasing popularity of the use of compound fertilizers in the PRC is mainly due to the variety of nutrients contained in the fertilizers.

Balance of supply and demand

In the PRC, over 80% of the total consumption of fertilizers is supplied by domestic fertilizer manufacturers. The chart below shows the total consumption and production output of fertilizers in the PRC during the period from 1998 to 2003. As shown in the chart below, the gap between the total consumption and total production output of fertilizers has narrowed gradually. In 2003, the total production output of fertilizers in the PRC was able to support approximately 88% of the total domestic consumption need.

				Percentage of
			total production
			output compared
	Total	Total production		to the total
Year	consumption	output	consumption need
	(Mt nutrient)	(Mt nutrient)
1998	40.84	30.10		73.70%
1999	41.24	32.51		78.83%
2000	41.46	31.86		76.84%
2001	42.54	33.83		79.53%
2002	43.39	37.91		87.37%
2003	44.12	38.81		87.96%

Source: China Statistical Yearbook 2004

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Production of fertilizers in the PRC

At the end of 2003, the total production output of fertilizers in the PRC reached approximately 38.81 Mt nutrient, representing a CAGR of 7.11% compared to approximately 33.83 Mt nutrient in 2001. The table below shows the total production output of nitrogenbased fertilizers, phosphate-based fertilizers, potash fertilizers and others in the PRC and the percentage of the total production output in the PRC between 2001 and 2003.

Nitrogen-based fertilizers Phosphate-based fertilizers Potash fertilizers and others Total	Mt nutrient 25.27 7.53 1.03 33.83	Production output (Mt nutrient) 2001 2002 % Mt nutrient % Mt nutrient 74.70 28.08 74.09 28.15 22.26 8.01 21.13 9.78 3.04 1.81 4.78 0.89 100.00 37.90 100.00 38.82	2003 % 72.52 25.19 2.29
			100.00

Source: China Statistical Yearbook 2003 and China Statistical Yearbook 2004

Import of fertilizers

The total volume of imported fertilizers from overseas gradually decreased during the past three years due to the increase in the total production output in the domestic market. The increase in the total production output is mainly due to the increasing number of new domestic fertilizer production enterprises that have entered into the PRC market and an increase in the production capacity of the existing production enterprises. Set out below is the volume of nitrogen-based fertilizers, phosphate-based fertilizers, potash fertilizers and compound fertilizers imported from overseas and the percentage of the total volume of fertilizers imported during the period between 2002 and 2004:

Nitrogen-based fertilizers Phosphate-based fertilizers Potash fertilizers Compound fertilizer Other fertilizers Total	Mt 1.92 4.98 6.95 2.85 0.10 16.8	Import volume (Mt nutrient) 2002 2003 % Mt % Mt 11.43 0.41 3.39 0.25 29.64 2.67 22.01 2.39 41.37 6.57 54.16 7.35 16.96 2.27 18.71 2.08 0.60 0.21 1.73 0.31 100.00 12.13 100.00 12.38	2004 % 2.02 19.31 59.37 16.80 2.50
			100.00

Source: (China Fertilizer Information Net (CFIN))

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

As illustrated in the above two tables, domestic production capacities are more focused on nitrogen-based fertilizers as China has abundant resources of natural gas which is the raw material for production of urea and other kinds of nitrogen-based fertilizers. Domestic nitrogen-based fertilizers satisfy most of the PRC’s domestic consumption needs. In addition, phosphate-based fertilizers are increasingly being produced domestically rather than imported. It is expected that reliance on imported products will gradually decline due to the increase in domestic production capacity. China very much relies on imported potash fertilizers which is due to the lack of natural potassium deposits in China together with a considerable amount of domestic consumption. As illustrated in the above table, the volume of imported potash fertilizers in 2003 accounted for over 50% of the total volume of fertilizers imported in 2003 and 2004.

An analysis of the demand for fertilizers in the PRC

The key factors which contribute to the increasing demand for fertilizers in the PRC are summarised below:

. The demand for agricultural products to satisfy the needs of the PRC’s large and growing population — China is one of the most densely populated countries in the world with a population of approximately 1.3 billion at the end of 2003. Major farm crops like rice, wheat, corn, vegetables and fruit are staples in the popular diet. At the end of 2003, the total production yield of major farm crops (including rice, wheat, corn and fruit) in the PRC amounted to 430.70 Mts[1] .
. The growth of livestock husbandry and the increasing demand for feed crops — With the significant improvement of living standards in the PRC during the last decade, the demand for livestock products for food consumption also experienced significant growth in the PRC. The gross output of meat in the PRC increased from 44.99 Mt in 1994 to 69.33 Mt in 2003, representing a CAGR of 4.92%[2] . The growing production output of livestock products has led to an increase in demand for feed crops, which in turn contributes to the growing demand for fertilizers. In addition, the Tenth Five-Year Plan also encourages the development of the feed crop industry to support the continuous growth in the livestock husbandry industry.
. Limited total area of arable land and the importance of fertilizers to increase crop yields — Despite the extensive boundaries of the PRC, the total area of cultivated land in the PRC amounts to only 1.3 million sq.km., representing only 13.54% of the total land area[3] . Given the limited area of cultivated land and the growing demand for agricultural products as well as feed crops, fertilizers play an important role in the modern farming system in the PRC in increasing the production yield of crops. According to a fertilizer study organised by FAO, the yields of crops can be increased by 40%–50% solely by using fertilizers, even under otherwise traditional farming conditions.

1Source: China Statistical Yearbook 2004.

2Source: China Statistical Yearbook 1996 and China Statistical Yearbook 2004

3Source: China Statistical Yearbook 2004

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

. Change in structure of the agricultural industry — Consumer demand for highquality cash crops like fruit and tea increased significantly during the past five years. The growth of these high-quality cash crops requires more fertilizer than traditional farm crops. The table below shows the comparison between the production output of grains, fruit and tea during the period from 1999 to 2003.

		Production output	Production output	(Mt)
	1999	2000	2001	2002	2003
Grains	508.38	462.18	452.64	457.06	430.70
Fruit	62.37	62.25	66.58	69.52	145.17
Tea	0.68	0.68	0.70	0.75	0.77

Source: China Statistical Yearbook 2004

With the support from the government to further develop the forestry industry, as evidenced by the State’s Tenth Five-Year Plan, it is expected that the increasing demand for forestry products like rubber and pine resin will also contribute to the increasing demand for fertilizers in future.

. Government policy to develop the agricultural industry — According to the China Statistical Yearbook 2004, approximately 365.46 million Chinese are engaged in the agricultural industry, which includes farming, forestry, animal husbandry and fishery activities, at the end of 2003. In order to ensure a stable grain production capacity, the PRC government has emphasised the importance of the agricultural industry from time to time. One of the objectives of the Tenth Five-Year Plan, for example, is to strengthen the agriculture industry as the foundation of the economy, to strive to increase farmers’ income, and to ensure a sufficient output of grains for consumption. The Tenth Five-Year Plan targets an average annual growth rate of 5% for the agricultural industry during the period from 2001 to 2005, while the gross output value of the agricultural industry is targeted at 13% of GDP.

Going forward, demand for fertilizers will be driven largely by population and economic growth. According to the Tenth Five-Year Plan, China’s population will climb to 1.37 billion by 2005 based on a natural growth rate of 13 per 1,000. Primary estimates made by the Ministry of Agricultural of the PRC show that major agricultural product output will reach 530 Mt to 540 Mt and the cultivated area will top 107 million hectares. In addition, the annual growth rate of GDP is projected at 7% under the Tenth Five-Year Plan. The projected population growth together with rising living standards are expected to result in a growing demand for agricultural products.

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Characteristics of the PRC fertilizer industry

The PRC fertilizer industry is fragmented and is not dominated by any particular enterprise. In respect of the supply side of the PRC fertilizer industry, the market comprises a mix of production enterprises, distributors, retailers and agents. The scale of operation of most of these enterprises is relatively small, many having a single line of business and/or a single type of products. As far as the Management of the Fertilizer Group is aware, there are a number of large enterprises which are engaged in the production of fertilizers in the PRC, including both state-owned enterprises and privately-owned enterprises. These enterprises frequently enjoy local market dominance or influence within the respective regions where their operations are focused.

In respect of sales and distribution, the Management of the Fertilizer Group is aware of a number large-scale fertilizer distributors in the PRC, including both state-owned and privatelyowned enterprises. The following chart sets out the market share of each type of enterprise in terms of sales revenue in 2003:

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Source: National Bureau of Statistics of China

REGULATORY OVERVIEW

Regulations on the tariff-rate quota (TRQ) system

Before China’s accession to the WTO, imports of fertilizers into the PRC were subject to quotas set by the relevant authorities. Under such controls, only certain enterprises in the PRC were authorised to import fertilizers. Following China’s accession to the WTO, this quota system was replaced by a tariff-rate quota system (the ‘‘TRQ System’’). Details of the TRQ System are set out in (the Provisional Administration Regulations on the Tariff-Rate Quota System for Imported Fertilisers) 15 January 2002 promulgated by (the State Economic and Trade

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Commission) and (the Customs General of the PRC), which became effective on 1 February 2002 (the ‘‘TRQ Regulations’’). According to the TRQ Regulations, the TRQ System applies to DAP, urea and NPK products. Any enterprise can apply to an authorised authority for a quota to import such fertilizer products in the PRC. The TRQ System permits the fertilizer products which are within the quota to be imported by an enterprise at a low in-quota duty rate of 4%. Import volume above the specified quantity will not be limited, but will face a duty of 50%. A specific portion of each quota quantity is reserved for importation through non-state trading entities, and the rest can be imported by state-trading entities.

Restrictions on imported fertilizers and and domestic trading of imported fertilizers

According to (the Provisional Regulations on the Administration of the State Trading Import of Raw Oil, Retained Oil and Fertiliser) promulgated by (the former Ministry of Foreign Trade and Economic Co-operation of the PRC) (‘‘MOFTEC’’) on 18 July 2002, the import of fertilizer is subject to the administration of MOFTEC. The state trading entities and non-state trading entities specifically approved by the PRC government are granted the right to import fertilizer from overseas subject to the control of the TRQ System. All entities qualified to conduct foreign trade, including but not limited to state trading entities and non-state trading entities, are entitled to import fertilizer from overseas at the out-quota duty rate.

Importers of fertilizer are entitled to sell the imported fertilizer by way of wholesale or retail subject to their contractual obligations and/or the restrictions imposed by the PRC government as the case may be.

Price control of fertilizers in the PRC

Ex-factory prices of fertilizers produced by domestic producers

According to (i) (the Notice Regarding the Fertiliser Market Structure) dated 16 November 1998 promulgated by the State Council, (the Notice Regarding the Further Changes on the Price Control Measures for Fertilisers) promulgated by NDRC dated 16 December 1998 (the ‘‘Fertilizer Price Notice’’) which became effective on 1 January 1999 and (ii) (the Notice Regarding the Supervision of the Supply, Production and the Pricing of Fertilisers) promulgated by NDRC on 11 November 2004 (the ‘‘2004 Notice’’), the ex-factory price of fertilizers produced by domestic producers is subject to the following price control measures imposed by NDRC:

. Nitrogen-based fertilizers (urea and ammonium)

Different price control measures in respect of the ex-factory price of fertilizers are imposed on large producers and medium-sized and small sized producers, respectively. Large producers are defined as producers of nitrogen-based fertilizers whose annual production capacity of ammonium amounted to or over 0.3 Mt. The average ex-factory price of urea and ammonium nitrate produced by large producers is set by NDRC subject to a 10% upward or downward price adjustment (except for urea where the restriction for downward adjustment was abolished in December 2004). Medium-sized and small-sized

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

producers are required to follow the ex-factory price range set by the regional pricing bureaus, which in turn set the price range with reference to the average ex-factory price set by the large producers.

. Phosphate-based fertilizers, potash fertilizers and compound fertilizers

The ex-factory prices for phosphate-based fertilizers, potash fertilizers and compound fertilizers are subject to the price range set by the regional pricing bureaus.

Wholesale prices of fertilizers produced by domestic producers

Upon request made by NDRC, the regional price bureaus of each province, autonomous region and municipality may intervene to set the wholesale and retail prices of a particular kind of fertilizer products in accordance with the actual situation within the province, autonomous region or the municipality.

Wholesale prices of imported fertilizers

According to the Fertilizer Price Notice, SDPC issued (the Notice Regarding Further Changes to Administration of the Price for Imported Fertilisers) (‘‘Further Notice’’) on 7 May 2000, the wholesale prices of imported fertilizers are subject to the following price control measures:

. Potash fertilizers imported by the State

A price ceiling is set by NDRC for the (‘‘onshore price’’) of potash fertilizers imported by the State, which is the sum of (i) the total actual cost approved by NDRC and (ii) a profit margin of not more than 1.7%. The total actual cost approved by NDRC is defined as the sum of the CIF price, insurance costs, product inspection costs, bank charges, custom and excise, handling charges, import duty, VAT, packaging costs and reasonable administration costs incurred by the importing enterprise (the ‘‘Approved Actual Costs’’).

. DAP and compound fertilizers imported by the State

A (‘‘guiding price’’) is set by NDRC for the (‘‘onshore price’’) of DAP and compound fertilizers imported by the State, which is the sum of (i) the Approved Actual Costs and (ii) a profit margin of not more than 1.7% (the ‘‘Guiding Price’’). Fertilizer enterprises are allowed to make an adjustment (both upward and downward) of not more than 3% of the Guiding Price for sales to their customers.

Pursuant to the Fertilizer Price Notice, imported potash fertilizers are still subject to the price control measures set out in the Fertilizer Price Notice, and a formula for determining the wholesale price is set for imported DAP and compound fertilizers. In principle, the wholesale price is the Approved Actual Cost as described above plus a profit margin of 1.7% (the ‘‘Wholesale Price’’), and the imported DAP and compound fertilizers can be sold to customers in the PRC within the margin of 3% above or below the Wholesale Price.

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FERTILIZER INDUSTRY AND REGULATORY OVERVIEW

Regulations on registration of fertilizer products

The PRC fertilizer industry is regulated by (the Ministry of Agriculture of the PRC) (the ‘‘MOA’’) which requires registration of all fertilizer products. The Regulations on (Registration of Fertilisers) (the ‘‘Registration Regulations’’) promulgated by the Ministry of Agriculture on 23 June 2000 apply to all enterprises which are involved in the import, production, sales and use of fertilizer products in the PRC. According to the Registration Regulations, details of all fertilizer products must be registered with the Ministry of Agriculture before being imported, produced, sold or used by any enterprises. However, exemptions from registration requirements are given to fertilizer products which meet the relevant standards set by the State or by other recognised standards within the industry and that have been commercially used for a long period of time.

Based on the advice of Tianyuan Law Firm, the Management of the Fertilizer Group has confirmed that the Fertilizer Group has fully complied with all the above-mentioned rules and regulations during the Track Record Period.

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LETTER FROM THE BOARD

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SINOCHEM HONG KONG HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

Stock code: 297

Executive Directors: LIU De Shu (Chairman) SONG Yu Qing (Deputy Chairman and Chief Executive Officer) CHEN Hao CHU Yu Lin, David CHU Ho Miu Hing

Independent non-executive Directors: KO Ming Tung, Edward LI Ka Cheung, Eric TANG Tin Sek

Principal place of business in Hong Kong: Unit 4603, 46th Floor Office Tower Convention Plaza 1 Harbour Road Wanchai Hong Kong

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

13 June 2005

To: the Shareholders

Dear Sir or Madam,

ACQUISITION FROM SINOCHEM HONG KONG (GROUP) COMPANY LIMITED OF THE FERTILIZER GROUP

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REVERSE TAKEOVER INVOLVING AN APPLICATION FOR NEW LISTING AND AN APPLICATION FOR THE WHITEWASH WAIVER CAPITAL REORGANISATION

INTRODUCTION

The Company and Sinochem HK announced in the Announcement that, on 28 January 2005, the Company (as purchaser) entered into the Acquisition Agreement with Sinochem HK (as vendor) for the acquisition of the entire issued share capital of the Fertilizer Company. The consideration for the Acquisition of HK$5,050 million will be satisfied in full by the allotment and issue of 5,050,000,000 Consideration Shares to Sinochem HK at the Issue Price of HK$1.00 per Consideration Share. If the Capital Reorganisation has not been given

For identification purposes only

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LETTER FROM THE BOARD

effect to on or before Completion, the parties have agreed that the number of Consideration Shares shall be adjusted to 50,500,000,000 new Ordinary Shares and the Issue Price shall be HK$0.10 per Ordinary Share. In either case, the Consideration Shares represent approximately 93.21% of the enlarged issued ordinary share capital of the Company after the issue of the Consideration Shares (on the basis that no Offering has taken place). The consideration for the Acquisition has been arrived at after arms’ length negotiation between the parties.

Cazenove Asia has been appointed as the financial adviser to Sinochem Corporation in relation to the Acquisition. Cazenove Asia and Goldman Sachs have been appointed as the Sponsors to the Company in relation to its new listing application as a result of the Acquisition. BOCI Asia has been appointed as the financial adviser to Sinochem HK in relation to the proposed placing of the Consideration Shares after Completion. Due to Cazenove Asia’s prior engagement as the financial adviser to Sinochem Corporation in connection with the Acquisition, the Stock Exchange Listing Division has formed a view that Cazenove Asia is not independent from the Company for the purposes of Rule 3A.07 of the Listing Rules. Although Cazenove Asia considers that its role as financial adviser to Sinochem Corporation does not affect its independence as sponsor to the Company in respect of the listing of the Fertilizer Business, the Stock Exchange Listing Division has held a view that this appointment constitutes a current business relationship with a substantial shareholder of the Company which would be reasonably considered to affect Cazenove Asia’s independence. As Goldman Sachs is independent of the Company for the purposes of Rule 3A.07 of the Listing Rules, it has been appointed as one of the joint Sponsors.

The Independent Board Committee has been formed to advise the Independent Shareholders in relation to the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares. As Mr. Liu De Shu, Mr. Song Yu Qing and Ms. Chen Hao, three of the executive Directors, hold directorships in the Sinochem Group and Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, the remaining two executive Directors, have voted at meetings of the Board to approve the Acquisition and Mr. Chu has sold shares in the Company to Sinochem HK, they are not considered sufficiently independent to advise the Independent Shareholders for the purposes of the Acquisition and the Whitewash Waiver. Accordingly, Mr. Ko Ming Tung, Edward, Dr. Li Ka Cheung, Eric and Dr. Tang Tin Sek, being the independent non-executive Directors, have been appointed to constitute the Independent Board Committee to consider the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares.

Somerley has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders as to whether or not the terms of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole, and whether the Non-exempt Continuing Connected Transactions are on normal commercial terms and in the ordinary course of business of the Enlarged Group.

The purpose of this circular is:

(a) to provide you with details on the Proposals;

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LETTER FROM THE BOARD

(b) to provide you with details of the Fertilizer Business;
(c) to set out the recommendations of the Independent Board Committee in respect of the terms of the Acquisition, Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares;
(d) to set out the advice of Somerley, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, in respect of the terms of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares;
(e) to give you notice of the SGM to consider and if thought fit, to approve the Proposals; and
(f) to provide you with such other information as required under the Takeovers Code and the Listing Rules.

Shareholders should be aware that the Acquisition is conditional upon a number of conditions precedent as set out in the paragraph headed ‘‘Conditions’’ below and the Acquisition may or may not proceed.

THE ACQUISITION AGREEMENT

Parties

Purchaser: The Company Vendor: Sinochem HK, a subsidiary of Sinochem Corporation

Assets involved

The entire issued share capital of the Fertilizer Company. The Fertilizer Company was established to become the holding company of the Fertilizer Group, which is a leading vertically-integrated fertilizer enterprise in the PRC, principally engaged in the sourcing, production and sales of fertilizer and other agricultural related products in the PRC. The Fertilizer Group is also the largest importer of fertilizer products in the PRC in terms of import volume prior to the Completion. The Management of the Fertilizer Group believes that the Enlarged Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after the Completion.

The following diagrams illustrate the simplified corporate and shareholding structure of the Company and the Fertilizer Company immediately before and after the issue of the Consideration Shares and the Offering.

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LETTER FROM THE BOARD

Immediately before the issue of the Consideration Shares and the Offering

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Immediately after the issue of the Consideration Shares but prior to the Offering

==> picture [230 x 216] intentionally omitted <==

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LETTER FROM THE BOARD

Immediately after Completion and the Offering

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Notes:

Represents the issued ordinary share capital of the Company held by Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, executive Directors.
Assumes all Qualifying Shareholders take up their Assured Entitlements under the Preferential Offer and the maximum number of new ordinary shares are issued under the Placing.
The shareholdings of the Investor and the placees under the Placing are considered to be part of the public float. Upon Completion and completion of the Offering, the Investor and the placees under the Placing will hold 9.99% and approximately 6.71% of the enlarged issued ordinary share capital of the Company respectively.

All percentages of ordinary shareholdings in the Company stated in the diagrams above have been prepared assuming, save for the ordinary shares that might be issued to satisfy the consideration under the Acquisition and the Offering, no further shares will be issued by the Company after the Latest Practicable Date until Completion.

Consideration

The consideration for the Acquisition is HK$5,050 million, which has been arrived at after arms’ length negotiations between the parties with reference to various factors including, but not limited to, the financial results of the Fertilizer Group and the earnings potential and the prospects of the Fertilizer Group. This represents approximately 9.9 times of the audited net profit of the Fertilizer Group for the year ended 31 December 2004 of RMB543,364,000 (equivalent to approximately HK$512.6 million). The consideration also represents 2.6 times the net asset value of the Fertilizer Group as at 31 December 2004 of RMB2,021,951,000 (equivalent to HK$1,907.5 million).

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LETTER FROM THE BOARD

Payment method

The consideration will be satisfied in full by the allotment and issue of 5,050,000,000 Consideration Shares to Sinochem HK at the Issue Price of HK$1.00 per Consideration Share. If the Capital Reorganisation has not been given effect to on or before Completion, the parties have agreed that the number of Consideration Shares shall be adjusted to 50,500,000,000 new Ordinary Shares and the Issue Price shall be HK$0.10 per Ordinary Share. In either case, the number of Consideration Shares represents approximately 93.21% of the enlarged issued ordinary share capital of the Company following the issue of the Consideration Shares (on the basis that no Offering has taken place). The Consideration Shares shall be issued as fully paid and shall rank pari passu in all respects with the ordinary shares of the Company in issue at the date of Completion. An application has been made by the Company to the Stock Exchange for the listing of and permission to deal in the Consideration Shares.

The Issue Price

The Issue Price of HK$1.00 per Consideration Share represents:

(a) a discount of approximately 78.9% from HK$4.75, the closing price of the Ordinary Shares (adjusted for the effects of the Capital Reorganisation) on the Stock Exchange on 26 January 2005, being the last trading day immediately prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(b) a discount of approximately 77.5% from approximately HK$4.445, the average closing price of the Ordinary Shares (adjusted for the effects of the Capital Reorganisation) on the Stock Exchange for the last 10 trading days prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(c) a discount of approximately 77.5% from approximately HK$4.437, the average closing price of the Ordinary Shares (adjusted for the effects of the Capital Reorganisation) on the Stock Exchange for the last 30 trading days prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(d) a discount of approximately 65.5% from HK$2.90, the closing price of the Ordinary Shares (adjusted for the effects of the Capital Reorganisation) on the Stock Exchange on 25 May 2005, being the last trading day prior to the Latest Practicable Date;
(e) a premium of approximately 42.48 times of the latest published audited consolidated net tangible assets of the Group of approximately HK$0.023 per New Share (adjusted for the effects of the Capital Reorganisation but without taking into account the effects of any redemption of the Preference Shares) as at 31 March 2004; and
(f) a premium of approximately 700% to the unaudited consolidated net tangible assets of the Group of approximately HK$0.125 per New Share (adjusted for the effects of the Capital Reorganisation but without taking into account the effects of any redemption of the Preference Shares) as at 30 September 2004.

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LETTER FROM THE BOARD

If the Capital Reorganisation has not been given effect to on or before Completion, the Issue Price will be HK$0.10 per Ordinary Share and will represent:

(a) a discount of approximately 78.9% from HK$0.475, the closing price of the Ordinary Shares on the Stock Exchange on 26 January 2005, being the last trading day immediately prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(b) a discount of approximately 77.5% from approximately HK$0.445, the average closing price of the Ordinary Shares on the Stock Exchange for the last 10 trading days prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(c) a discount of approximately 77.5% from approximately HK$0.444, the average closing price of the Ordinary Shares on the Stock Exchange for the last 30 trading days prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(d) a discount of approximately 65.5% from HK$0.29, the closing price of the Ordinary Shares on the Stock Exchange on 25 May 2005, being the last trading day prior to the Latest Practicable Date;
(e) a premium of approximately 42.48 times of the latest published audited consolidated net tangible assets of the Group of approximately HK$0.002 per Ordinary Share as at 31 March 2004; and
(f) a premium of approximately 700% to the unaudited consolidated net tangible assets of the Group of approximately HK$0.013 per Ordinary Share as at 30 September 2004.

Conditions

Completion is conditional upon the fulfilment of the following Conditions, on or before 30 September 2005, or such later date as may be agreed among the parties to the Acquisition Agreement:

(a) the continued listing of the Ordinary Shares on the Stock Exchange and there having been no suspension in trading in the Ordinary Shares, save for any temporary suspension not exceeding 10 consecutive trading days or such longer period as Sinochem HK may accept in writing, and save for any suspension in connection with a temporary suspension pending clearance by the Stock Exchange and the Executive of announcement(s) relating to the transactions contemplated under the Acquisition Agreement;
(b) the approval of the Listing Committee of the Stock Exchange of the new listing application by the Company having been obtained;
(c) (if necessary) the Bermuda Monetary Authority granting its permission to the allotment and issue of the Consideration Shares;
(d) the approval by the Independent Shareholders at the SGM by way of a poll of (i) the Acquisition; (ii) the allotment and issue of the Consideration Shares by the Company; (iii) all other transactions contemplated under the Acquisition Agreement; (iv) the Whitewash Waiver; and (v) the Non-exempt Continuing Connected Transactions and the proposed annual caps on the value of such transactions in

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accordance with the requirements of the Listing Rules and approval by the Shareholders of an increase in the authorized share capital of the Company to such an amount as shall allow the Company to allot and issue the Consideration Shares;

(e) the Listing Committee of the Stock Exchange agreeing to grant (subject to allotment) the listing of, and permission to deal in, the Consideration Shares (and such permission and listing not subsequently being revoked prior to the delivery of the definitive share certificate(s) representing the Consideration Shares);
(f) the Executive granting to Sinochem HK and parties acting in concert with it the Whitewash Waiver; and
(g) the obtaining of all licences, consents, approvals, authorizations, permissions, waivers, orders or exemptions from government or regulatory authorities (including relevant PRC authorities) or third parties which are necessary or desirable in connection with the execution and performance of the Acquisition Agreement and any of the transactions contemplated under the Acquisition Agreement (collectively, the ‘‘Consents’’).

Pursuant to the Acquisition Agreement, Sinochem HK may waive the Condition in (a) above, and the Company and Sinochem HK may jointly waive the condition precedent in item (g) above at any time if it is agreed that the Consent(s) which have not been obtained is/are not material to the business of the Group and the Fertilizer Group taken as a whole, and such waiver may be subject to such terms and conditions as may be jointly determined by the Company and Sinochem HK. All the other Conditions above cannot be waived and, in the event that they are not satisfied, the Acquisition will not proceed. Save for the Conditions in (c) and (g) above, none of the Conditions have been satisfied as the Latest Practicable Date.

PRC Approvals

The approvals from the relevant PRC authorities as referred to in Condition (g) above in respect of the Acquisition Agreement include, but are not limited to, approvals from the SASAC and China Securities Regulatory Commission.

The Company has been advised by Tianyuan Law Firm, its PRC legal adviser that, as at the Latest Practicable Date, all necessary regulatory approvals in the PRC in connection with the Acquisition Agreement have been obtained.

Completion

Completion is expected to take place on the fifth business day after all the Conditions have either been fulfilled and/or waived. If any of the Conditions has not been fulfilled (or waived by the relevant parties) by 30 September 2005 (or such later date as the parties to the Acquisition Agreement may agree in writing), the Acquisition Agreement will lapse and all obligations and liabilities of all parties thereunder will cease (without prejudice to the rights of the parties in respect of antecedent breaches).

Following Completion, the Fertilizer Company will become a wholly-owned subsidiary of the Company and its financial results will be consolidated into the financial statements of the Enlarged Group.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE BEFORE AND AFTER THE ACQUISITION

The Acquisition will result in a change of control of the Company.

Set out below is a table showing, for the purpose of illustration, the shareholding structure of the Company before and after the issue of the Consideration Shares and the Capital Reorganisation, but prior to any Offering:

Shareholders Sinochem HK and its concert parties (Note 2) Mr. Chu Yu Lin, David (Note 3) Mrs. Chu Ho Miu Hing (Note 3) Public Total	Existing shareholding as at the Latest Practicable Date Ordinary Shares % 778,477,633 21.16 312,876,297 8.50 64,304,000 1.75 2,523,840,354 68.59 3,679,498,284 100.00	Shareholding structure after the Capital Reduction and Share Consolidation but before Completion (Note 1) New Shares % 77,847,763 21.16 31,287,629 8.50 6,430,400 1.75 252,384,036 68.59 367,949,828 100.00	Shareholding structure after the Capital Reorganisation and the issue of the Consideration Shares (Note 1) New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 5,417,949,828 100.00	Shareholding structure after the Capital Reorganisation and the issue of the Consideration Shares (Note 1) New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 5,417,949,828 100.00
				100.00

Set out below is a table showing, for the purpose of illustration, the shareholding structure of the Company before and after the issue of the Consideration Shares in the absence of the Capital Reduction and Share Consolidation, and prior to any Offering:

Shareholders Sinochem HK and its concert parties (Note 2) Mr. Chu Yu Lin, David (Note 3) Mrs. Chu Ho Miu Hing (Note 3) Public Total	Existing shareholding as at the Latest Practicable Date Ordinary Shares % 778,477,633 21.16 312,876,297 8.50 64,304,000 1.75 2,523,840,354 68.59 3,679,498,284 100.00	Shareholding structure after the issue of the Consideration Shares (Note 1) Ordinary Shares % 51,278,477,633 94.65 312,876,297 0.58 64,304,000 0.11 2,523,840,354 4.66 54,179,498,284 100.00	Shareholding structure after the issue of the Consideration Shares (Note 1) Ordinary Shares % 51,278,477,633 94.65 312,876,297 0.58 64,304,000 0.11 2,523,840,354 4.66 54,179,498,284 100.00
			100.00

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LETTER FROM THE BOARD

Notes:

Assumes, save for the ordinary shares that might be issued to satisfy the consideration under the Acquisition, no further ordinary shares will be issued by the Company after the Latest Practicable Date until Completion, and no Offering has taken place.
Sinochem HK subscribed for 250,000,000 Ordinary Shares pursuant to a placing conducted by the Company in July 2001. It acquired a further 528,477,633 Ordinary Shares and 103 Preference Shares (together the ‘‘Relevant Shares’’) from Mr. Chu Yu Lin, David and his Associate pursuant to the exercise on 2 February 2004 of a call option granted to Sinochem HK by Mr. Chu and his Associate on 10 December 2003. The purchase price of HK$53,586,000 for the Relevant Shares was satisfied by setting off against the total amount outstanding under a loan of HK$53,586,000 advanced by Sinochem HK to Mr. Chu Yu Lin, David pursuant to a loan agreement dated 14 November 2003, which was secured by share charges over the Relevant Shares. All interest accrued on such loan was waived by Sinochem HK pursuant to the terms of the loan agreement and the relevant call option agreement. As a result of the exercise of the call option and the discharge of the loan, the share charges granted to Sinochem HK by Mr. Chu Yu Lin, David and his Associate over the Relevant Shares were effectively released.
Mr. Chu Yu Lin, David is an executive Director and is the husband of Mrs. Chu Ho Miu Hing, also an executive Director.

PARTICULARS OF THE GROUP

The Company is an investment holding company. It was incorporated in Bermuda on 26 May 1994 and its Ordinary Shares have been listed on the Main Board of the Stock Exchange since 30 September 1996. At the time of the Company’s initial listing, the name of the Company was Wah Tak Fung Holdings Limited (which was changed to Sinochem Hong Kong Holdings Limited with effect from 21 May 2004). The Group is principally engaged in property investment and investment holding.

History of the Group

At the time of the initial listing in 1996, the business of the Group focused on property investment, development and building management. With the severe property market downturn in Hong Kong after 1997, the value of the Group’s property portfolio has deteriorated significantly and the rental income of the Group has been subject to significant downward pressure. Significant losses were recognised as the value of the properties owned by the Group at that time continued to decline. Since 2003, the property market in Hong Kong has experienced a rebound. However, due to the realisation of assets during the market downturn, the Group is unable to benefit from such upturn of the Hong Kong property market.

To improve the working capital and financial position of the Group, the Company had conducted various fund-raising activities, including the placing of shares to Sinochem HK and other investors in 2001. In order to improve the prospects of the Group, the Company’s management is of the view that the Group should seek to develop alternative business opportunities. In this regard, the Board has since 2001 invited nominees of the Sinochem Group to join the Board to consider ways in which the Group’s financial position could be improved and to explore opportunities of utilising the business connection and network of the Sinochem Group for future development, with a view to maximising the profits and minimising the expenses of the Group. As a result of the effort of the Board, the Group concluded a series of debt restructuring exercises with its major bank creditors as a result of which the level of indebtedness was reduced and the overall financial position of the Group had improved. The Group successfully reduced its losses from approximately HK$129.9 million for

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the year ended 31 March 2003 to HK$101.9 million for the year ended 31 March 2004. In addition, turnover of the Group increased 18%, amounting to HK$99.5 million for the year ended 31 March 2004 as compared to the preceding year.

Existing principal business of the Group

As at the Latest Practicable Date, the Group is principally engaged in the leasing and sales of commercial properties in Hong Kong. Set out below are certain particulars of the properties held by the Group as at the Latest Practicable Date:

Property held for sale

			Approximate	Percentage
			gross floor	of interest
	Lease		area (square	held by the
Location	term	Type	metre)	Group
Workingbond Commercial	Long lease	Commercial	3,114	100%
Centre
No. 162 Prince Edward Road
West
Mongkok
Kowloon

Investment property

			Approximate	Percentage
			gross floor	of interest
	Lease		area (square	held by the
Location	term	Type	metre)	Group
Wallpark Commercial Building	Medium	Commercial	3,587	100%
Nos. 10–12 Chatham Court	lease
Tsimshatsui
Kowloon

Please refer to the property valuation report set out in Appendix V to this circular for the details and the open market value of the above properties held by the Group as at 30 April 2005.

Pursuant to the valuation of the properties held by the Group as at 30 April 2005 prepared by Chesterton Petty Limited as set out in Group III of the property valuation report in Appendix V to this circular, a net revaluation surplus of HK$3 million arose when compared with the carrying values of those properties as at 30 September 2004 as set out in Appendix II to this circular. Accordingly, the surplus from revaluation of those properties held by the Group as at 30 April 2005 as set out in Appendix V to this circular will be reflected in the accounts of the Group as at the date of Completion provided that there is no material change in the fair value of the respective properties from 30 April 2005 to the date of Completion.

The Company has applied to the Stock Exchange for a waiver from strict compliance with the disclosure requirements under Rules 5.01, 5.06 (1) and (2) and 19.10(6) and paragraphs 3 (a) and (b) of Practice Note 16 of the Listing Rules in relation to property no. 2

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LETTER FROM THE BOARD

in Group I (which comprises 140 buildings on 33 parcels of land) and 1,423 leased properties in Group II of the property valuation report. The Enlarged Group will own and lease in aggregate over 1,500 properties in the PRC upon Completion. Save for the 140 owned properties in Group I to be acquired in the PRC and those in Group III owned by the Group for investment purposes in Hong Kong (and for which detailed disclosure has been made in Appendix V to this circular in accordance with Rule 5.06), the Enlarged Group will not be engaged in the property business. The Enlarged Group will hold property interests for purposes ancillary to its businesses, such as housing the Enlarged Group’s manufacturing facilities, retail outlets and offices. Also, as disclosed in the property valuation report in Appendix V to this circular, the Fertilizer Group has 1,423 leased properties in the PRC which are set out in Group II of the property valuation report, all of which are of no commercial value (the ‘‘PRC Leased Properties’’).

In respect of the property no. 2 of Group I, (i) the 140 buildings comprising property no. 2 of Group I are based at a single location, but on 33 plots of land; (ii) the properties comprising property no. 2 of Group I are all owned and occupied by Sinochem Fuling; (iii) the buildings comprise a single production facility. As such, the Directors are of the view that to describe the 140 properties as 33 different properties would not only significantly lengthen the property valuation report contained in Appendix V to this circular, but would have little significance to Shareholders and would in fact be potentially confusing in presenting a single facility as 33 different properties due to the fact that they are based on 33 plots of land.

Given the above and (i) the number of properties involved in property no. 2 of Group I and the PRC Leased Properties; and (ii) in respect of the PRC Leased Properties, the fact that such properties are of no commercial value, the Directors are of the opinion that it is impracticable and unduly burdensome to include a full valuation report in respect of property no. 2 in Group I and the PRC Leased Properties which contains all the details and information required under Rule 5.06 of the Listing Rules in this circular. In addition, the Directors believe that detailed information relating to property no. 2 in Group I of the valuation report and each of the PRC Leased Properties set out in an exceptionally voluminous report would be of little relevance and assistance to the Shareholders in making an informed decision on the Acquisition. Furthermore, given the length of the full valuation report, the Directors are of the opinion that it would be unduly burdensome and impracticable to prepare an English translation of the full valuation report. The sections of the full valuation report containing details of property no. 2 in Group I of the valuation report and the PRC Leased Properties will be made available in Chinese only. The sections of the full valuation report containing details of properties in Group I (except for property no. 2), Group III and Group IV will be made available in English and Chinese. As such, the Company has applied to the Stock Exchange for a waiver from strict compliance with the disclosure requirements under Rules 5.01, 5.06 (1) and (2) and 19.10(6) and paragraphs 3 (a) and (b) of Practice Note 16 of the Listing Rules in relation to property no. 2 in Group I of the valuation report and the PRC Leased Properties. Instead of including a full valuation report in this circular, a summary of the full valuation reports on property no. 2 in Group I of the valuation report and the PRC Leased Properties are set out in Appendix V to this circular.

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LETTER FROM THE BOARD

PARTICULARS OF THE FERTILIZER GROUP

The Fertilizer Group is a leading fertilizer enterprise in the PRC offering a comprehensive range of fertilizer and agricultural-related products. It is also the largest importer of fertilizer products in the PRC in terms of import volume prior to the Completion. The Management of the Fertilizer Group believes that the Enlarged Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after Completion. The Fertilizer Group is the fertilizer flagship of Sinochem Corporation, one of the largest state-owned enterprises in the PRC established in 1950. It is also a Fortune Global company with global operations in the petroleum refinery, chemical and fertilizer industries.

At present, the Fertilizer Group operates three principal divisions, namely SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, which together form a vertically-integrated business operation across the fertilizer supply chain:

. SINOCHEM Procurement — sources a variety of fertilizer products and certain principal raw materials from both overseas and domestic suppliers for sales by SINOCHEM Distribution and production by SINOCHEM Production respectively.
. SINOCHEM Production — produces phosphate-based fertilizers and compound fertilizers with high nutrient content. As at the Latest Practicable Date, the Fertilizer Group had interests in seven production enterprises for the production of phosphate-based fertilizers and compound fertilizers.
. SINOCHEM Distribution — distributes products sourced by SINOCHEM Procurement and products produced by SINOCHEM Production. Products are principally sold in the PRC with a small proportion being exported to overseas customers. Products are sold through its own extensive sales and distribution network in the PRC as well as through independent distributors.

The Fertilizer Group has developed a centrally co-ordinated operations model to facilitate the integration of the three principal divisions. Under such operations model, the flow of products, information and funds, as well as resources deployment are managed and co-ordinated centrally. To ensure operational efficiency for its large scale operations, the Fertilizer Group also deploys a structured logistics network and a proprietary ERP system.

For details of the Fertilizer Business carried on by, and the financial information of, the Fertilizer Group, please refer to the sections headed ‘‘Information on the Fertilizer Group’’, ‘‘Financial Information — The Fertilizer Group’’ in this circular and the accountants’ report on the Fertilizer Group contained in Appendix I to this circular.

REASONS FOR AND BENEFITS OF THE ACQUISITION

Potential for the PRC fertilizer industry

Details of the PRC fertilizer industry are set out in the section headed ‘‘Fertilizer Industry and Regulatory Overview’’ in this circular. The Directors consider that the PRC fertilizer industry presents promising growth potential and the Acquisition will enable the Company to participate in the growth of the PRC fertilizer industry.

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LETTER FROM THE BOARD

A unique opportunity to become the largest distributor of imported fertilizer products in the PRC

The Fertilizer Group is a leading fertilizer enterprise in the PRC. It is the largest fertilizer importer in the PRC in terms of import volume prior to the Completion. The Management of the Fertilizer Group believes that the Enlarged Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after the Completion. The Directors consider that with China being one of the major fertilizer production and consumption countries in the world, the Acquisition represents an attractive opportunity for the Enlarged Group to immediately become a leading player in the PRC fertilizer industry.

A means to immediately enhance earnings capability and net asset value

Based on the historical results of the Fertiliser Group and the forecast consolidated profit of the Enlarged Group attributable to Shareholders for the year ending 31 December 2005 as set out in the paragraph headed ‘‘Financial Information — The Enlarged Group — Profit Forecast’’ in this circular, the Directors expect that the Acquisition will bring an immediate and substantial contribution to the earnings of the Group. In addition, there will be a significant increment in the net asset value of the Group, thereby enhancing the value for Shareholders as a whole.

A structure enabling the Company to become the flagship company of Sinochem Corporation

Upon Completion, the Company will be ultimately majority controlled by Sinochem Corporation, which is one of the largest state-owned enterprises in the PRC and has been listed among the Fortune Global 500 companies for 15 consecutive years and ranked 270th in 2004. It also ranks 7th among all Chinese industrial companies in terms of turnover in 2003. As the only Hong Kong listed flagship company for Sinochem Corporation, the Company would be able to leverage on the global business network of Sinochem Corporation for future development.

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LETTER FROM THE BOARD

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following table shows the unaudited pro forma financial information of the Enlarged Group after Completion extracted from Appendix III to this circular:

Pro forma profit and loss account of the Enlarged Group

Turnover Gross profit Net (loss)/profit attributable to shareholders	Year ended 31 March 2004 Group HK$’000 99,483 46,698 (101,873)	Year ended 31 December 2004 Fertilizer Group HK$’000 11,878,504 1,028,650 512,606	Aggregated Pro forma adjustments HK$’000 HK$’000 11,977,987 — 1,075,348 — 410,733 (25,932)	Pro forma Enlarged Group HK$’000 11,977,987 1,075,348 384,801

Pro forma balance sheet of the Enlarged Group

Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets	30 September 2004 Group HK$’000 65,717 88,843 154,560 87,847 20,673 108,520 46,040	31 December 2004 Fertilizer Group HK$’000 919,747 5,928,589 6,848,336 289,250 4,651,586 4,940,836 1,907,500	Aggregated HK$’000 985,464 6,017,432 7,002,896 377,097 4,672,259 5,049,356 1,953,540	Pro forma adjustments HK$’000 259,323 — 259,323 — 20,000 20,000 239,323	Pro forma Enlarged Group HK$’000 1,244,787 6,017,432
					7,262,219 377,097 4,692,259
					5,069,356 2,192,863

PROFIT FORECAST OF THE ENLARGED GROUP FOR THE YEAR ENDING 31 DECEMBER 2005

Forecast consolidated profit of the Enlarged Group attributable to Shareholders[(Note)] . . . . . . . . . . . . . . . . . . not less than RMB671 million (equivalent to approximately HK$633 million)

Sinochem HK has covenanted with the Company that, subject to Completion having occurred, the consolidated profit of the Enlarged Group attributable to Shareholders for the year ending 31 December 2005 will not be less than RMB671 million (equivalent to approximately HK$633 million) and, if the consolidated profit attributable to Shareholders following Completion as reflected in its audited consolidated financial statements for the year ending 31 December 2005 is less than RMB671 million (equivalent to approximately HK$633 million), it will pay or procure to be paid to the Company a cash sum equal to the shortfall within thirty business days of the date on which such audited consolidated financial statements are published. Please refer to the paragraph headed ‘‘Profit Forecast’’ in the section headed ‘‘Financial Information — The Enlarged Group’’ and Appendix IV to this circular for details of the profit forecast of the Enlarged Group for the year ending 31 December 2005.

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LETTER FROM THE BOARD

FUTURE INTENTIONS REGARDING THE GROUP

Existing business and management of the Group

The Directors expect that going forward, the Company’s resources will be focused on the PRC fertilizers and agricultural related products sector. The Company will be the fertilizer flagship of Sinochem Corporation. The Fertilizer Group will become the principal assets and operations of the Company.

In respect of the management, it is proposed that all existing Directors will remain in their positions, and one executive Director, Mr. Du Ke Ping and one non-executive Director, Dr. Chen Guo Gang who are nominated by Sinochem HK, be appointed at the earliest time permitted under Rule 7 of the Takeovers Code. Details regarding the two new Directors to be nominated for appointment are set out in the section headed ‘‘Directors and senior management’’ of this circular. Mr. Liu De Shu will continue to act as chairman of the Company and will together with Mr. Song Yu Qing be re-designated as non-executive Directors immediately after Completion. Further announcement will be made by the Company in respect of the appointment of any Director pursuant to the Listing Rules.

The Company has no intention to make any variations to the remuneration payable to or benefits in kind receivable by the Directors as a result of the Acquisition.

For details of Sinochem HK’s intention for the Enlarged Group, including the existing business of the Group, the management of the Enlarged Group and the treatment of the Preference Shares held by Sinochem HK, please refer to the section headed ‘‘Our intentions for the Enlarged Group’’ in the ‘‘Letter from Sinochem HK’’ in this circular.

MAINTAINING THE LISTING STATUS AND PUBLIC FLOAT

The parties to the Acquisition Agreement intend that the Company will maintain the listing of the ordinary shares of the Company on the Stock Exchange after Completion.

After the issue of the Consideration Shares and prior to the Offering, the shareholding of Sinochem HK will increase from approximately 21.16% (as at the Latest Practicable Date) to 94.65% of the issued ordinary share capital of the Company. In addition, approximately 0.69% of the issued ordinary share capital of the Company will be held by Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, executive Directors. The public float of the Company will be approximately 4.66% and therefore will be below the minimum 25% public float requirement under the Listing Rules.

Accordingly, the Company and Sinochem HK have undertaken to the Stock Exchange to ensure that the minimum public float of the ordinary shares of the Company then in issue shall not be less than 25% upon Completion. The Stock Exchange has stated that if, at the date of Completion, less than 25% of the issued ordinary shares are held by the public, then it will consider exercising its discretion to suspend trading in the ordinary shares until a sufficient public float is attained.

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LETTER FROM THE BOARD

The Offering

The Company and Sinochem HK are considering the following offering structure, involving (i) a placing of existing ordinary shares by Sinochem HK to the Investor; (ii) a preferential offer of existing ordinary shares by Sinochem HK to qualifying existing Shareholders; and (iii) a placing of new ordinary shares by the Company to professional, institutional and other investors, to maintain the minimum public float required under the Listing Rules. However, Shareholders should note that the final structure of the Offering, including the split between new and existing ordinary shares of the Company to be offered under each element of the Offering, have not yet been finally determined and will be subject to a number of considerations, including prevailing market conditions, the prevailing market price of the ordinary shares, investor demand for the ordinary shares at the relevant time and the Company’s capital requirements.

(i) Strategic Placing

Sinochem HK entered into a strategic placing agreement on 7 June 2005 with the Investor. Pursuant to the terms of that agreement, conditional upon, among others, Completion and completion of the Preferential Offer and the Placing, and there being no material adverse change in, among others, the financial condition of the Company or the Fertilizer Group since 31 December 2004, Sinochem HK:

(i) has agreed to sell 5,802,141,879 ordinary shares (subject to adjustment to take into account the effect of the Capital Reorganisation) to the Investor, representing 9.99% of the enlarged issued ordinary share capital of the Company upon completion of the Strategic Placing at the lower of (a) the institutional ‘‘book-building’’ price in the Placing; and (b) 15 times of the forecast consolidated profit of the Enlarged Group attributable to the Shareholders for the year ending 31 December 2005 as stated in this circular divided by the expected number of ordinary shares outstanding as at completion of the Strategic Placing; and
(ii) has granted the Option to the Investor to acquire from Sinochem HK up to a further 5,813,757,778 ordinary shares (subject to adjustment to take into account the effect of the Capital Reorganisation), representing 10.01% of the enlarged issued ordinary share capital of the Company upon completion of the Strategic Placing at the weighted average of the daily closing price per ordinary share on the Stock Exchange during the 10 consecutive trading days immediately prior to the exercise date. Pursuant to the terms of the strategic placing agreement, the Investor has confirmed that it will not be entitled to exercise the Option, in whole or in part, within the first six months from the date of completion of the Strategic Placing. The Investor has agreed to delay exercising the Option if the Company will have any public float problem after any such exercise. Sinochem HK has agreed to take all such necessary action to allow the Investor to exercise such Option, subject to the minimum public float requirement being met. The Option may be exercised in whole or in part until the third anniversary of the date of completion of the Strategic Placing.

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LETTER FROM THE BOARD

agree to grant any right to purchase, lend, or otherwise howsoever transfer or dispose of any part of the interest in the shares acquired under (i) above for a period of three years from the completion of the sale and purchase of such shares under the strategic placing agreement, and in respect of the shares which it may acquire under the Option, until the later of the expiry of the three years period referred to above or the first year after the completion of the relevant exercise of the Option.

The strategic placing agreement contains certain representations and warranties on the part of Sinochem HK and the Investor, including the representation and warranty on the part of Sinochem HK as to the accuracy and completeness of certain parts of this circular (primarily relating to information concerning the Fertilizer Group). Sinochem HK has also agreed to use it best efforts to ensure that the Company will not issue shares other than pursuant to, among others, an offer of shares to shareholders pro-rata to their shareholdings, a bona fide underwritten offering or institutional or private offering in which the price is at least 90% of the then current market value per share, any placement of shares in which the Investor has the right to participate up to its pro-rata interest in the Company, and shares issued under an employees’ stock option scheme and any scrip dividend scheme. It is expected that the Investor will have a representative on the Board upon completion of the Strategic Placing and will have another representative on the Board upon full exercise of the Option aforementioned. The strategic placing agreement may be terminated by either Sinochem HK or the Investor if (i) there is any law or any governmental authority takes any action restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated in the agreement or (ii) the other party has materially breached any representation, warranty, covenant or agreement contained in the strategic placing agreement which breach has not been cured (or is not capable of being cured) within the period stipulated in the agreement or (iii) if closing of the agreement shall not have occurred by 30 October 2005. Sinochem HK has applied to the SFC for, and the SFC has granted, its consent for Sinochem HK to enter into the strategic placing agreement prior to the SGM pursuant to paragraph 3(b) of Schedule VI of the Takeovers Code.

The Investor, an Independent Third Party, is a corporation incorporated in Canada with shares listed on the Toronto Stock Exchange and the New York Stock Exchange. The Investor is one of the world’s largest integrated fertilizer and related industrial and feed products companies, and the world’s largest producer of potash fertilizer by capacity. During the Track Record Period, Canpotex Limited, a company equally owned by the Investor and two other investors, supplied the Fertilizer Group with potash fertilizers and was the Fertilizer Group’s largest supplier in the financial years ended 31 December 2003 and 2004 and the second largest supplier in the year ended 31 December 2002, purchases from Canpotex Limited accounting for 15.81%, 13.66% and 14.75% of the Fertilizer Group’s total cost of sales for the three years ended 31 December 2004, respectively. The Management of the Fertilizer Group considers that the Investor’s interests in the Company will help to further raise the Company’s profile in the international fertilizer market and help to further strengthen the Fertilizer Group’s relationship with the Investor and Canpotex Limited, providing further potential business opportunities for the Enlarged Group in the future.

Please refer to the paragraph headed ‘‘Strategic Placing’’ of the ‘‘Letter from Sinochem HK’’ in this circular for further details of the Strategic Placing.

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LETTER FROM THE BOARD

(ii) Preferential Offer

Subject to Completion, Sinochem HK is proposing offering to Qualifying Shareholders the Reserved Shares, representing approximately 13.04% of the enlarged issued ordinary share capital of the Company on Completion and the completion of Placing, pursuant to the Preferential Offer.

The Preferential Offer is proposed to be made to the Qualifying Shareholders on the following basis:

. If the Share Consolidation does not take effect, Qualifying Shareholders will be invited to purchase ordinary shares on the basis of an estimated Assured Entitlement of three Reserved Shares (being, in this case, Ordinary Shares) for every Ordinary Share held by Qualifying Shareholders on the Record Date at a price of HK$0.10 per Reserved Share (together with applicable brokerage, fees or levies).
. If the Share Consolidation takes effect, Qualifying Shareholders will be invited to purchase ordinary shares on the basis of an estimated Assured Entitlement of three Reserved Shares (being, in this case, New Shares) for every New Share held by Qualifying Shareholders, such New Shares to be calculated based on adjustment made to the number of Ordinary Shares held by them on the Record Date to take account of the effects of the Share Consolidation (and, for the purpose of such adjustment, fractional shares arising from the Share Consolidation will be disregarded), at a price of HK$1.00 per Reserved Share (together with applicable brokerage, fees or levies).

However, the final Assured Entitlement is not known as it will depend on the number of Ordinary Shares held by Qualifying Shareholders on the Record Date and in the event that the Share Consolidation is approved by Shareholders, the effect of the Share Consolidation (including, in particular, the rounding down of fractional shares arising from the Share Consolidation). The Company will publish a press announcement after the Record Date confirming Qualifying Shareholders’ entitlement to apply for the Reserved Shares. Qualifying Shareholders will be entitled to apply for a number of Reserved Shares which is equal to or less than his or her Assured Entitlement, but will not be entitled to apply for a number of Reserved Shares which is greater than his or her Assured Entitlement. The price per ordinary share at which Qualifying Shareholders may purchase ordinary shares pursuant to the Preferential Offer represents the Issue Price at which the Consideration Shares will be issued to Sinochem HK pursuant to the Acquisition (subject to adjustment to take into account the effect of the Capital Reorganisation).

Assured Entitlements not taken up by Qualifying Shareholders will be either:

. retained by Sinochem HK; or
. reallocated under the Placing to professional, institutional and other third party investors;

or a combination of the above subject, in each case, to the overriding requirement that the Company complies with the provisions of Rule 8.08 of the Listing Rules.

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LETTER FROM THE BOARD

Assured Entitlements may represent ordinary shares not in a multiple of a full board lot of 2,000 ordinary shares and dealings in odd lot shares may be at below their prevailing market price.

Please refer to the paragraph headed ‘‘Preferential Offer’’ of the ‘‘Letter from Sinochem HK’’ in this circular for further details of the Preferential Offer.

(iii) Placing

Pursuant to the Placing, it is currently anticipated that the Company may enter into one or more placing underwriting agreements with one or more placing agents for the international placement of new ordinary shares in the Company to be offered by the Company to professional, institutional and other third party investors. It is currently anticipated that the Placing will take place after the approval of the Acquisition at the SGM, but shortly before or contemporaneously with Completion. It is further anticipated that the Placing price per ordinary share pursuant to the Placing will be determined by way of a ‘‘book-building’’ process whereby the placing agent(s) will solicit from prospective investors indications of interest in acquiring ordinary shares in the Company pursuant to the Placing. Prospective investors will be required to specify the number of ordinary shares they would be prepared to acquire either at different prices or at a particular price.

It is currently anticipated that the Company will issue not more than 3,900,000,000 new Ordinary Shares (subject to adjustment to take account of the effect of the Capital Reorganisation), representing approximately 6.71% of the enlarged issued ordinary share capital of the Company upon Completion and completion of the Placing, pursuant to the Placing at a Placing price of not less than HK$0.10 per ordinary share, subject to adjustment to take into account the effect of the Capital Reorganisation (together with applicable brokerage, fees and levies). The minimum Placing price per ordinary share represents the Issue Price at which the Consideration Shares will be issued to Sinochem HK pursuant to the Acquisition (subject to adjustment to take into account the effect of the Capital Reorganisation). However, the timing and size of the Placing(s) and the Placing price per ordinary share pursuant to the Placing have not yet been determined and will be subject to a number of considerations, including those set out in the paragraph headed ‘‘The Offering’’ above. The Placing will be conducted in full compliance with relevant provisions of the Listing Rules. The Company intends to seek a specific mandate from Shareholders for the issue of the required number of ordinary shares by the Company pursuant to the Placing. Since the Placing is an integral part of the Company’s plan to maintain the minimum public float of the ordinary shares of the Company as a result of the Acquisition, Sinochem HK, Mr. Chu Yu Lin, David, Mrs. Chu Ho Miu Hing and their respective Associates, being parties interested or taken to be interested in the Acquisition, are therefore required to abstain from voting on the resolution approving the specific mandate to issue new ordinary shares pursuant to the Placing.

Effect on Public Float

Assuming that the Offering proceeds as set out above, it is currently envisaged that the Company will have a public float of approximately 34.09% of its enlarged issued ordinary share capital upon Completion and completion of the Placing (and assuming Qualifying

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Shareholders take up their Assured Entitlements under the Preferential Offer and the maximum number of new ordinary shares are issued under the Placing), exceeding the minimum required pursuant to Rule 8.08 of the Listing Rules.

Effect on Shareholdings

The following table sets forth the shareholding information, for the purpose of illustration, of the Company after the issue of the Consideration Shares and the Capital Reduction and Share Consolidation (i) without the Offering; and (ii) with the Offering (but assuming the Option is not exercised).

Shareholder Sinochem HK and its concert parties Mr. Chu Yu Lin, David Mrs. Chu Ho Miu Hing Public (Note 1) Total	Immediately after the issue of the Consideration Shares but prior to the Offering New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 5,417,949,828 100.00	Immediately upon Completion and completion of the Offering (Note 2) New Shares % 3,790,481,469 65.26 31,287,629 0.54 6,430,400 0.11 1,979,750,330 34.09 5,807,949,828 100.00	Immediately upon Completion and completion of the Offering (Note 2) New Shares % 3,790,481,469 65.26 31,287,629 0.54 6,430,400 0.11 1,979,750,330 34.09 5,807,949,828 100.00
			100.00

The following table sets forth the shareholding information, for the purpose of illustration, of the Company after the issue of the Consideration Shares in the absence of the Capital Reduction and Share Consolidation (i) without the Offering; and (ii) with the Offering (but assuming the Option is not exercised).

Shareholder Sinochem HK and its concert parties Mr. Chu Yu Lin, David Mrs. Chu Ho Miu Hing Public (Note 1) Total Notes:	Immediately after the issue of the Consideration Shares but prior to the Offering Ordinary Shares % 51,278,477,633 94.65 312,876,297 0.58 64,304,000 0.11 2,523,840,354 4.66 54,179,498,284 100.00	Immediately upon Completion and completion of the Offering (Note 2) Ordinary Shares % 37,904,814,692 65.26 312,876,297 0.54 64,304,000 0.11 19,797,503,295 34.09 58,079,498,284 100.00	Immediately upon Completion and completion of the Offering (Note 2) Ordinary Shares % 37,904,814,692 65.26 312,876,297 0.54 64,304,000 0.11 19,797,503,295 34.09 58,079,498,284 100.00
			100.00

The shareholdings of the Investor and the placees are considered to be part of the public float. Upon Completion and completion of the Offering (and assuming Qualifying Shareholders take up all their Assured Entitlements under the Preferential Offer and the maximum number of new ordinary shares are

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issued under the Placing), the Investor and placees under the Placing will hold 580,214,187 New Shares and 390,000,000 New Shares, respectively (assuming the Capital Reduction and the Share Consolidation are given effect to) or 5,802,141,879 Ordinary Shares and 3,900,000,000 Ordinary Shares respectively (in the absence of the Capital Reduction and the Share Consolidation), representing 9.99% and approximately 6.71% of the enlarged issued ordinary share capital of the Company respectively upon Completion and completion of the Placing.

Assumes Qualifying Shareholders take up Assured Entitlements under Preferential Offer in full and the maximum number of new ordinary shares are issued under the Placing.

If the Option is exercised in full, and assuming no other changes in shareholdings, the Investor’s shareholding will increase to approximately 20.00% of the issued ordinary share capital of the Company. The Investor will therefore become a substantial shareholder (as defined in the Listing Rules) of the Company and its shareholding would no longer constitute part of the public float. As a result, the public float of the Company would be reduced by 9.99%. However, the Investor has agreed to delay exercising the Option if the Company will have any public float problem after such exercise. Sinochem HK has agreed to take all such necessary action to allow the Investor to exercise such Option, subject to the minimum public float requirement being met.

The Company shall make further announcements in relation to any action taken in respect of the public float of its ordinary shares to ensure strict compliance with the Listing Rules.

The Directors consider that the Offering and the Option will (i) allow the Company to broaden its shareholder base and increase the liquidity of its ordinary shares, thereby providing the Company with better opportunities to raise funds through the local and international capital markets in the future; (ii) provide Qualifying Shareholders with the opportunity to further participate in and share the future growth potential of the Enlarged Group; and (iii) help to further raise the Company’s profile in the international markets and provide the Enlarged Group with a concrete foundation for future sustainable growth.

Use of proceeds from issue of new ordinary shares

The net proceeds of any issue of new ordinary shares pursuant to the Placing, after deducting relevant placing fees and expenses, and assuming (i) a Placing price per ordinary share of HK$0.10 (being the minimum Placing price) and (ii) that the maximum number of 3,900,000,000 Ordinary Shares are issued under the Placing (in both cases, subject to adjustment to take account of the effect of the Capital Reorganisation), are estimated to be approximately HK$365 million, which the Company presently intends to use as follows:

. as to approximately HK$183 million (representing approximately 50%), to invest in the Fertilizer Group’s upstream manufacturing facilities;
. as to approximately HK$110 million (representing approximately 30%), for the expansion of the Fertilizer Group’s distribution network; and
. as to the balance of approximately HK$72 million for working capital and other general corporate purposes.

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In the event that the Placing price is set at more than the minimum of HK$0.10 per ordinary share (subject to adjustment to take account of the effect of the Capital Reorganisation), the additional net proceeds will be applied for the uses and in the proportions set out above. To the extent that the net proceeds of the Placing attributable to the Company are not immediately used for the above purposes, the Directors currently intend to place such proceeds on short term deposits with banks and qualified financial institutions.

Waiver from strict compliance with the requirements of Rule 10.07(1)

Pursuant to Rule 10.07(1) of the Listing Rules, in the period commencing on the date of the listing document and ending on the date which is 6 months from the date on which dealings in the securities of a new applicant commence on the Stock Exchange, a controlling shareholder is prohibited from disposing (whether directly or indirectly) of or entering into any agreement to dispose of or otherwise create any options, rights, or interests or encumbrances in respect of any of the securities of the relevant company in respect of which he is or they are shown by that listing document to be the beneficial owner.

Sinochem HK will hold approximately 94.65% of the issued ordinary share capital of the Company immediately following the issue of the Consideration Shares (and prior to any Offering) and will therefore be the controlling shareholder of the Company upon Completion. Sinochem HK would ordinarily be subject to the restriction under Rule 10.07(1) of the Listing Rules and will be prohibited from disposing of shares pursuant to the Strategic Placing and the Preferential Offer. As a result, unless the Stock Exchange should grant a waiver to Sinochem HK, the proposed sale of up to an aggregate of 13,373,662,941 existing ordinary shares (the ‘‘Sale Shares’’) (subject to adjustment to take account of the Capital Reorganisation) by Sinochem HK pursuant to the Strategic Placing and the Preferential Offer would not be available.

Pursuant to Rule 7.11 of the Listing Rules, the Stock Exchange may be prepared to allow disposals of shares by controlling shareholders pursuant to preliminary arrangements and placings to be made before the start of dealings where necessary to comply with the requirement in Rule 8.08(1) that a minimum prescribed percentage of any class of listed securities must at all times be held by the public.

Sinochem HK has applied to the Stock Exchange for, and the Stock Exchange has granted, a waiver from strict compliance with the requirements of Rule 10.07(1) of the Listing Rules so as to allow Sinochem HK to offer the Sale Shares pursuant to the Preferential Offer and place shares prior to or contemporaneously with Completion pursuant to the Strategic Placing as described above on the basis that:

(1) the proposed arrangements pursuant to the Strategic Placing and Preferential Offer described in this circular are consistent with the spirit of Rule 7.11 of the Listing Rules and effectively form part of the asset injection pursuant to the Acquisition Agreement, without which the Company would be unable to comply with the requirement in Rule 8.08(1) of the Listing Rules;
(2) as the Acquisition is subject to the requirement of independent shareholder approval under Chapters 14 and 14A of the Listing Rules, minority shareholders in the Company are provided sufficient protection; and

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(3) details of the proposed arrangements for the Offering have been disclosed in this circular.

RELEVANT LISTING RULES REQUIREMENTS

Very substantial acquisition and connected transaction

As at the Latest Practicable Date, Sinochem HK, the vendor under the Acquisition Agreement, is interested in 778,477,633 Ordinary Shares, representing approximately 21.16% of the existing issued ordinary share capital of the Company and is therefore a substantial Shareholder, and hence a connected person, of the Company. The Acquisition constitutes a very substantial acquisition and a connected transaction of the Company under Chapters 14 and 14A of the Listing Rules and is therefore subject to the approval of the Independent Shareholders by poll at the SGM.

Voting by the Independent Shareholders at the SGM will be conducted by poll. Sinochem HK, Mr. Chu Yu Lin, David and their respective Associates will abstain from voting on resolutions which require the approval of the Independent Shareholders at the SGM.

Reverse takeover and new listing application

In addition, as the Acquisition will involve a change of control of the Company, the Acquisition also constitutes a reverse takeover of the Company under Rule 14.06(6) of the Listing Rules and the Company will be treated as a new listing applicant under Rule 14.54 of the Listing Rules if the Acquisition proceeds. As such, the Acquisition is subject to approval of the Company’s new listing application by the Listing Committee of the Stock Exchange and the application made by the Company must comply with all the requirements under the Listing Rules, including the requirements under Chapters 8 and 9 of the Listing Rules. The Fertilizer Group meets the requirements under Rule 8.05(1) of the Listing Rules and the Enlarged Group meets all the other conditions set out in Chapter 8 of the Listing Rules. The Company has made a new listing application to the Stock Exchange. The Listing Committee of the Stock Exchange has given in-principle approval of the new listing application of the Company.

IMPLICATIONS OF THE TAKEOVERS CODE AND WHITEWASH WAIVER

As at the Latest Practicable Date, Sinochem HK and its concert parties own approximately 21.16% of the existing issued ordinary share capital of the Company. Sinochem HK also holds 103 unlisted Preference Shares, representing all the outstanding Preference Shares. None of Sinochem HK or its concert parties have dealt in any securities of the Company in the 6 months prior to the date of the Announcement. Sinochem HK and its concert parties have confirmed that they will not deal in any securities of the Company before the SGM. Upon the issue of the Consideration Shares and on the basis that no Offering has taken place, Sinochem HK and its concert parties shall be interested in 5,127,847,763 New Shares or 51,278,477,633 Ordinary Shares if the Capital Reorganisation has not been given effect to on or before Completion, in either case representing approximately 94.65% of the issued ordinary share capital of the Company as enlarged by the issue of the Consideration Shares upon Completion. Not only would this level of voting rights give Sinochem HK effective control of general meetings of the Company, it may also be possible for Sinochem HK to increase its shareholdings without incurring any further obligation under Rule 26 of the Takeovers Code to make a general offer. As such, Sinochem HK will, upon Completion, be required to make a mandatory general offer for all the issued shares of

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the Company not already owned or agreed to be acquired by Sinochem HK and parties acting in concert with it under Rule 26.1 of the Takeovers Code unless a waiver from strict compliance with Rule 26.1 of the Takeovers Code is granted by the Executive.

Sinochem HK has made an application to the Executive for the granting of the Whitewash Waiver which, if granted, would be subject to the approval of the Independent Shareholders at the SGM by way of a poll. Sinochem HK, its Associates and concert parties, and Mr. Chu Yu Lin, David, his Associates and concert parties, which are parties involved in or interested in the Acquisition, are required to abstain from voting at the SGM in relation to the Acquisition and the Whitewash Waiver. If the Whitewash Waiver is granted by the Executive, Sinochem HK and parties acting in concert with it would not be required to make a mandatory offer which would otherwise be required as a result of the allotment and issue of the Consideration Shares pursuant to the Acquisition Agreement.

If the Whitewash Waiver is not granted, the Acquisition Agreement will lapse and the Acquisition will not proceed.

RELATIONSHIP WITH SINOCHEM HK, SINOCHEM CORPORATION AND NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS

Immediately after the issue of the Consideration Shares and on the basis that no Offering has taken place, Sinochem HK will own approximately 94.65% of the then issued ordinary share capital of the Company. As Sinochem Corporation beneficially owns 100% of the issued share capital of Sinochem HK, Sinochem Corporation will be the ultimate controlling shareholder of the Company on Completion. Sinochem Corporation is a connected person of the Company by virtue of it being the parent company of Sinochem HK. Upon Completion, various companies within the Fertilizer Group will become subsidiaries of the Company. On-going provision of services, sale and purchase of products, and leasing and trademark licencing arrangements are expected to take place between members (and their Associates) of the Sinochem Group (other than the Enlarged Group) and members of the Enlarged Group, which will constitute continuing connected transactions under the Listing Rules. Also, certain joint venture partners of the Fertilizer Group’s joint venture companies will become connected persons (as defined in the Listing Rules) of the Company, and any transactions between the joint venture companies and such connected persons will become connected transactions under the Listing Rules upon Completion. Some of these continuing connected transactions constitute Non-exempt Continuing Connected Transactions and are subject to approval by the Independent Shareholders at the SGM. The Acquisition is conditional on, among other things, the approval of the Non-exempt Continuing Connected Transactions by the Independent Shareholders. Details of the Continuing Connected Transactions are set out in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in this circular.

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Sinochem Corporation has also entered into the Non-competition Undertaking in favour of the Company. Pursuant to the Non-competition Undertaking, Sinochem Corporation has undertaken to the Company that, so long as:

(i) Sinochem Corporation directly or indirectly owns 30% or more of the issued share capital of the Company or such other lower percentage for the triggering of the mandatory general offer obligation under the Takeovers Code; and
(ii) the Company’s ordinary shares are listed on the Stock Exchange and/or any other stock exchanges,

Sinochem Corporation will not and will procure its subsidiaries (except for members of the Enlarged Group and Sinochem Corporation’s various investments and subsidiaries which are engaged in the production of fertilizers as stated in the Non-competition Undertaking) not to, without the prior consent of the Company, develop, operate or assist in operating, participate in or conduct any business which may compete with the Fertilizer Business, either on its own or jointly with or on behalf of any other person or company in the PRC. Further details regarding the Non-competition Undertaking are set out in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in this circular.

CAPITAL REORGANISATION

Overview

The Board also proposes to implement the Capital Reorganisation which comprises:

(i) the Capital Reduction;
(ii) the Share Consolidation;
(iii) an increase in the authorized share capital of the Company;
(iv) the Existing Share Premium Cancellation; and
(v) the Further Share Premium Cancellation.

Capital Reduction

The Board proposes that the Capital Reduction be effected in the following manners:

(a) the nominal value of all issued Ordinary Shares of HK$0.10 each will be reduced by HK$0.09 per Ordinary Share by cancelling an equivalent amount of paid-up capital per Ordinary Share so that the nominal value of each such Ordinary Share will be reduced from HK$0.10 to HK$0.01; and
(b) the entire credit arising from such reduction will be transferred to the contributed surplus account of the Company.

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Share Consolidation

The Directors also propose that, subject to and immediately upon the Capital Reduction taking effect, every 10 Reduced Shares of HK$0.01 each then in issue be consolidated into one New Share of HK$0.10.

Increase in authorised share capital

The existing authorized share capital of the Company is HK$1,000,000,000 divided into 6,840,000,000 Ordinary Shares of HK$0.10 each and 316 Preference Shares of HK$1,000,000 each. It is proposed that the authorized share capital of the Company be increased to HK$8,316,000,000, comprising 80,000,000,000 ordinary shares of HK$0.10 each and 316 Preference Shares of HK$1,000,000 each.

Existing Share Premium Cancellation

The Directors further propose that the entire balance standing to the credit of the share premium account of the Company as at 31 March 2004 be cancelled, and the credit arising from the Existing Share Premium Cancellation be transferred to the contributed surplus account of the Company.

Further Share Premium Cancellation

The Directors propose that, if Completion occurs following the implementation of the matters referred to in (i) to (iv) under the sub-paragraph headed ‘‘Capital Reorganisation — Overview’’ above, a further amount of HK$131,625,200, representing part of the share premium arising from the issue of the Consideration Shares, be cancelled and the credit arising from the Further Share Premium Cancellation be transferred to the contributed surplus account of the Company.

Utilization of credits

The credit arising from the Capital Reduction is expected to amount to approximately HK$331,154,845 on the basis of a total of 3,679,498,284 Ordinary Shares in issue as at the Latest Practicable Date and assuming no further Ordinary Shares will be issued between the Latest Practicable Date and the date on which the Capital Reduction becomes effective.

The entire amount standing to the credit of the Company’s share premium account as at 31 March 2004 was approximately HK$749,182,000 which will give rise to a credit of the same amount under the Existing Share Premium Cancellation.

If Completion occurs after the implementation of the matters referred to in (i) to (iv) under the sub-paragraph headed ‘‘Capital Reorganisation — Overview’’ above, the issue of 5,050,000,000 Consideration Shares at the Issue Price of HK$1.00 each will result in a further share premium of HK$4.545 billion. Pursuant to the Further Share Premium Cancellation, a credit of HK$131,625,200 will arise from the cancellation of part of such further share premium.

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All amounts representing credits from the Capital Reduction, the Existing Share Premium Cancellation and the Further Share Premium Cancellation will be transferred to the contributed surplus account of the Company where it may be utilised as the Board may direct in accordance with the Bye-laws and all applicable laws.

As at 31 March 2004, the balance standing to the credit of the Company’s contributed surplus account amounted to approximately HK$1,114,686,000. Such balance, when combined with the aggregate credits to be transferred to the contributed surplus account as described above, is expected to amount to approximately HK$2,326,648,000. The Directors intend to utilise all such sums in the contributed surplus account to set off against an equivalent amount of the accumulated losses of the Company as at 31 March 2004 which stood at approximately HK$2,326,648,000. On the bases described above and assuming Completion occurs after the implementation of the matters referred to in (i) to (iv) under the sub-paragraph headed ‘‘Capital Reorganisation — Overview’’ above, the entire accumulated losses of the Company as at 31 March 2004 are expected to be eliminated in full following Completion.

If Completion fails to occur following the Capital Reorganisation, the Further Share Premium Cancellation will not be implemented and the resultant balance standing in the contributed surplus account is expected to amount to approximately HK$2,195,022,845 in aggregate. The Directors intend to utilise such sum to partially eliminate an equivalent amount of the accumulated losses of the Company as at 31 March 2004.

Effect of the Capital Reorganisation

The existing authorized share capital of the Company is HK$1,000,000,000 divided into 6,840,000,000 Ordinary Shares of HK$0.10 each and 316 Preference Shares of HK$1,000,000 each, of which 3,679,498,284 Ordinary Shares and 103 Preference Shares were in issue as at the Latest Practicable Date. Upon the implementation of the matters referred to in (i) to (iv) under the paragraph headed ‘‘Capital Reorganisation — Overview’’ above but prior to Completion, the authorised share capital of the Company will be increased to HK$8,316,000,000, divided into 80,000,000,000 New Shares of HK$0.10 each and 316 Preference Shares of HK$1,000,000 each, of which 367,949,828 New Shares of HK$0.10 each and 103 Preference Shares will be in issue (assuming no further Ordinary Shares are issued after the Latest Practicable Date and all outstanding Preference Shares have not been redeemed). Other than the expenses incurred in relation to the Capital Reorganisation and the elimination of the accumulated losses of the Company, the implementation thereof will not, by itself, alter the underlying assets, business operations, management or financial position of the Company. The Directors believe that the Capital Reorganisation will not have any material adverse effect on the financial position of the Company and its subsidiaries.

The Ordinary Shares are currently traded in board lots of 2,000 Ordinary Shares. The New Shares will be traded in board lots of 2,000 New Shares and will rank pari passu in all respects with each other. The Share Consolidation will not result in any change in the relative rights among the Shareholders. Any fractions which arise upon the Share Consolidation becoming effective will be aggregated and sold for the benefit of the Company.

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Reasons for the Capital Reorganisation

The audited financial statements of the Company as at 31 March 2004 showed that the Company had accumulated losses of approximately HK$2,326,648,000. The Directors believe that it is unlikely that the Company will generate sufficient profits in the immediate future to eliminate this deficit and that it would be inappropriate for the Company to pay dividends while the deficit remains. The Directors propose the Capital Reorganisation be adopted by the Company such that the amount arising from such reduction and cancellation may be applied to eliminate, in full or in part, the accumulated losses.

In addition, the proposed increase in the authorised share capital of the Company forms one of the Conditions to Completion and, if implemented, will enable the Company to issue the Consideration Shares as contemplated under the Acquisition Agreement, and any new ordinary shares pursuant to the Placing. Apart from the Consideration Shares and any new ordinary shares of the Company that might be issued under the Placing, the Directors have no present intention of issuing any part of the authorised capital of the Company following its increase.

The Directors expect that upon the Share Consolidation taking effect, the trading value of the New Shares will be in the preferred range from the perspective of international investors.

Conditions of the Capital Reorganisation

The Capital Reorganisation is conditional on:

(a) the passing by the Shareholders at the SGM of the necessary resolutions approving the Capital Reduction, the Share Consolidation, the increase in authorised share capital of the Company, the Existing Share Premium Cancellation and, conditional on Completion taking place, the Further Share Premium Cancellation and the transfer of all credits arising to the contributed surplus account of the Company; and
(b) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the New Shares in issue following the Share Consolidation.

Trading arrangements

Upon the Share Consolidation becoming effective, all existing blue share certificates for any number of Ordinary Shares in issue immediately before the effective date of the Share Consolidation will be deemed to be share certificates of the Company and will be effective as documents of title. New pink share certificates of the Company will be issued for the New Shares. Dealings in the New Shares are expected to commence on Wednesday, 6 July 2005. Parallel trading arrangements will be established on the Stock Exchange for dealings in the New Shares in the form of the existing blue share certificates and in the form of the new pink share certificates. The trading arrangements proposed for dealings in the New Shares are set out as follows:

(i) with effect from 9: 30 a.m. on Wednesday, 6 July 2005, the original counter for trading in Ordinary Shares in existing board lots of 2,000 Ordinary Shares will be closed temporarily. A temporary counter for trading in New Shares represented by

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existing blue share certificates in board lots of 200 New Shares will be established. Every existing certificate for whatever number of Ordinary Shares will be deemed to be a certificate, and will be effective as a document of title valid for settlement and delivery for trading transacted from 9: 30 a.m. on Wednesday, 6 July 2005 to 4: 00 p.m. on Wednesday, 10 August 2005 (both days inclusive) for New Shares in the amount equal to one tenth of that number of existing Ordinary Shares. The existing blue share certificates for the Ordinary Shares can only be traded at this temporary counter;

(ii) with effect from 9: 30 a.m. on Wednesday, 20 July 2005, the original counter will be reopened for trading in the New Shares in board lots of 2,000 New Shares. Only new pink share certificates for the New Shares can be traded at this counter;
(iii) with effect from 9: 30 a.m. on Wednesday, 20 July 2005 to 4: 00 p.m. on Wednesday, 10 August 2005 (both days inclusive) there will be parallel trading at the counters mentioned in (i) and (ii) above; and
(iv) the temporary counter for trading in New Shares represented by existing blue share certificates in board lots of 200 New Shares will be removed after the close of trading on Wednesday, 10 August 2005. Thereafter, trading will only be in New Shares represented by new pink share certificates in board lots of 2,000 New Shares and the existing blue share certificates for the Ordinary Shares will cease to be marketable and will not be acceptable for dealing and settlement purposes.

Subject to the Share Consolidation becoming effective on or about Wednesday, 6 July 2005, Shareholders may, during Wednesday, 6 July 2005 to Monday, 15 August 2005 (both days inclusive), submit existing blue share certificates for the Ordinary Shares to the branch share registrar of the Company in Hong Kong, Secretaries Limited at Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, for exchange, at the expense of the Company, for new pink share certificates for the New Shares. Thereafter, certificates for the Ordinary Shares will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each share certificate for the Ordinary Shares cancelled or each new share certificate issued for the New Shares, whichever number of certificates cancelled/issued is higher. Nevertheless, certificates for the Ordinary Shares will continue to be good evidence of legal title and may be exchanged for certificates for the New Shares at any time.

It is expected that new certificates for the New Shares will be available for collection within a period of 10 business days after the submission of the existing share certificates for the Ordinary Shares to the branch share registrar of the Company in Hong Kong, Secretaries Limited, for exchange. Unless otherwise instructed, new share certificates will be issued in board lots of 2,000 New Shares each. New share certificates for the New Shares will be pink in colour to distinguish them from the existing share certificates for the Ordinary Shares which are blue in colour.

Odd lots of New Shares may arise as a result of the Share Consolidation. In order to alleviate the difficulties in trading odd lots of New Shares, the Company has appointed BOCI Securities Limited to act as its agent to match, on a ‘‘best effort’’ basis, the sale and purchase of odd lots of New Shares arising from the Share Consolidation from Wednesday, 20 July 2005 up to and including Wednesday, 10 August 2005. This arrangement is to facilitate Shareholders who wish to dispose of or top up their odd lots of New Shares. Shareholders

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who wish to take advantage of this facility should contact Mr. Law Pak Hong, Vice President, Trading Department of BOCI Securities Limited of Suites 1601–1607, 16th Floor, Cityplaza One, 111 King’s Road, Taikooshing, Hong Kong (Tel: 2867 6663) during the period. Shareholders should note that the matching of the sale and purchase of odd lots of New Shares is not guaranteed and will depend on there being adequate amounts of odd lots of New Shares available for such matching.

Shareholders are recommended to consult their licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser if they are in any doubt about the facility described above.

Listing and dealings

An application has been made to the Stock Exchange for the listing of, and permission to deal in, the New Shares in issue upon the Share Consolidation becoming effective.

No part of the share capital of the Company is listed or dealt in on any stock exchanges other than the Stock Exchange and no such listing or permission to deal is being or is currently proposed to be sought from any other stock exchanges.

Dealings in the New Shares will be subject to Hong Kong stamp duty.

Subject to the granting of listing of, and permission to deal in, the New Shares on the Stock Exchange, the New Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the New Shares on the Stock Exchange or such other date as may be determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

Adjustments to other securities

Preference Shares

As at the Latest Practicable Date, there were 103 Preference Shares in issue held by Sinochem HK. These Preference Shares were convertible into Ordinary Shares by no later than the 7th business day before their maturity date of 27 February 2005, which is the third anniversary from their date of issue. Such conversion rights have not been exercised and have lapsed. As a result, no adjustment will be required to be made to the conversion price under the Preference Shares by reason of the Capital Reorganisation. According to the terms of the Preference Shares, unless previously converted into Ordinary Shares, all but not part of the Preference Shares may be redeemed at their aggregate nominal value of HK$103 million on the maturity date at the option of the holder or the Company. Sinochem HK has requested the redemption of all of the 103 Preference Shares held by it. The redemption amount of HK$103 million will be fully settled upon Completion from internal resources following Completion. Please refer to the sub-paragraph headed ‘‘Treatment of Preference Shares’’ in the ‘‘Letter from Sinochem HK’’ in this circular.

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Other Securities

As at the Latest Practicable Date, the Company has no outstanding Share Options or other securities exercisable or convertible into ordinary shares of the Company.

GENERAL MANDATE TO ISSUE SHARES AND THE REPURCHASE MANDATE

At the annual general meeting of the Company held on 30 August 2004, ordinary resolutions were passed granting to the Directors general mandates to allot, issue and deal with Ordinary Shares not exceeding 20%, and to repurchase Ordinary Shares not exceeding 10%, in each case, of the aggregate nominal amount of the issued ordinary share capital of the Company as at that date. These general mandates have not been refreshed or utilised since the time they were granted. No fund raising activity has been conducted by the Company in the 12 months preceding the Latest Practicable Date.

In accordance with the Listing Rules and the terms of the mandates referred to above, these mandates will lapse on the date on which the authorities given under these mandates are revoked or varied by ordinary resolutions of the Shareholders in general meeting.

At the SGM, ordinary resolutions will be proposed such that, conditional on Completion taking place:

a general mandate will be granted to the Directors to allot, issue and deal with ordinary shares of the Company of up to 20% of (a) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of the relevant resolution granting this mandate and, subject to the Share Consolidation taking effect, as adjusted to reflect the effects of the Share Consolidation; and (b) the nominal amount of the ordinary shares of the Company to be issued pursuant to the Acquisition Agreement;
the Repurchase Mandate will be granted to the Directors; and
the general mandate to issue ordinary shares as described in paragraph 1 above will be extended by adding to it the aggregate number of ordinary shares repurchased under the Repurchase Mandate.

Under Rule 13.36(4) of the Listing Rules, the proposed granting of the general mandate to issue shares on terms described in paragraphs 1 and 3 above constitutes a refreshment of the existing general mandate to issue shares granted to the Directors at the annual general meeting of the Company held on 30 August 2004. In accordance with Rule 13.36(4) of the Listing Rules, voting on the resolutions relating to the proposed general mandate to issue shares and extension of that mandate will be conducted by poll and the Directors and their respective Associates will abstain from voting on these resolutions.

The Directors have no immediate plans to issue or repurchase any ordinary shares of the Company pursuant to the authorities to be granted to them under the relevant mandates, but consider that the refreshment of the general mandate to issue shares would provide flexibility to the Company in raising additional funding if suitable opportunities arise prior to the expiry of such general mandate at the next annual general meeting of the Company. Where necessary, to facilitate any issue of shares or other securities pursuant to the general mandate, the Company will seek a waiver from the Stock Exchange from strict compliance

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with Rule 10.08 of the Listing Rules, which prohibits the Company from issuing any further shares or convertible securities within six months from the date on which its ordinary shares first commence dealing on the Stock Exchange.

An explanatory statement required by the Listing Rules to be sent to the Shareholders in connection with the Repurchase Mandate is set out in Appendix VII to this circular. The explanatory statement contains all information reasonably necessary to enable the Shareholders to make an informed decision on whether to vote for or against the relevant resolution at the SGM.

CHANGE OF FINANCIAL YEAR END

Upon Completion, it is the Company’s intention to change the financial year end of the Enlarged Group from 31 March to 31 December going forward to conform with the financial year end of the Fertilizer Group, to provide a consistent accounting period for the Enlarged Group in order to consolidate the results of the Fertilizer Group with those of the Group. A resolution will be proposed at the SGM for approval of this change by the Shareholders.

Pursuant to Rule 8.21(1)(b) of the Listing Rules, the Stock Exchange will not normally consider an application for listing from a new applicant which intends to change the period of its financial year during the period of the profit forecast, if any, or the current financial year, whichever is the longer period. Pursuant to Rule 14.54 of the Listing Rules, the Company is treated as a new listing applicant by reason of the Acquisition. Accordingly, the requirements under Rule 8.21(1)(b) of the Listing Rules will apply to the Company unless a waiver from strict compliance with such requirements is obtained from the Stock Exchange. An application has been made to the Stock Exchange for such a waiver, and the Stock Exchange has granted the waiver, based upon the main reasons described below.

(a) Pursuant to the Acquisition, the Company will acquire the Fertilizer Group, the extent of the assets and operations of which far exceeds those of the Company. (The financial results and positions of the Group relative to those of the Fertilizer Group for their respective preceding financial years are illustrated alongside each other in the unaudited pro forma financial information of the Enlarged Group in Appendix III to this circular.) Upon Completion, members of the Fertilizer Group will become subsidiaries of the Company and their financial results are required to be consolidated into the financial statements of the Company. Given the comparative scale of the operations of the Fertilizer Group and the Group, if the accounting period of the Company were to be inconsistent with that of the Fertilizer Group, this consolidation exercise is expected to be disproportionately complex and costly and the Company’s accounts might not fairly and properly present the financial results and position of the Enlarged Group in a manner that would be meaningful to the Shareholders and the investing public. Accordingly, it would be unduly burdensome and impracticable for the Enlarged Group to continue to prepare its accounts on the basis that the year end dates of the Company and its principal subsidiaries are different.
(b) The Fertilizer Group has its principal businesses and operations in the PRC. According to PRC legal advice, members of the Fertilizer Group established in the PRC are required to adopt a financial year end of 31 December to comply with the relevant requirements under PRC laws. Accordingly, it would not be feasible for members of the Fertilizer Group to alter their financial year end to complement that

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of the Company. The only option available to the Company to resolve the difficulties associated with differing financial year end dates, as highlighted above, would be to change the Company’s financial year end date to 31 December.

(c) According to the Management of the Fertilizer Group, its sales of fertilizer products to end-users are seasonal in nature and, in the northern PRC, the Fertilizer Group generates a higher proportion of its turnover in spring and autumn when fertilizer sales are at their peak, while in the southern PRC such sales peaks are less pronounced. As a result of these seasonal fluctuations, the Fertilizer Group’s operating results may vary substantially between fiscal quarters. Given these seasonal factors affecting the Fertilizer Business, if the results of the Fertilizer Group were to be consolidated into those of the Company based on a financial year end of 31 March, the consolidated financial information of the Enlarged Group might not accurately present the year on year financial performance of the Fertilizer Group by comparison to its results for preceding periods.
(d) The Company has been a listed issuer on the Stock Exchange since 1996 and has adopted a financial year end of 31 March since listing. The requirements of Rule 8.21 of the Listing Rules apply solely because the Company is deemed as a new listing applicant as a result of its entry into of the Acquisition Agreement in January 2005. Given these circumstances, the Company was not afforded a reasonable opportunity prior to its listing application to ensure both compliance with Rule 8.21(1) of the Listing Rules and a consistent accounting period for itself and members of the Enlarged Group which would become its principal subsidiaries following Completion.
(e) The results of the Fertilizer Group during the Track Record Period have been prepared and are presented in this circular by reference to a financial year end of 31 December for each of the preceding three financial years. Since the principal assets and operations of the Company following Completion will comprise the Fertilizer Group, a change of the Company’s financial year end to 31 December would allow the public to better assess the future performance of the Enlarged Group on a basis that is consistent with that adopted during the Track Record Period.

Assuming the above change becomes effective, the Company will publish its annual report for the year ended 31 March 2005 on or before 31 July 2005. In addition, the Company will issue its interim results announcement for the nine months ended 30 September 2005 on or before 31 December 2005, and will publish the first set of audited financial statements of the Company, after the change of the financial year end date (for the year ending 31 December 2005), on or before 30 April 2006, in accordance with the Listing Rules.

SGM

Your attention is hereby drawn to pages N-1 to N-7 of this circular where you will find a notice of the SGM to be held at Atrium Room, Level 39, Island Shangri-La Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong, on Tuesday, 5 July 2005 at 8: 30 a.m.

At the SGM, resolutions will be proposed to approve, inter alia, the Proposals.

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LETTER FROM THE BOARD

Sinochem HK, a substantial Shareholder which holds approximately 21.16% of the existing issued ordinary share capital of the Company as at the Latest Practicable Date, Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, who together held approximately 10.25% of the existing issued ordinary share capital of the Company as at the Latest Practicable Date, and their respective Associates will abstain from voting on resolutions to be proposed at the SGM which require the approval of the Independent Shareholders. Sinochem HK and Mr. Chu Yu Lin, David (and their respective Associates and concert parties) are parties interested or taken to be interested in the Acquisition and are therefore required to abstain from voting on the resolution approving the Acquisition, the Whitewash Waiver and the Non-exempt Continuing Connected Transactions at the SGM. Sinochem HK, Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, and their respective Associates are also required to abstain from voting on the resolution approving the specific mandate to issue new ordinary shares pursuant to the Placing. Pursuant to Rule 13.36(4) of the Listing Rules, Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, both executive Directors, are required to abstain from voting on the resolutions approving the proposed general mandate to issue shares and the extension of that mandate. Each of Sinochem HK and Mr. Chu Yu Lin, David (and their respective Associates) have otherwise indicated their intention to vote in favour of the resolutions on which they are respectively permitted to vote approving the other aspects of the Proposals. Voting on the resolutions to approve the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions, the specific mandate to issue new ordinary shares pursuant to the Placing, and the proposed general mandate to issue shares and the extension of that mandate will be conducted by poll.

No voting trust or other agreement or arrangement or understanding (other than an outright sale) has been entered into by or was binding upon Sinochem HK and/or any of its Associates as at the Latest Practicable Date, whereby Sinochem HK and/or its Associates has/have or may have temporarily or permanently passed control over the exercise of the voting rights in respect of its/their Ordinary Shares to a third party, either generally or on a case-by-case basis.

In accordance with Rule 13.36(4) of the Listing Rules, the Directors and their respective Associates will abstain from voting on the resolutions relating the proposed general mandate to issue shares and extension of that mandate as described in the section headed ‘‘General mandate to issue shares and the Repurchase Mandate’’ above. As at the Latest Practicable Date, apart from Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, both executive Directors, who together held an aggregate of 377,180,297 Ordinary Shares and so far as the Company is aware having made all reasonable enquiries, none of the Directors and their respective Associates held any Ordinary Shares. No voting trust or other agreement or arrangement or understanding (other than an outright sale) has been entered by or was binding upon Mr. Chu Yu Lin, David or Mrs. Chu Ho Miu Hing as at the Latest Practicable Date, whereby either of them has or may have temporarily or permanently passed control over the exercise of the voting right in respect of his/her Ordinary Shares to a third party, either generally or on a case-by-case basis.

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you intend to attend the SGM in person, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the branch share registrar and transfer office of the Company in Hong Kong, Secretaries Limited, Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible

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but in any event, not less than 48 hours before the time appointed for holding the SGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting or any adjourned meeting should you so wish.

Pursuant to the Bye-laws, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the declaration of the results of the show of hands or on the withdrawal of any other demand for poll) a poll is demanded (i) by the Chairman of the meeting; or (ii) by at least three Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or (iii) by a Shareholder or Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or (iv) by a Shareholder or Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

Voting on the resolutions approving the Acquisition, the Whitewash Waiver, the Nonexempt Connected Transactions, the general mandates to issue shares and the extension of that mandate will be by poll.

RECOMMENDATIONS

The Independent Board Committee, comprising Mr. Ko Ming Tung, Edward, Dr. Li Ka Cheung, Eric and Dr. Tang Tin Sek, has been appointed to advise the Independent Shareholders in relation to the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares. Somerley has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. Accordingly, your attention is drawn to the letter of advice from the Independent Board Committee set out on pages 112 to 113 of this circular, which contains its recommendation to the Independent Shareholders, and the letter from Somerley set out on pages 114 to 151 of this circular, which contains its advice to the Independent Board Committee and the Independent Shareholders.

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LETTER FROM THE BOARD

On the bases of the information set out in this circular, the Directors consider that the passing of the proposed resolutions for (a) the implementation of the Capital Reorganisation; (b) granting to the Directors of the General Mandates as described in the paragraph headed ‘‘General mandate to issue shares and the Repurchase Mandate’’ above; (c) the change of financial year end of the Enlarged Group to 31 December; and (d) the grant of a specific mandate to authorise the Directors to issue any new ordinary shares of the Company under the Placing are in the interests of the Company and the Shareholders as a whole. The Directors therefore recommend the Shareholders to vote in favour of these resolutions as set out in the notice of the SGM.

FURTHER INFORMATION

Your attention is drawn to the other sections and appendices of the circular, which contain further information on the Fertilizer Group, financial and other information of the Group and the Fertilizer Group and other information required to be disclosed in this circular under the Takeovers Code and the Listing Rules.

Yours faithfully, For and on behalf of the Board Sinochem Hong Kong Holdings Limited SONG Yu Qing Deputy Chairman and Chief Executive Officer

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LETTER FROM SINOCHEM HK

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SINOCHEM HONG KONG (GROUP) COMPANY LIMITED

(Incorporated in Hong Kong with limited liability)

Registered address: 47th Floor, Office Tower Convention Plaza 1 Harbour Road Wanchai Hong Kong

13 June 2005

Dear Sir/Madam,

ACQUISITION FROM SINOCHEM HONG KONG (GROUP) COMPANY LIMITED OF THE FERTILIZER GROUP

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REVERSE TAKEOVER INVOLVING AN APPLICATION FOR NEW LISTING AND AN APPLICATION FOR THE WHITEWASH WAIVER CAPITAL REORGANISATION

INTRODUCTION

It was jointly announced by the Company and Sinochem HK in the Announcement that, on 28 January 2005, the Company (as purchaser) entered into the Acquisition Agreement with Sinochem HK (as vendor) for the acquisition of the entire issued share capital of the Fertilizer Company. The consideration for the Acquisition of HK$5,050 million will be satisfied in full by the allotment and issue of 5,050,000,000 Consideration Shares to Sinochem HK at the Issue Price of HK$1.00 per Consideration Share. If the Capital Reorganisation has not been given effect to on or before Completion, the parties have agreed that the number of Consideration Shares shall be adjusted to 50,500,000,000 new Ordinary Shares and the Issue Price shall be HK$0.10 per Ordinary Share. In either case, the number of Consideration Shares represent approximately 93.21% of the enlarged issued ordinary share capital of the Company following the issue of the Consideration Shares (on the basis that no Offering has taken place).

As Sinochem HK and its concert parties is expected to become the new controlling shareholder of the Company, we now write to provide you with further details of our background, our future intentions regarding the Enlarged Group and the new Directors proposed to be appointed to the Board.

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LETTER FROM SINOCHEM HK

BACKGROUND OF SINOCHEM CORPORATION AND SINOCHEM HK

Sinochem Corporation is a state-owned enterprise under the supervision of SASAC. Founded as a state-owned import/export company in China in 1950 and formerly known as the China National Chemicals Import & Export Corporation, Sinochem Corporation is currently one of the oldest and largest state-owned conglomerates in the PRC, with operations in core businesses such as petroleum, fertilizer, rubber, plastic, chemical products, and inbound/ outbound trade. It also expanded into business areas including finance, insurance, logistics and real estates. In 2002, the Sinochem Group had total sales of approximately US$18.76 billion (equivalent to approximately RMB155.15 billion) and realized net profit of approximately US$101.29 million (equivalent to approximately RMB837.67 million).

Since 1998, the Sinochem Group has adopted a more pro-active attitude in its expansion strategy and has established its core strategies in petroleum, agriculture related products, chemical products, financial service and high-tech industries.

Sinochem HK is an investment holding company wholly-owned by Sinochem Corporation and incorporated under the laws of Hong Kong with limited liability. As at the Latest Practicable Date, Sinochem HK held 778,477,633 Ordinary Shares and 103 Preference Shares. It subscribed for 250,000,000 Ordinary Shares pursuant to a placing conducted by the Company in July 2001. Sinochem HK acquired a further 528,477,633 Ordinary Shares and 103 Preference Shares (together the ‘‘Relevant Shares’’) from Mr. Chu Yu Lin, David and his Associate pursuant to the exercise on 2 February 2004 of a call option granted to it by Mr. Chu and his Associate on 10 December 2003. The purchase price of HK$53,586,000 for the Relevant Shares was satisfied by setting off against the total amount outstanding under a loan of HK$53,586,000 advanced by Sinochem HK to Mr. Chu Yu Lin, David pursuant to a loan agreement dated 14 November 2003, which was secured by share charges over the Relevant Shares. All interest accrued on such loan was waived by Sinochem HK pursuant to the terms of the loan agreement and the relevant call option agreement. As a result of the exercise of the call option and the discharge of the loan, the share charges granted to Sinochem HK by Mr. Chu Yu Lin, David and his Associate over the Relevant Shares were effectively released.

THE FERTILIZER BUSINESS AND THE FERTILIZER GROUP

Details of our Fertilizer Business, the senior management and the financial information of the Fertilizer Group are set out in the sections headed ‘‘Information on the Fertilizer Group’’, ‘‘Directors and senior management’’ and ‘‘Financial information — the Fertilizer Group’’ in this circular.

OUR INTENTIONS FOR THE ENLARGED GROUP

Existing business of the Group

We share the same view of the Directors that going forward, the Company’s resources will be focused on the PRC fertilizers and agricultural related products sector. The Company will be the fertilizer flagship of Sinochem Corporation. The Fertilizer Group will become the principal assets and operations of the Company.

It is our intention that the existing business and operations of the Company will continue immediately upon Completion. A detailed evaluation of the existing business and operation of the Group, including its existing employees and human and other resources will be conducted

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LETTER FROM SINOCHEM HK

after Completion. Any plan in relation to the future treatment of the existing assets of the Group or the continued employment of its employees will depend on the outcome of such evaluation. No definite plan has been decided as at the Latest Practicable Date.

We and the Company will comply with all necessary disclosure and/or Shareholders’ approval requirements in respect of any future plans for the existing business and assets of the Group.

Treatment of the Preference Shares

As previously announced in the Announcement, as at the Latest Practicable Date, we held 103 Preference Shares, representing all of the outstanding Preference Shares. Pursuant to the terms of the Preference Shares, unless previously converted into Ordinary Shares, all but not part of the Preference Shares may be redeemed at their aggregate nominal value of HK$103 million on the maturity date, being 27 February 2005. We have requested the redemption of all of the outstanding Preference Shares. The redemption amount of HK$103 million will be fully settled upon Completion from internal resources following the Completion.

Directors proposed to be appointed upon Completion

Upon Completion and at the earliest time permitted under Rule 7 of the Takeovers Code, Sinochem HK intends to nominate Mr. Du Ke Ping and Dr. Chen Guo Guang, who are members of the senior management of the Fertilizer Group for appointment as new executive and non-executive Directors respectively. Biographical details of both Mr. Du and Dr. Chen are set out in the section headed ‘‘Directors and senior management’’ in this circular.

THE PREFERENTIAL OFFER

In order to provide the Qualifying Shareholders with the opportunity to further participate in and share the future growth potential of the Enlarged Group, Sinochem HK is proposing to offer to the Qualifying Shareholders part of the Consideration Shares on a preferential basis. Qualifying Shareholders will be invited to apply for an aggregate of 7,571,521,062 Reserved Shares (subject to adjustment to take account of the Capital Reorganisation) representing approximately 13.04% of the enlarged issued ordinary share capital of the Company on Completion and completion of the Placing, pursuant to the Preferential Offer.

Subject to the approval of the Proposals by the Independent Shareholders, a prospectus will be issued within 10 days after the SGM to give Qualifying Shareholders more detailed information on the Preferential Offer. An application form will also be dispatched to each Qualifying Shareholder with an Assured Entitlement together with the prospectus. The following are the main terms of the Preferential Offer:

Qualifying Shareholders

All Qualifying Shareholders are entitled to participate in the Preferential Offer.

Assured Entitlements of Qualifying Shareholders to Reserved Shares are not transferable and there will be no trading in nil-paid entitlements on the Stock Exchange. Any Reserved Shares not taken up by the Qualifying Shareholders will be either:

(i) retained by Sinochem HK; or

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LETTER FROM SINOCHEM HK

(ii) reallocated under the Placing to institutional, professional and other third party investors;

or a combination of the above subject, in each case, to the overriding requirement that the Company complies with the provisions of Rule 8.08 of the Listing Rules.

The documents to be issued in connection with the Preferential Offer will not be registered under applicable securities legislation of any jurisdiction other than Hong Kong. Accordingly, no Reserved Shares are being offered to Overseas Shareholders and no application forms will be sent to such persons. Applications will not be accepted from Overseas Shareholders or persons who are acting for the benefit of Overseas Shareholders. No applications will be accepted from Shareholders who would not constitute members of the public for the purposes of Rule 8.08 of the Listing Rules.

Entitlement

The Preferential Offer is proposed to be made to the Qualifying Shareholders on the following basis:

. If the Share Consolidation does not take effect, Qualifying Shareholders will be invited to purchase ordinary shares on the basis of an estimated Assured Entitlement of three Reserved Shares (being, in this case, Ordinary Shares) for every Ordinary Share held by Qualifying Shareholders on the Record Date at a price of HK$0.10 per Reserved Share (together with applicable brokerage, fees or levies).
. If the Share Consolidation takes effect, Qualifying Shareholders will be invited to purchase ordinary shares on the basis of an estimated Assured Entitlement of three Reserved Shares (being, in this case, New Shares) for every New Share held by Qualifying Shareholders, such New Shares to be calculated based on adjustment made to the number of Ordinary Shares held by them on the Record Date to take account of the effects of the Share Consolidation (and, for the purpose of such adjustment, fractional shares arising from the Share Consolidation will be disregarded), at a price of HK$1.00 per Reserved Share (together with applicable brokerage, fees or levies).

Offer Price

Qualifying Shareholders may purchase Reserved Shares offered to them on an assured basis at a price per Reserved Share equal to the Issue Price at which the Consideration Shares will be issued to us pursuant to the Acquisition (subject to adjustment to take account of the effect of the Capital Reorganisation).

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LETTER FROM SINOCHEM HK

Total number of Reserved Shares offered

A total of 7,571,521,062 Reserved Shares are being offered to the Qualifying Shareholders (subject to adjustment to take into account the effect of the Capital Reorganisation). The Assured Entitlements may represent ordinary shares not in a multiple of a full board lot of 2,000 ordinary shares and dealings in odd lot ordinary shares may be at below their prevailing market price.

Qualifying Shareholders will be entitled to apply for a number of Reserved Shares which is equal to or less than his or her Assured Entitlement, but will not be entitled to apply for a number of Reserved Shares which is greater than his or her Assured Entitlement. Any excess Reserved Shares resulting from Qualifying Shareholders with an Assured Entitlement declining to take up their Assured Entitlements will be dealt with as set out in the paragraph headed ‘‘Qualifying Shareholders’’ above.

THE STRATEGIC PLACING

(i) agreed to sell 5,802,141,879 ordinary shares (subject to adjustment to take into account the effect of the Capital Reorganisation) to the Investor, representing 9.99% of the enlarged issued ordinary share capital of the Company upon completion of the Strategic Placing at the lower of (a) the institutional ‘‘bookbuilding’’ price in the Placing; and (b) 15 times of the forecast consolidated profit of the Enlarged Group attributable to the Shareholders for the year ending 31 December 2005 as stated in this circular divided by the expected number of ordinary shares outstanding as at completion of the Strategic Placing; and
(ii) granted the Option to the Investor to acquire from Sinochem HK up to a further 5,813,757,778 ordinary shares (subject to adjustment to take into account the effect of the Capital Reorganisation), representing 10.01% of the enlarged issued ordinary share capital of the Company upon completion of the Strategic Placing at the weighted average of the daily closing price per ordinary share on the Stock Exchange during the 10 consecutive trading days immediately prior to the exercise date. Pursuant to the terms of the strategic placing agreement, the Investor has confirmed that it will not be entitled to exercise the Option, in whole or in part, within the first six months from the date of completion of the Strategic Placing. The Investor has agreed to delay exercising the Option if the Company will have any public float problem after any such exercise. Sinochem HK has agreed to take all such necessary action to allow the Investor to exercise such Option, subject to the minimum public float requirement being met. The Option may be exercised in whole or in part until the third anniversary of the date of completion of the Strategic Placing.

The Investor has also agreed not to purchase any ordinary shares of the Company within the first six months from the date of completion of the Strategic Placing. The Investor has undertaken not to offer, sell, pledge, mortgage, contract to sell, grant or agree to grant any right to purchase, lend, or otherwise howsoever transfer or dispose of any part of the interest

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in the shares acquired under (i) above for a period of three years from the completion of the sale and purchase of such shares under the strategic placing agreement, and in respect of the shares which it may acquire under the Option, until the later of the expiry of the three years period referred to above or the first year after the completion of the relevant exercise of the Option.

The strategic placing agreement contains certain representations and warranties on the part of Sinochem HK and the Investor, including the representation and warranty on the part of Sinochem HK as to the accuracy and completeness of certain parts of this circular (primarily relating to information concerning the Fertilizer Group). Sinochem HK has also agreed to use it best efforts to ensure that the Company will not issue shares other than pursuant to, among others, an offer of shares to shareholders pro-rata to their shareholdings, a bona fide underwritten offering or institutional or private offering in which the price is at least 90% of the then current market value per share, any placement of shares in which the Investor has the right to participate up to its pro-rata interest in the Company, and shares issued under an employees’ stock option scheme and any scrip dividend scheme. It is expected that the Investor will have a representative on the Board upon completion of the strategic placing agreement and will have another representative on the Board upon full exercise of the Option aforementioned. The strategic placing agreement may be terminated by either Sinochem HK or the Investor if (i) there is any law or any governmental authority takes any action restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated in the agreement or (ii) the other party has materially breached any representation, warranty, covenant or agreement contained in the strategic placing agreement which breach has not been cured (or is not capable of being cured) within the period stipulated in the agreement or (iii) if closing of the agreement shall not have occurred by 30 October 2005. Sinochem HK has applied to the SFC for, and the SFC has granted, its consent for Sinochem HK to enter into the strategic placing agreement prior to the SGM pursuant to paragraph 3(b) of schedule VI of the Takeovers Code.

The Investor, an Independent Third Party, is a corporation incorporated in Canada with shares listed on the Toronto Stock Exchange and the New York Stock Exchange. The Investor is one of the world’s largest integrated fertilizer and related industrial and feed products companies, and the world’s largest producer of potash fertilizer by capacity. During the Track Record Period, Canpotex Limited, a company equally owned by the Investor and two other investors, supplied the Fertilizer Group with potash fertilizers and was the Fertilizer Group’s largest supplier in the financial years ended 31 December 2003 and 2004 and the second largest supplier in the year ended 31 December 2002, purchases from Canpotex Limited accounting for 15.81%, 13.66% and 14.75% of the Fertilizer Group’s total cost of sales for the three years ended 31 December 2004 respectively. The Management of the Fertilizer Group considers that the Investor’s interests in the Company will help to further raise the Company’s profile in the international fertilizer market and help to further strengthen the Fertilizer Group’s relationship with the Investor and Canpotex Limited, providing further potential business opportunities for the Enlarged Group in the future.

Yours faithfully, For and on behalf of

Sinochem Hong Kong (Group) Company Limited SONG Yu Qing

Director

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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SINOCHEM HONG KONG HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

Stock code: 297

Independent non-executive Directors: KO Ming Tung, Edward LI Ka Cheung, Eric TANG Tin Sek

Principal place of business in Hong Kong: Unit 4603, 46th Floor Office Tower Convention Plaza 1 Harbour Road Wanchai Hong Kong

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

13 June 2005

To the Independent Shareholders

Dear Sir or Madam,

ACQUISITION FROM SINOCHEM HONG KONG (GROUP) COMPANY LIMITED OF THE FERTILIZER GROUP

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REVERSE TAKEOVER INVOLVING AN APPLICATION FOR NEW LISTING AND AN APPLICATION FOR THE WHITEWASH WAIVER NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS AND

GRANT OF GENERAL MANDATE TO ISSUE ORDINARY SHARES

We refer to the circular to the Shareholders dated 13 June 2005 (the ‘‘Circular’’) of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

For identification purposes only

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The Independent Board Committee has been formed to advise the Independent Shareholders as to whether, in our opinion, the entering into of the Acquisition Agreement, the granting of the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the terms of the proposed general mandate to issue shares (as described in the section headed ‘‘General mandate to issue shares and the Repurchase Mandate’’ in the ‘‘Letter from the Board’’ in the Circular) are in the interests of the Company and its Shareholders as a whole and the terms of which are fair and reasonable so far as the Independent Shareholders are concerned. Somerley has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders.

We wish to draw your attention to the ‘‘Letter from Somerley’’ as set out on pages 114 to 151 of the Circular. We have considered the terms and conditions of the Acquisition Agreement, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the terms of the proposed general mandate to issue shares, the advice of Somerley and the other factors contained in the ‘‘Letter from the Board’’ and the section headed ‘‘Information on the Fertilizer Group’’ as set out on pages 152 to 224 of the Circular.

In our opinion, the terms of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions, including the related annual caps, and the proposed general mandate to issue shares are fair and reasonable so far as the Independent Shareholders are concerned and the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares are in the interests of the Company and the Shareholders as a whole. We also consider the Nonexempt Continuing Connected Transactions are on normal commercial terms and in the ordinary course of business of the Enlarged Group. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Acquisition Agreement, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the proposed general mandate to issue shares.

Yours faithfully,

The Independent Board Committee of Sinochem Hong Kong Holdings Limited KO Ming Tung, Edward LI Ka Cheung, Eric TANG Tin Sek

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The following is the letter of advice from Somerley to the Independent Board Committee and the Independent Shareholders prepared for the purpose of inclusion in this circular.

SOMERLEY LIMITED Suite 2201, 22nd Floor Two International Finance Centre 8 Finance Street Central Hong Kong

13 June 2005

To: The Independent Board Committee and the Independent Shareholders

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION, REVERSE TAKEOVER INVOLVING AN APPLICATION FOR NEW LISTING AND AN APPLICATION FOR THE WHITEWASH WAIVER, NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS AND

GRANT OF GENERAL MANDATE TO ISSUE ORDINARY SHARES

INTRODUCTION

We refer to our appointment to act as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of (i) the Acquisition by the Company of the entire issued share capital of the Fertilizer Company from Sinochem HK, a wholly-owned subsidiary of Sinochem Corporation; (ii) the Whitewash Waiver; (iii) the Non-exempt Continuing Connected Transactions including the related annual caps; and (iv) the grant of the general mandate to issue ordinary shares of the Company (the ‘‘Mandate’’). Details of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the Mandate are contained in the circular of the Company to the Shareholders dated 13 June 2005 (the ‘‘Circular’’), of which this letter forms part. Capitalised terms used in this letter have the same meanings as defined in the Circular.

The Acquisition constitutes a very substantial acquisition and reverse takeover of the Company under the Listing Rules and involves the Company making an application for new listing. Sinochem HK is a wholly-owned subsidiary of Sinochem Corporation and a substantial Shareholder holding approximately 21.16% of the existing issued ordinary share capital of the Company. The Acquisition therefore also constitutes a connected transaction of the Company under the Listing Rules and requires the approval of the Independent Shareholders at the SGM by vote to be taken by poll. Immediately upon Completion but before the Offering, the interests of Sinochem HK and its concert parties will increase from approximately 21.16% to 94.65% of the enlarged issued ordinary share capital of the Company. Accordingly, upon Completion, Sinochem HK and its concert parties will be obliged to make an unconditional mandatory general offer for all the issued shares of the Company not already owned or agreed to be acquired by Sinochem HK and parties acting in concert with it under Rule 26.1 of the Takeovers Code. Sinochem HK has made an application to the Executive for the

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granting of the Whitewash Waiver. The Executive has indicated that it will grant the Whitewash Waiver to Sinochem HK and parties acting in concert with it subject to the approval of the Independent Shareholders on a vote taken by way of a poll.

The Board comprises five executive Directors and three independent non-executive Directors. Of the executive Directors, Mr. Liu De Shu is also the president and chief executive officer of Sinochem Corporation, and Mr. Song Yu Qing and Ms. Chen Hao are respectively the directors of Sinochem HK and a subsidiary of Sinochem Corporation. Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing have voted at meetings of the Board to approve the Acquisition and Mr. Chu has sold shares in the Company to Sinochem HK. Accordingly, neither of the aforesaid Directors are considered sufficiently independent to advise the Independent Shareholders in relation to the Acquisition, the Whitewash Waiver and the Nonexempt Continuing Connected Transactions. All the executive Directors are also considered not independent to advise the Independent Shareholders in relation to the Mandate. The Independent Board Committee comprising all the independent non-executive Directors, namely Mr. Ko Ming Tung, Edward, Dr. Li Ka Cheung, Eric and Dr. Tang Tin Sek, has been constituted to consider the terms of the Acquisition, the Whitewash Waiver, the Nonexempt Continuing Connected Transactions and the Mandate and to make a recommendation to the Independent Shareholders on how to vote on the relevant resolutions to be proposed at the SGM. We have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the Mandate.

In formulating our opinion and advice, we have relied on the information and facts supplied, and opinions expressed, by the Directors and its advisers, which we have assumed to be true, accurate and complete. We consider that the information we have received is sufficient for us to formulate the opinion and advice as set out in this letter. We have also sought and received confirmation from the Directors that no material factors have been omitted from the information supplied and opinions expressed to us. We have not, however, conducted an independent investigation into the business, operations or financial condition of the Group or the Fertilizer Group. We have also assumed that all facts and representations contained or referred to in the Circular were true at the time they were made and will continue to be true up to and including the date of the SGM.

THE ACQUISITION

In arriving at our opinion on the terms of the Acquisition, we have taken into consideration the following principal factors and reasons:

Background to and reasons for the Acquisition

The Company was incorporated in Bermuda in 1994 and listed on the Main Board of the Stock Exchange in September 1996. The Company, through its subsidiaries, has been principally engaged in property investment and investment holding. With the severe property market downturn in Hong Kong after 1997, the value of the Group’s property portfolio has deteriorated significantly and the rental income of the Group has been subject to significant downward pressure. The Group had suffered losses since 1998, which were largely attributable to losses/deficits arising from the disposal and revaluation of properties and finance costs. The Group also experienced liquidity difficulties and events of default occurred under certain bank loans. Following the

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continued efforts to negotiate with its bankers, the Group completed two debt restructuring arrangements in 2002 and 2004, as a result of which the Group’s financial position has been significantly improved from net liabilities to net assets.

Apart from the efforts put on debt restructuring and downsizing of its property portfolio to reduce financial commitment, the Group has also sought external funding by placing new shares to independent and strategic investors including Sinochem Group. It also diversified into other non-property related investments such as its investment in Hong Kong Satellite Technology Holdings Limited (‘‘HK Satellite’’), the subsidiaries of which are principally engaged in the development of satellite communication platform. However, such investment was not successful and full provision had been made for the total amount of investment in relation thereto.

At present, the property portfolio of the Group consists of two commercial properties in Kowloon. Despite the rebound in the property market in Hong Kong experienced since 2003, as a result of the downsizing of the Group’s property portfolio in previous years, the remaining property portfolio of the Group has not been able to benefit substantially from such upturn in the property market and the scale of operations of the Group is minimal. In order to improve the prospects of the Group, the Company’s management is of the view that the Group should seek to develop alternative business opportunities. To this end, we concur with the Directors’ view that the development of an alternative business opportunity is a logical step for the Group.

Business and financial information of the Group

(a) Historical performance of the Group

The Group incurred losses in 1999 and during the years from 2001 to 2003. The performance of the Group has recovered somewhat although reported profits are partly due to profits on waiver of bank debts as a result of the restructuring completed in early 2004.

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Set out below is a summary of the results of the Group for the three years ended 31 March 2002 to 2004 and for the six months ended 30 September 2004. Detailed information on the income statement during the same period is set out in Appendix II to the Circular.

Turnover — Sale of properties — Rental and building management services Operating (loss) profit Profit (loss) on disposal of subsidiaries and an associate Finance costs Share of results of associates (Loss) profit before taxation Taxation (charge) credit (Loss) profit before minority interests Minority interest Net (loss) profit for the year/period	Year 2002 HK$ million (audited) 36.0 22.3 58.3 (114.4) — (56.9) (2.8) (174.1) (0.5) (174.6) — (174.6)	ended 31 March 2003 2004 HK$ million HK$ million (audited) (audited) 62.2 87.8 22.2 11.7 84.4 99.5 (117.3) (91.5) 5.5 (0.4) (18.1) (10.2) — — (129.9) (102.1) (0.0) 0.2 (129.9) (101.9) — — (129.9) (101.9)	Six months ended 30 September 2004 HK$ million (unaudited) — 4.9 4.9 40.4 — (2.8) — 37.6 — 37.6 — 37.6

For the year ended 31 March 2002

During the year, turnover was derived from the sale of properties and the provision of rental and building management and agency services. Due to the decline in demand for commercial properties, turnover from disposal of properties for the year fell to approximately HK$36.0 million from approximately HK$105.5 million in the previous year. Income from rental and building management services also dropped as a result of the overall unfavourable economic climate during the year. Due to the decline in demand and price of commercial properties in Hong

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Kong, the Group suffered a loss attributable to shareholders of approximately HK$174.6 million during the year, which were largely attributable to losses arising from the disposal of properties and finance costs.

For the year ended 31 March 2003

Turnover of the Group during the year was approximately HK$84.4 million, an increase of 44.8% as compared with the corresponding figure in the preceding year. Turnover from sale of properties continued to be the major source of income for the Group, as the management continued their effort to reduce the debts of the Group by disposing the heavy debt laden properties. The provision of rental and building management services continued to provide steady income for the Group during the year. Loss attributable to shareholders amounted to approximately HK$129.9 million, caused mainly by the diminution in value of properties held by the Group. The narrow down of losses from the preceding year was mainly due to the reduction of bank loan and finance cost as a result of disposal of properties during the year and successful implementation of a debt restructuring exercise at the end of 2002.

For the year ended 31 March 2004

During the year, the Group continued to dispose of its investment properties to alleviate its financial commitment. Turnover of the Group comprised approximately HK$87.8 million proceeds from disposal of the Group’s two investment properties and some units of properties held for sale and HK$11.7 million income from rental and property management services. The drop in rental income and building management fee was within expectation as the number of investment properties held and managed by the Group declined upon disposal of properties. Loss for the year amounted to HK$101.9 million, which was principally attributable to an impairment loss of HK$140.4 million recognised in respect of the Group’s investment in HK Satellite, which experienced inability to obtain the required funds to develop the satellite communication platform.

For the six months ended 30 September 2004

During the period, the Group has not sold any of its properties and, for minimising costs, discontinued its building management services. Accordingly, no turnover was derived from sale of properties and building management services. Rental income fell by approximately 12% as compared to the last corresponding period as rentable areas dropped after the disposal of two investment properties in the year ended 31 March 2004. Due to the fulfillment of all the conditions of a settlement arrangement entered into between a subsidiary of the Company and one of the Group’s bankers, certain outstanding debts owed by the subsidiary to the banker have been fully discharged and released, resulting in the Group recording an income from the waiver of debts and related interest of HK$36.1 million. As a result, the Group recorded net profit of approximately HK$37.6 million for the six months ended 30 September 2004.

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(b) Balance sheet

Set out below is the consolidated balance sheet of the Group as at 31 March 2004 and 30 September 2004:

Non-current assets Investment properties Tangible fixed assets Current assets Properties held for sale Trade and other receivables Bank balances and cash Current liabilities Trade and other payables Deposits received Amount due to a director Amount due to a shareholder Dividend payable Bank borrowings Non-current liabilities Bank borrowings Amount due to a director Amount due to a shareholder Deferred taxation liabilities Net assets, financed by Ordinary Shares Preference Shares Reserves	31 March 2004 HK$ million (audited) 63.0 0.2 63.2 82.0 1.6 4.2 87.8 16.6 2.9 2.4 — 0.6 38.9 61.4 77.2 3.7 — 0.3 81.2 367.6 103.0 (462.2) 8.4	30 September 2004 HK$ million (unaudited) 65.5 0.2 65.7 83.5 1.4 3.9 88.8 4.6 3.0 2.4 1.2 — 9.5 20.7 82.0 2.5 3.0 0.3 87.8 367.8 103.0 (424.8) 46.0

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Investment properties and properties held for sale

These comprised commercial units in Kowloon with aggregate area of approximately 6,701 sq.m. The properties are let under various tenancies with overall occupancy rate over 90%. Based on the independent valuation prepared by Chesterton Petty Limited, the open market value of these properties as at 30 April 2005 amounted to approximately HK$152 million, representing a 2.0% appreciation from the book value of HK$149 million as at 30 September 2004. Details of the properties together with the valuation report prepared by Chesterton Petty Limited are contained in Appendix V to the Circular.

Bank borrowings

Total bank borrowings as at 30 September 2004 amounted to HK$91.5 million, representing a significant drop from HK$116.0 million as at 31 March 2004 principally due to the waiver of bank debts of approximately HK$21.9 million upon the completion of a debt settlement arrangement between a subsidiary of the Company and one of the Group’s bankers during the six months ended 30 September 2004.

Net assets and capital structure

The Group’s net asset value as at 30 September 2004 has improved substantially as compared to that as at 31 March 2004. The improvement is chiefly due to the debt settlement arrangement completed during the six months ended 30 September 2004, which resulted in an aggregate amount of HK$36.1 million debt and interest waived being credited to the income statement during the period.

As at 30 September 2004, there were 103 Preference Shares outstanding, which are held by Sinochem HK. Pursuant to the terms of the Preference Shares, unless previously converted into Ordinary Shares, all but not part of the Preference Shares may be redeemed at their aggregate nominal value of HK$103 million on the maturity date, being 27 February 2005. Sinochem HK has requested the redemption of all the outstanding Preference Shares on the maturity date, but has confirmed to the Company that if the Acquisition does not proceed, it will not demand settlement of the sum of HK$103 million arising from its redemption of the Preference Shares prior to the end of July 2005. Taking into account the existence and proposed redemption of the Preference Shares, the Group would have a net liability position.

(c) Conclusion

As stated above, the property portfolio of the Group has been significantly downsized in previous years and the property management operations have ceased for cost reasons. Results of the efforts on diversification into other non-property related investments such as HK Satellite have not been encouraging. In addition, certain one-off benefits from debt settlement arrangements in 2004 have flattered reported results. Despite the recent recovery in the property market in Hong Kong, given the limited scale of the present property portfolio, we believe the existing property portfolio of the Group is immaterial to capture any significant upside from the improved property market sentiment in Hong Kong and the existing business of the Group will not have much

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potential or capacity for growth without significant injection of assets or fund raising. Furthermore, based on the existing financial position of the Group as discussed in the sub-paragraph headed ‘‘Balance sheet’’ above, in particular, the insignificant amount of current assets other than properties held for sale of approximately HK$5.3 million compared to total current liabilities of HK$20.7 million as at 30 September 2004, unless other sources of financing are made available to the Company, it is unlikely that the Company would have sufficient financial resources to meet the demand for payment on redemption of the Preference Shares if the Acquisition does not proceed.

The Acquisition

(a) Assets being acquired

The Acquisition involves the sale by the Vendor and the purchase by the Company of the entire issued share capital of the Fertilizer Company. Through its subsidiaries, the Fertilizer Company is a leading fertilizer enterprise in the PRC offering a comprehensive range of fertilizer and agricultural-related products. Upon completion of the Acquisition, the Fertilizer Company will become a wholly-owned subsidiary of the Company.

The Acquisition does not include the Remaining Fertilizer Business, which are (i) the 40% interest in Tianji JV; (ii) the 60% interest in Sinochem Shandong; (iii) the 20% interest in Qinghai Salt Lake; and (iv) the 100% interest in US Agri-Chemicals. Tianji JV and Sinochem Shandong have not been included in the Fertilizer Group as they have not fully commenced production. The 20% interest in Qinghai Salt Lake was acquired by Sinochem Corporation in June 2004, which acquisition will have to be approved by the relevant PRC government authorities. In order to avoid delaying the restructuring of the Fertilizer Group, the shareholding in Qinghai Salt Lake is retained by Sinochem Corporation. The majority of the products of US Agri-Chemicals are sold to the United States, Latin America and Australia. Its business does not form part of the core business of the Fertilizer Group and as a result US Agri-Chemicals has not been included as part of the Fertilizer Group. Apart from these, the entire PRC fertilizer business of Sinochem Corporation was transferred to the Fertilizer Company and will be purchased by the Group.

(b) Non-competition undertaking and option to purchase the Remaining Fertilizer Business

It is the intention of the Sinochem Group to inject the Remaining Fertilizer Business (except US Agri-Chemicals) into the Group at such time as it considers appropriate and Sinochem Corporation has granted to the Company an option to purchase any of the Remaining Fertilizer Business at a fair market price at any time as the Company deems appropriate. The option will remain valid and exercisable by the Company until the termination of the Non-competition Undertaking. However, until such time as all of the business comprising the Remaining Fertilizer Business have been injected into the Group, Sinochem Group’s continuing ownership will give rise to potential competition issues. Sinochem Corporation has provided the Non-competition Undertaking to the Company in order to address the perceived or potential competition between the Sinochem Group and the Company after completion of the Acquisition.

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Pursuant to the Non-competition Undertaking, Sinochem Corporation undertakes that, so long as (i) Sinochem Corporation directly or indirectly owns 30% or more of the issued share capital of the Company or such other lower percentage for the triggering of the mandatory general offer obligation under the Takeovers Code; and (ii) the Company’s ordinary shares are listed on the Stock Exchange and/or other stock exchanges, Sinochem Corporation will not and will procure that its subsidiaries (except for the members of the Enlarged Group, Tianji JV, Sinochem Shandong, Qinghai Salt Lake and US Agri-Chemicals) will not, without the prior consent of the Company, develop, operate or assist in operating, participate in or conduct any business which may compete with the Fertilizer Business, either on its own or jointly with or on behalf of any other person or company in the PRC. In addition, if any opportunity of new business same as or similar to the Fertilizer Business arises, the Company shall have a right of first refusal to carry on such new business and if the Company declines to pursue the new business, Sinochem Group is not allowed to operate such new business. The power to decide whether or not to exercise the right of first refusal is vested with the independent non-executive Directors only.

We consider that the Non-competition Undertaking and the option to purchase the Remaining Fertilizer Business safeguard the Enlarged Group from competition with the Sinochem Group in the future and is beneficial to the Enlarged Group.

(c) Profit guarantee

Sinochem HK has covenanted with the Company that, subject to occurrence of Completion, the consolidated profit of the Enlarged Group attributable to shareholders of the Company for the year ending 31 December 2005 will not be less than RMB671 million (equivalent to approximately HK$633 million) (the ‘‘Profit Guarantee’’), and, if the consolidated profit attributable to shareholders of the Company following Completion as reflected in its audited consolidated financial statements for the year ending 31 December 2005 is less than RMB671 million (equivalent to approximately HK$633 million), it will pay or procure to be paid to the Company a cash sum equal to the shortfall within thirty business days of the date on which such audited consolidated financial statements are published.

We consider the Profit Guarantee is in the interests of the Company as it assures a minimum credit to the reserve of the Enlarged Group for the year ending 31 December 2005 subject to the possible impairment of the goodwill arising from the Acquisition.

(d) Conditions precedent

Completion of the Acquisition is conditional upon certain conditions being fulfilled or waived by the Company on or before 30 September 2005 (or such later date as may be agreed among the parties to the Acquisition Agreement). The more significant ones from the Independent Shareholders’ perspective are:

(i) the approval by the Independent Shareholders in general meeting by way of poll of (i) the Acquisition Agreement; (ii) the allotment and issue of the Consideration Shares by the Company; (iii) all other transactions contemplated under the Acquisition Agreement; (iv) the Whitewash Waiver; and (v) the Non-

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exempt Continuing Connected Transactions and the proposed annual caps on the value of such transactions in accordance with the requirements of the Listing Rules; and
(ii) the Executive granting to Sinochem HK and parties acting in concert with it the Whitewash Waiver.

The abovementioned conditions are not waivable and accordingly, in the event that they are not satisfied, the Acquisition will not proceed.

The Fertilizer Group

(a) Business, past performance and financial position of the Fertilizer Group

Business

The Fertilizer Group is a leading fertilizer enterprise in the PRC offering a comprehensive range of fertilizer and agricultural-related products. It is also the largest importer of fertilizer products in the PRC in terms of import volume prior to Completion and will be the largest distributor of imported fertilizer producers in terms of sales volume in the PRC after Completion. It operates three principal divisions, namely, SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, which together form a vertically-integrated business operation across the fertilizer supply chain. Apart from the interest in Tianji JV, Sinochem Shandong, Qinghai Salt Lake and US Agri-Chemicals, the Fertilizer Group represents the entire PRC fertilizer business of Sinochem Corporation and is the fertilizer flagship of Sinochem Corporation.

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Past performance

The Fertilizer Group recorded net profit attributable to shareholders of RMB240.4 million, RMB415.8 million and RMB543.4 million for each of the three years ended 31 December 2004 respectively. Set out below is a summary of the income statements of the Fertilizer Group for each of the three years ended 31 December 2004 prepared in accordance with generally accepted accounting principles in Hong Kong. Further details on the financial information of the Fertilizer Group are set out in Appendix I to the Circular.

Turnover Gross profit Other revenue Distribution costs Administrative expenses Other operating income (expenses), net Operating profit Finance cost Share of net profits (losses) of jointly controlled entities Profit before taxation Taxation Profit after taxation Minority interests Profit attributable to shareholders Sales volume (in tonnes)	Year ended 31 December 2002 2003 2004 RMB million RMB million RMB million 7,800.8 10,371.5 12,591.2 410.6 847.7 1,090.4 44.1 42.0 44.9 (69.2) (257.6) (336.3) (54.5) (74.0) (126.4) (1.6) 2.4 43.9 329.4 560.5 716.5 (32.1) (45.4) (50.1) (0.2) 8.0 44.2 297.1 523.1 710.6 (57.0) (105.4) (150.2) 240.1 417.7 560.4 0.3 (1.9) (17.0) 240.4 415.8 543.4 5,836,067 7,602,197 8,355,204

(i) Turnover

Products sold by the Fertilizer Group comprise potash fertilizer, phosphate-based fertilizer, nitrogen-based fertilizer, compound fertilizer and other related products. Turnover of the Fertilizer Group has recorded continuous growth during the Track Record Period, both in terms of sales volume and value. Total turnover for the year ended 31 December 2002 was approximately RMB7,800.8 million, which was increased to approximately RMB12,591.2 million for the year ended 31 December 2004, representing a compound annual growth of approximately 27.0%. Apart from the strong demand for fertilizer products in the PRC, the Management of the Fertilizer Group also attributes the growth in turnover to the continuous expansion of the Fertilizer Group’s distribution network as well as the efforts to optimise and

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increase its production capacity to capture the growing demand for its products through the establishment of new production enterprises with other investors or strategic partners and through acquisitions of or investment in other fertilizer producers in the PRC during the Track Record Period.

(ii) Gross profit

The gross profit margin of the Fertilizer Group experienced a continuous improvement from 5.3% in 2002 to 8.2% in 2003 and 8.7% in 2004. The improvement in gross profit margin in 2003 was due to the continued adjustment of product mix for profit maximisation, while the improvement in 2004 was mainly due to the increase in gross profit margin of potash fertilizers sold by the Fertilizer Group because of shortage in supply in the PRC.

(iii) Expenses

Distribution expenses mainly comprise transportation costs, insurance and salaries. Administrative expenses mainly comprised staff salaries and benefits and operating leasing expenses. These expenses in general increased alongside with the increase in turnover.

(iv) Profit attributable to shareholders

The Fertilizer Group recorded net profit attributable to shareholders of approximately RMB240.4 million for the year ended 31 December 2002. Along with the remarkable growth in turnover, net profit continued to grow to RMB415.8 million in 2003 and RMB543.4 million in 2004, representing a compound annual growth of approximately 50.3% from 2002.

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Financial position of the Fertilizer Group

Set out below is a summary of the audited combined balance sheet of the Fertilizer Group as at 31 December 2003 and 31 December 2004.

Non-current assets Fixed assets Interest in jointly controlled entities Investment securities Current assets Inventories Loans receivable Trade and bills receivables Other receivables and prepayments Bank balances and cash Current liabilities Trade payables Other payables and accruals Taxation payable Short-term bank loans Current portion of long-term loans Net current assets Total assets less current liabilities Non-current liabilities Long-term loans Deferred tax liabilities Minority interests Net assets financed by shareholders’ equity	31 December 2003 RMB million 83.1 76.7 116.9 276.7 3,167.4 21.9 412.9 349.6 275.1 4,226.9 1,037.3 409.9 119.3 1,610.2 — 3,176.7 1,050.2 1,326.9 100.9 0.9 101.8 44.1 1,181.0	31 December 2004 RMB million 585.7 374.1 15.1
		974.9
		4,101.9 218.5 567.2 1,169.0 227.7
		6,284.3
		1,522.5 1,549.5 115.3 1,737.4 6.0
		4,930.7
		1,353.6
		2,328.5 139.0 2.2
		141.2
		165.3
		2,022.0

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(i) Assets

Inventories accounted for the largest asset item of the Fertilizer Group. Such balance comprises mainly fertilizer merchandise and raw materials. The increase in inventory level as at 31 December 2004 as compared to 31 December 2003 was to cater for the increased sales level. Other receivables and prepayments as at 31 December 2004 amounted to approximately RMB1,169.0 million, which comprised principally advance payments to domestic suppliers for purchases. Such prepayments to suppliers are in accordance with PRC market practice. The increase in such balances as compared to 2003 was principally attributable to the increase in advance payments to domestic suppliers in order to secure an adequate supply of certain fertilizers which were experiencing a shortage of supply. For each of the years ended 31 December 2002, 2003 and 2004, purchases from domestic suppliers accounted for approximately 10.4%, 39.1% and 37.0% of the Fertilizer Group’s total raw material purchases.

(ii) Liabilities

On liability side, trade payables amounted to approximately RMB1,522.5 million as at 31 December 2004 which were mainly trade and bills payables to suppliers. Despite the effort of the Management of the Fertilizer Group in making use of cash inflows to pay off outstanding trade payables, the trade payable balance as at 31 December 2004 recorded increase from that of 31 December 2003, which was due to the increase in purchases to satisfy the growth in sales. Other payables and accruals as at 31 December 2004 amounted to approximately RMB1,549.5 million, which comprised advance receipts from customers for orders placed with the Fertilizer Group. The increase in this balance as compared to 2003 corresponds to the increase in advance payments by the Fertilizer Group to domestic suppliers as discussed above, as the Fertilizer Group demanded prepayment from customers for purchases from domestic suppliers. Total loans amounted to RMB1,882.4 million, of which RMB1,737.4 million were short term and the remaining RMB145.0 million were long term.

(iii) Net assets

As at 31 December 2004, the Fertilizer Group had net assets of RMB2,022.0 million, registering an increase of RMB841.0 million from that of RMB1,181.0 million as of 31 December 2003.

(b) Prospects of the Fertilizer Group

According to the data of the FAO and IFA as disclosed in the section headed ‘‘Fertilizer industry and regulatory overview’’ in the Circular, global consumption of three major types of fertilizers grew by an annual average rate of 2.0% during 1993/94 to 2002/03, with the largest increase seen in South Asia and China. Consumption of fertilizers in the PRC has increased over 50 times since 1960s from 0.73 Mt nutrient to 39.60 Mt nutrient in 2002, growing at a CAGR of 10.2%.

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The consumption of fertilizers largely relates to population size and the demand for agricultural products. According to statistics obtained from China Statistical Yearbook 2004, the population of China was approximately 1.2 billion at the end of 1993 and approximately 1.3 billion as the end of 2003. The consumption of chemical fertilizers has increased in a much bigger magnitude than the growth in total population from approximately 31.5 Mt nutrient in 1993 to 44.1 Mt nutrient in 2003. Such increase could have been contributed also by the development of the feed crop industry to support the growth in demand for livestock products for food consumption as a result of significant improvement in living standard, as well as the limited total area of arable land in China. According to the Tenth Five-Year Plan, China’s population will climb to 1.37 billion by 2005 based on a natural growth rate of 13 per 1,000. With the growth in population, the increase in demand for feed crops and the limited area of cultivated land as discussed above, fertilizers are expected to play an important role in the modern farming system in China to increase production yield of crops. These together with the government policy to develop the agricultural industry in China are expected to provide fuel for the continuous growth in demand for fertilizers.

The fertilizer industry is a regulated industry in China. Import of fertilizer is subject to the administration of MOFTEC. Only certain enterprises in the PRC are authorised to import fertilizers subject to the tariff-rate quota system. Sales price of various types of fertilizer products are also subject to different price control measures imposed by the State, which limit the ability for fertilizer importer to adjust the price of its fertilizer products at its discretion without prior governmental approval based on market demand and supply beyond the price range set by the government authorities and maintain its profit margin when purchase prices fluctuate. Competition in the PRC fertilizer industry may also intensify with China’s accession to the WTO, as the PRC government has undertaken to open up the domestic market to foreign companies and lift the restriction on foreign companies for the operation of fertilizer retail business. Aside from foreign entrants to the PRC market, the Fertilizer Group also faces competition from domestic players with an increasing number of privately-owned enterprises engaged in the manufacturing and sale of fertilizer products in the PRC. Intensified competition may lead to erosion in profit margins. To achieve its objective of becoming the largest fullyintegrated fertilizer enterprise in the PRC, the Fertilizer Group proposed to adopt business strategies to (i) enhance the operation of SINOCHEM Procurement through strengthening its existing relationships with major overseas suppliers and developing business opportunities with selective new overseas suppliers; (ii) strengthen SINOCHEM Production through increase in production capacity by setting up production enterprises at strategic locations; (iii) further expand the sales and distribution network to cover all agricultural provinces in the PRC; and (iv) strengthen the logistics operation to support the increasing sales volume.

Sinochem Corporation is currently one of the two approved State trading enterprises to engage in domestic trading of fertilizer products since 1998 and one of the four entities permitted under PRC law to import fertilizer products into the PRC since 1992. With its leading market position as the largest importer of fertilizer products in the PRC in terms of import volume, the established track record in the fertilizer business offering a comprehensive range of fertilizer and agricultural related products, as well as its business strategies described above which we consider to be reasonable measures in

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light of market developments, the Fertilizer Group is, in our view, well positioned to capture the growth potential in the fertilizer industry posted by the factors and contested by the challenges described above.

Your attention is drawn to the section headed ‘‘Fertilizer industry and regulatory overview’’ in the Circular for further details about the fertilizer market in which the Fertilizer Group is operating.

Evaluation of the consideration

The consideration for the Acquisition is HK$5,050 million, which has been arrived at after arm’s length negotiations among the parties with reference to, among others, the financial results, the earnings potential and prospects of the Fertilizer Group.

(a) Comparison of the consideration with profit

The consideration for the Acquisition represents approximately 9.9 times the audited net profit of the Fertilizer Group of approximately RMB543.4 million (equivalent to approximately HK$512.6 million) for the year ended 31 December 2004.

As discussed in the sub-paragraph headed ‘‘Profit guarantee’’ under the paragraph headed ‘‘The Acquisition’’ above, Sinochem HK has given the Profit Guarantee to the Company. Given that the operations of the Fertilizer Group are substantially larger and the existing business of the Group has only been marginally profitable during the six months ended 30 September 2004 if the effect of the waiver of bank debts is excluded, we have assumed that the minimum profit of RMB671 million (equivalent to approximately HK$633 million) under the Profit Guarantee is contributed solely by the Fertilizer Group. On this basis, the consideration represents approximately 8.0 times the minimum profit under the Profit Guarantee.

(b) Comparison with net assets

Pursuant to the Acquisition, the Company will acquire the entire equity of Fertilizer Company at HK$5,050 million. Based on the Fertilizer Group’s audited financial statement for the year ended 31 December 2004, the Fertilizer Group’s audited net asset value as at 31 December 2004 was approximately RMB2,022.0 million (equivalent to approximately HK$1,907.5 million). Accordingly, the consideration for the Acquisition reflects a premium of approximately HK$3,142.5 million or 164.7% over the Fertilizer Group’s audited net asset value as at 31 December 2004.

We consider that a premium over the Fertilizer Group’s net asset value is justified because of its strong profitability and earnings capability. The Fertilizer Group has been consistently profitable during the Track Record Period. It recorded net profit attributable to shareholders of RMB543.4 million for the year ended 31 December 2004, representing an increase of 30.7% over the previous financial year. The Acquisition provides the Group with an immediate and reliable source of revenue and gives the Group an opportunity to participate in the growing fertilizer market in the PRC.

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(c) Comparable Companies

For the purpose of assessing the consideration for the Acquisition, we have reviewed other listed companies engaged in the fertilizer business and made a comparison on this basis with the consideration for the Acquisition. However, we are unable to identify any listed company in Hong Kong that are primarily engaged in the fertilizer related business which is similar to the Fertilizer Group. For this purpose, we have reviewed all listed fertilizer companies in other markets having a market capitalisation of between HK$3 billion to HK$10 billion, which we consider to be of a similar size range to the Fertilizer Group (the ‘‘Comparable Companies’’).

Set out below are the closing share prices of the Comparable Companies and the comparison of such prices against historical earnings, book value and revenue of the relevant Comparable Companies:

			Historical
			price-
		Closing	earnings	Price to	Price to
Country	Company	share price	multiple	book value	revenue
		(Note)	(Note)	(Note)	(Note)
		HK$	Times	Times	Times
Taiwan	Taiwan Fertilizer Co., Ltd.	9.68	18.4	1.2	4.0
Brazil	Fertilizantes Fosfatados	88.03	6.8	3.1	1.3
	S.A.
United States	Terra Industries Inc.	51.82	7.7	1.3	0.3
PRC	Qinghai Salt Lake Potash	9.19	25.5	5.5	6.3
	Co., Ltd.
	Yunnan Yuntianhua Co.,	8.54	9.3	2.3	2.4
	Ltd.
	Sichuan Lutianhua	5.95	13.9	2.1	1.4
	Company Limited
	Average for the PRC		16.2	3.3	3.4
Egypt	Abou Kir Fertilizers and	123.45	11.7	3.1	3.4
	Chemicals Industries
	Company
Pakistan	Fauji Fertilizer Company	18.89	9.9	3.8	1.4
	Limited
	Fauji Fertilizer Bin Qasim	3.38	17.6	3.5	3.5
	Limited
	Average for Pakistan		13.8	3.7	2.5
India	Rashtriya Chemicals and	6.73	12.4	1.7	0.8
	Fertilizers Limited
	National Fertilizers Limited	7.25	12.4	1.8	0.6
	Average for India		12.4	1.8	0.7
Average			13.2	2.7	2.3
Median			12.4	2.3	1.4
The Acquisition			9.9	2.6	0.4

Source: Bloomberg

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Note: Based on the latest available closing share price of the respective Comparable Companies immediately prior to or at the Latest Practicable Date and the latest published earnings per share, book value per share and the total revenue of the respective Comparable Companies for the last audited financial year and translated into HK$ at the prevailing exchange rates.

As noted from the above table, the price-earnings and price to revenue ratios represented by the consideration payable for the Fertilizer Group are at the lower end of the range of present rating of the Comparable Companies and are lower than the average of the relevant ratios of the Comparable Companies. The price to book ratio represented by the consideration payable for the Fertilizer Group is comparable to the average and median of the same ratio for the Comparable Companies.

(d) Share price performance and comparison with issue price of the Consideration Shares

Comparison of the issue price for the Consideration Shares with market prices

The issue price of HK$1.00 per Consideration Share represents:

(i) a discount of approximately 78.9% to the closing price of the Ordinary Shares of HK$4.75 (adjusted for the effects of the Capital Reorganisation) on 26 January 2005, being the last trading day immediately prior to the suspension of trading in the Ordinary Shares on 26 January 2005;
(ii) a discount of approximately 77.5% to the average closing price of the Ordinary Shares of HK$4.445 (adjusted for the effects of the Capital Reorganisation) for the 10 trading days up to and including 26 January 2005;
(iii) a discount of approximately 77.5% to the average closing price of the Ordinary Shares of HK$4.437 (adjusted for the effects of the Capital Reorganisation) for the 30 trading days up to and including 26 January 2005; and
(iv) a discount of approximately 65.5% to the closing price of the Ordinary Shares of HK$2.90 (adjusted for the effects of the Capital Reorganisation) on 25 May 2004, being the last trading day (the ‘‘Last Trading Day’’) of the Ordinary Shares prior the Latest Practicable Date.

The issue price for the Consideration Shares also represents:

(i) a premium of approximately 50 times over the latest published audited consolidated net tangible assets of the Group of approximately HK$0.02 per New Share (adjusted for the effect of the Capital Reorganisation but without taking into account the effects of any redemption of the Preference Shares) as at 31 March 2004; and

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(ii) a premium of approximately 7 times over the unaudited consolidated net tangible assets of the Group of approximately HK$0.13 per New Share (adjusted for the effect of the Capital Reorganisation but without taking into account the effects of any redemption of the Preference Shares) as at 30 September 2004.

Analysis of Ordinary Share price

The chart below shows the closing prices of the Ordinary Shares (before adjusting for the effect of the Capital Reorganisation) traded on the Stock Exchange from January 2004 up to and including the Last Trading Day:

==> picture [326 x 51] intentionally omitted <==

Source: Bloomberg

As shown in the above chart, the price of the Ordinary Shares has increased from HK$0.295 per Ordinary Share (equivalent to HK$2.95 per New Share assuming the Capital Reorganisation has taken effect) on 2 January 2004 to HK$0.43 (equivalent to HK$4.3 per New Share assuming the Capital Reorganisation has taken effect) on 2 February 2004. Such increase may have reflected the positive market perception about Sinochem HK increasing its interest in the Company from approximately 6.8% to 21.18% and becoming a substantial Shareholder on 2 February 2004. Thereafter, the Ordinary Shares have been traded within the range of HK$0.26 to HK$0.44 (equivalent to HK$2.6 to HK$4.4 per New Share assuming the Capital Reorganisation has taken effect) during the period up to September 2004. The price of the Ordinary Shares shot up from HK$0.355 (equivalent to HK$3.55 per New Share assuming the Capital Reorganisation has taken effect) on 30 September 2004 to HK$0.44 per Ordinary Share (equivalent to HK$4.4 per New Share assuming the Capital Reorganisation has taken effect) on 15 October 2004 and further to HK$0.50 (equivalent to HK$5.0 per New Share assuming the Capital Reorganisation has taken effect) on 8 November 2004, which may

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have been caused by rumors in the market that Sinochem Corporation may increase its stake in the Company by way of an injection of petrochemical related assets. Thereafter, the Ordinary Shares have been traded within a narrow range of HK$0.43 to HK$0.475 (equivalent to HK$4.3 to HK$4.75 per New Share assuming the Capital Reorganisation has taken effect). The Ordinary Shares closed at HK$0.475 (equivalent to HK$4.75 assuming the Capital Reorganisation has taken effect) on 26 January 2005, being the last trading day of the Ordinary Shares prior to the suspension of the trading of the Ordinary Shares pending the release of the Announcement.

The Ordinary Shares have been traded within the range of HK$0.24 to HK$0.325 (equivalent to HK$2.4 to HK$3.25 per New Share assuming the Capital Reorganisation has taken effect) since the Announcement. As at the Last Trading Day, the Ordinary Shares closed at HK$0.29 per share (equivalent to HK$2.90 per New Share assuming the Capital Reorganisation has taken effect).

Analysis of trading volume

The chart below shows the monthly trading volume of the Ordinary Shares on the Stock Exchange from January 2004 up to the Last Trading Day:

==> picture [333 x 192] intentionally omitted <==

Source: Bloomberg

The above chart indicates that the Ordinary Shares were more actively traded in the first three months in 2004 as compared to the subsequent six months. This, in our opinion, may be a result of expectations of improvement in the Group’s financial position after the introduction of Sinochem Corporation as a substantial Shareholder. Throughout the period from April 2004 to September 2004, the Ordinary Shares were in general thinly traded on the Stock Exchange, with monthly trading volume representing 1.4% to 7.7% of the

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total issued Ordinary Shares. Trading volume of the Ordinary Shares increased again since October 2004, which we believe was related to the market rumours about the possible asset injection by Sinochem Corporation.

(e) Method of payment and dilution of Independent Shareholders’ holdings

The consideration for the Acquisition will be satisfied entirely by the allotment and issue of the Consideration Shares. This is favourable to the Company in that it enables the Group to make an acquisition of a very significant business without a large outlay of cash, but involves the issue of a substantial number of New Shares with consequent dilution to the Independent Shareholders. Such dilution to Independent Shareholders could be avoided if a rights issue or an open offer is conducted to raise capital for the Acquisition. However, having considered the past financial performance and latest financial position of the Group and the size of the offer needed to fully settle the consideration for the Acquisition, it is unlikely that arm’s length underwriters and Independent Shareholders would be attracted to participate in such offer on terms which are the same as the issue of the Consideration Shares.

The following table illustrates the Company’s shareholding changes as a result of the Capital Reorganisation and the Acquisition but prior to any Offering:

Shareholders Sinochem HK and its concert parties Mr. Chu Yu Lin, David Ms. Chu Ho Miu Hing Independent Shareholders	Shareholding structure before the Acquisition (Note) New Shares % 77,847,763 21.16 31,287,629 8.50 6,430,400 1.75 252,384,036 68.59 367,949,828 100.00	Shareholding structure immediately after the Acquisition New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 5,417,949,828 100.00	Shareholding structure immediately after the Acquisition New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 5,417,949,828 100.00
			100.00

Note: Based on the existing shareholding structure as at the Latest Practicable Date adjusted for the effects of the Capital Reorganisation.

The interest of the existing Independent Shareholders will be diluted from approximately 68.59% to approximately 4.66% upon issue of the Consideration Shares. We consider the level of dilution to the existing Independent Shareholders significant. However, Independent Shareholders will participate in a much larger business with significantly greater revenue base, improved earnings capability as well as a more liquid balance sheet, which is likely to lead to more consistent liquidity of the Shares.

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Public float

The parties to the Acquisition Agreement intend that the Company will maintain the listing of the ordinary shares of the Company on the Stock Exchange after Completion. Immediately after Completion but before the Offering, the public float of the Company will stand at 4.66%, which is significantly below the minimum requirement of the Listing Rules of 25%. The Company and Sinochem HK have undertaken to the Stock Exchange to ensure that the minimum public float of the Company shall not be less than 25% upon Completion. The Stock Exchange has stated that if, at the date of Completion, less than 25% of the issued ordinary shares are held by the public, then it will consider exercising its discretion to suspend trading in the ordinary shares until a sufficient public float is attained. The Company and Sinochem HK are considering the following offering structure, involving (i) a placing of 5,802,141,879 existing ordinary shares (subject to adjustment to take into account the effect of the Capital Reorganisation) by Sinochem HK to the Investor, who is also granted the Option to acquire from Sinochem HK up to a further of 5,813,757,778 existing ordinary shares (subject to adjustment to take into account the effect of the Capital Reorganisation), (ii) a preferential offer of existing ordinary shares by Sinochem HK to qualifying existing Shareholders on the basis of an estimated Assured Entitlement of three Reserved Shares for every Ordinary Share held at a price equal to the nominal value of the ordinary share of the Company and the Issue Price at which the Consideration Shares will be issued to Sinochem HK pursuant to the Acquisition (subject to adjustment to take into account the effect of the Capital Reorganisation); and (iii) a placing of new ordinary shares by the Company to professional, institutional and other investors, to maintain the minimum public float required under the Listing Rules. Details of the proposed structure of the Offering are set out under the paragraph headed ‘‘Maintaining the listing status and public float’’ in the letter from the Board and in the letter from Sinochem HK contained in the Circular.

Pursuant to the Placing, it is currently anticipated that the Company may enter into one or more placing and underwriting agreements with one or more placing agents for the international placement of new ordinary shares of the Company to be offered by the Company with professional, institutional and other third party investors. It is currently anticipated that the Placing will take place after the approval of the Acquisition at the SGM, but shortly before or contemporaneously with Completion. The Placing will be conducted in full compliance with relevant provisions of the Listing Rules. The Company intends to seek a mandate from Shareholders for the issue of the required number of ordinary shares by the Company pursuant to the Placing.

It is currently anticipated that pursuant to the Placing, the Company will issue not more than 3,900,000,000 ordinary shares (subject to adjustment to take account of the effect of the Capital Reorganisation), representing approximately 6.71% of the enlarged issued ordinary share capital of the Company upon completion of the Acquisition and the Placing, at a Placing price of not less than HK$0.10 per ordinary share (being the nominal value of the ordinary shares of the Company and the Issue Price at which the Consideration Shares will be issued to Sinochem HK pursuant to the Acquisition). However, Shareholders should note that the timing and size of the Placing and the Placing price per ordinary share pursuant to the Placing have not yet been determined and will be subject to a number of factors including prevailing market conditions and investor demand for the ordinary shares of the Company at the relevant time and the Company’s capital requirements.

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The net proceeds from the Placing, after deducting relevant placing fees and expenses and assuming a Placing price per ordinary share of HK$0.10, are estimated to be approximately HK$365 million, which are presently intended to be used as to (i) approximately HK$183 million (50%) to invest in the Fertilizer Group’s upstream manufacturing facilities; (ii) approximately HK$110 million (30%) for the expansion of the Fertilizer Group’s distribution network; and (iii) the balance of approximately HK$72 million (20%) for working capital and other general corporate purposes. In the event that the Placing price is above the minimum of HK$0.10 per ordinary share (subject to adjustment to take account of the effect of the Capital Reorganisation), the additional net proceeds will be applied for the uses and in the proportions set out above.

The following table illustrates the Company’s shareholding as a result of the Acquisition and assuming completion of the Placing of 390,000,000 New Shares but prior to any possible Strategic Placing or Preferential Offer:

Shareholders Sinochem HK and its concert parties Mr. Chu Yu Lin, David Ms. Chu Ho Miu Hing Existing Independent Shareholders Placees	Shareholding structure before the Acquisition (Note) New Shares % 77,847,763 21.16 31,287,629 8.50 6,430,400 1.75 252,384,036 68.59 — — 367,949,828 100.00	Shareholding structure immediately after the Acquisition New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 — — 5,417,949,828 100.00	Shareholding structure immediately after the Acquisition and the Placing New Shares % 5,127,847,763 88.29 31,287,629 0.54 6,430,400 0.11 252,384,036 4.35 390,000,000 6.71 5,807,949,828 100.00	Shareholding structure immediately after the Acquisition and the Placing New Shares % 5,127,847,763 88.29 31,287,629 0.54 6,430,400 0.11 252,384,036 4.35 390,000,000 6.71 5,807,949,828 100.00
				100.00

Note: Based on the existing shareholding structure as at the Latest Practicable Date adjusted for the effects of the Capital Reorganisation.

As shown in the table above, upon completion of the Acquisition and the proposed Placing on the assumption that 390,000,000 New Shares are to be issued, the shareholding of the existing Independent Shareholders will be further diluted from 4.66% immediately upon Acquisition to 4.35% after completion of the Placing. In order to avoid the dilution, the Qualifying Shareholders may choose to take up their entitlements under the Preferential Offer at the same price per ordinary share as the Issue Price of the Consideration Shares.

The Placing is an integral part of the Company’s plan to maintain the minimum public float of ordinary shares as a result of the Acquisition. Without the Offering, the ordinary shares of the Company may be suspended from trading immediately after Completion. As the Placing price (subject to adjustment to take account of the effect of the Capital Reorganisation) will be at least equal to the Issue Price of the Consideration Shares under the Acquisition and the Placing will raise additional capital for the Enlarged Group, we consider the Placing is in the interests of the Company and its shareholders as a whole and is fair and reasonable to the Independent Shareholders.

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Assuming that the Offering (without the Option being exercised) proceeds on the structure as set out in the letter from the Board and all the Qualifying Shareholders take up their Assured Entitlements under the Preferential Offer and the maximum number of new ordinary shares of the Company are issued under the Placing, it is currently envisaged that the Company will have a public float of approximately 34.09% of its enlarged issued ordinary share capital upon Completion and completion of the Placing, exceeding the minimum required pursuant to Rule 8.08 of the Listing Rules.

Financial effects of the Acquisition on the Group

(a) Net profit

Based on the unaudited pro forma combined financial information contained in Appendix III to the Circular prepared based on the profit and loss accounts of the Group for the year ended 31 March 2004 and that of the Fertilizer Group for the year ended 31 December 2004, the proforma combined net profit attributable to shareholders of the Enlarged Group would be approximately HK$384.8 million (equivalent to approximately 7.1 cents per New Share assuming 5,417,949,828 New Shares were in issue throughout the year ended 31 December 2004). This represents a significant improvement from the net loss attributable to shareholders of the Group of HK$101.9 million (equivalent to loss per Ordinary Share of 2.8 cents as disclosed in the 2004 annual report of the Company or 28 cents per New Share after adjusting for the effect of the Capital Reorganisation) for the year ended 31 March 2004. It should be noted that the Acquisition is expected to result in a goodwill in the amount of approximately HK$259.3 million before taking into account the redemption of the outstanding Preference Shares. The redemption of the Preference Shares would result in an upward adjustment of HK$103 million to the goodwill arising from the Acquisition. For illustration purposes, the goodwill has been amortised over an estimated useful life of 10 years and an amortisation expenses of approximately HK$25.9 million has been charged to the pro forma consolidated profit and loss account contained in Appendix III to the Circular. According to the new accounting standards which have become effective for accounting period commencing 1 January 2005, amortisation of goodwill is prohibited and goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment. As a result, the amount of impairment losses, if any, which may be charged to the profit and loss account of the Enlarged Group in future cannot be ascertained at present. Further details of the accounting policies as well as the basis of the preparation of the pro forma financial information of the Enlarged Group are set out in Appendix III to the Circular.

It should also be further noted that the aforesaid proforma statement is prepared based on the historical financials of the Fertilizer Group. In addition, the operations of the Fertilizer Group differ from that of the existing business of the Group. Accordingly, the Acquisition involves business and other risks to which the Group is not currently exposed. Notwithstanding the Profit Guarantee given by Sinochem HK for the year ending 31 December 2005, there is no assurance that the performance of the Enlarged Group thereafter would be similar to those historical figures as reported in the proforma combined financial statements contained in Appendix III to the Circular. Shareholders are advised to read the

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section headed ‘‘Risk factors’’ contained in the Circular which describes the risks relating to the Acquisition, the Enlarged Group, the Fertilizer Group and the PRC fertilizer industry.

(b) Net assets

As set out in Appendix III to the Circular, after completion of the Acquisition but before taking into the effects of any Placing or the redemption of the Preference Shares, the proforma combined net assets of the Enlarged Group (based on the respective balance sheets of the Group as at 30 September 2004 and of the Fertilizer Group as at 31 December 2004) will be approximately HK$2,192.9 million, representing an increase of approximately HK$2,146.9 million from that of the Group of HK$46.0 million as at 30 September 2004. As goodwill of approximately HK$259.3 million will arise on completion of the Acquisition (before taking into account the redemption of the Preference Shares), the proforma net tangible asset value of the Enlarged Group will be approximately HK$1,933.5 million. On a per share basis, the net tangible asset value will increase from HK$0.125 (calculated based on 367,949,828 New Shares to be in issue upon the Capital Reorganisation becoming effective) to HK$0.36 (calculated based on 5,417,949,828 New Shares to be in issue upon completion of the Acquisition). The improvement in the pro forma net assets and net tangible assets position of the Group represents a significant benefit to the Company and the Shareholders as a whole.

(c) Gearing and working capital

The Group’s gearing ratio (defined as total bank borrowings divided by net assets) as at 30 September 2004 was 198.7%. Based on the proforma consolidated balance sheet of the Enlarged Group contained in Appendix III to the Circular, the gearing ratio of the Enlarged Group would be 85.2% assuming completion of the Acquisition but before taking into the effects of any Placing or the redemption of the Preference Shares. The significant improvement in gearing is attributable to the Fertilizer Group’s sizeable net assets base and the issue of the Consideration Shares for the Acquisition, which would enhance the Enlarged Group’s equity base. The improved gearing is expected to improve the Enlarged Group’s credit rating and its cost of borrowing.

Based on the combined cash flow statements of the Fertilizer Group as set out in Appendix I to the Circular, the Fertilizer Group had cash outflow of RMB61.5 million and generated RMB309.4 million net cash inflow from operating activities for each of the two years ended 31 December 2003 and 2004 respectively. Taking into account the cashflow from investing and financing activities, the Fertilizer Group recorded increase in cash and cash equivalent of approximately RMB155.0 million for the year ended 31 December 2003, but a decrease in cash and cash equivalent of approximately RMB46.9 million for the year ended 31 December 2004. It is expected that the Fertilizer Group will be able to finance its operations independently from the Company. Nevertheless, whether the Fertilizer Group is able to generate additional working capital to enhance the cashflow position of the Company and the rest of the Enlarged Group will depend on the working capital requirement of the Fertilizer Group as well as the ability of the Fertilizer Group in declaring and repatriating dividends and/or remitting capital to the Company.

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WHITEWASH WAIVER

Assuming that there is no further issue of Ordinary Shares prior to the effective date of the Capital Reorganisation and immediately upon completion of the Acquisition but before any Offering, the interests of Sinochem Corporation and parties acting in concert with it in the Company will increase from approximately 21.16% to approximately 94.65% of the issued ordinary share capital of the Company immediately upon completion of the Acquisition. Sinochem Corporation and its concert parties are therefore obliged under Rule 26.1 of the Takeovers Code to make a general offer for all the issued shares of the Company that are not already owned or agreed to be acquired by Sinochem Corporation. Sinochem Corporation has applied to the Executive for the Whitewash Waiver under Note 1 of the Notes on dispensation from Rule 26 of the Takeovers Code and the Executive has indicated that it will grant to Sinochem Corporation and its concert parties the Whitewash Waiver subject to the approval of the Independent Shareholders at the SGM by way of a poll.

Shareholders should note that after completion of the Acquisition, Sinochem Corporation and parties acting in concert with it will hold more than 50% of the issued ordinary share capital of the Company. As such, any further acquisition of interest in the Company by Sinochem Corporation or any members of the concert group will not be subject to the obligation to make a general offer under the Takeovers Code.

As discussed in the paragraph headed ‘‘The Acquisition’’ above, the Acquisition is conditional on, among other things, the approval of the Whitewash Waiver by the Independent Shareholders at the SGM. If the Whitewash Waiver is not approved, the Acquisition will not proceed and no general offer obligation will be triggered. In the event the Acquisition cannot proceed, the Group and the Shareholders will not be able to enjoy the benefits that would arise from the Acquisition, in particular, the prospects of the Enlarged Group as one of the largest fertilizer group in the PRC and the enhancement in the Group’s net tangible assets and earnings capability as discussed above.

NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS

Background of and reasons for the Non-exempt Continuing Connected Transactions

In the circumstances, on 6 June 2005, various agreements were entered into between various members of the Sinochem Group (other than the Enlarged Group) and the Enlarged Group which set out the framework and general terms of the Continuing Connected Transactions to be conducted for the three years ending 31 December 2007. Since the Board anticipates that the percentage ratios (other than the profit ratio) for four of the Continuing Connected Transactions on an annual basis will not be less than 2.5% and the annual consideration of such four transactions are expected to be higher than HK$10,000,000, the four Continuing Connected Transactions therefore constitute nonexempt continuing connected transactions of the Company under Rule 14A.35 of the

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Listing Rules. The Directors therefore consider that it is in the commercial interest of the Company to seek from Independent Shareholders the approval of the Non-exempt Continuing Connected Transactions which will be conducted in the three financial years ending 31 December 2007, subject to an annual maximum transaction value (the ‘‘Annual Caps’’) for each respective Non-exempt Continuing Connected Transactions.

(a) Import service framework agreement

Pursuant to the PRC law, only approved importers are allowed to import fertilizer products into the PRC. At present, only Sinochem Corporation and three other importers are granted the right to import fertilizer products into the PRC. Sinochem Fertilizer, Sinochem Corporation and Sinochem Macao therefore entered into an import service framework agreement (the ‘‘Framework Agreement’’) pursuant to which Sinochem Corporation has agreed to provide import service to the Fertilizer Group. Under the Framework Agreement, Sinochem Macao, being the international procurement arm of the Fertilizer Group, will source fertilizer products from overseas and sell them to Sinochem Corporation. Sinochem Corporation, as an approved importer of fertilizer products in the PRC, will import the products and sell them all (except for any such products imported by Sinochem Corporation as an agent for other customers) to Sinochem Fertilizer.

(b) Fertilizer purchase agreement with US Agri-Chemicals

US Agri-Chemicals, an indirect wholly-owned subsidiary of Sinochem Corporation, produces phosphate-based fertilizers in the United States. As the majority of the products of US Agri-Chemicals is sold to the United States, Latin America and Australia, its business does not form part of the core business of the Fertilizer Group and US AgriChemicals has not been included as part of the Fertilizer Group. The Fertilizer Group purchased fertilizer products produced by US Agri-Chemicals through another whollyowned subsidiary of Sinochem Corporation in the United States in the past. It is expected that the Fertilizer Group will continue to purchase fertilizer products from US Agri-Chemicals in the future and therefore Sinochem Macao and US Agri-Chemicals entered into the fertilizer purchase agreement on 6 June 2005 (the ‘‘US Agri-Chemicals Agreement’’). Pursuant to the US Agri-Chemicals Agreement, Sinochem Macao shall place purchase orders with US Agri-Chemicals direct as and when Sinochem Macao desires. Sinochem Macao is not obliged to purchase fertilizers from US Agri-Chemicals, whereas US Agri-Chemicals has undertaken to Sinochem Macao not to sell any of its products to any purchaser in the PRC.

(c) Fertilizer purchase and supply agreements with Sinochem Shandong

Sinochem Shandong, a 60% owned subsidiary of Sinochem Corporation, has not been included as part of the Fertilizer Group as its production has not fully commenced. Sinochem Shandong has, since the completion of its first stage of construction at the end of 2004, been producing and selling compound fertilizers in the PRC. Sinochem Fertilizer has been purchasing fertilizer products from Sinochem Shandong since midDecember 2004. In order to avoid any potential competition between the Fertilizer Group and Sinochem Shandong, Sinochem Shandong has entered into the fertilizer purchase agreement with Sinochem Fertilizer on 6 June 2005 (the ‘‘Shandong Purchase Agreement’’) under which Sinochem Shandong has agreed to sell all its fertilizer products to Sinochem Fertilizer.

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On the other hand, Sinochem Fertilizer and Sinochem Shandong entered into the fertilizer supply agreement on 6 June 2005 (the ‘‘Shandong Supply Agreement’’) pursuant to which Sinochem Fertilizer shall supply potash fertilizers to Sinochem Shandong. We understand from the Management of the Fertilizer Group that such potash fertilisers are used by Sinochem Shandong in its production of compound fertilisers.

We consider that it would be in the interest of the Enlarged Group to enter into the Framework Agreement to secure the service of an approved importer to arrange for the import of fertilizers from overseas suppliers which are necessary for its business operations and to cement a continuous business relationship with one of the few approved fertilizers importers in the PRC before the relevant import restrictions in the PRC are lifted. We also consider that the entering into of the US Agri-Chemicals Agreement, the Shandong Purchase Agreement and the Shandong Supply Agreement are in the interest of the Enlarged Group as these agreements enable the Fertilizer Group to secure suppliers for fertilizer products for the next three years.

Principal terms of the Non-exempt Continuing Connected Transactions

(a) Framework Agreement

Pursuant to the Framework Agreement, fertilizer products sourced from overseas by Sinochem Macao for Sinochem Fertilizer will first be sold to Sinochem Corporation, an approved importer of fertilizer products in the PRC, who will then sell them all (except for any such products imported by Sinochem Corporation as an agent for other customers) to Sinochem Fertilizer. It is the intention of the Company to import through Sinochem Corporation all the fertilizer products sourced from overseas to be sold by the Fertilizer Group after Completion. Sinochem Corporation also imports a small amount of fertilizer products direct from specific countries from time to time. Sinochem Corporation has undertaken that except for fertilizer products imported by it as an agent for other customers, it will sell all the fertilizer products it imports to Sinochem Fertilizer exclusively. On the other hand, Sinochem Fertilizer is free to purchase fertilizer products from any supplier.

For fertilizer products sourced by Sinochem Macao for Sinochem Fertilizer, the price to be paid by Sinochem Corporation to Sinochem Macao will be set in accordance with prevailing international market price. Pursuant to the Framework Agreement, Sinochem Corporation will charge Sinochem Fertilizer on a cost basis, that is, based on the price of the imported fertilizer products purchased by Sinochem Corporation from Sinochem Macao plus product inspection costs, customs and excise handling charges, import duty, value-added tax and other administrative expenses. For fertilizer products sourced by Sinochem Corporation direct from overseas, price will be set in accordance with the domestic wholesale market price.

(b) US Agri-Chemicals Agreement

Pursuant to the US Agri-Chemicals Agreement, Sinochem Macao shall place purchase orders with US Agri-Chemicals, setting out in each order the quantity and quality of fertilizer products required, price, payment terms, delivery and shipping requirements and other customary instructions relating to the purchase. It is stipulated in the US Agri-Chemicals Agreement that each purchase shall be on normal commercial

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terms and the price shall be agreed between the parties and determined based on the fair market prices of the relevant products in the international market at the time the purchase order is placed.

(c) Shandong Purchase Agreement

Pursuant to the Shandong Purchase Agreement, Sinochem Shandong has granted Sinochem Fertilizer an exclusive right to distribute its fertilizer products in the PRC, and shall sell all its fertilizer products to Sinochem Fertilizer at the fair market price in the PRC at the time the purchase plan is submitted by Sinochem Fertilizer two months in advance of the purchase. Sinochem Shandong shall not grant any right to any third party to sell any of its fertilizer products in the PRC during the term of the Shandong Purchase Agreement.

(d) Shandong Supply Agreement

Pursuant to the Shandong Supply Agreement, Sinochem Fertilizer shall supply potash fertilizers to Sinochem Shandong. The price of the fertilizers shall be set at fair market price in the PRC at the time the purchase order is placed by Sinochem Shandong in advance.

Given the commodity nature of the fertilizer products, we consider that the basis for determining the prices for the fertilizer products to be transacted under the Framework Agreement, the US Agri-Chemicals Agreement, the Shandong Purchase Agreement and the Shandong Supply Agreement, which are set with reference to prevailing international or domestic wholesale market prices, are reasonable. We also consider that the prices for products to be sold by Sinochem Corporation to Sinochem Fertilizer sourced by Sinochem Macao under the Framework Agreement, which is determined based on cost with no mark-up, is fair and reasonable to the Fertilizer Group.

As the Fertilizer Group used to be part of the Sinochem Group and did not engage any independent importer in the past, we have not been able to review and compare the terms of the past Non-exempt Continuing Connected Transactions under the Framework Agreement with transactions between the Fertilizer Group and independent fertilizer importers. We have therefore reviewed contracts for sale/purchase transactions of similar products between the Sinochem Group and Independent Third Parties and noted that the basis of price determination for the Non-exempt Continuing Connected Transactions under the Framework Agreement are no less favourable to the Fertilizer Group than those similar transactions between the Sinochem Group and Independent Third Parties. We have also reviewed sample contracts between the Fertilizer Group and Independent Third Parties for similar products under the US Agri-Chemicals Agreement, the Shandong Purchase Agreement and the Shandong Supply Agreement and noted that the basis of price determination for the Nonexempt Continuing Connected Transactions under the aforesaid agreements are no less favourable to the Fertilizer Group than those similar transactions between Fertilizer Group and Independent Third Parties.

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Annual Caps

The Non-exempt Continuing Connected Transactions are subject to the Listing Rules requirements and conditions as more particularly discussed under the paragraph headed ‘‘Reporting requirements and conditions of the Non-exempt Continuing Connected Transactions’’ below. In particular, the Non-exempt Continuing Connected Transactions are subject to the Annual Caps.

In assessing the reasonableness of the Annual Caps, we have discussed with the Management of the Fertilizer Group the basis and assumptions underlying the projections of the Annual Caps. The Management of the Fertilizer Group advised us that the Annual Caps for the Non-exempt Continuing Connected Transactions are determined with reference to, among other things, the value of the historical transactions, the projected price of both imported and domestic fertilizers, the projection of future purchases and sales for the Fertilizer Group, the estimated production capacity of US Agri-Chemicals and Sinochem Shandong, and the estimated growth of the fertilizer markets in the PRC.

(a) Review of historical figures

The table below sets out the value of each category of the Non-exempt Continuing Connected Transactions during the Track Record Period:

	Year	ended 31 December	ended 31 December
	2002	2003		2004
	RMB million	RMB million	RMB	million
Framework Agreement	9,168	7,737		8,347
US Agri-Chemicals Agreement	100.3	146.4		294.4
Shandong Purchase Agreement	—	—		0.7
Shandong Supply Agreement	—	—		—

Framework Agreement

As the procurement arrangement between Sinochem Corporation, Sinochem Macao and Sinochem Fertilizer was not in place during the Track Record Period, for the purpose of our review, we have used the amount of purchases from international suppliers for the Fertilizer Group during the Track Record Period as a reference instead. As indicated from the above table, the aggregate value of purchases from international suppliers in 2003 dropped by 15.6% when compared to 2002. Such decrease was mainly due to the fact that the import price of phosphate-based fertilizers inflated under the pressure of rising raw material cost and transportation cost in the international market. As a result, the price of imported fertilizer products was higher than those of the local products and consequently the Fertilizer Group reduced its purchases from international suppliers in 2003. Such inflation in prices of overseas fertilizer products continued in 2004, and the Fertilizer Group further reduced its volume of purchases from international suppliers during the year. Despite the diminished purchase volume, there was a 7.9% increase in the value of purchases from international suppliers in 2004, which was attributable to the soaring purchase price of the imported fertilizers.

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US Agri-Chemicals Agreement

During the Track Record Period, the Fertilizer Group purchased fertilizers produced by US Agri-Chemicals through another wholly-owned subsidiary of Sinochem Corporation, US Chem Resources. Accordingly, the figures shown in the above table relate to the total purchases by the Fertilizer Group through US Chem Resources of phosphate-based fertilizers produced by US Agri-Chemicals in the relevant period. We note from the above table that the value of purchases of phosphate-based fertilizers produced by US Agri-Chemicals through US Chem Resources increased by 46.0% from approximately RMB100.3 million in 2002 to RMB146.4 million in 2003, and further by 101.1% to RMB294.4 million in 2004. The purchases represent a compound annual growth of about 71.3%. The growth was contributed by both the increase in the volume of fertilizer products purchased as well as the rise in selling price of fertilizer products in the international market.

Shandong Purchase Agreement and Shandong Supply Agreement

As Sinochem Shandong has just commenced its production in December 2004, the value of compound fertilizers with high level of nitrogen purchased from Sinochem Shandong was only about RMB693,000 in 2004 and there was no historical figure for the supply of potash fertilizer to Sinochem Shandong.

(b) Assessment of the Annual Caps

Set out below are the Annual Caps being proposed for the Non-exempt Continuing Connected Transactions for each of the three years ending 31 December 2007:

	Year	ending 31 December	ending 31 December
	2005	2006	2007
	RMB million	RMB million	RMB million
Framework Agreement
— for transactions between	11,563.9	11,931.0	12,665.2
Sinochem Corporation and	(US$1,398.3	(US$1,442.7	(US$1,531.5
Sinochem Macao	million)	million)	million)
— for transactions between
Sinochem Corporation and
Sinochem Fertilizer	10,863.0	12,180.0	14,991.0
US Agri-Chemicals Agreement	431.7	570.6	589.7
	(US$52.2	(US$69.0	(US$71.0
	million)	million)	million)
Shandong Purchase Agreement	555.1	925.1	1,850.0
Shandong Supply Agreement	116.4	209.5	383.8

Framework Agreement — in respect of transactions between Sinochem Corporation and Sinochem Macao

Despite there has been a drop in international sourcing in 2003, the Fertilizer Group expects that it would need to secure a stable supply of high-quality imported fertilizer products to meet the anticipated robust growth in demand in the PRC. The Annual Cap for 2005 of RMB11,563.9 million represents an increase by

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approximately 38.5% over the purchases from international suppliers in 2004, which increase is made up of expected increases in both quantity as well as average selling price for the products. We note that for the purpose of the Annual Cap in 2005, the estimated quantity is similar to the average quantity of purchases from international suppliers during the Track Record Period whereas the average price is set at the higher end of the range of average selling price of the Fertilizer Group of RMB1,433.1 to RMB2,033.0 per tonne for major products in 2004 as disclosed in the section headed ‘‘Financial information — the Fertilizer Group’’ in the Circular. The Annual Caps for 2006 and 2007 represent further increases of approximately 3.2% and 6.1% over the corresponding preceding period, which are attributable to expected growth in quantity. In view of the escalation in import price during the Track Record Period as discussed in paragraph (a) above and the growth in demand for fertilizer products which may further push up fertilizer prices, we consider the Annual Caps provide a comfortable buffer for the Fertilizer Group to capture the growth potential in the fertilizer market in the PRC as well as to accommodate for the expected rise in fertilizer prices.

Framework Agreement — in respect of transactions between Sinochem Corporation and Sinochem Fertilizer

The quantity of products expected to be sold by Sinochem Corporation to Sinochem Fertilizer under the Framework Agreement is principally based on the quantity of products expected to be sold by Sinochem Macao to Sinochem Corporation as discussed above, after adjusting for the quantity that Sinochem Corporation may sell as an agent to other customers and the amount of products imported by Sinochem Corporation directly from specific countries from time to time. It is expected that the quantity of products that Sinochem Corporation may sell as agent to other customers will gradually reduce while Sinochem Corporation will import more fertilizer products from specific countries and supply to Sinochem Fertilizer. The average price of products to be sold by Sinochem Corporation to Sinochem Fertilizer for the purpose of the Annual Caps are based on the prices of products sold by Sinochem Macao to Sinochem Corporation as estimated on the basis discussed above, plus an additional cost per tonne which is estimated based on the actual administrative and other direct costs incurred for the import of fertilizer products in 2004.

US Agri-Chemicals Agreement

The Annual Cap for the US Agri-Chemicals Agreement of RMB431.7 million for the year ending 31 December 2005 represents a 46.9% increase over the value of purchases through US Chem Resources of products produced by US AgriChemicals in 2004, and the Annual Cap of RMB570.6 million for 2006 represents a further growth of 32.2% from 2005. The increase in Annual Caps is projected with an expected growth in quantity as well as a rise in average price after taking into account the remarkable growth of purchases through US Chem Resources of products from US Agri-Chemicals during the Track Record Period as discussed in paragraph (a) above and the increase of approximately 7.1% in average cost of sales for phosphate-based fertilizers from approximately RMB1,715 per tonne in 2003 to RMB1,837 per tonne in 2004 as described in the section headed ‘‘Financial Information — the Fertilizer Group’’ in the Circular. The Annual Cap for 2007 represents a growth of 3.3% from 2006, which growth is attributable only to an

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expected increase in fertilizer price as the Fertilizer Group expects that the purchase quantity would be limited by the production capacity of US AgriChemicals.

Shandong Purchase Agreement

As disclosed in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in the Circular, Sinochem Shandong has completed the first stage construction of its production facilities at the end of 2004 for the production of 0.2 Mt of (gunited granulates) per year. The construction work for production facilities of 0.4 Mt of (tower-form melted granulates) per year and 0.4 Mt of (compound fertilizers with high level of nitrogen) per year are expected to be completed and ready for production by the end of 2005 and the end of 2007 respectively.

Pursuant to the Shandong Purchase Agreement, Sinochem has agreed to sell all its products to the Fertilizer Group on an exclusive basis. Accordingly, for the purpose of setting the Annual Caps for the Shandong Purchase Agreement, the quantity of nitrogen-based compound fertilizer products to be purchased from Sinochem Shandong is estimated based on the aforesaid planned production capacity of Sinochem Shandong, with a uniform average unit price for all the three years ending 31 December 2007. As disclosed in the section headed ‘‘Financial information — the Fertilizer Group’’ in the Circular, the average cost of sales of compound fertilizer increased by 13.3% from RMB1,376 per tonne in 2002 to RMB1,559 per tonne in 2003 and dropped slightly by 2.3% to RMB1,523 per tonne in 2004. In view of the fluctuation in the average price during the Track Record Period, in particular, the substantial rise in price in 2003, we consider the Annual Caps provide reasonable buffers to cater for the possible increase in the purchase price in the next three years.

Shandong Supply Agreement

Potash fertilizer is one of the ingredients needed by Sinochem Shandong in its production of nitrogen-based compound fertilizer products. The Annual Caps are therefore estimated on the basis of the expected production capacity of Sinochem Shandong for each of the three years ending 31 December 2007 as referred to above, taking into account that compound fertilizers produced by Sinochem Shandong generally contain approximately 20% to 25% potash. The Annual Caps have also provided for a rise in the unit price of potash fertilizer in view of the substantial rise in the average selling price of such products by 24.6% from RMB1,150 per tonne in 2003 to RMB1,433.1 per tonne in 2004 as disclosed in the section headed ‘‘Financial information — the Fertilizer Group’’ in the Circular.

Having considered the basis from which the Annual Caps are determined as described above, we are of the view that the Annual Caps are fair and reasonable.

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Reporting requirements and conditions of the Non-exempt Continuing Connected Transactions

Pursuant to Rules 14A.37 to 14A.40 of the Listing Rules, the Non-exempt Continuing Connected Transactions are subject to the following annual review requirements:

(a) each year the independent non-executive Directors must review the Non-exempt Continuing Connected Transactions and confirm in the annual report and accounts that the Non-exempt Continuing Connected Transactions have been entered into:
(i) in the ordinary and usual course of business of the Enlarged Group;
(ii) either on normal commercial terms or, if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Enlarged Group than terms available to or from (as appropriate) Independent Third Parties; and
(iii) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole;
(b) each year the auditors of the Company must provide a letter to the Board (with a copy provided to the Stock Exchange at least 10 business days prior to the bulk printing of the Company’s annual report) confirming that the Non-exempt Continuing Connected Transactions:
(i) have received the approval of the Board;
(ii) are in accordance with the pricing policies of the Group;
(iii) have been entered into in accordance with the relevant agreements governing the transactions; and
(iv) have not exceeded the relevant Annual Caps;
(c) the Company shall allow, and shall procure the relevant counterparties to the Nonexempt Continuing Connected Transactions shall allow, the Company’s auditors with sufficient access to their records for the purpose of the reporting on the Nonexempt Continuing Connected Transactions as set out in paragraphs (b); and
(d) the Company shall promptly notify the Stock Exchange and publish an announcement in the newspaper if it knows or has reason to believe that the independent non-executive Directors and/or auditors of the Company will not be able to confirm the matters set out in paragraphs (a) and (b) respectively.

In light of the reporting requirements attached to the Non-exempt Continuing Connected Transactions, in particular, (i) the restriction of the value of the Non-exempt Continuing Connected Transactions by way of the Annual Caps; and (ii) the ongoing review by the independent non-executive Directors and auditors of the Company of the terms of the Nonexempt Continuing Connected Transactions and the Annual Caps not being exceeded, we are

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of the view that appropriate measures will be in place to govern the conduct of the Nonexempt Continuing Connected Transactions and safeguard the interests of the Independent Shareholders.

GRANT OF GENERAL MANDATE TO ISSUE ORDINARY SHARES

Background

At the annual general meeting of the Company held on 30 August 2004, ordinary resolutions were passed granting to the Directors a general mandate to allot, issue and deal with Ordinary Shares not exceeding 20%, and to repurchase Ordinary Shares not exceeding 10%, in each case, of the aggregate nominal amount of the issued ordinary share capital of the Company as at that date. This mandate, which granted to the Directors the power to allot, issue and deal with 735,899,656 Ordinary Shares, has not been refreshed or utilised since the time they were granted. The Company has not undertaken any equity capital raising exercise in the last twelve months.

Reasons for the proposed grant of the Mandate

At the SGM, ordinary resolutions will be proposed such that, conditional on Completion taking place, the Mandate will be granted to the Directors to allot, issue and deal with ordinary shares of the Company of up to 20% of (a) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of the relevant resolution granting the Mandate and, subject to the Share Consolidation taking effect, as adjusted to reflect the effects of the Share Consolidation; and (b) the nominal amount of the ordinary shares of the Company to be issued pursuant to the Acquisition Agreement. The Mandate will be extended by adding to it the aggregate number of ordinary shares repurchased under the Repurchase Mandate.

On the basis of the existing Ordinary Shares in issue and assuming that no further Ordinary Shares will be issued prior to the SGM and the Share Consolidation takes effect, the maximum number of New Shares that may be allotted and issued under the Mandate will be 1,083,589,965 New Shares (i.e. 20% of the issued share capital of the Company as enlarged by the Acquisition). Such limit is significantly higher than that under the existing mandate. We consider that the Mandate will provide more financial flexibility to the Group to allot new shares and raise a more sizeable amount of capital for the business development of the Group within a short period of time should suitable market opportunities arise. Equity financing is also viewed as an important avenue of working capital to the Group as unlike bank borrowings, it would not create any interest paying obligations on the Group. We consider that the Mandate is in the interest of the Company and the Shareholders as a whole.

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Potential dilution to Shareholders

The following table illustrates the Company’s shareholding changes assuming full utilization of the Mandate:

Shareholders Sinochem HK and its concert parties Mr. Chu Yu Lin, David Ms. Chu Ho Miu Hing Independent Shareholders New Shares that may be issued under the Mandate	Shareholding structure immediately after the Acquisition (Note) New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 — — 5,417,949,828 100.00	Shareholding structure assuming full utilization of the Mandate New Shares % 5,127,847,763 78.87 31,287,629 0.48 6,430,400 0.10 252,384,036 3.88 1,083,589,965 16.67 6,501,539,793 100.00	Shareholding structure assuming full utilization of the Mandate New Shares % 5,127,847,763 78.87 31,287,629 0.48 6,430,400 0.10 252,384,036 3.88 1,083,589,965 16.67 6,501,539,793 100.00
			100.00

Note: Based on the existing shareholding structure as at the Latest Practicable Date adjusted for the effects of the Capital Reorganisation and assuming Completion has taken place but prior to any possible Offering.

The Independent Shareholders’ percentage holding in the Company will be diluted from approximately 4.66% to 3.88% if the Mandate is utilised in full but prior to any possible Offering. We consider such potential dilution is acceptable having considered the financial flexibility that the Mandate may bring to the Company and the fact that the shareholding of all the Shareholders will be diluted to the same extent.

DISCUSSION AND ANALYSIS

Acquisition

Commercially, the Acquisition will provide the Group with the opportunity to participate in the fertilizer business in the PRC which is depicting a promising growth prospects. The Acquisition will also enable the Group to enhance its earnings capability by investing into the Fertilizer Group which had a profitable track record. We consider that the commercial logic for the Acquisition is sound.

The Group recorded a loss of HK$101.9 million for the year ended 31 March 2004 and a profit of HK$37.6 million for the six months ended 30 September 2004. However, this profit is inclusive of a one-off gain from waiver of bank debts and accrued interest of HK$36.1 million. Despite signs of recovery in the property market in Hong Kong recently, in view of the much downsized property portfolio of the Group, we consider the Group will not be able to benefit from such recovery significantly without a major acquisition or other similar development.

The Acquisition is expected to improve the earnings capability and gearing position of the Group as enlarged by the Fertilizer Group. As described in section headed ‘‘Financial effects of the Acquisition on the Group’’ above, the proforma combined profit of the Enlarged

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Group would be approximately HK$384.8 million, versus a net loss for the Group of HK$101.9 million. The gearing ratio of the Enlarged Group based on the proforma consolidated balance sheet after Completion is 85.2%, compared to 198.7% of the Group as at 30 September 2004.

The demand for fertilizers in China is expected to grow in step with the growth of China’s population and the improvement in living standard. In view of the niche of the Fertilizer Group in the PRC market as the largest importer of fertilizer products in terms of import volume prior to Completion and the largest distributor of imported fertilizer products in terms of sales volume after Completion, the Fertilizer Group is well positioned to meet the challenges of increasing competition and bear the business risks as well as capture the growth potential in the fertilizer industry.

The consideration of HK$5,050 million for the Acquisition will be settled by the allotment and issue of 5,050 million New Shares at HK$1.00 each if the Share Consolidation takes effect. Given the existing financial position of the Group, this settlement method of the consideration is the only viable way that enables the Group to acquire a profitable business without stretching its financial position. The issue price of the Consideration Shares represents a discount to average market prices before the announcement of the Acquisition, but substantial premium over the net tangible asset value per share. Given that the Group has been loss making for the last few years, we believe the market price of the shares was not supported by the fundamentals of the Group.

The price-earnings multiple implied by the consideration is 9.9 times based on 2004 earnings of the Fertilizer Group, which is lower than the current average and median priceearnings multiples of 13.2 and 12.4 times respectively of the Comparable Companies.

Independent Shareholders’ percentage interest in the Company will be diluted from 68.59% to 4.66% after completion of the Acquisition but before the Offering. After the Placing, the percentage interest of the Independent Shareholders will be further diluted to 4.35%. This is significant but we regard such dilution as inevitable in the case of a substantial acquisition of this type. Following the Acquisition but before the Offering, the net tangible asset value per New Share will increase from HK$0.125 to HK$0.36.

Non-exempt Continuing Connected Transactions

Upon completion of the Acquisition, certain members of the Enlarged Group and connected persons (as defined under the Listing Rules) of the Company will carry out or will continue to carry out transactions that will constitute non-exempt continuing connected transactions for the Company under the Listing Rules.

The agreements for the Non-exempt Continuing Connected Transactions are entered into to facilitate the future fertilizer business of the Enlarged Group. The selling or purchase prices of fertilizer products under the agreements will be determined with reference to prevailing domestic or international market prices. The Annual Caps have been set on the basis of expected market prices of the products and projected growth in the business of the Fertilizer Group taking into account historical trend for past transactions.

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Grant of the Mandate

The Mandate will provide financial flexibility to the Group in raising additional equity capital and respond to market promptly should suitable opportunity arises. Despite the potential dilution to Independent Shareholders’ percentage shareholding in the Company, such dilution applies to all Shareholders to the same extent.

OPINION AND ADVICE

Having taken into account the above factors and reasons, we consider that the terms of the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions including the Annual Caps and the Mandate are fair and reasonable so far as the Independent Shareholders are concerned and the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the Mandate are in the interests of the Company and the Shareholders as a whole. We also consider the Non-exempt Continuing Connected Transactions are on normal commercial terms and in the ordinary course of business of the Enlarged Group.

Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Acquisition, the Whitewash Waiver, the Non-exempt Continuing Connected Transactions and the Mandate.

Yours faithfully, for and on behalf of SOMERLEY LIMITED Beatrice Lung Director — Corporate Finance

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INFORMATION ON THE FERTILIZER GROUP — OVERVIEW

OVERVIEW

General Overview

The Fertilizer Group is a leading fertilizer enterprise in the PRC offering a comprehensive range of fertilizer and agricultural related products (see the chart below). It is the largest importer of fertilizer products in the PRC in terms of import volume prior to Completion. The Management of the Fertilizer Group believes that the Enlarged Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after Completion. At present, it operates three principal divisions, namely SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, which together form a vertically-integrated business operation model across the fertilizer supply chain. The Fertilizer Group is the fertilizer flagship of Sinochem Corporation. Sinochem Corporation was established in 1950 and is one of the largest state-owned enterprises in the PRC in terms of turnover. It has been listed among the Fortune Global companies for 15 consecutive years and ranked 270th in 2003. In 2003, Sinochem Corporation also ranked 7th among all Chinese industrial companies in terms of its turnover of the same year. The Fertilizer Group is also a leading supplier of fertilizer products in terms of sales volume and one of the major producers of phosphate-based fertilizers in the PRC in terms of production output for 2004. The Fertilizer Group adheres to a unified branding strategy. All of the sale centres under its sales and distribution network carry the brand ‘‘ (Sinochem Fertilizer)’’, and substantially all of the products are sold under the trademark ‘‘ (Sinochem)’’, which is recognised as a (China Well-Known Trademark) by the Trademark Office of the SAIC.

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INFORMATION ON THE FERTILIZER GROUP — OVERVIEW

Centrally co-ordinated operations

The operations model of the Fertilizer Group can be illustrated as follows:

==> picture [365 x 253] intentionally omitted <==

The Fertilizer Group has developed a centrally co-ordinated operation model to facilitate the integration of the three principal divisions. Under such operation model, the flow of products, information and funds, as well as resources deployment are managed and coordinated centrally. To ensure operational efficiency for its large-scale operations, the Fertilizer Group also deploys a structured logistics network and a proprietary ERP system.

SINOCHEM Procurement

SINOCHEM Procurement sources a wide variety of products and certain principal raw materials from both overseas and domestic suppliers for sales by SINOCHEM Distribution and production by SINOCHEM Production respectively. The total volume of fertilizer products sourced by SINOCHEM Procurement in 2004 amounted to approximately 8.90 Mt, of which approximately 63.8% and 36.2% were sourced from overseas and domestic suppliers respectively. According to data from CFIN, the total volume of fertilizer products sourced from overseas by the Fertilizer Group in 2004 represented approximately 45.9% of the aggregate national import of fertilizer products in the PRC of the same year.

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INFORMATION ON THE FERTILIZER GROUP — OVERVIEW

SINOCHEM Production

SINOCHEM Production produces phosphate-based fertilizers and compound fertilizers all with high nutrient contents. As at the Latest Practicable Date, the Fertilizer Group had interests in seven production enterprises, including one subsidiary and three jointly controlled entities for the production of phosphate-based fertilizers, and two subsidiaries and one jointly controlled entity for the production of compound fertilizers. The aggregate annual production capacity and production output of these seven enterprises in 2004 amounted to approximately 2.46 Mt and 1.85 Mt respectively. All of the four phosphate-based fertilizer production enterprises are strategically located in close proximity to the natural mineral resources of phosphorus rocks. This enables SINOCHEM Production to obtain a stable supply of phosphorus rocks with relatively low transportation costs.

SINOCHEM Distribution

SINOCHEM Distribution distributes all products sourced by SINOCHEM Procurement and certain portion of products produced by SINOCHEM Production. Products are principally sold in the PRC with a small proportion being exported to overseas customers. In 2004, the total sales volume and sales turnover of fertilizer products sold by SINOCHEM Distribution amounted to approximately 8.36 Mt and RMB12,591 million, respectively. Products are sold through SINOCHEM Distribution’s own extensive sales and distribution network. In respect of the remaining sales during the Track Record Period, a substantial portion were made mainly by Sinochem Fertilizer’s head office to independent distributors as well as other customers. As at 30 April 2005, the sales and distribution network comprised 14 branch companies and over 838 sales centres in 15 major agricultural provinces, representing approximately 66.4% of the total cultivated area in the PRC.

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INFORMATION ON THE FERTILIZER GROUP — KEY STRENGTHS AND STRATEGIES

KEY STRENGTHS AND STRATEGIES

Key Strengths

The Fertilizer Group is a leading fertilizer enterprise in the PRC with strong market presence and brand recognition in the PRC fertilizer industry. The Management of the Fertilizer Group believes that the success of the Fertilizer Group is attributable to the following key strengths:

. Vertically-integrated, large-scale operations model

The Fertilizer Group is one of the few leading fertilizer enterprises in the PRC which has established a vertically-integrated operations model encompassing both upstream and downstream operations. In 2004, the total sales volume and turnover of fertilizer products sold by the Fertilizer Group amounted to approximately 8.36 Mt and RMB12,591 million respectively. The Management of the Fertilizer Group believes that the vertically-integrated, large-scale operation model enables the Fertilizer Group to capture the profit opportunities available throughout the fertilizer supply chain and secure its leading position in the PRC fertilizer industry.

. Strong upstream capability to secure supplies of fertilizer products

The Fertilizer Group has multiple sourcing channels, including sourcing from independent overseas and domestic suppliers as well as sourcing from SINOCHEM Production. The Fertilizer Group has established long-term strategic relationships with a number of independent suppliers, some of which have entered into exclusive distribution arrangements with the Fertilizer Group for distribution of their products in the PRC. On the other hand, SINOCHEM Production has interests in seven production enterprises for the production of phosphate-based fertilizers and compound fertilizers, with a total annual production capacity of approximately 2.46 Mt and 1.85 Mt, respectively for 2004. These multiple sourcing channels provide the Fertilizer Group with a diversified source of supplies and enhance its flexibility in adjusting its supply sources and product portfolio for profit maximisation.

. Strong downstream sales and distribution capabilities

The Fertilizer Group has established and operates its own extensive sales and distribution network, which covers 15 major agricultural provinces, representing approximately 66.4% of the total cultivated area in the PRC. As at 30 April 2005, the sales and distribution network comprised 14 branch offices and over 838 sales centres in the PRC, including 268 regional sales centres at county level and 570 local sales centres in rural areas. The Fertilizer Group’s sales and distribution network has grown significantly in recent years and is expected to continue to grow. In 2002, 2003 and 2004, 21.4%, 42.3% and 43.8%, respectively of the Fertilizer Group’s turnover was attributable to sales made through its sales and distribution network. This extensive sales and distribution network allows the Fertilizer Group to effectively penetrate target markets and at the same time collect first-hand market intelligence. The sales and distribution network is connected and supported by the structured logistics network and a proprietary ERP system, providing the Fertilizer Group with a management platform to efficiently manage its extensive sales and distribution network.

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INFORMATION ON THE FERTILIZER GROUP — KEY STRENGTHS AND STRATEGIES

. Comprehensive product portfolio

The Fertilizer Group offers a comprehensive range of different types of fertilizer products including potash fertilizers, phosphate-based fertilizers, nitrogen-based fertilizers and compound fertilizers, all with high level of nutrient content and different nutrient composition to cater to customers’ needs. This helps the Fertilizer Group capture demand from different segments in different areas, and at the same time promote the brand ‘‘ (Sinochem)’’ as a leading brand in the PRC fertilizer industry.

. Strong brand recognition among customers and end-users

The Fertilizer Group adheres to a unified branding strategy. All of the sales centres carry the brand ‘‘ (Sinochem Fertilizer)’’, and most of the products are sold under the trademark ‘‘ (Sinochem)’’. The trademark ‘‘ (Sinochem)’’ was recognized as one of the six (China Well-Known Trademarks) in the PRC fertilizer industry by the Trademark Office of the SAIC in 2002 and 2004 for the quality of its products. The Management of the Fertilizer Group believes that its brand equity enhances customer loyalty and provides the Fertilizer Group with a solid platform for its further expansion of its sales network, product range and services.

. Experienced management team

The senior management of the Fertilizer Group has demonstrated experience in, and market knowledge of, the PRC fertilizer industry. Members of the senior management team have been working in the PRC fertilizer industry, on average, for over 5 years. The experience of the management team enables the Fertilizer Group to proactively formulate strategies ahead of its competitors to capture opportunities offered in the PRC fertilizer market.

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INFORMATION ON THE FERTILIZER GROUP — KEY STRENGTHS AND STRATEGIES

Strategies

The goal of the Fertilizer Group is to become the largest fully-integrated fertilizer enterprise in the PRC. The Fertilizer Group proposes to adopt the following business strategies to achieve its objective:

Upstream operations

The Management of the Fertilizer Group believes that one of the key factors to becoming successful in the PRC fertilizer industry is the ability to secure products or material supplies from diversified sources, in order to maintain the flexibility of the Fertilizer Group to adjust its products and supplies mix for profit maximisation. In this regard, the Fertilizer Group will endeavour to maintain stable and long-term access to major fertilizer resources in both international and domestic markets through the following measures:

. Enhance the operation of SINOCHEM Procurement

The Fertilizer Group intends to further strengthen its existing relationships with its major overseas suppliers to ensure a stable supply of high-quality imported fertilizer products. Particular focus will be on products or materials which are limited natural resources in the PRC, including potash fertilizers and phosphorus rocks or phosphate-based fertilizers. Building on the solid strategic alliance with its existing overseas suppliers, the Fertilizer Group intends to explore other forms of cooperation, including the introduction of strategic investors and formation of joint ventures. In addition, the Fertilizer Group will also develop business opportunities with selected new overseas suppliers.

. Strengthen SINOCHEM Production through strategically increasing its production capacity

The Fertilizer Group plans to further expand SINOCHEM Production and increase its production capacity through establishing new production enterprises with strategic partners as well as acquiring or investing in other large fertilizer producers in the PRC. The Management of the Fertilizer Group believes that access to natural mineral resources is crucial to enhance its competitiveness in the PRC fertilizer industry in the long run. As such, the Fertilizer Group will keep implementing its expansion strategies, to establish production enterprises at locations which are close to major fertilizer resources with a view to gaining direct access to, and where possible, control of such resources. It will seek to (i) leverage its leading position in the PRC fertilizer industry to form partnerships with mines and other owners of natural resources to secure a stable and long-term supply of natural resources for production; and (ii) capitalise on its extensive sales and distribution network to distribute products produced by these enterprises. In addition, the Fertilizer Group will also consider opportunities to directly acquire or invest in suitable mining enterprises in the PRC.

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INFORMATION ON THE FERTILIZER GROUP — KEY STRENGTHS AND STRATEGIES

Downstream operations

The Management of the Fertilizer Group is of the view that, given the wide geographical coverage of the cultivated land in the PRC, it is imperative for the Fertilizer Group to effectively distribute its products to customers. It therefore intends to:

. Further expand its sales and distribution network to cover all agricultural provinces in the PRC

The Fertilizer Group’s sales and distribution network currently covers approximately 66.4% of the cultivated land in the PRC. The Fertilizer Group intends to expand the geographical coverage and deepen the penetration of its existing sales and distribution network through the establishment of branch companies and sales centres at strategic locations to cover all agricultural provinces in the PRC.

. Strengthen its logistics operations to support its increasing sales volume

The Management of the Fertilizer Group believes that it is important to establish an efficient logistics network in order to support the growing sales volume and rapid expansion of its sales and distribution network. The Fertilizer Group intends to strengthen its logistics operation by establishing large-scale logistics centres in major agricultural provinces in the PRC and expanding its storage capacity and other warehouse facilities to fully cover and support its sales and distribution network.

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INFORMATION ON THE FERTILIZER GROUP — PRODUCT PORTFOLIO

PRODUCT PORTFOLIO

The Fertilizer Group offers a comprehensive range of fertilizer products, all with high levels of nutrient content and different compositions of nutrients to cater to customers’ needs. The following table summarises the turnover of the Fertilizer Group by major product types during the Track Record Period:

Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total	2002 RMB Million 3,208.4 2,860.3 675.0 1,050.1 7.0 7,800.8	Year ended 31 December 2003 2004 % RMB Million % RMB Million 41.1 4,812.0 46.4 5,799.4 36.6 3,360.0 32.4 3,289.7 8.7 954.7 9.2 1,403.0 13.5 1,208.7 11.7 1,615.7 0.1 36.1 0.3 483.4 100.0 10,371.5 100.0 12,591.2	% 46.1 26.1 11.2 12.8 3.8
			100.0

The following table sets out a summary of the major fertilizer products and other agricultural-related products sold by SINOCHEM Distribution:

Potash fertilizers

Name of product Country of origin Description

MOP Canada, Israel, . KCl (60%–62% or more) Jordan, Russia, . pink or white in colour and in granular or PRC (Qinghai) powder form
. can be applied directly or used for producing compound fertilizer, potassium sulphate, potassium nitrate, monopotassium phosphate
. increases productivity and crop quality
. used in soil which lacks potassium

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INFORMATION ON THE FERTILIZER GROUP — PRODUCT PORTFOLIO

Phosphate-based fertilizers

Name of product	Country of origin	Description	Description
TSP	PRC	.	phosphate (46% or more)
		.	usually used for direct application as well
			as in granulated processes and in bulk
			blending with other materials
		.	suitable for soils if soil test levels for
			phosphate are low
MAP	PRC	.	nitrogen (11% or more), phosphate (46%
			or more)
		.	a semi-finished product, usually used for
			bulk blending rather than direct
			application as it can cause germination
			injury if used in direct contact with the
			seed
		.	suitable for soils which need phosphate
		.	highly water soluble
		.	pH-balanced and environmentally friendly
DAP	PRC	.	nitrogen (18% or more), phosphate (46%
			or more)
		.	usually for direct application as a base
			fertilizer for crops
		.	suitable N:P ratio, particularly for field
			crops like wheat and rice
Nitrogen-based fertilizers
Name of product	Country of origin	Description
Ammonium sulphate	Taiwan, Russia	.	nitrogen (21% or more), sulphur (23% or
			more)
		.	can be used for direct application
		.	an ideal provider of sulphur in the readily
			available sulphate form
		.	suitable for alkaline and lime soil
		.	suitable for cultivation of rice, oats,
			potatoes, vegetables and sugar cane

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INFORMATION ON THE FERTILIZER GROUP — PRODUCT PORTFOLIO

Name of product

Country of origin Description

Urea

PRC, Ukraine

. nitrogen (45% or more)
. for direct application, can be applied to soil as a solid or solution or as a foliar spray
. involves little or no fire or explosion hazard
. high nitrogen content (46% or more) helps reduce handling, storage and transportation costs over other forms
. suitable for all kinds of crops

Compound fertilizers

Name of product Country of origin Description

‘‘Sinochem’’ branded PRC processed compound fertilizer
. reasonably formulated with quality nutrients
. easy for mechanical application
. low in heavy metal content
. environmentally friendly
15-15-15 NPK Norway, fertilizer with Finland, potassium Belgium, sulphate Greece
. NPK ratio 1: 1: 1
. formulated for all uses, can be used as a base fertilizer or supplement fertilizer
. single nitrogen-based fertilizers or potash fertilizers can be easily used to adjust the NPK ratio after application
. the sulphur content is suitable for soil in the PRC, which has low sulphur content
. safe to apply to crops which are sensitive to chlorine, helps to improve quality of crops
NPK fertilizer with Russia potassium chloride
. balanced and with high level of nutrients . scientific formula, can be used as a base fertilizer or supplement fertilizer
. high water solvency rate, easy for absorption by plants with low nutrient loss and long-lasting effect

Organic NPK PRC (Sinochem . high level of nutrients fertilizer Dongfang) . easy for storage and transportation . highly soluble and easy for absorption . low nutrient loss BB fertilizer PRC (Sinochem . suitable for all kinds of soil and plants Dongfang) . made with advanced technology

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INFORMATION ON THE FERTILIZER GROUP — PRODUCT PORTFOLIO

Sulphur and other agricultural products

Name of product Country of origin Description

Sulphur . Canada, USA, . insoluble in water Middle East, . mainly used to produce sulphuric acid Japan, Taiwan, and other sulphide products Middle Asia . a kind of basic raw material for the production of DAP, MAP and NPK fertilizers
Monceren TWS47 . Germany . fungicide for seed treatment applications Raxil WS2 . Germany . fungicide for seed treatment applications Arozin 30EC . India . herbicide for application to rice Cobra 24EC . Brazil . herbicide for application to soybean Confidor 200s . Germany . Insecticide control application Dropp 50WP . Germany . plant growth regulator Gaocho 600FS . Germany . seed treatment for application to cotton, controls early season pests

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

SINOCHEM PROCUREMENT

. SINOCHEM Procurement sources fertilizer products for sale by SINOCHEM Distribution as well as some of the raw materials required by SINOCHEM Production from both international and domestic suppliers.
. The Fertilizer Group is the largest importer of fertilizer products in the PRC in terms of import volume prior to Completion. The Management of the Fertilizer Group believes that the Enlarged Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after Completion.
. The total volume of fertilizer products sourced by SINOCHEM Procurement in 2004 amounted to approximately 8.90 Mt, of which approximately 63.8% and 36.2% are sourced from overseas and domestic suppliers, respectively.
. The Fertilizer Group has established long-term strategic relationships with both overseas and domestic suppliers, a number of which have entered into exclusive distribution arrangements with the Fertilizer Group for the distribution of their products in the PRC.

Sourcing

Fertilizer products and certain raw materials are sourced by SINOCHEM Procurement from suppliers across the world as well as suppliers in the PRC. The following table sets out the volume of fertilizer products and raw materials sourced from both international and domestic suppliers during the Track Record Period:

International suppliers Domestic suppliers Total	2002 Mt 7.78 0.67 8.45	Year ended 31 December 2003 2004 % Mt % Mt 92.1 6.08 65.2 5.68 7.9 3.24 34.8 3.22 100.0 9.32 100.0 8.90	% 63.8 36.2
			100.0

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

Products sourced by SINOCHEM Procurement include potash fertilizers, phosphatebased fertilizers, nitrogen-based fertilizers, compound fertilizers, sulphur and other agricultural-related products. Set out below is the breakdown of the volume and value of the major types of fertilizer products sourced by SINOCHEM Procurement during the Track Record Period:

		Year	ended 31	December
Types of products	2002		2003		2004
		RMB		RMB		RMB
	Mt	(million)	Mt (million)		Mt	(million)
Potash fertilizers	4.21	4,143	4.11	4,288	5.30	6,876
Phosphate-based fertilizers	2.62	3,930	2.88	4,922	1.23	2,210
Nitrogen-based fertilizers	0.51	466	0.72	909	1.03	1,620
Compound fertilizers	1.12	1,695	1.61	2,592	1.35	2,538

Relationship with suppliers

The Fertilizer Group has established long-term strategic relationships with both overseas and domestic suppliers to ensure a stable supply of quality fertilizer products.

The Fertilizer Group enters into annual procurement contracts or master procurement contracts or memoranda of understanding with most of its suppliers. Certain major terms, including estimated annual purchase volume, pricing mechanisms, payment terms and delivery arrangements are set out in such procurement contracts. Detailed purchase orders with shipment schedules are placed by the Fertilizer Group with the suppliers on a monthly or quarterly basis. Pursuant to the terms of these procurement contracts, the Fertilizer Group usually enjoys a credit period ranging from 30 to 90 days. Payments for international purchases are normally made in US dollars, whereas those for domestic sourcing are made in RMB.

Procurement from the five largest suppliers of the Fertilizer Group in aggregate accounted for approximately 68.8%, 45.1% and 39.0% of the cost of sales of the Fertilizer Group for the three years ended 31 December 2004, respectively. The amount of purchases from the largest supplier of the Fertilizer Group accounted for 17.7%, 13.7% and 14.8% of the cost of sales of the Fertilizer Group for the three years ended 31 December 2004, respectively. All of the five largest suppliers are overseas producers of fertilizer products. The largest supplier for the two years ended 31 December 2004 was Canpotex Limited, a company equally-owned by the Investor and two other investors, who supplied the Fertilizer Group with potash fertilizers. Upon Completion and completion of the Offering, the Investor will hold 9.99% of the enlarged issued ordinary share capital of the Company. The Investor will become a substantial shareholder (as defined in the Listing Rules) of the Company if the Option granted to the Investor is exercised in full. For details, please refer to the paragraph headed ‘‘Maintaining the listing status and public float — (ii) Strategic Placing’’ in the ‘‘Letter from the Board’’ and the paragraph headed ‘‘Strategic Placing’’ in the ‘‘Letter from Sinochem HK’’ in this circular. Save as disclosed above, none of the Directors, the chief executive, the Management of the Fertilizer Group, their respective Associates or any shareholders holding more than 5% of the issued share capital of the Company had any interest in any of the five largest suppliers of the Fertilizer Group for the three years ended 31 December 2004.

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

Procurement from such suppliers was conducted through Sinochem UK, Dohigh Trading, and Sinochem Bahamas during the Track Record Period. Upon the establishment of Sinochem Macao, Sinochem Macao became the sole international procurement arm of the Fertilizer Group.

International sourcing

In respect of international sourcing, SINOCHEM Procurement sources various kinds of fertilizer products, raw materials and other agricultural-related products mainly from North America, Europe and the Middle East. The Fertilizer Group has established long-term relationships with its overseas suppliers. As at the Latest Practicable Date, a total of 8 overseas suppliers had entered into exclusive distribution arrangements with the Fertilizer Group for distribution of their products in the PRC. The term of these exclusive distribution arrangements ranges from one to two years. Prior to the establishment of Sinochem Macao, the Fertilizer Group processed its international procurement through Sinochem UK, US Chem Resources, Sinochem Bahamas and Dohigh Trading, all of which are subsidiaries (direct or indirect) of Sinochem Corporation. As part of the Reorganisation, Sinochem Macao was established as the sole international procurement arm of the Fertilizer Group. In particular, Sinochem UK and US Chem Resources have ceased all their procurement business after the Reorganisation and currently, they only provide local supplier relations and logistics services to Sinochem Macao in Europe and in the United States, respectively. On the other hand, Sinochem Bahamas and Dohigh Trading became part of the Fertilizer Group pursuant to the Reorganisation and Sinochem Bahamas has been recently dissolved. For details of the services provided by Sinochem UK and US Chem Resources to the Fertilizer Group, please refer to the section headed ‘‘Information on the Fertilizer Group — Relationship Between the Enlarged Group and the Sinochem Group’’ in this circular.

The following chart illustrates in simplified form the mechanism of the international sourcing operation of the Fertilizer Group after the Reorganisation:

Sinochem Corporation possesses the right granted by the State to import fertilizer products in the PRC.

Sinochem Corporation, the ultimate holding company of the Fertilizer Group, is one of the two state trading enterprises permitted to engage in the domestic trading of fertilizer products. It is also one of the four entities which has obtained the approval granted by the

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

Ministry of Commerce to import fertilizer products into the PRC. Sinochem Corporation has historically been approved by the PRC government to import fertilizer and such right to import is formally stated in a list of enterprises published by the MOFTEC in 2002. Prior to the Reorganisation, since Sinochem Fertilizer, the PRC operation arm of the Fertilizer Group, was wholly-owned by Sinochem Corporation, the right to import fertilizer products was delegated by Sinochem Corporation to Sinochem Fertilizer. As Sinochem Fertilizer became a whollyforeign owned enterprise after the Reorganisation, the right to import fertilizer products is no longer permitted to be delegated to Sinochem Fertilizer under (the Provisional Regulations on the Administration of the State Trading Import of Raw Oil, Retained Oil and Fertilizer).

Sinochem Fertilizer, Sinochem Corporation and Sinochem Macao have entered into an import service framework agreement, pursuant to which Sinochem Corporation agreed to provide import services to the Fertilizer Group for the purpose of sourcing fertilizer products from overseas suppliers. Pursuant to PRC law, in order for fertilizer products to be imported into the PRC, the products supplied by overseas suppliers must first be sold to a company which has the right to import the fertilizer products and then the products will be sold by this company to the domestic distribution company which arranged for the supply of the products from the overseas suppliers. Therefore, under the import service framework agreement, Sinochem Macao, the international procurement arm of the Fertilizer Group, will source fertilizer products from overseas and sell them to Sinochem Corporation. Sinochem Corporation, as an approved importer of fertilizer products in the PRC, will import the products and sell them all (except for any such products imported by Sinochem Corporation on behalf of its other customers) to Sinochem Fertilizer. Under such arrangement, Sinochem Macao will enter into contracts with Sinochem Corporation for the sale to Sinochem Corporation of the products it purchased from overseas suppliers and Sinochem Corporation will also enter into separate contracts with Sinochem Fertilizer for the sale of the products to Sinochem Fertilizer. The procedures for the import of fertilizers procured by Sinochem Macao will largely follow the steps below:

(i) Sinochem Fertilizer will ascertain the amount and types of products that are required to be imported and, based on the information provided by Sinochem Macao in relation to the supplier’s price for the relevant products, Sinochem Fertilizer will enter into a contract with Sinochem Corporation for the purchase of the products required and Sinochem Fertilizer will be charged for the price of the products, customs and excise handling charges, import duty and other taxes and administration cost of approximately RMB0.1 per tonne;
(ii) Sinochem Corporation will enter into contracts with Sinochem Macao for the purchase of fertilizer products in respect of which it has entered into a contract with Sinochem Fertilizer. The price of products that Sinochem Macao will charge Sinochem Corporation will be the same as the price of products as stated in the sales contract between Sinochem Corporation and Sinochem Fertilizer in respect of the same products;
(iii) Sinochem Macao will enter into contracts with overseas suppliers for the supply of products with respect to which Sinochem Fertilizer has entered into an agreement with Sinochem Corporation as mentioned in (i);

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

(iv) Sinochem Corporation will arrange for customs and import clearance once the fertilizers reach PRC port; and
(v) the fertilizers will be collected by Sinochem Fertilizer once the customs and import clearance procedures are completed.

The price to be paid by Sinochem Fertilizer to Sinochem Corporation will be set on a cost basis, that is, the price of the imported fertilizers acquired by Sinochem Corporation from Sinochem Macao plus product inspection costs, customs and excise handling charges, import duty, value-added tax and a reasonable administration cost (estimated to be approximately RMB0.1 per tonne of fertilizers imported) incurred by Sinochem Corporation in relation to the import of fertilizers. Sinochem Corporation will act effectively as an administrative agent for the Fertilizer Group which role will just be handling all the import and custom procedures, and it will not be handling any negotiation with suppliers for the products procured by Sinochem Macao. As advised by Tianyuan Law Firm, the PRC legal adviser to the Company, although PRC law requires that two separate sales contracts be entered into between (i) Sinochem Macao and Sinochem Corporation; and (ii) Sinochem Corporation and Sinochem Fertilizer, in order for the products to be imported into the PRC, due to the back-to-back contractual arrangements for the import of the fertilizer products between Sinochem Macao, Sinochem Corporation and Sinochem Fertilizer, and it is specifically stated in the import service framework agreement entered into between the parties that the risk for the products will remain with the Fertilizer Group. The risk of the imported fertilizer products will not be transferred to Sinochem Corporation at any point during course of the import process.

Sinochem Fertilizer has its own independent relationships with overseas suppliers and its own sales network in the PRC, and it only engages Sinochem Corporation to arrange for the import of the fertilizer as required by PRC law. Therefore, the Management of the Fertilizer Group believes that Sinochem Fertilizer can handle the sourcing and sales of fertilizer products independent of Sinochem Corporation. Sinochem Corporation imports a small amount of fertilizer products direct from specific countries from time to time. Such imports made by Sinochem Corporation are expected to represent 6.9% and 6.8% of the total amounts of fertilizers projected to be imported by the Fertilizer Group for the two years ending 30 June 2006 and such fertilizers are imported by Sinochem Corporation as the relationship with such suppliers is traditionally maintained by Sinochem Corporation as a state-owned enterprise as directed by the State. Sinochem Corporation undertakes that, except for any fertilizer products imported by it for its customers which engage it to provide import service, it will sell all the fertilizer products imported by it to Sinochem Fertilizer exclusively. On the other hand, Sinochem Fertilizer is free to purchase fertilizer products from any supplier. Various PRC entities also engage Sinochem Corporation to arrange for import of fertilizers for them from time to time on an individual order basis. However, Sinochem Corporation does not have any other long term fertilizer import arrangement with other customers. For details of the import arrangements, please refer to the sub-section headed ‘‘Relationship between the Enlarged Group and the Sinochem Group’’ — ‘‘Continuing Connected Transactions involving the Fertilizer Group’’ in this section below.

Domestic sourcing

In respect of domestic sourcing, SINOCHEM Procurement sources its fertilizer products and raw materials directly from producers as well as through agents in the PRC. The domestic producers which supply fertilizer products to the Fertilizer Group include those

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

enterprises in which the Fertilizer Group has interests. In particular, SINOCHEM Procurement has entered into long-term purchase contracts with Sinochem Kailin, Sanhuan Sinochem Jiaji, Sinochem Dongfang and Sinochem Zhisheng, pursuant to which SINOCHEM Procurement has undertaken to purchase certain amounts of fertilizer products produced by these enterprises. For details, please refer to the sub-paragraphs headed ‘‘Sales of products’’ in the section headed ‘‘Information on the Fertilizer Group — SINOCHEM Production’’ in this circular.

SINOCHEM Procurement has also entered into a purchase agreement with Qinghai Salt Lake and Sinochem Shandong for the supply of potash fertilizers and compound fertilizers, respectively. According to the annual supply contract entered into between Sinochem Fertilizer and Qinghai Salt Lake in January 2005, Qinghai Salt Lake has agreed to supply an aggregate of 600 Kt of potash fertilizers to the Fertilizer Group for the year ended 31 December 2005.

Since Sinochem Shandong will be regarded as a connected person of the Company upon Completion, the transactions contemplated under the fertilizer purchase agreement entered into between SINOCHEM Procurement and Sinochem Shandong will constitute connected transactions of the Company after the Completion. For details of the fertilizer purchase agreement, please refer to the paragraph headed ‘‘Continuing Connected Transactions involving the Fertilizer Group’’ in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in this circular.

Purchase planning

SINOCHEM Procurement prepares annual purchase plans each year to determine the amount of fertilizer products and raw materials to be sourced in the forthcoming year. For the preparation of such annual purchase plans, SINOCHEM Procurement first considers the total historical sales of each type of its products, the total consumption of the raw materials by SINOCHEM Production and the total production output of SINOCHEM Production for the preceding year. It will then liaise with SINOCHEM Production and SINOCHEM Distribution for an estimation of products and materials requirements for the forthcoming year. SINOCHEM Procurement will then negotiate the purchase volume, purchase price or pricing mechanisms and other terms with its suppliers. In general, purchase price is usually determined in accordance with either of the following two mechanisms:

. Spot pricing — purchase price is determined in accordance with the global market price from time to time. Actual purchase price is normally fixed with reference to the prevailing market price on the date when purchase orders are placed by the Fertilizer Group with the suppliers.
. Annual pricing — purchase price is usually agreed in advance with the suppliers and is set out in the annual or master procurement agreements with reference to the expected market price of the products, subject to any substantial fluctuation of the global market price, in which case both parties will negotiate a new purchase price.

The Fertilizer Group has not entered into any forward contract or other hedging arrangements for hedging the price fluctuation of products and/or materials.

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM PROCUREMENT

Quality inspection

For imported fertilizer products, samples are extracted from each shipment of fertilizer products received and sent to the (State Entry-Exit Inspection and Quarantine Bureau) (the ‘‘State Inspection Bureau’’) where testing on quality, weight and nutrient content are carried out to confirm compliance with the standards set out in the procurement agreement, and inspection certificates will then be issued by the State Inspection Bureau. According to the policy of the Fertilizer Group and the terms set out in most of its procurement agreements, the Fertilizer Group is entitled to claim against its suppliers for any defective products or products which fail to meet the required standards. The Fertilizer Group has not made any material claim against its suppliers in this respect during the Track Record Period.

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SINOCHEM PRODUCTION

. As at the Latest Practicable Date, SINOCHEM Production had interests in seven production enterprises for the production of phosphate-based fertilizers and compound fertilizers.
. The Fertilizer Group is one of the major producers of phosphate-based fertilizers in the PRC in terms of production output for 2004.
. All of the four enterprises for the production of phosphate-based fertilizers are strategically located in close proximity to deposits of natural mineral resources of phosphorus rocks, the fundamental raw materials for the production of phosphatebased fertilizers. This enables SINOCHEM Production to secure a stable supply of phosphorus rocks with relatively low transportation costs.

Background

SINOCHEM Production was established in 2001 as part of an effort of the Fertilizer Group to vertically integrate its operations across the fertilizer supply chain. It provides the Fertilizer Group with a major alternative source of fertilizer products and further strengthens the upstream operations of the Fertilizer Group.

SINOCHEM Production produces phosphate-based and compound fertilizers. It has a complete production model, including production of semi-finished products such as MAP, as well as finished products for direct application by end-users, including DAP, TSP, BB fertilizers and other NPK fertilizers.

The production enterprises

As at the Latest Practicable Date, SINOCHEM Production had interests in seven production enterprises, including one subsidiary and three jointly controlled entities for the production of phosphate-based fertilizers, and two subsidiaries and one jointly controlled entity for the production of compound fertilizers.

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Location of the production enterprises

The map below illustrates the location of the production enterprises in the PRC:

==> picture [448 x 393] intentionally omitted <==

Notes:

This enterprise will produce phosphate-based fertilizers, however it had not yet commenced operation as at the Latest Practicable Date.
Sinochem Fertilizer directly owns 26% and Dohigh Trading directly owns 25%.

It is part of SINOCHEM Production’s strategy to establish production enterprises in close proximity to deposits of minerals with strategic partners who are also mining enterprises. All four production enterprises for production of phosphate-based fertilizers, namely Sinochem Fuling, Sinochem Sanhuan, Sanhuan Sinochem Jiaji and Sinochem Kailin, are strategically located in close proximity to the natural mineral resources of phosphorus rocks in the PRC. Phosphorus rock is the fundamental raw material for production of phosphate-based fertilizers, and currently the two areas with major natural mineral resources in the PRC are

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Yunan Province and Guizhou Province. Each of Sinochem Kailin, Sanhuan Sinochem Jiaji and Sinochem Sanhuan is located next to phosphorus rock mines and Sinochem Kailin and Sanhuan Sinochem Jiaji have entered into long-term supply arrangements with the respective mining enterprises or owners of the natural resources, who are also joint venture partners to the production enterprises. Sinochem Fuling is located in Chongqing, the PRC where substantial trading activities in phosphorus rocks are conducted. This enables SINOCHEM Production to obtain a stable supply of phosphorus rocks with relatively low transportation costs.

Production process

The following diagrams illustrate the principal stages involved in the production of the key fertilizer products produced by SINOCHEM Production, namely, MAP, DAP, TSP, SSP, NPK fertilizers and BB fertilizers.

Production of MAP

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(a) MAP granulates (b) MAP powder
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Production of DAP

Production of TSP

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Production of SSP

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Production of NPK fertilizer

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Production of BB fertilizer

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Production facilities and production capacity

As at the Latest Practicable Date, the seven production enterprises in which the Fertilizer Group had interests (excluding Sinochem Sanhuan which was not yet in operation as at the Latest Practicable Date) had an aggregate of 12 and 5 production lines for the production of phosphate-based fertilizers and compound fertilizers, respectively. The aggregate annual production capacity and the actual production output of the five production enterprises which were in operation during 2004 amounted to 2.46 Mt and 1.85 Mt, respectively.

The following table sets out certain key information on the production facilities of the seven enterprises in which SINOCHEM Production has interests:

Name of the production enterprise % of equity interest held by the Fertilizer Group Year of commencement Phosphate-based fertilizers Sinochem Fuling 60% June 2004 Sinochem Kailin 41% July 2003 Sanhuan Sinochem Jiaji 25% May 2001 Sinochem Sanhuan (note 2) 40% (note 2) Total Compound fertilizers Sinochem Dongfang 55% (note 3) June 2002 Sinochem Zhisheng 53% August 2002 Sinochem Yantai 51% (note 4) January 2005 Total	Number of production lines (note 1) 7 4 1 (note 2) 12 3 1 1 5	Maximum annual production capacity (note 1) 1,000 Kt 510 Kt 600 Kt (note 2) 2,110 Kt 50 Kt 200 Kt 100 Kt 350 Kt	Actual annual production output Utilization rate (note 1) 823.9 Kt 82.4% 298.9 Kt (note 6) 58.6% (note 6) 606.4 Kt (note 7) 101.1% (note 7) (note 2) (note 2) 1,729.2 Kt 28.4 Kt (note 6) 56.8% (note 6) 88.2 Kt (note 6) 44.1% (note 6) (note 5) (note 5) 116.6 Kt

Notes:

(1) Figures are based on the internal records of the Fertilizer Group for the year ended 31 December 2004.
(2) Sinochem Sanhuan was not yet in operation as at the Latest Practicable Date. Commencement of operations is expected to be in 2007.
(3) Sinochem Dongfang is regarded as a jointly controlled entity as set out in note 30 of Accountants’ Report on the Fertilizer Group, the text of which is set out in Appendix I to this circular.
(4) Sinochem Fertilizer directly holds 26%, Dohigh Trading directly holds 25%.
(5) Sinochem Yantai commenced its operations in January 2005 only.

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(6) Production has been affected by certain external factors including power shortages in the PRC generally and insufficient rail transportation. Please refer to the paragraph headed ‘‘Risks relating to the Fertilizer Group — The Fertilizer Group’s production may be affected by external factors, including interruption in electricity supply and rail transport’’ in this circular for details of power supply shortages encountered by this enterprise.
(7) The designed capacity of the facilities at Sanhuan Sinochem Jiaji is 600Kt. However, the facilities have been able to produce beyond their designed capacity.

Raw materials

Major raw materials for the production of phosphate-based fertilizers include phosphorus rocks, sulphuric acid and ammonia, whereas major raw materials for the production of compound fertilizers include MAP, MOP, urea, ammonium and potassium chloride. Save for phosphorus rocks which are largely sourced directly at the mines or from sources where the relevant production enterprises are situated, a certain amount of the above major raw materials are purchased through SINOCHEM Procurement.

Each of Sinochem Kailin and Sanhuan Sinochem Jiaji have entered into long-term supply arrangements with the owner of the respective mines where it is situated. Other raw materials for the production of both phosphate-based fertilizers and compound fertilizers are sourced by SINOCHEM Procurement from both international and domestic suppliers.

Future expansion of SINOCHEM Production

It is one of the long-term goals of the Fertilizer Group to become the largest fertilizer producer in the PRC. To achieve this, the Fertilizer Group intends to increase its total production capacity through the establishment of new production enterprises with other investors or strategic partners, and also through acquisitions of or investment in other fertilizer producers in the PRC. In addition, the Fertilizer Group proposes to further expand the product range produced by SINOCHEM Production to include potash fertilizers and nitrogen-based fertilizers. Set out below are the key expansion plans of SINOCHEM Production:

. Potash fertilizers — At present, Sinochem Corporation has a 20% equity interest in Qinghai Salt Lake, the largest producer of potash fertilizers in the PRC at present. The Fertilizer Group has an option to acquire the equity interests of Sinochem Corporation in Qinghai Salt Lake. Any such acquisition will be subject to the approval by the relevant authority in the PRC. For details, please refer to the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in this circular.
. Nitrogen-based fertilizers — SINOCHEM Production plans to establish production enterprises in Shanxi Province which is rich in coal mines for the production of ammonium, one of the key ingredients in nitrogen-based fertilizers.

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Sales of products

A majority of the products produced by the six production enterprises (which were in operation as at the Latest Practicable Date) is sold through the sales and distribution network of SINOCHEM Distribution. SINOCHEM Procurement has entered into long-term purchase contracts with four of these productions enterprises, namely Sinochem Kailin, Sanhuan Sinochem Jiaji, Sinochem Dongfang and Sinochem Zhisheng, pursuant to which SINOCHEM Procurement has undertaken to purchase certain amounts of products produced by these enterprises:

		Amount
Name of the		of products
production		to be
enterprise	Major products	purchased	Pricing mechanism
		(kt)
Sinochem Kailin	DAP, MAP and TSP	200 (Note 1)	With reference to PRC
			market price
Sanhuan Sinochem	DAP	200	With reference to PRC
Jiaji			market price
Sinochem Dongfang	Compound fertilizers	50	With reference to PRC
			market price
Sinochem Zhisheng	Compound fertilizers	120 (Note 2)	With reference to PRC
			market price

Notes:

(1) SINOCHEM Procurement has undertaken to purchase all DAP produced by Sinochem Kailin.
(2) SINOCHEM Procurement has been granted an exclusive right for sales and distribution of the products produced by Sinochem Zhisheng in the PRC.

Other products are sold directly by the respective enterprises in the domestic market.

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Standardised administration management

The resources development department of the Fertilizer Group is responsible for the overall administration and management of SINOCHEM Production. It designs the standardised administration measures for adoption by Sinochem Fuling, Sinochem Dongfang, Sinochem Yantai and Sinochem Zhisheng. In respect of the other three production enterprises which are jointly controlled entities of the Fertilizer Group, representatives from SINOCHEM Production are present in the respective management teams to ensure close cooperation between the Fertilizer Group and the respective production enterprises. In addition, the financial controllers of six of these enterprises are nominated by the Fertilizer Group. Set out below are certain key administration measures adopted by the four production enterprises controlled by the Fertilizer Group:

(i) Quality control measures

SINOCHEM Production implements stringent quality control measures in accordance with the national standard throughout its production process. Some of the production enterprises have their own quality control department to ensure the quality of their products meets the standards set by the State.

Certain production enterprises controlled by SINOCHEM Production, namely Sinochem Dongfang, Sinochem Zhisheng and Sinochem Fuling, were awarded the ISO 9001 (2000 certificate) in 2000. In addition, products produced by Sinochem Zhisheng were awarded the (Famous Brand of the Fujian Province) in 2004, while the products of Sinochem Fuling were awarded (the Exempt Inspection Products of the State) in 2004.

The quality management and control system of SINOCHEM Production encompasses the following features:

. Production — Testing appliances are installed in each production workshop. Quality inspection teams undertake spot tests of both intermediate and finished products on a sample basis to ensure the products comply with the required standards. Testing processes include checking the physical appearance, the composition of nutrients and the weight.
. Packaging and storage — Systematic procedures for package and storage are in place to ensure proper packaging and to avoid any damage to the products during storage in the warehouses.
. Machinery and equipment management — Engineers and other personnel conduct regular checks, repairs and maintenance of the production facilities to ensure stable, safe and reliable operation of the production facilities.

As at the Latest Practicable Date, SINOCHEM Production had not experienced any material sales returns by customers and had not experienced any product liability or other legal claims due to allegations relating to, or problems with, the quality of its products.

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(ii) Production safety measures

The production enterprises have their own sets of production safety measures. As far as the Management of the Fertilizer Group is aware, all of the seven production enterprises comply with the relevant rules and regulations under the PRC law in relation to production safety.

(iii) Environmental protection measures

Sewage, exhaust gas and solid waste are discharged and noise is created during the production process of fertilizer products. According to the PRC environmental laws and regulations, fertilizer producers in the PRC must comply with environmental laws and regulations stipulated by the State and the local environmental protection bureaus. Companies are required to carry out environmental impact studies before the commencement of construction to ensure that production processes meet the required PRC environmental standards.

In order to ensure compliance with the relevant laws and regulations on environmental protection, the production enterprise operated by the Fertilizer Group has implemented measures to monitor waste water, exhaust gas and/or solid waste. All such waste is treated before being discharged in accordance with the relevant environmental laws and regulations. The Management of the Fertilizer Group has confirmed that the Fertilizer Group had fully complied with the relevant laws and regulations on environmental protection during the Track Record Period, and the production facilities of the production enterprises meet the applicable PRC standards relating to environmental protection.

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SINOCHEM DISTRIBUTION

. The Fertilizer Group is a leading supplier of fertilizer products in the PRC in terms of sales volume.
. Products are sold by SINOCHEM Distribution through its own sales and distribution network as well as through Sinochem Fertilizer’s head office to independent distributors and other customers.
. As at 30 April 2005, the sales and distribution network of the Fertilizer Group comprised 14 branch companies and over 838 sale centres in 15 major agricultural provinces, representing approximately 66.41% of the total cultivated area in the PRC.
. The sales and distribution network is supported by the structured logistics network and the proprietary ERP system of the Fertilizer Group.

Overview

The Fertilizer Group is a leading supplier of fertilizer products in the PRC in terms of sales volume. In 2004, the total sales volume and turnover of fertilizer products sold by SINOCHEM Distribution amounted to approximately 8.36 Mt and RMB12,591 million respectively. SINOCHEM Distribution distributes all products sourced by SINOCHEM Procurement and a majority of products produced by SINOCHEM Production. In 2004, approximately 98.4% of the products were sold to customers in the PRC with only approximately 1.6% being sold to overseas customers.

Sales and distribution network in the PRC

Products are sold to customers in the PRC through the distribution and sales network operated by SINOCHEM Distribution and through independent distributors to domestic customers usually in areas where the Fertilizer Group considers it not economical to extend its network. For the three years ended 31 December 2004, sales through the sales and distribution network operated by SINOCHEM Distribution amounted to approximately RMB1,669 million, RMB4,387 million and RMB5,490 million respectively, representing approximately 21.4%, 42.3% and 43.8% of the turnover of the Fertilizer Group for the same period respectively. In respect of the remaining sales during these periods, a substantial portion were mainly made by Sinochem Fertilizer’s head office to independent distributors as well as other customers.

The sales and distribution network operated by SINOCHEM Distribution covers 15 major agricultural provinces, namely, Anhui, Fujian, Guangdong, Guangxi, Hainan, Hebei, Henan, Heilongjiang, Hubei, Hunan, Jilin, Jiangsu, Jiangxi, Liaoning and Shandong, which collectively represent approximately 66.41% of the total cultivated area in the PRC. As at 30 April 2005, the sales and distribution network consisted of 14 branch companies and over 838 sales centres, including 268 regional sales centres at county level and 570 local sales centres.

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Operation of the sales and distribution network

Based on market consumption and sales volume, SINOCHEM Distribution divides its sales and distribution the network into 4 major sales regions, each of which covers a market with a total market consumption of approximately 3.61 Mt to 10.84 Mt. Each sales region consists of branch companies and sales centres. The entire sales and distribution network is supported by the logistics network of the Fertilizer Group. The following chart illustrates the structure of the sales and distribution network of the Fertilizer Group:

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Management of the sales and distribution network

Branch companies

Branch companies cover major coastal and inland provinces. All branch companies directly report to the sales department at the Beijing head office. They act as the principal channel connecting the flow of inventory and information between the head office and the sales centres. Each of the branch companies is responsible for co-ordinating and managing the operation of sales centres within the same sales region. They also help the head office liaise with local suppliers and the logistics department of the Fertilizer Group.

Sales centres

Sales centres are divided into regional sales centres and local sales centres. Regional sales centres cover major counties, while local sales centres cover towns and villages in rural areas. They are all managed by the respective branch companies within the same geographical area. Sales centres are focused on sales to retailers and end-users of

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fertilizer products. Apart from sales representatives, sales centres employ (agricultural consultants) to provide customer-support services to their customers, including demonstration and guidance on the application of the products.

Strategies for the expansion of the sales and distribution network

The Management of the Fertilizer Group believes that the success of the Fertilizer Group substantially depends on the extensive and effective sales and distribution network established and operated by SINOCHEM Distribution. Since the establishment of the first branch company in Yantai in April 1999, the Fertilizer Group experienced a rapid expansion of its sales and distribution network. The following table sets out the numbers of branch companies and sales centres as at 31 December 2002, 2003 and 2004 and 30 April 2005:

					As at the
		As at 31 December			30 April
		2002	2003	2004	2005
Branch companies		11	13	13	14
Sales	centres	59	404	552	838
—	Regional sale centres	59	118	163	268
—	Local sale centres	0	286	389	570

The Fertilizer Group will continue to seek expansion of its sales and distribution network, in particular, to extend its reach to more villages in rural areas by establishing more branch companies and sales centres. Set out below are certain major criteria for the establishment of branch companies and sales centres:

. Market consumption — branch company will be first established in a province or an area where the total market consumption of fertilizer products amounts to approximately 4 Mt per year. Establishment of sales centres will then be considered once the total market consumption within a particular area reaches a minimum of approximately 20 Kt per year.
. Location of sales centres — since the sales centres focus on retail sales and small-scale wholesales, the Management of the Fertilizer Group considers that the location of the sales centres is crucial. Sales centres are established at a location which is accessible by convenient transportation and is supported by the Fertilizer Group’s own logistics network.
. Competition — the Fertilizer Group also considers the existence of any competitors and the level of competition within the particular province or area in deciding on the location of a new branch company or sales centre.

Sales to independent distributors and other customers

Apart from sales through the Fertilizer Group’s own sales and distribution network, sales are also made by Sinochem Fertilizer’s head office to independent distributors as well as other customers. For the three years ended 31 December 2004, such sales amounted to approximately RMB6,131 million, RMB5,984 million and RMB7,101 million, respectively,

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representing approximately 78.6%, 57.7% and 56.2% of the turnover of the Fertilizer Group for the same periods. Sales through independent distributors are usually carried on in areas which are not covered by the Fertilizer Group’s own sales and distribution network. During the Track Record Period, none of such independent distributors had entered into any long-term sales contract with the Fertilizer Group. It is expected that sales through independent distributors will gradually decrease in terms of sales volume as a result of the expansion of the Fertilizer Group’s own sales and distribution network.

Pricing

The wholesale prices of fertilizer products in the PRC are subject to price controls imposed by the PRC government. At present, the wholesale prices of all imported fertilizers, except imported DAP and compound fertilizers, are subject to price controls. Essentially, imported fertilizers (except imported DAP and compound fertilizers) can only be sold with a maximum profit margin of 1.7% of the total actual cost approved by NDRC. The approved total actual cost of a particular shipment of imported fertilizers is the sum of the CIF price, insurance cost, product inspection costs, bank charges, customs and excise handling charges, import duty, VAT, packaging costs and reasonable administration costs incurred by the importer (the ‘‘Approved Actual Cost’’). In respect of imported DAP and compound fertilizers, products can be sold within the margin of 3% below and above the sum of the Approved Actual Cost and a profit margin of 1.7%. For details, please refer to the paragraph headed ‘‘Regulatory Overview’’ in the section headed ‘‘Fertilizer Industry and Regulatory Overview’’ in this circular.

The Management of the Fertilizer Group has confirmed that the Fertilizer Group fully complied with all the price control measures imposed by the PRC government as set out in the relevant PRC laws and regulations during the Track Record Period.

Pricing of the products sold by SINOCHEM Distribution is determined and regulated by the head office of the Fertilizer Group in Beijing. Minimum price ranges of each type of product are set regularly in accordance with market demand and supply. However, the wholesale prices of all kinds of fertilizer products in the PRC are also subject to price controls imposed by the PRC government, and the minimum price range set by the head office of the Fertilizer Group is all within the price range announced by the government. The minimum price range is strictly followed by the branch companies and sales centres, and no product may be sold below such minimum price range.

Customers

The customers of the Fertilizer Group include both large-scale wholesale customers such as large agricultural companies as well as small fertilizer distributors and retailers. For the three years ended 31 December 2004, the five largest customers of the Fertilizer Group accounted for approximately 22.7%, 25.8% and 23.2% of the turnover of the Fertilizer Group, respectively, and the largest customer accounted for approximately 6.6%, 8.6% and 8.9% of the turnover of the Fertilizer Group for the same period.

The largest customer for each of the three years ended 31 December 2004 was (Shandong Yantai City Agricultural Production Information and Supply Centre), which is an Independent Third Party. None of the Directors, the chief executive, the Management of the Fertilizer Group, their respective Associates or any

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shareholders holding more than 5% of the issued share capital of the Company had any interest in any of five largest customers of the Fertilizer Group for the three years ended 31 December 2004.

Credit policy

The Fertilizer Group adopts a stringent credit policy to minimise the occurrence of bad debts. Pursuant to such policy, the total amount of credit given to customers at any time shall not exceed the capped amount set and approved by the Fertilizer Group. In addition, the logistics department of the Fertilizer Group internally assesses the credit rating of each of its customers and the respective credit policy is adjusted accordingly. In general, customers are classified into three classes, namely no credit customers, low credit-rating customers and high credit-rating customers. Set out below is a summary of the credit control measures adopted by the Fertilizer Group:

. No credit customers — no credit is generally given to new customers and customers with poor credit ratings. Such customers are required to make full payment before delivery.
. Low credit-rating customers — delivery is allowed to be made as long as there is sufficient evidence to show that payment has been made by the respective customers despite the fact that receipt of payment has not yet been confirmed by the finance department of the Fertilizer Group.
. High credit-rating customers — such customers usually enjoy a credit period given by the Fertilizer Group ranging from 7 days to 60 days, and a credit period of up to 210 days will be granted to a limited number of customers who have a long business relationship with the Fertilizer Group.

The Fertilizer Group made a doubtful debts provision for the year ended 31 December 2002 of approximately RMB0.9 million, and had a write-back of provision for doubtful debts for the two years ended 31 December 2004 of RMB1.7 million and RMB3.0 million, respectively. Please refer to the paragraph headed ‘‘I. Financial Information — the Fertilizer Group — Critical Accounting Policies — Provisions for bad and doubtful debts’’ in the section headed ‘‘Financial Information’’ of this circular.

Customer support services

The Management of the Fertilizer Group believes that the quality of customer support services is crucial in building customer loyalty. At present, the Fertilizer Group maintains a free telephone hotline services for its customers. The telephone hotline system provides a platform to answer enquiries from customers relating to all aspects of fertilizer, from application and usage of the fertilizer products distributed by the Fertilizer Group to the location of the nearest retail outlet. The telephone hotline system also entertains complaints from customers.

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Centrally co-ordinated operations

The Fertilizer Group has developed a centrally co-ordinated operations model to facilitate the integration of SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, through the central co-ordination of Fertilizer Group’s operational processes and resources deployment. The integration of the three segments is achieved through the management of three major processes, namely product flow, information flow and funds flow. In addition, efforts like branding and marketing, as well as research and development are centrally co-ordinated at the group level for efficiency purposes.

Product flow — the logistics network

The logistics network of the Fertilizer Group is crucial to its operations as it helps ensure an effective flow of inventory among SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, as well as connecting suppliers to, the Fertilizer Group and its customers. The logistics network of the Fertilizer Group is responsible for (i) the transportation of products among seaports, suppliers, the production enterprises of SINOCHEM Production and different warehouses; and (ii) delivery of products to its customers.

Warehousing and inventory management

As at the 30 April 2004, the logistics network operated a total of 559 warehouses in various agricultural provinces in the PRC. In general, a single warehouse covers one or two counties or cities within an area with a radius of 40 km to 100 km, serving one to two regional sales centres and/or four to five local sales centres. All warehouses are leased by the Fertilizer Group from Independent Third Parties.

Transportation

SINOCHEM Distribution delivers the products to its customers across the PRC mainly by rail and by boat along rivers and waterways in the PRC. Boat transportation along rivers and waterways is a cheaper means of transportation in the PRC. However, it is limited to areas with accessible canals. Rail is the most reliable and efficient means of cross-province or longhaul delivery across the PRC, as compared to trucks, which are limited to short-haul transportation. During the Track Record Period, over one-half of the Fertilizer Group’s transportation was conducted by rail.

Strategies to strengthen the logistics network

The Fertilizer Group intends to set up large-scale logistics centres with large storage capacities in major agricultural provinces and major transport interchanges, so that the frequency and distance of the transportation can be reduced and shortened. In addition, the Fertilizer Group plans to increase the number of and capacity of its warehouses through leasing, acquisition or re-construction in order to increase the coverage of the logistics network. With a more structured and efficient logistics network, the Fertilizer Group believes that timely and reliable delivery of its products to its customers can be enhanced. For a discussion of certain risks relating to the Fertilizer Group’s reliance on rail transport, see

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‘‘Risk Factors — Risks relating to the Fertilizer Group — The Fertilizer Group’s production and distribution may be affected by external factors, including interruptions in electricity supply and rail transport’’ in this circular.

Information flow — the ERP system

The sales and distribution network of the Fertilizer Group is also supported by an integrated ERP system. The Management of the Fertilizer Group believes that the ERP system significantly improves the efficiency in product procurement, inventory management, logistics and sales. The ERP system comprises two different information management systems, namely DMS and SAP.

DMS and SAP are two different information system management platforms. DMS links all sales centres while SAP links the head office and all branch companies. The two systems are connected and data recorded by these two systems are synchronised every day to provide the Fertilizer Group with an integrated information management system.

The ERP system of the Fertilizer Group is able to centralise all major types of operationrelated data, including sourcing, sales planning, inventory management and delivery schedules. Data on the ERP system is shared by every division and department of the Fertilizer Group, although different authorization levels are assigned to different data access areas.

The ERP system not only significantly improves the efficiency of sales, it also provides better logistics and inventory management. SINOCHEM Distribution utilises the ERP system to track sales volumes and to monitor the levels of inventory kept at its warehouses, ensuring that inventory is maintained at an appropriate level. The integrated ERP system also enables the senior management of the Fertilizer Group to closely monitor the financial condition and operations of the Fertilizer Group and to facilitate making timely and accurate adjustments and overall planning decisions.

Marketing and branding

Marketing strategies

Ever since its establishment in 1993, the Fertilizer Group has been devoted to serving and contributing to the agricultural sector in the PRC. The Fertilizer Group places strong emphasis on satisfying customer’s needs and requirements.

The marketing team of the Fertilizer Group is responsible for promoting the brand ‘‘ (Sinochem)’’. It is also responsible for gathering the latest market information, market trends and changes in demand. To further strengthen its market presence, the Fertilizer Group intends to deepen the penetration of its existing sales and distribution network to end-users and retail customers, given the importance of the agricultural sector in the PRC and the large proportion of the population engaged in the agricultural industry.

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The Fertilizer Group adopts pro-active marketing strategies in addition to advertising on television. Set out below is a summary of various marketing and advertising campaign strategies organised and adopted by the marketing team of the Fertilizer Group:

. Radio programme — The Fertilizer Group currently hosts a four-minute radio programme broadcasted by (the Central People’s Broadcasting Station) on Monday to Friday. The radio programme is the first radio programme jointly organised and hosted by an agricultural enterprise and a broadcasting station on agricultural topics in China. The daily radio programme provides agricultural knowledge, market information, and analysis of the latest government policies. The radio programme is followed by free telephone hotlines hosted by professors from (the China Agricultural University) to answer enquiries from the
audience. The Fertilizer Group believes that the daily radio programme provides the best marketing channel for its products and effectively promotes the brand name of ‘‘ (Sinochem)’’ amongst end-users.
. Education for farmers — The Fertilizer Group hires (agricultural attendants) to provide agricultural knowledge to farmers in rural areas, including holding seminars, testing soil contents, and demonstration and guidance on the application of its products. The Management of the Fertilizer Group believes that this ‘‘direct-contact’’ approach is very effective in opening up the end-user market and building up loyalty among farmers.
. Regular media exposure and charity events — The Fertilizer Group has entered into a co-operation agreement with ( ) (Economics Daily — Agricultural Version) in the PRC for publishing an agricultural magazine on a regular basis. The Fertilizer Group also organises or sponsors various charity events every year. These charity events are targeted at farmers in rural areas.
. Regular visits to major customers — Sales staff regularly visit the Fertilizer Group’s major customers, who include producers of fertilizer products and large agricultural companies in China, to maintain close customer relationships and to keep customers abreast of developments relating to the products distributed by the Fertilizer Group while at the same time gathering information and feedback from its customers.
. Participation in large conferences and exhibitions — The Fertilizer Group also participates in large agricultural conferences and exhibitions every year, including (the National Fertiliser Information Exchange and
Fertiliser Products Trading Fair) and (National Trading Fair of high nutrient content phosphate — based and compound fertilizers). The Management of the Fertilizer Group believes that this activity further enhances the recognition of the Fertilizer Group’s brand name within the PRC fertilizer industry.

Branding

The Fertilizer Group adopts unified marketing strategies in promoting its brand ‘‘Sinochem’’, including a unified application of logos, corporate image (CI) and virtual identity (VI) design systems. The unified CI and VI design systems and the use of Sinochem’s

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logos apply to different aspects of the downstream operation of the Fertilizer Group, from the layout and colour scheme of its distribution centers and retail outlets to packaging, promotion materials and advertisements. The Management of the Fertilizer Group believes that the unified marketing strategies can effectively enhance the recognition of Sinochem’s brand name by arousing people’s attention. In addition, a unified CI and VI design system also facilitates SINOCHEM Distribution’s overall marketing campaign.

Intellectual property rights

The Fertilizer Group uses a number of trademarks which are currently owned by Sinochem Corporation. Prior to the Reorganisation, Sinochem Corporation and Sinochem Fertilizer entered into a trademark licence agreement in March 2003 (the ‘‘Old Trademark Licence Agreement’’) pursuant to which Sinochem Fertilizer was granted a non-transferable and exclusive right to use the respective trademarks for free. The Old Trademark Licence Agreement was terminated and replaced by new trademark licence agreements entered into between Sinochem Corporation and certain members of the Enlarged Group on 6 June 2005. The licence arrangements contemplated under the new trademark licence agreements are set out in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group — Continuing Connected Transactions involving the Fertilizer Group’’ in this circular. Pursuant to the new trademark licence agreements, each relevant member of the Enlarged Group is granted a licence to use the trademarks set out below in accordance with the terms of the relevant agreement for a fee of RMB1 during the entire term of that agreement. Each new trademark licence agreement commenced on 6 June 2005 and expires on 31 December 2007. Unless otherwise agreed by Sinochem Corporation, a trademark licence agreement shall automatically terminate if and when Sinochem Corporation ceases to be a substantial shareholder of the relevant licensee. Upon its expiry, each trademark licence agreement will be renewed on the same terms for successive periods of three years unless otherwise agreed by the relevant parties.

	Registration	Place of		Registration effective
Trademark	number	registration	Class	period
	875907	PRC	35 (Note 1)	28/09/1996 to 27/09/2006
	773539	PRC	35 (Note 2)	14/12/1994 to 13/12/2014
	316798	PRC	1 (Note 3)	20/06/1988 to 19/06/2008
	1951056	PRC	35 (Note 4)	21/11/2002 to 20/11/2012
	2022759	PRC	1 (Note 5)	21/02/2003 to 20/02/2013
	3121714	PRC	1 (Note 5)	28/06/2003 to 27/06/2013
	3121870	PRC	1 (Note 5)	28/06/2003 to 27/06/2013
	1951090	PRC	35 (Note 4)	28/11/2002 to 27/11/2012

Notes:

(1) This class relates to promotion (for others), publication of ad (publicizing) versions, ad (publicizing), preparation of ad (publicizing) bulletin, posting of ad, commercial enquiry, outdoor ad, agency for import and export, lease of ad (publicizing) equipment, publication of ad (publicizing) copies, ad distribution, ad

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM DISTRIBUTION

distribution business, agency for commercial information, statistical materials, direct mail ad, update of ad materials, distribution of samples, market analysis, commercial investigation, lease of ad materials, consulting commercial organization, ad, radio ad, radio program for commercial ad, commercial study and research, commercial research, stenograph, TV ad, TV commercial ad, window display in shop, ad agency, model service for ad or promotion, organization of commercial of ad exhibition, commercial information and lease of ad space.

(2) This class relates to update of ad materials, distribution of samples, career investigation, lease of ad materials, commercial organization, ad, radio ad, radio program for commercial ad, commercial study and research, commercial research, stenograph, TV ad, TV commercial ad, window display in shop, ad agency, model service for ad or promotion, organization of commercial of ad exhibition, commercial information, lease of ad space, promotion (for others), publication of ad (publicizing) versions, ad (publicizing), preparation of ad (publicizing) bulletin, lease of ad (publicizing) equipment, publication of ad (publicizing) copies, posting of ad, commercial enquiry, outdoor ad, agency for import and export, ad distribution, ad distribution business, agency for commercial information, statistical materials and direct mail ad.
(3) This class relates to chemical fertilizers, plant fertilizers and animal fertilizers.
(4) This class relates to hotel management; ad agency; ad promotion; commodity exhibition; information input for computer database; information systemization of computer database; agency for import and export; professional consulting on trading business; commercial information; and promotion (for others).
(5) This class relates to industrially used isotopes, including agricultural chemicals except bactericides, herbicides, weedicides, pesticides and parasiticides; gardening chemicals except bactericides, herbicides, pesticides and parasiticides; forestry chemicals except fungicides, weedicides, pesticides and parasiticides; substances for seed preservation; chemical products for scientific use (non-medicinal and non-veterinary use); compound resin plastic; fertilizer; fire-proof agent; and chemicals for welding use; and chemicals for surface treatment of leather.

The Fertilizer Group adopts certain measures to prevent possible infringement of its trademarks, including attaching special labels to the packaging to differentiate its products from counterfeit products. Such labels and packaging are made by an independent entity exclusively for the Fertilizer Group. The Fertilizer Group also maintains a telephone hotline to entertain reports of counterfeit products. Once any counterfeit products are identified and verified by the Fertilizer Group, the Fertilizer Group will make public announcements regarding such counterfeit products to alert the public and help them in differentiating the products of the Fertilizer Group.

During the Track Record Period, legal proceedings were brought by Sinochem Corporation against an enterprise in Hangzhou, an Independent Third Party in 2003, in respect of an infringement of the trademark ‘‘ (Sinochem)’’. A judgement was made in favour of Sinochem Corporation by the Beijing People’s High Court in May 2004.

Research and development

The Management of the Fertilizer Group believes that both domestic and overseas fertilizer enterprises compete not only in quality and cost, but also in the ability to innovate new products with new formulae, features, specifications and enhanced application. In March 2003, Sinochem Fertilizer and the China Agricultural University jointly established a fertilizer research institute, known as (Sinochem Fertilizer-Agricultural University Research and Development Institute). China Agricultural University is a leading agricultural education and research institution in China.

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INFORMATION ON THE FERTILIZER GROUP — SINOCHEM DISTRIBUTION

The research institute comprises three different departments, each of which is responsible for different areas, including development of nutrients and fertilizers in the PRC agricultural industry, research and development on new products and promotion of agricultural education. It provides the Fertilizer Group with the latest developments in the global and domestic fertilizer markets. The Management of the Fertilizer Group believes that it is more efficient and effective to strengthen the research and development capabilities of the Fertilizer Group through long-term cooperation with China Agricultural University, which enables the Fertilizer Group to leverage on the personnel, technologies and resources available to China Agricultural University.

According to (the cooperative agreement) dated 13 February 2003 entered into between Sinochem Fertilizer and China Agricultural University, Sinochem Fertilizer shall contribute a sum of approximately RMB200,000 each year to the research institute to finance its daily operation expenses. Sinochem Fertilizer may provide additional funding on a project-by-project basis. In return, China Agricultural University shall provide offices, laboratories and the necessary equipment for the research activities conducted by the research institute. The intellectual property rights of any new products or new formulae developed by the research institute shall be owned by Sinochem Fertilizer. As at the Latest Practicable Date. Sinochem Fertilizer had provided a total of approximately RMB2,812,900 to the research institute since its establishment in March 2003, for the purpose of funding its research activities. The amount also includes the initial expenses for the establishment of the institute.

Since its establishment in 2003, the research institute has successfully developed certain new formulae for fertilizers for the production enterprises operated by SINOCHEM Production, including various enhanced-formulae for BB fertilizers and special-formulated fertilizers for wheat, tobacco, cotton, chilli and bamboo shoots.

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INFORMATION ON THE FERTILIZER GROUP — HISTORY AND DEVELOPMENT

HISTORY AND DEVELOPMENT

The history of the Fertilizer Group can be traced back to 1993 when Sinochem Fertilizer, a state-owned enterprise in the PRC, was established by Sinochem Corporation. The establishment of Sinochem Fertilizer was approved by the MOFTEC. At the time of its establishment, Sinochem Fertilizer enjoyed a monopoly status, where Sinochem Fertilizer was the only approved enterprise in the PRC allowed to engage in the import and export of fertilizer products.

In November 1998, a reform within the PRC fertilizer industry was carried out by the State in order to open up the PRC fertilizer industry (the ‘‘Reform’’). Pursuant to the Reform, Sinochem Fertilizer lost its monopoly status and Sinochem Corporation, the holding company of Sinochem Fertilizer at that time, became one of the two enterprises in the PRC approved by the PRC government to engage in the import of fertilizer products. However, at the same time, Sinochem Fertilizer was granted a right to engage in the domestic trading and sales of fertilizer products in the PRC. The number of PRC enterprises which are approved by the PRC Government to engage in the import of fertilizer products in the PRC increased to four in 2003.

The loss of monopoly status brought substantial new challenges to Sinochem Fertilizer. The management of Sinochem Fertilizer decided to carry out an internal business reform in order to enhance its competitiveness and face the new challenges brought by the Reform. The internal business reorganisation implemented by Sinochem Fertilizer had two focuses, namely (i) to establish downstream operations by developing an extensive sales and distribution network; and (ii) to strengthen the upstream operations by establishing SINOCHEM Production. As a result of the business reorganisation, the business model of Sinochem Fertilizer successfully switched from a single line of trading and agency operation to a vertically-integrated enterprise, which includes sourcing, production and sales of fertilizer products. The Management of the Fertilizer Group believes that the success of the internal business reorganisation has significantly contributed to the existing leading position of the Fertilizer Group within the PRC fertilizer industry.

The following table shows the three stages of development experienced by the Fertilizer Group since its establishment:

April 1993 to November 1998 — Monopoly operation

April 1993 . Sinochem Fertilizer was established as a state-owned enterprise in the PRC by Sinochem Corporation.
. Sinochem Fertilizer was the only approved enterprise in the PRC at that time to carry out the import and export of fertilizer. Its principal business included the import of fertilizer products from overseas suppliers acting as agent on behalf of users of fertilizer products in the PRC.

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INFORMATION ON THE FERTILIZER GROUP — HISTORY AND DEVELOPMENT

November 1998 to 2001 — Development of a vertically-integrated business model

19 November . (State 1998 Council’s Notice of Reformation on the System of Deepening the Penetration of Chemical Fertiliser in the PRC) was issued by the State Council, pursuant to which Sinochem Fertilizer lost its monopoly status. However, at the same time, Sinochem Fertilizer was granted the right to engage in the domestic trading and sales of fertilizer products in the PRC.
. Sinochem Fertilizer decided to establish its downstream operation by establishing its own sales and distribution network in the PRC and set up SINOCHEM Production to strengthen its upstream operation.
By the end of . Four branch companies, located in Qingtao, Yantai, Lianyungang 2000 and Yingkou, were established.
. Sinochem Fertilizer carried out feasibility studies on setting up or investing in production enterprises in the PRC.
By the end of . Sanhuan Sinochem Jiaji was jointly established between 2001 Sinochem Fertilizer and other independent investors in which Sinochem Fertilizer holds a 25% equity interest. It went into production in the same year.
. Four more branch companies were established.

2002 to present — Further expansion and development

By the end of . The vertically-integrated operation model was in place: 2002
. SINOCHEM Procurement: entered into exclusive distribution arrangements with overseas suppliers of phosphate-based fertilizers and potash fertilizers.
. SINOCHEM Production: two new production enterprises, namely, Sinochem Dongfang and Sinochem Zhisheng, were established in which Sinochem Fertilizer holds 55% and 53% equity interests, respectively. Both Sinochem Dongfang and Sinochem Zhisheng went into production in the same year.
. SINOCHEM Distribution: a total of 11 branch companies and more sale centres were established in the PRC.

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INFORMATION ON THE FERTILIZER GROUP — HISTORY AND DEVELOPMENT

By the end of . SINOCHEM Procurement: strategic relationships with the 2003 international suppliers were maintained.
. SINOCHEM Production: Sinochem Kailin was established between Sinochem Corporation and other investors with Sinochem Fertilizer holding a 41% equity interest. It went into production in the same year.
. SINOCHEM Distribution: number of branch companies increased to 13 and more sales centres were established.
By the end of . SINOCHEM Procurement: strategic relationships with international 2004 suppliers were maintained.
. SINOCHEM Production: Sinochem Fertilizer acquired its 60% equity interest in Sinochem Fuling from Sinochem Corporation in September 2004. In addition, Sinochem Sanhuan and Sinochem Yantai were established in which Sinochem Fertilizer holds 40% and 51% equity interests in aggregate respectively.
. SINOCHEM Distribution: a new branch company and more sales centres were established.

REORGANISATION

In contemplation of the Acquisition, the Fertilizer Business was restructured pursuant to the Reorganisation which includes a reorganisation of the shareholding and related transfers of interests in members of the Fertilizer Group. The main steps of the Reorganisation are as follows:

. The Fertilizer Company and Sinochem BVI were incorporated in the BVI as whollyowned subsidiaries of Sinochem HK on 16 December 2004 and 1 July 2004, respectively;
. Interests in various PRC companies not directly owned by Sinochem Fertilizer were transferred to Sinochem Fertilizer and various entities which were not transferred to Sinochem Fertilizer ceased the operations which may potentially be in competition with the Fertilizer Group, except for those entities mentioned in the sub-section headed ‘‘Remaining fertilizer businesses’’ in this section below;
. According to the approvals issued by the relevant PRC government authorities, Sinochem Corporation transferred its 100% shareholding in Sinochem Fertilizer to the Fertilizer Company;
. Sinochem Macao was incorporated in Macao as a wholly-owned subsidiary of Sinochem BVI;
. Sinochem Corporation transferred its 100% shareholding in Sinochem Bahamas and one share in Dohigh Trading to Sinochem BVI;

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. Sinochem HK transferred its 14,999,999 shares in Dohigh Trading to Sinochem BVI; and
. Sinochem HK transferred its 100% shareholding in Sinochem BVI to the Fertilizer Company.

Corporate Structure of the Fertilizer Group

Set out below are the main operating companies of the Fertilizer Group as of the Latest Practicable Date:

==> picture [404 x 205] intentionally omitted <==

Notes:

(1) Sinochem Fertilizer holds a direct 90% equity interest in Manzhouli Kaiming and the remaining 10% is held by Sinochem Suifenhe. Manzhouli Kaiming is engaged in import and export trading operations and fertilizer business.
(2) Sinochem Fertilizer holds a direct 66% equity interest in Sinochem Suifenhe and the remaining 34% is held by Sinochem Erlianhaote. Tianyuan Law Firm, the legal adviser to the Company, has confirmed that the cross-shareholding structure complies with the relevant PRC laws and regulations. Sinochem Suifenhe is engaged in self-operating business, provision of agency services for the import and export of all types of commodities and technology (except those under the restrictive dealing category or prohibited from importing and exporting by the State), (Russian-border small scale trading business) (except for those not permitted under the State policies) and border trading of fertilizers.
(3) Sinochem Fertilizer holds a direct 90% equity interest in Sinochem Erlianhaote and the remaining 10% is held by Sinochem Suifenhe. Tianyuan Law Firm, the legal adviser to the Company, has confirmed that the cross-shareholding structure complies with the relevant PRC laws and regulations. Sinochem Erlianhaote is engaged in small scale trading at (the borders of neighbouring countries) (except for those prohibited or restricted by the State) and border trading of fertilizers.
(4) Sinochem Zhisheng is principally engaged in the production of compound fertilizers. The other shareholder is Yongan Zhisheng, an Independent Third Party, with a 46.81% equity interest.
(5) Sinochem Dongfang is principally engaged in the production of compound fertilizers. The other shareholder is (Hubei Dongfang Agricultural Centre), an Independent Third Party, with a 45% equity interest.

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INFORMATION ON THE FERTILIZER GROUP — HISTORY AND DEVELOPMENT

(6) Sinochem Fuling is principally engaged in the production of phosphate-based fertilizers. The other shareholder is (Chongqing Fuling District Finance Bureau) and (Suzhou Compound Fertiliser Factory), both are Independent Third Parties, with 38.75% and 1.25% equity interests respectively. Sinochem Fuling also owns majority interest in 9 other PRC companies which business is not material in relation to the operation of the Fertilizer Group.
(7) Tianjin Beifang is engaged in fertilizers and other related products business, provisions of agency services for railway transportation and automobile transportation. The other shareholder is (Tianjin Port No.4 Stevedoring Company (‘‘Tianjin Port’’)), an Independent Third
Party, with a 40% equity interest.
(8) Sinochem Kailin is principally engaged in the production of phosphate-based fertilizers. The other shareholders are (Guizhou Kailin (Group) Limited) (‘‘Guizhou Kailin’’) and (Guiyang City Industrial Investment Holdings Limited) with 49% and 10%
equity interests respectively. All are Independent Third Parties.
(9) Sanhuan Sinochem Jiaji is principally engaged in the production of phosphate-based fertilizers. The other shareholders are GNSII (US) LLC, (Yunnan Sanhuan Chemical Engineering Limited) and (Yantai City Agricultural Production Resources Limited) with 35%, 35% and 5% equity interests respectively. All are Independent Third Parties.
(10) Sinochem Sanhuan is principally engaged in the production of phosphate-based fertilizers. The other shareholders are (Yunnan Sanhuan Chemical Engineering Limited) and (Yunnan Petroleum Chemical Engineering Group Limited) with 40% and 20%
equity interests respectively. All are Independent Third Parties.
(11) Sinochem Logistics is principally engaged in the business invitation business and general consultation management in the chemical logistics zone and development of information system for chemical logistics. The other shareholders are (Sinochem International Trading Limited) and (Rillfung Company Limited) with 48.33% and 41.67% equity interests respectively.
(12) Sichuan Chuanhua is engaged in the sale of fertilizers, chemical products and raw chemical materials (excluding hazardous items), ordinary merchandise, electric appliances, metal materials, building materials and plastic products, provisions of research development and technical services relating to fertilizers, chemical products and raw chemical materials (excluding hazardous items). The other shareholders are (Chuanhua Shares Limited), (Chuanhua Group Limited), (Sichuan Province Chemical Engineering Research and Design Institute) and (Hengping Trust Investments Limited) with 40%, 39%, 4% and 7% equity interests respectively. All are Independent Third Parties.
(13) Tianjin Beihai is engaged in the construction and operation of the infrastructure of ports and piers, provision of sack filling, transportation, storage and related services of imported bulk fertilizers and other bulk cargos. The other shareholders are Tianjin Port, (Sinochem International Storage and Transportation Limited), Rillfung Company Limited and (Tianjin Economic and Technology Development Zone Agricultural Trading Company) with 48.18%, 14.53%, 25% and 6.39% equity interests respectively.
(14) Sinochem Yantai is principally engaged in the production of compound fertilizers. Dohigh Trading also owns a 25% equity interest in Sinochem Yantai. The other shareholders are (Shandong Province Yantai City Agricultural Resources Procurement
Supply Station) and (Yantai Gang Affairs Bureau) with 29% and 20% equity interests respectively. All are Independent Third Parties.
(15) Dohigh Trading is an investment holding company. Dohigh Trading also owns a 50% interest in Sinochem Cargill Fertilizer Co., Ltd. (‘‘Sinochem Cargill’’), a company incorporated in Hong Kong. Sinochem Cargill has ceased trading and will be wound-up.
(16) Sinochem Macao is principally engaged in sourcing fertilizer products and other related agricultural products from overseas suppliers.

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INFORMATION ON THE FERTILIZER GROUP — HISTORY AND DEVELOPMENT

(17) Yingkou Shunda is principally engaged in the provision of packing of bulk cargo and related services. The other shareholders are (China Yingkou Kang Affairs Bureau) and (China Agricultural Production Resources Group Company) with 50% and 20%
equity interests respectively. All are Independent Third Parties.
(18) Sinochem Bahamas was recently been dissolved on 15 April 2005.

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INFORMATION ON THE FERTILIZER GROUP — RELATIONSHIP BETWEEN THE ENLARGED GROUP AND THE SINOCHEM GROUP

RELATIONSHIP WITH SINOCHEM CORPORATION

Overview

Sinochem HK is an investment holding company incorporated under the laws of Hong Kong and wholly-owned by Sinochem Corporation. Upon Completion, Sinochem Corporation will be the ultimate controlling shareholder of the Company. The members of the board of directors of Sinochem HK are Mr. Liu De Shu, Mr. Song Yu Qing and Mr. Li Lun. Mr. Li Lun will not hold any position in the Enlarged Group after the Completion. Mr. Liu De Shu and Mr. Song Yu Qing will be redesignated as non-executive directors of the Company immediately after Completion. Sinochem Corporation does not have a board of directors and the management power of Sinochem Corporation is exercised by a management committee. The members of the management committee of Sinochem Corporation are Mr. Liu De Shu, Mr. Han Gen Sheng, Mr. Luo Dong Jiang, Mr. Pan Zheng Yi, Mr. Li Hui, Mr. Zhi Yin, Mr. Du Ke Ping, Mr. Wang Yin Ping, Dr. Chen Guo Gang, Mr. Shi Guo Liang, Mr. Feng Zhi Bin, Mr. He Cao and Mr. Zeng Xing Qiu. Except for Mr. Liu De Shu who is an existing director of the Company, Mr. Du Ke Ping who will be appointed as an executive director of the Company, and Dr. Chen Guo Gang, who will be appointed as a non-executive director of the Company, none of the other members of the management committee hold any position or assume any role in the Enlarged Group after the Completion. Sinochem Corporation, through Sinochem HK, will be entitled to the rights of a controlling shareholder, including the election of Directors and voting in respect of amendments to the Bye-laws.

Sinochem Corporation is a state-owned enterprise under the supervision of SASAC. Founded as a state-owned import/export company in China in 1950 and formerly known as the China National Chemicals Import & Export Corporation, Sinochem Corporation is currently one of the largest state-owned conglomerates, with core businesses such as petroleum, fertilizer and chemical products. It also expanded into business areas including finance, insurance, logistics and real estate. In 2002, the Sinochem Group had total sales of approximately US$18.76 billion (equivalent to RMB155.15 billion) and realized net profit of approximately US$101.29 million (equivalent to RMB837.67 million).

Remaining Fertilizer Business

Pursuant to the Reorganization, apart from the interests stated in this section, the entire PRC fertilizer business of the Sinochem Corporation was transferred to the Fertilizer Company. The following are members of the Sinochem Group (other than the Enlarged Group) that will continue to be engaged in the production of chemical fertilizers after Completion (‘‘Remaining Fertilizer Business’’). The directors of the Company and Sinochem HK confirm that apart from the Remaining Fertilizer Business (except for US Agri-Chemicals), the Sinochem Group (excluding the Enlarged Group) does not have any interest in any other business which competes or is likely to compete, either directly or indirectly, with the business of the Enlarged Group.

				Shareholding
				held by
			Registered	Sinochem		Annual Production
Company	Products	Location	Capital	Group	2003 Turnover	Capacity		Directors
Tianji JV	Nitrogen-based fertilizers	PRC	RMB500 million	40%	newly established in 2004 and	.	0.4 Mt of (ammonia	Li Zhonghua(2), Shen Qi(1), Wang
	(ammonia				expected to		alcoholate)	Guang Biao(2), Lu
	compound and				commence			An Hua(2), Chen Qi
	urea)				operation in 2006	.	0.6 Mt of urea	Wei(2), Yang Yu
								Fang(2), Zhang
								Wei(1)

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INFORMATION ON THE FERTILIZER GROUP — RELATIONSHIP BETWEEN THE ENLARGED GROUP AND THE SINOCHEM GROUP

				Shareholding
				held by
			Registered	Sinochem		Annual Production
Company	Products	Location	Capital	Group	2003 Turnover	Capacity		Directors
Sinochem Shandong	Compound fertilizers and	PRC	RMB 50,000,000	60%	newly established in 2004 and	1 Mt of (compound fertilizers		Du Ke Ping(1)(3), Shen Qi(1), Chen Qi
	related				commenced limited	with high level of		Wei(2), Yao Li Xin(2),
	products				production in	nitrogen)		Yang Lin(2), Xu He
					December 2004.			Gan(2), Zhang Guo
					Full production is			Lin(2), Zheng Shu
					expected to			Lin(2), Zhang Wei(1)
					commence in 2007
Qinghai Salt Lake	Potash	PRC	RMB	20%	RMB	1.5 Mt MOP		Shen Qi(1), Wang
	fertilizers		767,550,000		448,285,200			Xiao Min(2), Zheng
								Changshan(2), Fong
								Qinsheng(2), Xu
								Shisen(2), An
								Pingsui(2), Wang
								Guiyuan(2), Zheng
								Yongan(2), Dai
								Darong(2), Wu
								Wenhao(2), Tang
								Dexin(2), Ren
								Xuan(2), Zhang
								Quanming(2)
US Agri-Chemicals	Phosphate-	US	USD	100%	USD	.	1.42 Mt sulphuric	Du Ke Ping(1)(3),
	based fertilizers		92,610,000		160,800,000		acid	Yang Hong Wei(2),
			(equivalent to		(equivalent to			Wayne R.
			RMB765,884,700)		RMB1,329,816,000)	.	0.51 Mt phosphoric	Brobeck(2)
							acid
						.	1 Mt of
							diammonium
							phosphate (DAP)
						.	0.3 Mt of
							monoammonium
							phosphate (MAP)
Notes:

(1) These directors are directors or members of the senior management (as the case may be) of the Enlarged Group. For the positions held and roles assumed by these directors in the Enlarged Group, please refer to the section headed ‘‘Directors and Senior Management’’ below.
(2) None of these directors hold any position or assume any role in the Enlarged Group.
(3) Mr. Du Ke Ping, a proposed Director, is also a director of Sinochem Shandong and US Agri-Chemicals, members of the Sinochem Group which will continue to engage in the Remaining Fertilizer Businesses. Save as disclosed, as at the Latest Practicable Date, none of the existing and proposed Directors and their respective Associates was interested in any business apart from the business of the Enlarged Group, which competes or is likely to compete, either directly or indirectly, with the business of the Enlarged Group.

Tianji JV

Tianji JV was established in the PRC on 1 November 2004 with a registered capital of RMB500 million. Tianji JV is owned as to 40% by Sinochem Corporation and 60% by Tianji Coal, an Independent Third Party.

The manufacturing facilities of Tianji JV are still being constructed and it is expected to have manufacturing facilities with the capacity to produce 0.4 Mt of (ammonia alcoholate) and 0.6 Mt of urea granulates. The construction of the manufacturing facilities is expected to be completed by the beginning of 2006 whereupon production will commence.

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INFORMATION ON THE FERTILIZER GROUP — RELATIONSHIP BETWEEN THE ENLARGED GROUP AND THE SINOCHEM GROUP

The articles of association of Tianji JV provides for each party’s rights to appoint directors. The board of directors will comprise seven directors, four of which will be nominated by Tianji Coal and three of which will be nominated by Sinochem Corporation. The Chairman of the board will be nominated by Tianji Coal from the board members. Each party will also nominate one vice chairman of the board from the members of the board. The articles of association also provides for the establishment of a steering committee comprising of five members. Sinochem Corporation and Tianji Coal are each entitled to nominate two members and the remaining member will be elected by employees of Tianji JV. The steering committee will assume a supervisory role over the board and the management and is accountable to the shareholders of the joint venture. It is also provided that there will be one general manager and five deputy managers (including one executive deputy manager and one finance manager). Sinochem Corporation is entitled to nominate the executive deputy manager and finance manager, while Tianji Coal is entitled to nominate the general manager and the other three deputy managers.

Tianji JV has not been included in the Fertilizer Group as it has not commenced production yet. After the expected completion of the construction of its manufacturing facilities in 2006, Tianji JV will produce and sell ammonia alcoholate and urea granulates in the PRC. The Fertilizer Group engages in a similar business of producing and selling ammonium sulphate and urea in the PRC. In order to minimize any potential competition between the Fertilizer Group and Tianji JV, Sinochem Corporation, Sinochem Fertilizer and Tianji Coal entered into a sales arrangement pursuant to which 80% of the products of Tianji JV will be sold to a sales company (to be owned as to 60% by Sinochem Fertilizer and 40% by Tianji Coal) for resale. It is anticipated that the sales company will be established and the sales arrangement between Tianji JV and Sinochem Fertilizer will be entered into before Tianji JV commences production. Sinochem Corporation has also granted an option to the Company which allows the Company to acquire Sinochem Corporation’s interest in Tianji JV at a fair market value.

Tianji JV will be one of many suppliers available which will supply the types of fertilizer products it will produce. The Management of the Fertilizer Group does not foresee any difficulty in sourcing such fertilizer products from other suppliers if required, and is therefore of the view that the Fertilizer Group will be capable of carrying on its business independently of, and at arm’s length from, Tianji JV.

Sinochem Shandong

Sinochem Shandong was established in the PRC on 31 March 2004 with a registered capital of RMB50,000,000. Sinochem Shandong is owned as to 60% by Sinochem Corporation, 20% by Shandong Xinhongri (an Independent Third Party) and 20% by Guizhou Kailin (an Independent Third Party).

According to the joint venture agreement between Sinochem Corporation and Shandong Xinhongri, Sinochem Shandong will have manufacturing facilities with the capacity to produce 1 Mt of (compound fertilizers with high level of nitrogen) per year by the end of 2007. The construction of such manufacturing facilities is underway. Facilities for the production of 0.2 Mt of (gunited granulates) per year was completed at the end of 2004 whereupon production commenced; and those for the production of 0.4 Mt of

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(tower-form melted granulates) per year and 0.4 Mt of (compound fertilizers with high level of nitrogen) per year are expected to be completed and ready for production by the end of 2005 and 2007, respectively.

The articles of association of Sinochem Shandong provides for each party’s right to appoint directors. The board of directors will comprise seven directors, of which four will be nominated by Sinochem Corporation and three will be nominated by Shandong Xinhongri. There will be one chairman and one vice chairman for the board. The Chairman of the board will be nominated by Sinochem Corporation, while the vice chairman of the board will be nominated by Shandong Xinhongri. There will be a steering committee comprising of three members. Each shareholder of Sinochem Shandong is entitled to nominate one member and the remaining member will be nominated by the employees of Sinochem Shandong. The steering committee will assume a supervisory role over the board and the management and is accountable to the shareholders. It is also provided that there will be one general manager, four deputy managers and one finance manager. Sinochem Corporation is entitled to nominate the first general manager, finance manager and two deputy managers, while Shandong Xinhongri is entitled to nominate the other two deputy managers.

Sinochem Shandong has not been included as part of the Fertilizer Group as its production has not fully commenced. Sinochem Shandong has since the completion of its first stage of construction at the end of 2004 been producing and selling nitrogen compound fertilizers in the PRC. The Fertilizer Group also engages in the business of producing and selling these products in the PRC. In order to avoid any potential competition between the Fertilizer Group and Sinochem Shandong, Sinochem Shandong entered into an agreement on 6 June 2005 with Sinochem Fertilizer under which Sinochem Shandong has agreed to sell all the fertilizer products produced by it to Sinochem Fertilizer during the three year’s term of the agreement. Sinochem Corporation has also granted an option to the Company which allows the Company to acquire Sinochem Corporation’s interest in Sinochem Shandong at a fair market value.

Sinochem Shandong is one of the many suppliers available which supply the types of fertilizer products it produces. The Management of the Fertilizer Group does not foresee any difficulty in sourcing such fertilizer products from other suppliers if required, and is therefore of the view that the Fertilizer Group is capable of carrying on its business independently of, and at arm’s length from, Sinochem Shandong.

Qinghai Salt Lake

Qinghai Salt Lake is a state-owned enterprise established in the PRC in 1997 with a registered capital of RMB767,550,000 and listed on the Shenzhen Stock Exchange. At present, Qinghai Sale Lake has a manufacturing capacity to produce 1.5 Mt of MOP per year. Qinghai Salt Lake’s main business is the manufacturing and sale of MOP, and the exploitation, development, processing and smelting of carnalite and other minerals.

Sinochem Corporation acquired 20% of the issued share capital of Qinghai Salt Lake from its majority shareholder in June 2004. Pursuant to the acquisition agreement entered into by Sinochem Corporation, it has the right to appoint two directors to the eleven members’ board of directors of Qinghai Salt Lake and one supervisor to the nine members’ supervisory board. Sinochem also has the right to appoint finance and sales personnel as senior management of Qinghai Salt Lake.

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As the shares acquired are state-owned shares, the transfer of such shares to the Fertilizer Group will have to be approved by the relevant PRC government authorities. In order to avoid delaying the reorganisation of the Fertilizer Group, the abovementioned 20% shareholding in Qinghai Salt Lake is retained by Sinochem Corporation. Both Qinghai Salt Lake and the Fertilizer Group engage in the manufacturing and selling of potash fertilizers. In order to minimise any potential competition between Qinghai Salt Lake and the Fertilizer Group, and as part of the ongoing arrangements between the Fertilizer Group and Qinghai Salt Lake, Sinochem Fertilizer and (Qinghai Salt Lake Potash Sales Company) (a wholly owned subsidiary of Qinghai Salt Lake) entered into an agreement for the sale of 0.6 Mt of MOP produced by Qinghai Salt Lake to Sinochem Fertilizer in 2005. The price of the products will be fixed in accordance with the prevailing market price at the time of the order. The Management of the Fertilizer Group is of the view that this contract was entered into on normal commercial terms and on an arm’s length basis. Sinochem Corporation has granted an option to the Company which allows the Company to acquire Sinochem Corporation’s interest in Qinghai Salt Lake at a fair market value.

Qinghai Salt Lake is one of the many suppliers available which supply the types of fertilizer products it produces. The Management of the Fertilizer Group does not foresee any difficulty in sourcing such fertilizer products from other suppliers if required. In addition, the quantity of fertilizer products supplied by Qinghai Salt Lake or Qinghai Salt Lake Potash Sales Company to the Fertilizer Group only constitutes a small portion of the total quantity of fertilizer products purchased by the Fertilizer Group each year. As such, the Management of the Fertilizer Group is of the view that the Fertilizer Group is capable of carrying on its business independently of, and at arm’s length from, Qinghai Salt Lake.

US Agri-Chemicals

US Agri-Chemicals was established in the State of Florida in March 1989 with a registered capital of USD92,610,000 (equivalent to RMB765,884,700). US Agri-Chemicals is an indirectly wholly owned subsidiary of Sinochem Corporation. At present, US AgriChemicals has manufacturing facilities with the capacity to produce 1.42 Mt of sulphuric acid, 0.51 Mt of phosphoric acid, 1 Mt of DAP and 0.3 Mt of MAP. As the majority of the products of US Agri-Chemicals is sold to the United States, Latin America and Australia, its business does not form part of the core business of the Fertilizer Group. As a result, US AgriChemicals has not been included as part of the Fertilizer Group and the Management of the Fertilizer Group does not believe there is or is likely to be any competition between the Fertilizer Group and US Agri-Chemicals. The Fertilizer Group purchased through US Chem Resources approximately 0.15 Mt of DAP produced by US Agri-Chemicals in 2004. On 6 June 2005, Sinochem Macao entered into an agreement with US Agri-Chemicals for purchase of fertilizers. The agreement will expire on 31 December 2007. Pursuant to this agreement, US Agri-Chemicals undertakes not to sell any of its products to any purchaser in the PRC. Please refer to ‘‘Continuing Connected Transactions involving the Fertilizer Group’’ in this section for details.

US Agri-Chemicals is one of the many suppliers available which supply the types of fertilizer products it produces. The Management of the Fertilizer Group does not foresee any difficulty in sourcing such fertilizer products from other suppliers if required, and is therefore of the view that the Fertilizer Group is capable of carrying on its business independently of, and at arm’s length from, US Agri-Chemicals.

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Intention of Sinochem Group in relation to the Remaining Fertilizer Business

The Sinochem Group (other than the Company and its subsidiaries) has an intention to inject the Remaining Fertilizer Business (except for US Agri-Chemicals which business does not form part of the core business of the Fertilizer Group) into the Company at such time as it considers appropriate. Sinochem Corporation has granted the Company an option to purchase the Remaining Fertilizer Business (except for US Agri-Chemicals) at a fair market price at any time as the Company deems appropriate. The Company will consider any proposed acquisition of these Remaining Fertilizer Business at the relevant time, subject to, amongst other things, the satisfactory completion of due diligence, the negotiation of legally binding acquisition agreements on terms satisfactory to the Board and the obtaining of all necessary governmental, regulatory and Shareholders’ approvals in Hong Kong, the PRC and any other relevant jurisdictions. The Company will issue separate announcements regarding the proposed acquisitions should it decide to proceed with such acquisitions. However, until such time as all of the businesses comprising the Remaining Fertilizer Business have been injected into the Company, their continuing ownership by Sinochem Corporation will give rise to certain potential competition issues. The Directors and the directors of Sinochem HK believe that any competition between the Remaining Fertilizer Business and the Fertilizer Business has been minimized by the sales arrangements between Sincohem Fertiliser and the Remaining Fertilizer Business as well as the entrustment arrangements in respect of Sinochem Group’s interests in Sinochem Shandong and Tianji JV (as described in the section headed ‘‘Continuing Connected Transactions involving the Fertilizer Group’’ below).

Non-competition Undertaking and option to purchase the Remaining Fertilizer Business

The Sinochem Corporation has provided the Non-competition Undertaking to the Company in order to address any actual as well as perceived and potential competition between the Sinochem Group (excluding the Enlarged Group) and the Company. The following is a description of the terms of the Non-competition Undertaking.

Pursuant to the Non-competition Undertaking, Sinochem Corporation has undertaken to the Company that, so long as:

(i) Sinochem Corporation directly or indirectly owns 30% or more of the issued share capital of the Company or such other lower percentage for the triggering of the mandatory general offer obligation under the Takeovers Code; and
(ii) the Company’s ordinary shares are listed on the Stock Exchange and/or any other stock exchanges;

Sinochem Corporation will not and will procure that its subsidiaries (except for members of the Enlarged Group, Tianji JV, Sinochem Shandong, Qinghai Salt Lake and US AgriChemicals) will not, without the prior consent of the Company, develop, operate or assist in operating, participate in or conduct any business which may compete with the Fertilizer Business, either on its own or jointly with or on behalf of any other person or company in the PRC.

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If any opportunity of new business same as or similar to the Fertilizer Business arises, the Company shall have a right of first refusal to carry on such new business and if the Company declines to pursue the new business, Sinochem Group is not allowed to operate such new business. The power to decide whether or not to exercise the right of first refusal is vested with the independent non-executive Directors only.

Pursuant to the Non-competition Undertaking, the Company has also been granted an option to purchase at a fair market value Sinochem Corporation’s interest in Tianji JV, Sinochem Shandong and Qinghai Salt Lake and a right of first refusal to purchase Sinochem Corporation’s interests in each of these businesses. The ‘‘fair market value’’ will be negotiated between the parties taking into account the prevailing PRC law requirement which currently stipulates that the price must not deviate by more than 10% from the value as determined by an independent valuer. The option will remain valid and exercisable by the Company until the termination of the Non-competition Undertaking. In the event that the Company decides to exercise the option to acquire Sinochem Corporation’s interests in the Remaining Fertilizer Business (except for US Agri-Chemicals), the transaction will be submitted to the independent non-executive Directors for their review. The option will be valuable to the Fertilizer Group as it will allow the Company to purchase any of the Remaining Fertilizer Business (except for US Agri-Chemicals) as and when it thinks the Remaining Fertilizer Business will be most valuable to the business of the Fertilizer Group. Pursuant to the Listing Rules, exercise of such option by the Company constitutes a connected transaction. Also, non-exercise of the option or transfer of the option to a third party by the Company will be treated as if the option was exercised, which constitutes a connected transaction under the Listing Rules. The Company will comply with the relevant requirements of the Listing Rules in relation to the exercise, nonexercise and transfer of the option to purchase Sinochem Corporation’s interests in Tianji JV, Sinochem Shandong and Qinghai Salt Lake.

Independence from the Sinochem Group

The Directors consider that the Fertilizer Group is capable of carrying on its business independently of the Sinochem Group after the Completion for the following reasons:

1. Operational Independence

The Fertilizer Group is capable of operating the Fertilizer Business independently for the following reasons:

. Procurement: Most of the products sold by the Fertilizer Group and raw materials required for manufacturing are sourced by the Fertilizer Group independently from overseas and domestic suppliers. Under PRC law, only companies which have been granted by the PRC government the right to import fertilizers can import fertilizers and all companies that are engaged in the distribution of imported fertilizers will have to use the service of companies which have been granted the right to import fertilizers. The PRC government has only granted the right to import fertilizers to four PRC companies. There are no stated procedures or conditions for a company to apply for the right and it is all subject to the policy of the PRC government. As the Fertilizer Group does not have the right to import fertilizer products, all such products are required to be imported through any of the companies that are authorised under the PRC law to import fertilizer products. The Directors believe that the

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Fertilizer Group does not depend on Sinochem Corporation as it is free to engage whichever company it prefers to arrange for the import of fertilizers (except for the fertilizer products that are subject to the tariff-rate quota system). Currently, the Fertilizer Group has decided to retain Sinochem Corporation to import fertilizers for it due to the long history of their relationship. Through their collaboration, Sinochem Corporation has developed a solid understanding of the business of, and an efficient mechanism for providing services to, the Fertilizer Group, which the Management of the Fertilizer Group considers to be beneficial to the Enlarged Group. Pursuant to the import service framework agreement entered into between Sinochem Fertilizer, Sinochem Macao and Sinochem Corporation, Sinochem Fertilizer is not obliged to engage Sinochem Corporation to import fertilizers for it. In case other authorised importers can offer more favourable terms for the service, Sinochem Fertilizer may consider engaging other authorised importers to import fertilizers for it. According to the import service framework agreement entered into between Sinochem Fertilizer, Sinochem Macao and Sinochem Corporation, all fertilizer products sourced by the Fertilizer Group from overseas suppliers will be imported into the PRC through Sinochem Corporation which is authorised to import fertilizer products. However, the Fertilizer Group is free to purchase fertilizer products from any supplier. For details of the import arrangement, please refer to the sub-section headed ‘‘Continuing Connected Transactions involving the Fertilizer Group’’ in this section below. As such, the Fertilizer Group is capable of carrying on its procurement activities independent of the Sinochem Group.

. Manufacturing: The Fertilizer Group operates and has interests in seven manufacturing enterprises in the PRC, including one subsidiary and three jointly controlled entities for the production of phosphate-based fertilizers and two subsidiaries and one jointly controlled entity for the production of compound fertilizers. All these manufacturing operations are independent of the Sinochem Group for the reasons set out below:
. The Fertilizer Group has its own manufacturing facilities located in its own production sites.
. Each facility can operate independently and has its own factory buildings, production or business licence and production machinery and equipment.
. Each facility has its own management team and employees which are independent of the Sinochem Group.
. Each production facility determines its own production plans according to market developments, changes in demand and order flows.
. Each facility sources its raw materials independent of the Sinochem Group.
. Distribution: The Fertilizer Group is able to distribute the products sourced and produced by it within the PRC independently. Sinochem Fertilizer has an extensive sales and distribution network in the PRC which is operated

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independently of the Sinochem Group. Products sourced and manufactured by the Fertilizer Group are sold and distributed through its network. Sinochem Fertilizer will solicit purchase orders from its customers and the orders will be placed by the customers with Sinochem Fertilizer. The Sinochem Group has undertaken not to engage in any fertilizer sales activity in the PRC. As such, the Fertilizer Group does not rely on the Sinochem Group in terms of sales of fertilizers after Completion.

(a) The Fertilizer Group licenses certain trademarks from the Sinochem Group and the trademarks are mainly used in the business of SINOCHEM Distribution. The strength of the SINOCHEM Distribution is mainly built on the Fertilizer Group’s (i) extensive sales and distribution network in the PRC; (ii) comprehensive product portfolio; and (iii) long-term and stable relationships with its customers. While the unified branding strategy may further enhance the sales and distribution capabilities of the Fertilizer Group, the Management of the Fertilizer Group believes that, given the strengths of the SINOCHEM Distribution as mentioned above, even if the trademark agreements are terminated by Sinochem Corporation, there will not be any material impact on the operations or financial position of the Enlarged Group. Pursuant to the trademark license agreements entered into between the Fertilizer Group and Sinochem Corporation, each of the agreements can be terminated upon occurrence of any of the following events:
- (i) when the relevant licensee wishes to terminate the agreement, it may terminate the agreement by sending a written termination notice to Sinochem Corporation. The agreement will terminate on the day of issue of such notice;
- (ii) where the relevant licensee breaches any terms of the agreement and fails to remedy the breach within 10 days of the notice of breach sent by Sinochem Corporation, Sinochem Corporation has the right to terminate the agreement by written notice. The agreement will terminate on the day the relevant licensee receives the termination notice; or
- (iii) unless otherwise agreed by Sinochem Corporation, the agreement shall automatically terminate if and when Sinochem Corporation ceases to be a substantial shareholder of the relevant licensee.
. Services: The agreements relating to Continuing Connected Transactions (please refer to the sub-section headed ‘‘Continuing Connected Transactions involving the Fertilizer Group’’ in this section below) do not contractually bind the Fertilizer Group to rely on the Sinochem Group. The service agreements entered into between members of the Fertilizer Group and the Sinochem Group are all entered into for the benefit of, and without undue obligations on, the Fertilizer Group because: (i) the agreements are entered into on a nonexclusive basis as far as the Fertilizer Group is concerned such that any member of the Fertilizer Group has the discretion to decide to procure services

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from third parties when it sees fit; (ii) the services provided by the Sinochem Group under the agreements are not unique and are readily available in the market.

Financial independence: The Directors are of the opinion that the Fertilizer Group is financially independent of the Sinochem Group for the following reasons:
(1) The Fertilizer Group has established its own credit facilities with banks and not borrowed any money from the Sinochem Corporation (note (a));
(2) Sinochem Corporation does not provide any financial assistance, including but not limited to guarantees or mortgages, in relation to the borrowings of the Fertilizer Group (note (b));
(3) the terms for the sale of services and goods between Sinochem Corporation and the Fertilizer Group are on normal commercial terms and negotiated on an arm’s length basis; and
(4) the Fertilizer Group has established its own finance department and employed its own financial personnel to manage and operate its financial affairs independently.

Notes:

(a) Loans — As at 31 December 2004, the Fertilizer Group had a loan of approximately RMB86 million which represented a bank loan borrowed by Sinochem Corporation for use by the Fertilizer Group and had been fully repaid in May 2005. In addition, the Fertilizer Group had a short term loan of approximately RMB165 million from (China Economy and Trade Trust Investment Company Limited) (‘‘CETTI’’), a wholly owned subsidiary of Sinochem Corporation. As at the Latest Practicable Date, all of these loans have been fully repaid; and
(b) Guarantees — Sinochem Corporation provides guarantee to the various banking facilities of the Fertilizer Group. As at 31 December 2004, the banking facilities utilised by the Fertilizer Group which are guaranteed by Sinochem Corporation amounted to approximately RMB2.41 billion, comprising short-term bank loans of approximately RMB1.39 billion, bills payable of approximately RMB0.58 billion and contingent liabilities in respect of letters of credit of approximately RMB0.44 billion. As at the Latest Practicable Date, approximately RMB53 million of such facilities are still being guaranteed by Sinochem Corporation. As confirmed by the Management of the Fertilizer Group, all these guarantees will be released upon Completion.
Management independence: The Directors are of the opinion that the Company will have a management team independent of Sinochem Group upon Completion for the following reasons:
(1) A majority of the executive Directors will be independent of the Sinochem Corporation upon Completion. Mr. Liu De Shu, an existing executive Director who is also the chief executive officer of Sinochem Corporation and a director of Sinochem HK will be re-designated as a non-executive Director, and will continue in his role as the Chairman of the Company. Dr. Chen Guo Gang, who is also the chief financial officer of Sinochem Corporation, will be

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appointed as a non-executive Director upon Completion. Both Mr. Liu De Shu and Dr. Chen Guo Gang will not be involved in the day-to-day operation or management of the Company upon Completion;

(2) Although Mr. Du Ke Ping, an executive Director to be appointed upon Completion, is also one of the 13 members of the management committee of Sinochem Corporation, he will not have any other executive duties to Sinochem Corporation apart from his duties to the Fertilizer Group. Since January 1999, Mr. Du has been acting as the general manager of the Fertilizer Group and is responsible for the overall management and development of the Fertilizer Group. As an executive Director and chief executive officer of the Company to be appointed upon Completion, Mr. Du will devote substantially all of his time to lead the management and operations of the Company; and
(3) All members of the senior management of the Fertilizer Group will become members of the senior management of the Company upon Completion. They do not hold any position in Sinochem Corporation or Sinochem HK, and are all independent.

CONTINUING CONNECTED TRANSACTIONS INVOLVING THE FERTILIZER GROUP

Members of the Sinochem Group (other than the Company and its subsidiaries) and those of the Fertilizer Group have entered into various transactions which will continue from time to time after Completion. As members of the Sinochem Group (other than the Enlarged Group) are and will continue to be connected persons (as defined in the Listing Rules) of the Company, transactions between members of the Enlarged Group and members (and their Associates) of the Sinochem Group (other than the Enlarged Group) will constitute connected transactions under the Listing Rules upon Completion. Also, certain joint venture partners of the Fertilizer Group’s joint venture companies will become connected persons (as defined in the Listing Rules) of the Company, and any transaction between these joint venture companies and such connected persons (as defined in the Listing Rules) will become connected transactions under the Listing Rules upon Completion.

Set out below is further information on the Continuing Connected Transactions. The Directors are of the view that each of the Continuing Connected Transactions is entered into in the ordinary and usual course of business, on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole. Sinochem HK, Mr. Chu Yu Lin, David and their respective Associates and concert parties will abstain from voting at the SGM on the resolution relating to, among other things, the approval of the Non-exempt Continuing Connected Transactions. All agreements entered into in respect of the Non-exempt Continuing Connected Transactions are conditional on such approval being obtained.

Shareholders’ attention is also drawn to the recommendation of the Independent Board Committee and the letter of advice from the Independent Financial Adviser in relation to the Non-exempt Continuing Connected Transactions set out in this circular.

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Overview of the Continuing Connected Transactions

The Continuing Connected Transactions comprise the following:

Non-exempt Continuing Connected Transactions

(A) Import service framework agreement;
(B) Fertilizer purchase agreement with US Agri-Chemicals;
(C) Fertilizer purchase agreement with Sinochem Shandong;
(D) Fertilizer supply agreement with Sinochem Shandong;

As each of the relevant applicable percentage ratios set out in the Listing Rules for determining the value of connected transaction (excluding the profits ratio and the equity capital ratio which are not applicable) for each of the Non-exempt Continuing Connected Transactions in paragraphs (A) to (D) above is expected to be 2.5% or above on an annual basis or, each of the relevant applicable percentage ratios is expected to be equal to or higher than 2.5% but less than 25% on an annual basis and the annual consideration of each such transaction is expected to be HK$10,000,000 or more, each such transaction is subject to disclosure and approval by the Independent Shareholders at the SGM as required under the Listing Rules.

Continuing Connected Transactions exempt from independent shareholders’ approval requirements

(E) Service agreement with Sinochem UK;
(I) Service agreement with US Chem Resources;
(K)(i) Port services provided by Tianjin Port to Tianjin Beifang;
(K)(ii) Sales service provided by Sinochem Zhisheng to Yongan Zhisheng;
(K)(iii) Supply of raw materials by Yongan Zhisheng to Sinochem Zhisheng;

As each of the relevant applicable percentage ratios set out in the Listing Rules for determining the value of connected transaction (that is, excluding the profits ratio and the equity capital ratio which are not applicable) for each of the Continuing Connected Transactions in paragraphs (E), (I) and (K)(i)–(iii) above is expected to be less than 2.5% on an annual basis or, each of the relevant applicable percentage ratios is expected to be higher than 2.5% but less than 25% on an annual basis and the annual consideration of each such transaction is expected to be less than HK$10,000,000, each such transaction is exempt from the Independent Shareholders’ approval requirement under the Listing Rules.

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Continuing Connected Transactions exempt from reporting, announcement and independent shareholders’ approval requirements

(F) Information technology services Agreement;
(G) Trademark license agreements;
(H) Lease agreement;
(J) Management agreements in respect of Sinochem Group’s joint venture interests;
(K)(iv) Supply of utilities by Yongan Zhisheng to Sinochem Zhisheng;
(K)(v) Licence of trademark by Yongan Zhisheng to Sinochem Zhisheng; and
(K)(vi) Office lease between Tianjin Beihai and Tianjin Beifang.

As each of the relevant applicable percentage ratios set out in the Listing Rules for determining the value of connected transaction (that is, excluding the profits ratio and the equity capital ratio which are not applicable) for each of the Continuing Connected Transactions in paragraphs F to H, J and K(iv) to (vi) above is expected to be less than 0.1% on an annual basis or, each of the relevant applicable percentage ratios is expected to be higher than 0.1% but less than 2.5% on an annual basis and the annual consideration of each such transaction is expected to be less than HK$1,000,000, each such transaction is exempt from the reporting, announcement and Independent Shareholders’ approval requirements under the Listing Rules.

Details of the Continuing Connected Transactions

Each of the above transactions is described in detail below.

(A) Import Service Framework Agreement

Sinochem Fertilizer, Sinochem Corporation and Sinochem Macao entered into an import service framework agreement (the ‘‘Framework Agreement’’) on 6 June 2005. As under PRC law the Fertilizer Group is not allowed to import fertilizers and the right to import fertilizers is only granted to Sinochem Corporation and three other importers, Sinochem Corporation has agreed to provide import service to the Fertilizer Group according to this agreement. Pursuant to this agreement, fertilizer products sourced from overseas by Sinochem Macao for Sinochem Fertilizer will first be sold to Sinochem Corporation. Sinochem Corporation, as an approved importer of fertilizer products in the PRC, will import the products sourced by Sinochem Macao and sell them all (except for any such products imported by Sinochem Corporation on behalf of its other customers) to Sinochem Fertilizer. It is the intention of the Company to import through Sinochem Corporation all the fertilizer products sourced from overseas to be sold by the Fertilizer Group after Completion. Sinochem Corporation also imports a small amount of fertilizer products direct from specific countries from time to time. Sinochem Corporation has undertaken that, except for any fertilizer products imported by it on behalf of its other

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customers, it will sell all the fertilizer products it imports to Sinochem Fertilizer exclusively. On the other hand, Sinochem Fertilizer is free to purchase fertilizer products from any supplier.

Sinochem Fertilizer, Sinochem Corporation and Sinochem Macao will, in accordance with provisions and principles stipulated in the Framework Agreement, enter into further specific agreements for the products imported through Sinochem Corporation.

Under the Framework Agreement, the pricing principles for the sale and purchase of fertilizer products between the parties are as follows:

(i) The price to be paid by Sinochem Corporation to Sinochem Macao for fertilizer products sold by Sinochem Macao to Sinochem Corporation will be set in accordance with the prevailing international market price;
(ii) the price to be paid by Sinochem Fertilizer to Sinochem Corporation for fertilizer products sourced from overseas by Sinochem Macao will be set on a cost basis, that is, the price of the imported fertilizer products acquired by Sinochem Corporation from Sinochem Macao plus product inspection costs, customs and excise handling charges, import duty, value-added tax and a reasonable administration cost (such administration cost is estimated to be approximately RMB0.1 per tonne of fertilizer products imported) incurred by Sinochem Corporation in relation to the importation of the fertilizers; and
(iii) the price to be paid by Sinochem Fertilizer to Sinochem Corporation for fertilizer products sourced by Sinochem Corporation direct from overseas will be set in accordance with the domestic wholesale market price.

The maximum aggregate annual value in respect of the connected transactions between Sinochem Macao and Sinochem Corporation under the Framework Agreement for each of the three years ending 31 December 2007 is estimated to be US$1,398,293,000 (equivalent to RMB11,563,883,110), US$1,442,683,000 (equivalent to RMB11,930,988,410) and US$1,531,463,000 (equivalent to RMB12,665,199,010), respectively. Such estimates are calculated based on (i) the projected quantities of purchase by Sinochem Corporation for Sinochem Fertilizer and the projected average price per tonne of products for each of the relevant years (which is set in accordance with the prevailing international market price); and (ii) the projected quantities of purchase by Sinochem Corporation for and on behalf of other customers which engage it to provide import service and the projected average price per tonne of products for each of the relevant years.

The maximum aggregate annual value in respect of the connected transactions between Sinochem Fertilizer and Sinochem Corporation under the Framework Agreement for each of the three years ending 31 December 2007 is estimated to be RMB10,863,000,000, RMB12,180,000,000 and RMB14,991,000,000, respectively. Such estimates are calculated based on (i) the projected quantities of sales of fertilizer products sourced from overseas by Sinochem Macao and the projected average price per tonne of fertilizer products for each of the relevant years (which is set on a cost basis); and (ii) the projected quantities of sales of fertilizer products sourced by

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Sinochem Corporation direct from overseas and the projected average price per tonne of fertilizer products for each of the relevant years (which is set in accordance with the domestic wholesale market price).

Where a party to the Framework Agreement has committed a material breach of any terms of the Framework Agreement and such breach is not remedied within 60 days of the date of written notice from the other parties requesting remedy of the breach, the other parties may terminate the Framework Agreement. Otherwise, only Sinochem Macao or Sinochem Fertilizer may terminate the Framework Agreement by giving one month’s notice to the other parties.

The Framework Agreement has a term not exceeding three years and will expire on 31 December 2007. The term of the Framework Agreement can be extended with the consent of Sinochem Fertilizer, Sinochem Corporation and Sinochem Macao.

(B) Fertilizer Purchase Agreement with US Agri-Chemicals

US Agri-Chemicals, an indirectly wholly-owned subsidiary of Sinochem Corporation, produces phosphate-based fertilizers in the United States. The Fertilizer Group purchased fertilizer products (including the fertilizer products produced by US AgriChemicals) from US Chem Resources from time to time in the past. US Agri-Chemicals entered into a purchase agreement with Sinochem Macao on 6 June 2005 for the purchase and supply of fertilizer products. The agreement has a term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007. Pursuant to the purchase agreement, Sinochem Macao shall place purchase orders with US Agri-Chemicals direct as and when Sinochem Macao desires, setting out in each order the quantity and quality of fertilizer products required, price, payment terms, delivery and shipping requirements and other customary instructions relating to the purchase. Sinochem Macao is not obliged to purchase fertilizers from US AgriChemicals. It is stipulated in the agreement that each purchase shall be on normal commercial terms and the price shall be agreed between the parties and determined based on the fair market prices of the relevant products in the international market at the time the purchase order is placed.

The Fertilizer Group did not purchase fertilizer products direct from US AgriChemicals until after the date of the agreement. Prior to that, all purchases were made with US Chem Resources. For each of the three years ended 31 December 2004, the total purchases by the Fertilizer Group through US Chem Resources of fertilizers produced by US Agri-Chemicals amounted to approximately US$12,129,400 (equivalent to RMB100,310,138), US$17,698,000 (equivalent to RMB146,362,460) and US$35,593,700 (equivalent to RMB294,359,899), respectively. The Management of the Fertilizer Group has confirmed that the prices paid for the purchase of fertilizers produced by US Agri-Chemicals in the past were on normal commercial terms in line with market prices.

The Fertilizer Group estimates that the maximum annual amount of purchases of fertilizer products by Sinochem Macao from US Agri-Chemicals will be approximately US$52,200,000 (equivalent to RMB431,694,000), US$69,000,000 (equivalent to RMB570,630,000) and US$71,300,000 (equivalent to RMB589,651,000), respectively

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for each of the three years ending 31 December 2007. Such estimates are calculated based on projected quantities of purchase and projected average price per tonne of products for each of the relevant years.

(C) Fertilizer Purchase Agreement with Sinochem Shandong

Sinochem Shandong entered into a fertilizer purchase agreement with Sinochem Fertilizer on 6 June 2005. Sinochem Shandong is held as to 60% by Sinochem Corporation. The agreement has a term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007. Sinochem Fertilizer may request that Sinochem Shandong enters into a new purchase agreement with it on the same terms upon the expiry of the current agreement.

Pursuant to this agreement, Sinochem Shandong has granted to Sinochem Fertilizer an exclusive right to sell its fertilizer products in the PRC, and shall sell all its fertilizer products to Sinochem Fertilizer at the fair market price in the PRC at the time the purchase plan is submitted. Sinochem Shandong shall not, and shall not grant any right to any third party to, sell any of its fertilizer products in the PRC during the term of the agreement. The agreement does not contain any provision obliging Sinochem Fertilizer to purchase fertilizer products from Sinochem Shandong. Sinochem Fertilizer shall provide Sinochem Shandong with a purchase plan two months in advance of a purchase, and Sinochem Shandong shall supply the fertilizer products required accordingly. Sinochem Fertilizer has entered into this agreement with Sinochem Shandong in order to avoid any competition between Sinochem Shandong and the Fertilizer Group. Sinochem Fertilizer has purchased fertilizer products from Sinochem Shandong since before this agreement in mid-December 2004. For the month of December 2004, the total purchases by Sinochem Fertilizer from Sinochem Shandong amounted to approximately RMB693,000.

The Fertilizer Group estimates that the maximum annual amount of purchases of chemical fertilizer products from Sinochem Shandong under the fertilizer purchase agreement will be approximately RMB555,060,000, RMB925,100,000 and RMB1,850,000,000, respectively, for each of the three years ending 31 December 2007. Such estimates are calculated based on projected production capacity of Sinochem Shandong and projected average price per tonne of products for each of the relevant years.

(D) Fertilizer Supply Agreement with Sinochem Shandong

Sinochem Fertilizer entered into a fertilizer supply agreement with Sinochem Shandong on 6 June 2005. The agreement has a term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007.

Pursuant to this agreement, Sinochem Fertilizer shall supply potash fertilizers to Sinochem Shandong. Sinochem Shandong shall place a purchase order with Sinochem Fertilizer two months in advance of a purchase, and Sinochem Fertilizer shall reply to Sinochem Shandong within 15 business days of each purchase order. The price of the fertilizers shall be their fair market price in the PRC at the time the purchase order is placed. Sinochem Fertilizer shall deliver the fertilizers ordered to Sinochem Shandong upon full payment of the relevant price.

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Pursuant to the supply agreement, Sinochem Fertilizer may request that Sinochem Shandong enters into a new supply agreement with it on the same terms upon the expiry of the current agreement.

The Fertilizer Group estimates that the maximum annual amount of sales of potash fertilizers to Sinochem Shandong under the fertilizer supply agreement will be approximately RMB116,407,200, RMB209,520,000 and RMB383,760,000 for each of the three years ending 31 December 2007. Such estimates are calculated based on projected quantities of sales and projected average price per tonne of potash fertilizers for each of the relevant years. (E) Service Agreement with Sinochem UK Sinochem UK is an indirectly wholly-owned subsidiary of Sinochem Corporation. Sinochem UK was in the past one of the entities used by the Fertilizer Group for overseas procurement. Pursuant to the Reorganisation, such function has been assumed by Sinochem Macao and Sinochem UK will cease all its fertilizer procurement business with the Fertilizer Group.

Sinochem UK entered into an agreement with Sinochem Macao on 6 June 2005. The agreement has a term not exceeding three years, commencing on 1 April 2005 and expiring on 31 December 2007. Pursuant to the agreement, Sinochem UK shall provide local supplier relations and logistics services to Sinochem Macao in Europe at cost (which mainly includes salaries and employee benefits, office rent, repair and maintenance, utilities, insurance and other administrative costs). The fee payable by Sinochem Macao shall be US$2 (equivalent to RMB16.54) per tonne of products Sinochem Macao purchased from its suppliers and in respect of which Sinochem UK has provided service. Sinochem UK and Sinochem Macao may by agreement in writing adjust the fee payable in accordance with changes in operation expenses of Sinochem UK. The total amount of fee payable by Sinochem Macao to Sinochem UK under the agreement shall not exceed US$2,000,000 (equivalent to RMB16,540,000) each calendar year. Such services are required by the Fertilizer Group as it does not have any staff working in Europe.

The Fertilizer Group estimates that the maximum annual amount of fees payable to Sinochem UK for each of the three years ending 31 December 2007 will be approximately US$2,000,000 (equivalent to RMB16,540,000). Such estimates are calculated based on projected quantities of purchases of Sinochem Macao from local suppliers and projected average price per tonne of products for each of the relevant years.

(F) Information Technology Services Agreement

The Company and Sinochem Corporation entered into an information technology services agreement dated 6 June 2005. Pursuant to this agreement, Sinochem Corporation agreed to provide and to procure the relevant service providers (which are all members of the Sinochem Group) to provide mainframe custody, server maintenance and computer repair services to members of the Enlarged Group free of charge.

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The services to be provided under the information technology services agreement shall be provided on a non-exclusive basis. Sinochem Corporation may only terminate the information technology services agreement where the Company has committed a material breach of any term of the information technology services agreement and such breach is not remedied within a reasonable period, or by giving a six months’ prior written notice provided the Company is able to find alternative service providers to provide the relevant services.

The information technology services agreement has a term of not exceeding three years and will expire on 31 December 2007. The Company may request for a renewal of the service agreement on the same terms upon its expiry for a term of three years before 31 December 2007.

(G) Trademark License Agreements

Sinochem Corporation entered into a trademark license agreement with each of the Company, Sinochem Fertilizer, Sinochem Suifenhe, Sinochem Erlianhaote, Sinochem Zhisheng, Sinochem Dongfang, Sinochem Fuling, Sinochem Yantai, Tianjin Beifang, Manzhouli Kaiming, Sinochem Kailin, Sinochem Sanhuan, Sinochem Logistics, Sichuan Chuanhua, Tianjin Beihai and Yingkou Shunda on 6 June 2005. Each of the trademark license agreements has an initial term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007. Upon expiration of the initial term, each such agreement will be automatically renewed on the same terms for successive periods of three years unless otherwise agreed by the relevant parties to the agreement. Pursuant to the trademark license agreements, Sinochem Corporation has granted a license, on a non-exclusive and non-transferable basis, to each licensee to use in the PRC certain trademarks registered in Sinochem Corporation’s name. The licensees shall not sub-license the use of the abovementioned trademarks to any third party without the prior written approval of Sinochem Corporation. Each licensee shall pay a license fee of RMB1 to Sinochem Corporation for the term of the relevant license agreement. Unless otherwise agreed by Sinochem Corporation, a trademark licence agreement shall automatically terminate if and when Sinochem Corporation ceases to be a substantial shareholder of the relevant licensee. Where Sinochem Corporation obtains registration of any other trademark under its name and such trademark is required by any licensee for its business use, then upon the application by such licensee, Sinochem Corporation may license the use of such other trademark to that licensee by entering into a separate agreement with the latter.

(H) Lease Agreement

On 6 June 2005, Sinochem International Properties Hotel Management Company Limited and Sinochem Fertilizer entered into a lease in relation to two rooms in an office building in Beijing. Sinochem International Properties Hotel Management Company Limited is owned as to 75% by Sinochem Corporation. The lease has a term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007.

Pursuant to the lease, Sinochem International Properties Hotel Management Company Limited has leased to Sinochem Fertilizer the relevant premises with a total gross floor area of approximately 1,642 square meters at a rent of US$36,124

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(equivalent to RMB298,745.48) per month, payable every six months. In addition, each month, Sinochem Fertilizer shall pay Sinochem International Properties Hotel Management Company Limited telephone, fascimile and telecommunication line charges actually incurred in the previous month. Sinochem International Properties Hotel Management Company Limited shall bear the cost of management and cleaning services, while Sinochem Fertilizer shall bear the cost of electricity for electrical appliances other than lights. Chesterton Petty Limited, an independent valuer, has confirmed that the rental payment under the lease reflects the fair market rents of the properties leased. For each of the three years ended 31 December 2004, the total rental paid by Sinochem Fertilizer to Sinochem International Properties Hotel Management Company Limited for the leasing of office premises amounted to approximately RMB4,981,000, RMB3,102,000 and RMB4,676,000, respectively.

Sinochem Fertilizer has the right to terminate the lease by a 30 days’ prior written notice to Sinochem International Properties Hotel Management Company Limited. Sinochem Fertilizer may apply for a renewal of the lease upon its expiry and Sinochem International Properties Hotel Management Company Limited shall give priority to Sinochem Fertilizer’s application against any other offer to lease the same office properties.

(I) Service Agreement with US Chem Resources

US Chem Resources is an indirectly wholly-owned subsidiary of Sinochem Corporation. US Chem Resources was in the past one of the entities used by the Fertilizer Group for overseas procurement. Pursuant to the Reorganisation, such function will be assumed by Sinochem Macao and US Chem Resources will cease all its fertilizer procurement business with the Fertilizer Group.

US Chem Resources entered into an agreement with Sinochem Macao on 6 June 2005. This agreement has a term not exceeding three years, commencing on the date it was entered into and expiring on 31 December 2007. Pursuant to the agreement, US Chem Resources shall provide local supplier relations and logistics services to Sinochem Macao in the United States at cost (which mainly includes salaries and employee benefits, office rent, repair and maintenance, utilities and other administrative costs). The fee payable by Sinochem Macao shall be US$2 (equivalent to RMB16.54) per tonne of products Sinochem Macao purchased from its suppliers and in respect of which US Chem Resources has provided service. US Chem Resources and Sinochem Macao may by agreement in writing adjust the fee payable in accordance with changes in operation expenses of US Chem Resources. The total amount of fee payable by Sinochem Macao to US Chem Resources under the agreement shall not exceed US$2,000,000 (equivalent to RMB16,540,000) each calendar year. Such services are required by the Fertilizer Group as it does not have any staff working in the United States.

(J) Management agreements in respect of Sinochem Group’s joint venture interests

Sinochem Corporation and Sinochem Fertilizer entered into two management agreements on 30 March 2005. Each of these agreements has a term not exceeding three years, commencing on the date they were entered into and expiring on 31 December 2007.

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Pursuant to the management agreements, Sinochem Corporation has entrusted Sinochem Fertilizer to manage the rights in its 60% and 40% equity interests in Sinochem Shandong and Tianji JV, respectively. The rights entrusted to Sinochem Fertilizer are all the shareholder’s rights of Sinochem Corporation, including the rights to nominate directors and supervisors, but excluding the rights to receive dividends, rights to deal with (such as transfer and pledge) the equity interests concerned and rights to nominate the chief financial officers. Sinochem Corporation shall pay Sinochem Fertilizer a fee on a cost basis for the management service provided by Sinochem Fertilizer. The fee payable by Sinochem Corporation in respect of the management of the interests in Sinochem Shandong and those in Tianji JV shall be RMB324,000 and RMB503,000, respectively.

Each of the abovementioned management agreements shall be terminated upon the earlier of:

. the transfer of the equity interest held by Sinochem Corporation in the relevant joint venture to Sinochem Fertilizer or its nominee;
. the transfer of the equity interest held by Sinochem Corporation in the relevant joint venture to any other company;
. the liquidation of the relevant joint venture; and
. the expiry date of the management agreement.

(K) Transactions between certain joint ventures and the joint venture partners

Sinochem Fertilizer has entered into a number of joint ventures. Some of the joint venture partners hold 10% or more interest in joint ventures that are subsidiaries of Sinochem Fertilizer. Those joint venture partners will become connected persons (as defined in the Listing Rules) of the Company upon Completion, and transactions between those partners and the joint ventures they have interest in will constitute connected transactions under the Listing Rules. In addition, some of the joint venture partners who hold 10% or more interest in the joint ventures will be associates of connected persons (as defined in the Listing Rules) of the Company upon Completion. Transactions between those joint ventures and such associates will constitute connected transactions upon Completion. Joint ventures that have entered into connected transactions are Sinochem Zhisheng and Tianjin Beifang. Details of such connected transactions are set out below.

(i) Port services provided by Tianjin Port to Tianjin Beifang

Tianjin Beifang is a jointly controlled entity of the Fertilizer Group as set out in note 31 of the Accountants’ Report on the Fertilizer Group, in which Sinochem Fertilizer holds a 60% equity interest. Tianjin Port and Tianjin Beifang entered into a service agreement dated 16 May 2005. The agreement has a term not exceeding 3 years commencing on the date it was entered into and expiring on 31 December 2007. Pursuant to this agreement, Tianjin Port shall provide logistics services to Tianjin Beifang in return for standard fees at which Tianjin Port charges all its customers.

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Tianjin Beifang commenced operation in April 2004. The total amount of fees paid by Tianjin Beifang to Tianjin Port for the provision of the port services for the eight months ended 31 December 2004 was RMB12,427,900.

The maximum annual amount of fees payable by Tianjin Beifang to Tianjin Port for the provision of such services for each of the three years ending 31 December 2007 is estimated to be RMB22,000,000, RMB26,500,000 and RMB31,800,000, respectively. Such estimates are calculated based on projected quantities of products that will require port services and fees payable for each of the relevant years, having regard to historical quantities and fees.

(ii) Sales service provided by Sinochem Zhisheng to Yongan Zhisheng

Sinochem Zhisheng is a joint venture company held as to 53.19% by Sinochem Fertilizer and 46.81% by Yongan Zhisheng. Sinochem Zhisheng entered into an agreement with Yongan Zhisheng on 28 July 2002 under which Sinochem Zhisheng agreed to sell all the urea for agricultural use produced by Yongan Zhisheng on the latter’s behalf. The agreement has a term of 15 years, commencing on the date it was entered into.

Pursuant to the agreement, Yongan Zhisheng shall not sell any urea for agricultural use to other third parties from the date of the agreement. Sinochem Zhisheng has the right to determine the price of urea for agricultural use it sells on behalf of Yongan Zhisheng on a reasonable and timely basis according to market conditions. Yongan Zhisheng may supervise the pricing process. Yongan Zhisheng pays Sinochem Zhisheng a fee equal to not more than 0.5% of the price Sinochem Zhisheng sold the urea for agricultural use at. Pursuant to the agreement, Yongan Zhisheng will deliver urea for agricultural use to Sinochem Zhisheng upon receipt of the purchase price net of the fee due and payable by Yongan Zhisheng to Sinochem Zhisheng (‘‘Net Purchase Price’’). Sinochem Zhisheng shall bear the economic loss if the sales revenue received by Sinochem Zhisheng falls short of the purchase price paid to Yongan Zhisheng.

The amount of Net Purchase Price paid by Sinochem Zhisheng to Yongan Zhisheng under the above agreement for the five months ended 31 December 2002 and each of the two years ended 31 December 2004 was RMB48,022,000, RMB141,320,000 and RMB130,340,000, respectively.

The maximum annual amount of Net Purchase Price payable by Sinochem Zhisheng to Yongan Zhisheng under the above agreement for each of the three years ending 31 December 2007 is estimated to be RMB130,626,000. Such estimate is calculated based on projected quantities of sales for each of the relevant years, having regard to historical quantities.

(iii) Supply of raw materials by Yongan Zhisheng to Sinochem Zhisheng

Yongan Zhisheng entered into an agreement with Sinochem Fertilizer and Sinochem Zhisheng on 28 July 2002 under which Yongan Zhisheng agreed to supply (gas ammonia, molten urea solution and powdery material) (‘‘Specified Raw Materials’’) to Sinochem Zhisheng and to use its best

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endeavours to help Sinochem Zhisheng procure other raw materials (‘‘Other Raw Materials’’). The agreement has a term of 15 years, commencing on the date it was entered into.

Specified Raw Materials: Pursuant to the agreement, Sinochem Zhisheng shall notify Yongan Zhisheng on a monthly basis the types, quantity and standard of Specified Raw Materials it requires for the following month, and Yongan Zhisheng shall supply all the Specified Raw Materials required by Sinochem Zhisheng unless affected by the maintenance or repair of its equipment. The price of the Specified Raw Materials shall be the actual cost of supply of such materials to Yongan Zhisheng plus tax charges. Yongan Zhisheng also agreed to bear the cost of technological improvement and adjustment of techniques for the purposes of meeting Sinochem Zhisheng’s requirements in respect of (molten urea solution). Sinochem Zhisheng shall pay Yongan Zhisheng on a monthly basis for the Specified Raw Materials purchased in the previous month.

Other Raw Materials: Yongan Zhisheng agreed to use its best endeavours to help Sinochem Zhisheng procure, at a favourable price, other raw materials the latter requires for its production. The total amount of purchase price paid by Sinochem Zhisheng for the Specified Raw Materials under the above agreement for each of the three years ended 31 December 2004 was approximately RMB14,310,000, RMB28,120,000 and RMB31,526,000, respectively. No Other Raw Materials have been sold or purchased.

The maximum annual amount of purchase price payable by Sinochem Zhisheng under the above agreement for each of the three years ending 31 December 2007 is estimated to be RMB54,373,487, RMB63,968,808 and RMB63,968,808, respectively. Such estimates are calculated based on projected quantities of purchases for each of the relevant years, having regard to historical quantities.

(iv) Supply of utilities by Yongan Zhisheng to Sinochem Zhisheng

Yongan Zhisheng entered into an agreement with Sinochem Zhisheng on 28 July 2002 under which the former agreed to provide water, electricity, gas and steam to the latter. The agreement has a term of 15 years, commencing on the date it was entered into. The Sponsors and the Independent Financial Adviser are of the view that a term of such duration is a normal business practice for an agreement of this type in the PRC, and the relatively long agreement term will ensure the continued supply of utilities to Sinochem Zhisheng, which is crucial and beneficial to its production. Pursuant to this agreement, the parties entered into separate agreements for the supply of each of the abovementioned utilities.

Water: The parties entered into an agreement for the supply of water on 28 July 2002 (‘‘Water Supply Agreement’’). The agreement has a term of 15 years, commencing on the date it was entered into. Pursuant to the Water Supply Agreement, Sinochem Zhisheng shall notify Yongan Zhisheng before each anniversary of the date of the agreement of the amount of water it requires

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Yongan Zhisheng to supply for the coming year. Yongan Zhisheng shall supply water to Sinochem Zhisheng accordingly and shall not restrict or stop such supply unless with a legitimate reason and according to law. The Water Supply Agreement sets out the prices for water to be supplied by Yongan Zhisheng: The price of water for production use shall be the actual cost of such water to Yongan Zhisheng plus relevant tax charges; and that of water for domestic use shall not exceed the cost of such water to Yongan Zhisheng. The foregoing agreed prices are, however, subject to change in the price of water as prescribed by the relevant PRC authority. Sinochem Zhisheng shall pay Yongan Zhisheng a monthly fee calculated on the basis of the amount of water it actually utilised for the relevant month.

Electricity: The parties entered into an agreement for the supply of electricity on 28 July 2002 (‘‘Electricity Supply Agreement’’). The agreement has a term of 15 years, commencing on the date it was entered into. Pursuant to the Electricity Supply Agreement, Sinochem Zhisheng shall notify Yongan Zhisheng before each anniversary of the date of the agreement of the amount of electricity it requires Yongan to supply for the coming year. Notification shall be given one month before the said anniversary if the amount of electricity required for the coming year will be different from the existing amount, in which case the amount can be changed by mutual agreement of the parties. Yongan Zhisheng shall supply electricity to Sinochem Zhisheng according to the notification or agreement (as the case may be) and shall not restrict or stop such supply unless the safety of Yongan Zhisheng’s production is adversely affected by a breach of law or regulation by the relevant electricity authority or Sinochem Zhisheng. The Electricity Supply Agreement stipulates that the price of electricity to be supplied by Yongan Zhisheng to Sinochem Zhisheng shall not exceed the average annual accumulated cost of electricity utilised by Yongan Zhisheng. Pursuant to the Electricity Supply Agreement, the parties shall enter into a subsidiary electricity supply agreement each year on the same price terms for a term of one year or such other period as may be agreed by the parties. Sinochem Zhisheng shall pay Yongan Zhisheng a monthly fee calculated on the basis of the amount of electricity it actually utilised for the relevant month.

Gas: The parties entered into an agreement for the supply of compressed air and semi-liquified coal gas on 28 July 2002 (‘‘Gas Supply Agreement’’). The agreement has a term of 15 years, commencing on the date it was entered into. Pursuant to the Gas Supply Agreement, Sinochem Zhisheng shall notify Yongan Zhisheng before the anniversary of the date of the agreement of the amount of gas it requires Yongan Zhisheng to supply for the coming year. Yongan Zhisheng shall supply gas to Sinochem Zhisheng accordingly and shall not restrict or stop such supply except in the event of unforeseen circumstances. The Gas Supply Agreement stipulates that the price of gas to be supplied by Yongan Zhisheng to Sinochem Zhisheng shall be the actual cost of such gas to Yongan Zhisheng plus relevant tax charges. Sinochem Zhisheng shall pay Yongan Zhisheng a monthly fee calculated based on the amount of gas it actually utilised for the relevant month.

Steam: The parties entered into an agreement for the supply of steam on 28 July 2002 (‘‘Steam Supply Agreement’’). The agreement has a term of 15 years, commencing on the date it was entered into. Pursuant to the Steam Supply

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Agreement, Sinochem Zhisheng shall notify Yongan Zhisheng before each anniversary of the date of the agreement of the amount of steam it requires Yongan Zhisheng to supply for the coming year. Yongan Zhisheng shall supply steam to Sinochem Zhisheng accordingly and shall not restrict or stop such supply except in the event of unforeseen circumstances. The Steam Supply Agreement stipulates that the price of steam to be supplied by Yongan Zhishengto Sinochem Zhisheng shall be the average cost of such steam to Yongan Zhisheng. Sinochem Zhisheng shall pay Yongan Zhisheng a monthly fee calculated based on the amount of steam it actually utilised for the relevant month.

The aggregate amounts of fees paid by Sinochem Zhisheng for the purchases of the above utilities for the years ended 31 December 2002, 2003 and 2004 amounted to RMB96,000, RMB2,513,000 and RMB2,092,000, respectively.

(v) Licence of trademark by Yongan Zhisheng to Sinochem Zhisheng

Pursuant to the joint venture agreement dated 28 July 2002 between Sinochem Fertilizer and Yongan Zhisheng, Yongan Zhisheng entered into a trademark licence agreement with Sinochem Zhisheng on 25 August 2003 under which it has licensed the use of a trademark registered in its name to Sinochem Zhisheng on a nonexclusive and non-transferable basis and free of charge. Sinochem Zhisheng shall not sub-license the use of the trademark to any third party without the prior written approval of Yongan Zhisheng. The trademark license has a term of six years and shall expire on 19 June 2008.

(vi) Office lease between Tianjin Beihai and Tianjin Beifang

Tianjin Beihai and Tianjin Beifang entered into a lease agreement on 21 May 2004. The lease is effective from 1 January 2004 until it is terminated. Tianjin Beihai is held as to approximately 48.18% by Tianjin Port which holds 40% of the equity interest in Tianjin Beifang. Tianjin Beihai is therefore an Associate of Tianjin Beifang under the Listing Rules.

Pursuant to the lease agreement, Tianjin Beihai has leased an office space of approximately 140 square meters to Tianjin Beifang at an annual rent of RMB50,000. Tianjin Beihai has also leased a sedan to Tianjin Beifang for the latter’s business use at a monthly rent of RMB3,000.

Directors’ View on the Continuing Connected Transactions

The Directors are of the view that all the Continuing Connected Transactions have been conducted on normal commercial terms, were entered into in the ordinary and usual course of business of the Enlarged Group, are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and that the maximum annual value of each of the relevant Continuing Connected Transactions as disclosed in this section are fair and reasonable.

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Annual maximum of the Non-exempt Continuing Connected Transactions

The Non-exempt Continuing Connected Transactions will be conducted in the ordinary course of business of the Fertilizer Group on normal commercial terms for a period not exceeding three years ending 31 December 2007 and the annual amount payable under each contract shall not exceed the annual maximum amount as set out below:

(i) in relation to the Framework Agreement:
. the maximum aggregate annual value of connected transactions between Sinochem Macao and Sinochem Corporation for each of the three years ending 31 December 2007 is estimated to be US$1,398,293,000 (equivalent to RMB11,563,883,110), US$1,442,683,000 (equivalent to RMB11,930,988,410) and US$1,531,463,000 (equivalent to RMB12,665,199,010), respectively; and
. the maximum aggregate annual value of connected transactions between Sinochem Fertilizer and Sinochem Corporation for each of the three years ending 31 December 2007 is estimated to be RMB10,863,000,000, RMB12,180,000,000 and RMB14,991,000,000, respectively;
(ii) in relation to the fertilizer purchase agreement with US Agri-Chemicals, the total amount of purchases from US Agri-Chemicals for each of the three financial years ending 31 December 2007 will not exceed US$52,200,000 (equivalent to RMB431,694,000), US$69,000,000 (equivalent to RMB570,630,000) and US$71,300,000 (equivalent to RMB589,651,000), respectively;
(iii) in relation to the fertilizer purchase agreement with Sinochem Shandong, the total amount of purchases from Sinochem Shandong for each of the three financial years ending 31 December 2007 will not exceed RMB555,060,000, RMB925,100,000 and RMB1,850,000,000, respectively; and
(iv) in relation to the fertilizer supply agreement with Sinochem Shandong, the total amount of sales to Sinochem Shandong for each of the three financial years ending 31 December 2007 will not exceed RMB116,407,200, RMB209,520,000 and RMB383,760,000, respectively.

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INFORMATION ON THE FERTILIZER GROUP — RELATIONSHIP BETWEEN THE ENLARGED GROUP AND THE SINOCHEM GROUP

Annual maximum of the Continuing Connected Transactions exempt from independent shareholders’ approval requirements

The Continuing Connected Transactions exempt from independent shareholders’ approval requirements will be conducted in the ordinary course of business of the Fertilizer Group on normal commercial terms for a period not exceeding three years ending 31 December 2007 and the annual amount payable under each contract shall not exceed the annual maximum amount as set out below:

(i) in relation to the service agreement with Sinochem UK, the total amount of service fees payable to Sinochem UK for each of the three years ending 31 December 2007 will not exceed US$2,000,000 (equivalent to RMB16,540,000);
(ii) in relation to the service agreement with US Chem Resources, the total amount of service fees payable by Sinochem Macao to US Chem Resources for each of the three years ending 31 December 2007 will not exceed US$2,000,000 (equivalent to RMB16,540,000);
(iii) in relation to the port services provided by Tianjin Port, the total amount of service fees payable to Tianjin Port for each of the three years ending 31 December 2007 will not exceed RMB22,000,000, RMB26,500,000 and RMB31,800,000 respectively;
(iv) in relation to the sales agreement with Yongan Zhisheng, the total amount of the Net Purchase Price payable by Yongan Zhisheng for each of the three years ending 31 December 2007 will not exceed RMB130,626,000; and
(v) in relation to the raw material supply agreement with Yongan Zhisheng, the total amount of purchase price payable to Yongan Zhisheng for each of the three years ending 31 December 2007 will not exceed RMB54,373,487, RMB63,968,808 and RMB63,968,808 respectively.

Confirmation from the Independent Financial Adviser

Somerley considers that the Non-exempt Continuing Connected Transactions are on normal commercial terms, in the ordinary and usual course of business of the Enlarged Group, in the interests of the Company and the Shareholders as a whole, and fair and reasonable so far as the Independent Shareholders are concerned. Somerley is also of the view that the maximum annual value of the Non-exempt Continuing Connected Transactions are fair and reasonable.

EXISTING CONTINUING CONNECTED TRANSACTIONS

Set out below are details of the transactions and arrangement entered into by the Group subsisting at the Latest Practicable Date which constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

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INFORMATION ON THE FERTILIZER GROUP — RELATIONSHIP BETWEEN THE ENLARGED GROUP AND THE SINOCHEM GROUP

Tenancy agreement

A wholly owned subsidiary of the Company has entered into a tenancy agreement with Sinochem HK under which it rents from Sinochem HK the premises located at Unit 4603, 46th Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong for use as the Company’s principal place of business and head office in Hong Kong. The tenancy agreement is for a term of one year commencing with effect from 1 March 2005. Pursuant to the tenancy agreement, such subsidiary is to pay to Sinochem HK a monthly rental of HK$20,000 at the beginning of each month which has been determined with reference to prevailing market rates. As Sinochem HK is a substantial shareholder of the Company, the tenancy agreement constitutes a continuing connected transaction of the Company under the Listing Rules.

The Directors are of the view that the tenancy agreement is on normal commercial terms and fair and reasonable so far as the Shareholders, taken as a whole, are concerned. As each of the relevant percentage ratios set out in the Listing Rules (other than the profit ratio and equity capital ratio which are not applicable) in respect of the rental payable under the tenancy agreement is, on an annual basis, equal to or more than 0.1% but less than 2.5% and the annual consideration is less than HK$1,000,000, the transaction under the tenancy agreement is exempt from the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

Loan facilities

On 20 September 2004 and 18 March 2005 respectively, two facility letters were executed by the Company as borrower and Sinochem HK as lender under which Sinochem HK agreed to make available to the Company two unsecured term loan facilities of up to an aggregate of HK$12,000,000 to finance the working capital requirements of the Group. As at the Latest Practicable Date, a total principal amount of HK$9,000,000 was drawn by the Company under these facilities, and an amount of HK$3,000,000 remained undrawn under the facility letter dated 18 March 2005.

According to the terms of both facility letters, amounts advanced are unsecured and bear interest at the prime lending rate per annum quoted by The Hong Kong and Shanghai Banking Corporation Limited for the time being. Sinochem HK has the right to terminate the loan facilities by written notice of at least 14 days to the Company. Unless earlier terminated, HK$6,000,000, representing the total principal amount advanced under the first facility, is repayable on 30 December 2005 and the remaining HK$3,000,000 advanced under the second facility is repayable on the expiry of one calendar year from the date on which the second facility is fully drawn. Interests accrued on the principal amounts advanced are payable in one lump sum on the respective due dates for repayment of the principal sums. As at 30 April 2005, the aggregate amount (principal and interest) outstanding under the facilities was approximately HK$9,157,000. Sinochem HK and the Company have agreed that the Company will repay this total outstanding amount immediately upon Completion.

The Directors are of the view that the facility letters are on normal commercial terms and are fair and reasonable so far as the Shareholders, taken as a whole, are concerned. Since the transactions under the facility letters constitute financial assistance provided by a connected person for the benefit of the Company on normal commercial terms where no

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security over the assets of the Company is granted in respect of the financial assistance, such transactions are exempt from the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

Amount due to Director

As at 30 April 2005, the Company was indebted to Mr. Chu Yu Lin, David in a total amount of approximately HK$3.47 million. Mr. Chu Yu Lin, David and his wife Mrs. Chu Ho Miu Hing, both executive Directors, are also Shareholders collectively interested in approximately 10.25% of the issued ordinary share capital of the Company as at the Latest Practicable Date. The amount due from the Company to Mr. Chu is unsecured and comprises prior outstanding director’s salaries due to Mr. Chu, and fixed cumulative cash dividends accrued on the Preference Shares previously held by Mr. Chu which were unpaid at the time. Under the current arrangement between the Company and Mr. Chu, the Company is making monthly payments of HK$200,000 towards discharge of the total amount due to him.

The amount owed by the Company to Mr. Chu constitutes financial assistance provided by Mr. Chu, a connected person of the Company, for the benefit of the Company where no security over the assets of the Company is granted in respect of such financial assistance, and accordingly is exempt from the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

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DIRECTORS AND SENIOR MANAGEMENT

The following sets out the biographical details of the existing and proposed Directors, senior management of the Company as well as the senior management of the Fertilizer Group.

EXISTING DIRECTORS OF THE COMPANY

Executive Directors to be re-designated as non-executive Directors

Mr. LIU De Shu ( ), aged 52, joined the Company as the Chairman in April 2004 and will be re-designated as a non-executive Director upon Completion. Mr. Liu is also the chief executive officer of Sinochem Corporation, one of the 185 China Superior Enterprises and holding company of Sinochem HK. Mr. Liu holds other senior positions in several subsidiaries and joint venture companies of the Sinochem Group. In particular, he is the vice chairman of Dalian West Pacific Petrochemical Co., Ltd., a director of Sinochem HK, a director of Manulife-Sinochem Life Insurance Co. Ltd. and (China National Trading Limited) and the chairman of Lion Fund Management Ltd. Mr. Liu will continue to hold the above positions in the Sinochem Group after Completion. Mr. Liu graduated from (Tsinghua University) in the PRC with a Bachelors degree in Manufacturing Technology and Equipment in April 1979 and from (China Europe International School) in the PRC with an EMBA in 1998. He was the chairman of China National Machinery & Equipment Import & Export Corporation and Sinochem International Corporation, a company listed on the stock exchange in Shanghai, PRC. Mr. Liu has over 20 years extensive corporate management experience in large enterprises and is a member of the 10th National Committee of the Chinese People’s Political Consultative Conference.

Mr. SONG Yu Qing ( ), aged 56, joined the Company in August 2001 and is the Deputy Chairman and the current Chief Executive Officer of the Company. He will be redesignated as a non-executive Director upon Completion. He has approximately 18 years experience in the management of large enterprises, and is also the managing director of Sinochem HK and was the deputy general manager of Shanghai Foreign Trade Center which was responsible for the construction of Jinmao Tower in Shanghai. Mr. Song will continue to be the managing director of Sinochem HK after Completion.

Executive Directors

Ms. CHEN Hao ( ), aged 39, joined the Company in August 2002. She obtained a Master Degree in Business Administration (Investment and Finance) from the University of Hull in July 2000 and a bachelor’s degree in banking and finance from (Xiamen University) in July 1988. Ms. Chen was a director of FPB Pacific Bank and a director of Sinochem Kingsway Asset Management Limited, and is also an executive director of Paddison Limited, which is one of the subsidiaries and investment arms of Sinochem Corporation. She has over 10 years’ experience in investment and asset management. She is responsible for the management of the Group’s property business. Ms. Chen will continue to hold the above position in Sinochem Group after Completion.

Mr. CHU Yu Lin, David ( ), aged 61, joined the Group in September 1987. Mr. Chu received his Master of Business Administration degree from Harvard University in 1977, a Bachelor of Science degree in 1966 and a Master of Science degree in 1968 both from Northeastern University and was awarded an honorary Doctor of Public Service degree from Northeastern University in 2001. Prior to joining the Group, he had worked for a number of

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sizeable international corporations such as General Electric Co., Chi Wo Properties Limited and Gammon Properties Limited, Gammon Hong Kong Limited and Jardine Matheson & Company Limited. Mr. Chu is currently an independent non-executive director of Chuang’s China Investments Limited, CATIC International Holdings Limited, Tidetime Sun (Group) Limited (formerly known as Sun Sports Media Group Limited), Hong Kong Pharmaceutical Holdings Limited, a company in respect of which provisional liquidators have been appointed, and Jiuzhou Development Company Limited (formerly known as Zhu Kuan Development Company Limited), the controlling shareholder of which is in provisional liquidation. The shares of all of these companies are listed on the Stock Exchange. Mr. Chu has over 18 years of experience in property investment and development. Mr. Chu is currently a deputy of the Hong Kong Special Administrative Region to the 10th National Congress of the People’s Republic of China and a Justice of the Peace of Hong Kong. Mr. Chu is the husband of Mrs. Chu Ho Miu Hing.

Mrs. CHU Ho Miu Hing ( ), aged 63, received her bachelor’s degree in chemistry from Mount Holyoke College, US in 1963, and a bachelor’s degree in music from New England Conservatory of Music, US in 1969. She joined the Group in September 1987 and has over 18 years of experience in property investment and development. Mrs. Chu was a Council Member of the Stock Exchange. She is currently the vice-chairman of The Chamber of Hong Kong Listed Companies. In November 2000, the SFC announced its findings that a number of buy orders placed by Mrs. Chu for shares in the Company during July 1998 had the potential of distorting the market price of the Company’s shares, and publicly reprimanded Mrs. Chu on this matter. Mrs. Chu is the wife of Mr. Chu Yu Lin, David.

Independent Non-Executive Directors

Mr. KO Ming Tung, Edward ( ), aged 44, is a solicitor and a partner of Messrs. Alfred Lam, Keung & Ko. He obtained a Bachelor of Laws Degree in August 1986 and is a member of the Law Society of Hong Kong. Mr. Ko has been practising as a solicitor in Hong Kong for more than 14 years. He was appointed as Deputy Presiding Officer of the Labour Tribunal from July 2000 to January 2002 and is presently a Member of the Panel of Adjudicators of the Obscene Articles Tribunal. Mr. Ko is also an independent non-executive director of Guo Xin Group Limited, New Smart Holdings Limited and Thiz Technology Group Limited, and was an independent non-executive director of INNOMAXX Biotechnology Group Limited from March 2001 to September 2003, all of which are companies whose shares are listed on the Stock Exchange. Mr. Ko has been an independent non-executive director of the Company since April 2000.

Dr. LI Ka Cheung, Eric ( ), GBS, OBE, JP, LLD, DSocSc., B.A., aged 52, joined the Company in September 2004. Dr. Li obtained a Bachelor of Arts (Economics) degree from the University of Manchester in 1975 and is the Senior Partner of Li, Tang, Chen & Co., a firm of Certified Public Accountants (Practising). He has over 30 years of experience in the accounting field and is currently an independent non-executive director of The Kowloon Motor Bus Holdings Limited, SmarTone Telecommunications Holdings Limited, Wong’s International (Holdings) Limited, CATIC International Holdings Limited, Hang Seng Bank Limited, China Resources Enterprise, Limited and RoadShow Holdings Limited, all of which are companies whose shares are listed on the Stock Exchange. He is also an independent non-executive director of China Vanke Co., Ltd. and Strategic Global Investments Plc., companies listed on the stock exchange in Shenzhen and on the Alternative Investment Market (AIM) of the London Stock Exchange, respectively. Dr. Li was a director of SIIC Medical Science & Technology (Group) Limited, which was then a company listed on the Stock Exchange.

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DIRECTORS AND SENIOR MANAGEMENT

Between the period from 1991 to 2004, Dr. Li was a member of the Legislative Council, and between 1995 to 2004, the Chairman of the Public Accounts Committee of the Legislative Council of Hong Kong. He was formerly the president of the Hong Kong Institute of Certified Public Accountants (formerly known as the Hong Kong Society of Accountants) and is currently a fellow member of The Institute of Chartered Accountants in England & Wales, the Hong Kong Institute of Certified Public Accountants and The Institute of Chartered Secretaries and Administrators, the United Kingdom.

Dr. TANG Tin Sek ( ), aged 46, is a Certified Public Accountant and a partner of Terence Tang & Partners. He is also an independent non-executive director of CEC International Holdings Limited, New Smart Holdings Limited, INNOMAXX Biotechnology Group Limited and Frankie Dominion International Limited, all of which are companies whose shares are listed on the Stock Exchange. He obtained a Bachelor of Science degree from the University of Hong Kong in 1980, a Master of Business Administration degree from the University of Sydney, Australia in 1990 and a Doctor of Accountancy Degree from the Hong Kong Polytechnic University in 2004. He has over 24 years’ experience in corporate finance, business advisory, financial management and auditing. He is also a member of The Chinese Institute of Certified Public Accountants, The Institute of Chartered Accountants in Australia and the Chartered Association of Certified Accountants in the United Kingdom. He has been an independent non-executive director of the Company since April 2000.

DIRECTORS TO BE APPOINTED UPON COMPLETION

Mr. DU Ke Ping ( ), aged 43, will be appointed as an executive Director and Chief Executive Officer of the Company upon Completion. He was appointed as the General Manager as Sinochem Fertilizer in 1999 and was later promoted to the head of the Fertilizer Business of Sinochem Corporation. He was then appointed as the vice-president and one of the 13 members of the management committee of Sinochem Corporation. He graduated from the accounting department of (Shandong Economic College). Mr. Du also obtained a MBA degree from (Foreign Economics and Trade University). Before taking up his current position, Mr. Du was a senior official of the Ministry of Commerce of the PRC (formerly the Ministry of Foreign Trade and Economic Commission). Mr. Du joined Sinochem Group in 1989. As an executive Director and chief executive officer of the Company to be appointed upon Completion, Mr. Du will devote substantially all of his time to lead the management and operations of the Company. Although Mr. Du is also one of the 13 members of the management committee of Sinochem Corporation, he will not have any other executive duties with Sinochem Corporation apart from his duties with the Fertilizer Group. He is responsible for the overall management and development of the Fertilizer Group.

Dr. CHEN Guo Gang ( ), aged 45, is the Chief Finance Officer and one of the 13 members of the management committee of Sinochem Corporation. He will be appointed as a non-executive director of the Company upon Completion. Dr. Chen will continue to hold his current positions in Sinochem Group after Completion. He graduated from the Accounting department of (Xiamen University) with a doctorate degree and is a Senior Accountant. Before taking up his current position, Dr. Chen occupied a number of senior positions within subsidiaries of Sinochem Corporation. Dr. Chen joined Sinochem Group in 1991. Dr. Chen is also a director of Sinochem International Corporation which is a company listed on the Shanghai Stock Exchange.

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It is expected that the Investor will have a representative on the Board upon completion of the Strategic Placing and will have another representative on the Board upon full exercise of the Option referred to in the section headed ‘‘Maintaining the Listing Status and Public Float’’ in the ‘‘Letter from the Board’’ and ‘‘The Strategic Placing’’ in the ‘‘Letter from Sinochem HK’’ in this circular.

SENIOR MANAGEMENT OF THE GROUP

Ms. TSE Yin Hung, Bonnie ( ), aged 44, joined the Group in July 1997 and is the Financial Controller of the Group, responsible for the Group’s finance, accounting and corporate administration. She graduated from the University of Technology, Sydney in 1988 and is a holder of a Bachelor of Business Degree, majoring in Accounting. She is an associate member of the Hong Kong Institute of Certified Public Accountants and a Certified Practising Accountant of the Australian Society of Certified Practising Accountants and has over 16 years’ working experience in accounting, finance and related field.

SENIOR MANAGEMENT OF THE FERTILIZER GROUP

Mr. ZHANG Bao Hong ( ), aged 38, is the Deputy General Manager of the Fertilizer Group. He graduated from the (Guangdong Foreign Language and Foreign Trade University) in 1988 majoring in corporate finance management, with a bachelor degree in economics. Mr. Zhang obtained an EMBA degree from (Guanghua School of Management of Beijing University). Mr. Zhang joined Sinochem Corporation in 1988 after graduation. He then joined Sinochem Fertilizer as the Financial Controller in June 1999 and was later promoted to the position of Deputy General Manager of Sinochem Fertilizer in August 2000. Mr. Zhang took up his current position in January 2002. Mr. Zhang is responsible for the administration of the logistics operation, financial management, the information system and the marketing activities of the Fertilizer Group. Mr. Zhang has over five years’ experience in the PRC fertilizer industry. He will be appointed as the senior management of the Company after Completion.

Mr. ZHANG Wei ( ), aged 36, is the Deputy General Manager and the General Manager of the sales and distribution department of Sinochem Fertilizer. He graduated from the chemical engineering faculty of (Tsinghua University) in 1992 with a bachelor degree in engineering. He also obtained a masters degree in bio-chemistry engineering from the same university in 1995. Mr. Zhang first joined Sinochem Corporation in 1995 after graduation. He then joined Sinochem Fertilizer in August 1999 and was later promoted to his current position in January 2002. Mr. Zhang is responsible for the development of the sales network, and sales and distribution of the Fertilizer Group’s products. Mr. Zhang has over five years’ experience in the PRC fertilizer industry. He will be appointed as the senior management of the Company after Completion.

Mr. LI Qiu Bing ( ), aged 37, is the Deputy General Manager and the General Manger of the international trading and international cooperation department of Sinochem Fertilizer. He graduated from (Beijing Industrial University) in 1990 with a bachelor degree in economics, majoring in foreign trade. Before taking up his current position, Mr. Li joined Sinochem Fertilizer in February 2003 and was later promoted to his current position in November 2003. Mr. Li is responsible for the overseas procurement of phosphate-based fertilizers and compound fertilizers and the international relation activities of the Fertilizer Group. He will be appointed as the senior management of the Company after Completion.

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DIRECTORS AND SENIOR MANAGEMENT

Mr. SHEN Qi ( ), aged 32, is the Deputy General Manager and the General Manager of the resources development department of Sinochem Fertilizer. He graduated from (Beijing University) in 1995 majoring in domestic economics management with a bachelor degree in economics. He first joined Sinochem Corporation in 1995 after graduation. He then joined the Sinochem Fertilizer in December 1997 and was later promoted to his current position in November 2003. Mr. Shen is responsible for the development and operation of SINOCHEM Production of the Fertilizer Group. Mr. Shen has over seven years’ experience in the PRC fertilizer industry. He will be appointed as the senior management of the Company after Completion.

Mr. KANG Jun Xiang ( ), aged 41, is the Deputy General Manager of Sinochem Fertilizer. He graduated from the faculty of economics of (Guangzhou Jinan University) in 1987 with a bachelor degree in economics. He joined (Sinochem Guangdong Export and Import Company) in 1987 after graduation. He joined Sinochem Fertilizer in January 2005 and was appointed to his current position in March 2005. He is responsible for the development of the sales network, and sales and distribution of the Fertilizer Group’s products. Mr. Kang has over 17 years’ experience in import and export operation in the PRC. He will be appointed as the senior management of the Company after Completion.

Mr. FENG Ming Wei ( ), aged 42, is the Assistant to General Manager and the General Manager of the potash fertilizer business department of Sinochem Fertilizer. He graduated from (Beijing Steel Academy) in 1987 with a diploma in automation. He had been working with Sinochem Corporation Group since 1984 before he joined Sinochem Fertilizer in 2001. He was promoted to his current position in July 2003. Mr. Feng has over three years’ experience in the PRC fertilizer industry. Mr. Feng is responsible for the overseas procurement and domestic sales of potash fertilizers of the Fertilizer Group. He will be appointed as the senior management of the Company after Completion.

Mr. Miao Lin ( ), aged 43, is the Assistant to General Manager and the Office Administrator of Sinochem Fertilizer. He graduated from (China Society University) in 1986 with a bachelor degree in corporate management. He joined Sinochem Corporation in 1986 after graduation. He then joined Sinochem Fertilizer in July 2002. Mr. Miao is responsible for the general office administration of the Fertilizer Group. Mr. Miao has over seven years’ experience in corporate management. He will be appointed as the senior management of the Company after Completion.

Mr. DUAN Chang Sheng ( ), aged 33, is the Assistant to General Manager and the General Manager of the integrated trading department of the Sinochem Fertilizer. He graduated from the faculty of chemistry of (Tianjin Nan Kai University) in 1993 with a bachelor degree in engineering. Mr. Duan joined Sinochem Corporation in 1993 after graduation. He then joined Sinochem Fertilizer in July 1998 and was later promoted to his position in May 2004. Mr. Duan is responsible for the development of new products and the export business of the Fertilizer Group. Mr. Duan has over six years’ experience in the PRC fertilizer industry. He will be appointed as the senior management of the Company after Completion.

Ms. CHEN Yi Qing ( ), aged 34, is the General Manager of the Human Resources Department of Sinochem Fertilizer. She graduated from (Beijing Economics Institute) in 1993 majoring in trading and economics with a bachelor degree in economics. She also obtained a master degree in human resources management from

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(Capital Economics and Trading University) in 2000. Ms. Chen joined Sinochem Fertilizer in 2001 and was promoted to her current position in 2003. Ms. Chen is responsible for the overall administration the Human Resources Department of the Fertilizer Group. Ms. Chen has over five years’ experience in human resources management. She will be appointed as the senior management of the Company after Completion.

EMPLOYEES

As at 31 March 2005, the Fertilizer Group had approximately 5,136 full-time employees. An analysis by division as at 31 March 2005 is as follows:

		Approximate
		percentage of
Divisions	Employees	total (%)
Procurement	367	7.15
Production	2,126	41.39
Sales and distribution	2,321	45.19
General administration	322	6.27
Total	5,136	100.00

COMPLIANCE ADVISER

The Company will appoint Cazenove Asia, which is also one of the Sponsors, as its compliance adviser pursuant to Rule 3A.19 of the Listing Rules to advise the Company on the following matters in accordance with Rule 3A.23 of the Listing Rules:

before the publication of any regulatory announcement, circular or financial report;
where a transaction, which might be a notifiable or connected transaction, is contemplated including share issues and share repurchases; and
where business activities, developments or results of the Group deviate from any forecast, estimate, or other information in this Circular; and
where the Stock Exchange makes an inquiry of the Company of unusual movements in the price or trading volume of its listed securities or any other matters in accordance with Rule 13.10 of the Listing Rules.

The appointment is exclusive and shall commence on the date of Completion and end on the date on which the Company sends its financial results as required under Rule 13.46 of the Listing Rules for the first full financial year commencing after the date of Completion.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

This section entitled ‘‘Financial Information — the Fertilizer Group’’ should be read in conjunction with the combined financial statements and historical combined financial data of the Fertilizer Group, in each case together with the accompanying notes, set out in the Accountants’ Report at Appendix I to this circular. The audited combined financial statements were prepared in accordance with HK GAAP. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Such risks and uncertainties include, without limitation, those discussed in the sections headed ‘‘Risk Factors’’ and ‘‘Information on the Fertilizer Group’’ and elsewhere in this circular.

For the purposes of this section, unless the context otherwise requires, references to ‘‘2002’’, ‘‘2003’’ and ‘‘2004’’ refer to the Fertilizer Group’s financial year ended 31 December of such year.

OVERVIEW

The Fertilizer Group is a leading supplier of fertilizers in the PRC. The primary business activities of the Fertilizer Group include sourcing and distribution of a comprehensive range of fertilizer and other agriculture-related products and production of phosphate-based fertilizers and compound fertilizers. In 2002, 2003 and 2004, the total sales volume and total turnover of the Fertilizer Group amounted to 5.8 Mt, 7.6 Mt and 8.4 Mt and RMB7,800.8 million, RMB10,371.5 million and RMB12,591.2 million respectively.

The Fertilizer Group is the largest importer of fertilizer products in the PRC in terms of import volume prior to Completion. The Management of the Fertilizer Group believes that the Enlarged Group will be the largest distributor of imported fertilizer products in terms of sales volume in the PRC after Completion. Revenues from the sourcing and distribution businesses of fertilizers and other agriculture related products accounted for 98.9% of the Fertilizer Group’s total revenue in 2002 and 93.9% of its total revenue in 2004.

The Fertilizer Group is also a leading producer of fertilizer products in the PRC in terms of production output for 2004. As at the Latest Practicable Date, the Fertilizer Group had interests in seven production enterprises, including three subsidiaries and four jointly controlled entities, for the production of phosphate-based fertilizers and compound fertilizers. The aggregate annual production capacity and production output of these seven enterprises in 2004 amounted to approximately 2.47 Mt and 1.85 Mt respectively. Revenues from the production business as a percentage of the Fertilizer Group’s total revenue increased from 1.1% in 2002 to 6.1% in 2004.

The Fertilizer Group operates through three principal business divisions, namely SINOCHEM Procurement, SINOCHEM Production and SINOCHEM Distribution, which together form the vertically-integrated business operations across the fertilizer supply chain. The Fertilizer Group has developed a centrally co-ordinated operation model to facilitate the integration of these three principal business divisions. Under such operation model, the flow of products, information and funds, as well as resources deployment, are managed and coordinated centrally. To enhance operational efficiency for its large scale operation, the Fertilizer Group also deploys a structured logistics network and a proprietary ERP system.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Products sold by SINOCHEM Distribution comprise fertilizer and other agriculture-related products sourced by SINOCHEM Procurement from both overseas and domestic suppliers and fertilizers produced by SINOCHEM Production, which operates the three production subsidiaries and participates in the management of the four jointly controlled entities engaged in fertilizer production in which the Fertilizer Group has interests. In addition to its own sales and distribution network, the Fertilizer Group relies on a network of independent distributors to distribute fertilizer and other agriculture-related products in the PRC. As at 30 April 2005, the sales and distribution network of the Fertilizer Group comprised 14 branch companies and over 838 sales centres in 15 major agricultural provinces representing approximately 66.4% of the total cultivated area in the PRC. In 2002, 2003 and 2004, 21.4%, 42.3% and 43.8%, respectively, of the Fertilizer Group’s turnover was attributable to sales made through its own sales and distribution network, a proportion that the Fertilizer Group expects to increase as it continues to build up its network.

The Fertilizer Group’s business can be divided into five major product segments: potash fertilizers, phosphate-based fertilizers, nitrogen-based fertilizers, compound fertilizers and other agriculture-related products. In 2004, turnover derived from the sale of potash fertilizers, phosphate-based fertilizers, nitrogen-based fertilizers, compound fertilizers and other agriculture-related products accounted for 46.1%, 26.1%, 11.2%, 12.8% and 3.8%, respectively of the total turnover of the Fertilizer Group.

The following table sets out the revenue and the approximate percentage of the Fertilizer Group’s total turnover attributable to its major product segments for the periods indicated.

Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total	For 2002 Revenue (RMB in millions) Percentage of turnover 3,208.4 41.1% 2,860.3 36.6% 675.0 8.7% 1,050.1 13.5% 7.0 0.1% 7,800.8 100.0%	the year ended 31 December 2003 2004 Revenue (RMB in millions) Percentage of turnover Revenue (RMB in millions) Percentage of turnover 4,812.0 46.4% 5,799.4 46.1% 3,360.0 32.4% 3,289.7 26.1% 954.7 9.2% 1,403.0 11.2% 1,208.7 11.7% 1,615.7 12.8% 36.1 0.3% 483.4 3.8% 10,371.5 100.0% 12,591.2 100.0%	the year ended 31 December 2003 2004 Revenue (RMB in millions) Percentage of turnover Revenue (RMB in millions) Percentage of turnover 4,812.0 46.4% 5,799.4 46.1% 3,360.0 32.4% 3,289.7 26.1% 954.7 9.2% 1,403.0 11.2% 1,208.7 11.7% 1,615.7 12.8% 36.1 0.3% 483.4 3.8% 10,371.5 100.0% 12,591.2 100.0%
			100.0%

The Fertilizer Group’s turnover increased from RMB7,800.8 million in 2002 to RMB12,591.2 million in 2004. The growth of the Fertilizer Group’s turnover resulted primarily from a growth in overall sales volume, driven by an expansion of the Fertilizer Group’s sales and distribution network, enabling it to reach more customers, and increases in average selling prices of potash fertilizers, phosphate-based fertilizers and nitrogen-based fertilizers over the three year period. Changes in average selling price are strongly influenced by changes in international and domestic market prices for fertilizer.

The relative contribution of two of the Fertilizer Group’s principal product segments changed substantially during the three-year period, as potash fertilizers increased from 41.1% of total turnover to 46.1% of total turnover and phosphate-based fertilizers declined from 36.6% of total turnover to 26.1% of total turnover. These trends reflect management’s efforts to optimise the Fertilizer Group’s product mix as the international prices of phosphate-based fertilizers have been higher than the domestic prices in recent years. As a result,

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management reduced the sale of imported phosphate-based fertilizers and, as a result, sales volume of phosphate-based fertilizers as a percentage of total sales volume has shown a decreasing trend. It also reflects the growth of a new product segment, other agriculturerelated products, which grew from 0.1% of total turnover in 2002 to 3.8% in 2004. The proportion of turnover attributable to nitrogen-based fertilizer and compound fertilizer stayed relatively constant over the three year period.

The principal driver of turnover for the three-year period was the sale of potash fertilizers, the sales volume of which increased from 3.0 million tonnes in 2002 to 4.0 million tonnes in 2004 and the average selling price per tonne of which increased from RMB1,059 in 2002 to RMB1,433 in 2004. The Fertilizer Group’s sales of potash fertilizer were helped by a lack of domestic supply of potash fertilizer adequate to meet market demand in the PRC and the Fertilizer Group’s dominant position in the PRC market for potash fertilizers due to its long term relationship with overseas suppliers. In addition to potash fertilizers, nitrogen-based fertilizers also experienced notable increases in both sales volume and price.

The gross profit margin of the Fertilizer Group’s business in 2002, 2003 and 2004 was 5.3%, 8.2% and 8.7%, respectively. Since most of the Fertilizer Group’s business is focused on its sourcing and trading activities, particularly the import and domestic on-sale of fertilizer and raw materials, its gross profit margins are principally a function of domestic and international price movements in fertilizer and the materials used in its production, which drive cost of sales. The Fertilizer Group tries to pass along increases in its cost of sales to its customers in order to minimize the effect on its margins, but is not always able to do so due to market pressures, or there may be a time lag in any such corresponding price increases. In addition, the ex-factory prices of fertilizers produced domestically and the wholesale prices for fertilizer products in the PRC are subject to various price control measures imposed by the State. Although the Fertilizer Group has historically not encountered significant difficulty increasing its average selling prices for fertilizer products in response to increases in the market price due to such price controls, such price controls impose an additional limitation on the ability of the Fertilizer Group to increase its average selling price for particular products in order to maintain its gross profit margins. As a result of these factors, the Fertilizer Group’s gross profit margins differ among its product segments.

The gross profit margin of potash fertilizers, the Fertilizer Group’s most important product segment during the Track Record Period, was 0.7%, 9.3% and 7.6% in 2002, 2003 and 2004, respectively, and is particularly subject to international price movements because a significant majority of potash fertilizer is imported. The Management of the Fertilizer Group believes, however, that the Fertilizer Group’s strategic position in the potash fertilizer market, combined with likely continued demand in the PRC, will enable it to continue to maintain reasonably attractive margins. The Fertilizer Group’s gross profit margins for phosphatebased fertilizers, its second most important product, were 4.7%, 6.4% and 9.6% for 2002, 2003 and 2004, respectively. The Fertilizer Group’s gross profit margins for nitrogen-based fertilizers, which were 5.3%, 3.8% and 6.5%, for 2002, 2003 and 2004 respectively, tend to be somewhat lower than those for potash fertilizers and phosphate-based fertilizers. Most phosphate-based fertilizers and nitrogen-based fertilizers sold in the PRC are produced domestically, as a result of which the gross profit margins for these products are largely driven by movements in the domestic market price, which drive the cost of sales for these products. Gross profit margins for compound fertilizers, which were 20.7%, 12.1% and 14.5% for 2002, 2003 and 2004, respectively, have historically been higher than any of the Fertilizer Group’s other products. The Management of the Fertilizer Group expects, however, that

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compound fertilizers will increasingly be sourced from domestic suppliers rather than foreign suppliers, which may result in an increase in sales volume and may have an effect on market price and cost of sales, and therefore on margins.

THE REORGANISATION

The Fertilizer Company was incorporated in the BVI with limited liability on 16 December 2004 and is a wholly-owned subsidiary of Sinochem HK. It was established for the purpose of becoming the holding company of the Fertilizer Group.

The Sinochem Group underwent the Reorganisation in 2004, pursuant to which the Fertilizer Business carried on by the Sinochem Group (with the exclusion of certain assets as disclosed in the Non-competition Undertaking and those fertilizer businesses which will cease) were transferred to the Fertilizer Company. As a result, the Fertilizer Company became the holding company of the companies now comprising the Fertilizer Group and its jointly controlled entities and Sinochem Fertilizer was transformed into a wholly-owned foreign enterprise.

For details on the Reorganisation, please refer to the paragraphs under the heading ‘‘Reorganisation’’ in the section headed ‘‘Information on the Fertilizer Group — History and Development’’ in this circular.

THE ACQUISITION

Pursuant to the Acquisition, the Company will acquire the entire issued share capital of the Fertilizer Company. Upon Completion, the Enlarged Group will be principally engaged in the Fertilizer Business. In addition, the Directors expect that going forward, the Enlarged Group’s resources will be focused on the PRC fertilizer industry and agriculture-related products sector. The principal assets and operations of the Enlarged Group will consist of the Fertilizer Group.

Sinochem HK will conduct a detailed evaluation of the existing business and operations of the Company (i.e. its current, pre-Acquisition business) (the ‘‘Non-Fertilizer Business’’) following the Acquisition and, based on such evaluation, will make a decision about whether to dispose of the Non-Fertilizer Business. Please see the section below headed ‘‘Financial Information of the Group’’ for a discussion of the financial condition and results of operations of the Group. For further detail on the financial information of the Group, please refer to Appendix II to this circular which sets out the summary of the published audited consolidated profit and loss accounts of the Company for the three years ended 31 March 2004 as extracted from the respective annual reports of the Company.

For details on the Acquisition, please refer to the section headed ‘‘The Acquisition Agreement’’ in the ‘‘Letter from the Board’’ in this circular.

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MAJOR FACTORS AFFECTING THE FERTILIZER GROUP’S RESULTS OF OPERATIONS

The Fertilizer Group’s results of operations and the period-to-period comparability of the Fertilizer Group’s financial results are affected by a number of factors and uncertainties, including:

Market supply of and demand for fertilizer products in the PRC

The results of operations of the Fertilizer Group are directly affected by the supply of, and the market demand for, fertilizer products in the PRC. Demand for fertilizer products, in turn, depends significantly on demand for agricultural products in the PRC, including specifically grains, vegetables and fruit, which require the use of fertilizer products such as those sold by the Fertilizer Group. Demand for such agricultural products, and therefore for the Fertilizer Group’s products, has been increasing in recent years. The Management of the Fertilizer Group believes that the PRC fertilizer industry has growth potential and that the market demand for the Fertilizer Group’s products will continue to grow, due to a number of factors, including (a) growing demand for agricultural products to satisfy the needs of the PRC’s large and growing population; (b) the limited total area of arable land and the consequent importance of fertilizers to increase crop yields; (c) the growing demand for livestock products as a result of improved living standards in the PRC and the consequent growth of livestock husbandry and the increasing demand for feed crops; (d) the growth of consumer demand for high-quality cash crops like certain fruits and tea which generally require more fertilizer than traditional farm crops and for forestry products; and (e) the PRC’s government policy of encouraging the development of the agricultural industry. For more detail, please refer to the section headed ‘‘Fertilizer industry and regulatory overview’’ in this circular.

Procurement and production capacity of the Fertilizer Group

The fertilizer imported by the Fertilizer Group represented approximately 47% of the total fertilizer imported into the PRC in 2004. The Management of the Fertilizer Group of the Fertilizer Group believes that the Fertilizer Group has had, and continues to have, significant advantages in the overseas procurement and importation of fertilizer, including supply channels and relationships with fertilizer suppliers that other PRC fertilizer producers and distributors do not have. The Fertilizer Group’s future success will depend in part on its ability to maintain this leading position.

An important part of the Fertilizer Group’s strategy going forward is its plan to produce an increasing proportion of the fertilizers it sells. The Management of the Fertilizer Group believes this is important as the PRC government has announced that it intends to encourage domestic production of fertilizer, and an increasing proportion of the fertilizers used in the PRC may be produced domestically. The Fertilizer Group has made continuous efforts to optimise and increase its production capacity to capture the growing demand for its products through the establishment of new production enterprises with other investors or strategic partners, and also through acquisitions of or investment in other fertilizer producers in the PRC. As at the Latest Practicable Date, the Fertilizer Group had interests in seven production enterprises, including one subsidiary and three joint venture enterprises for the production of phosphate-based fertilizers, and two subsidiaries and one jointly controlled entity for the production of compound fertilizers. As a result, the Fertilizer Group’s production capacity increased from approximately 0.87 Mt per annum as at 31 December 2002 to approximately 2.47 Mt per annum as at 31 December 2004.

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It is uncertain whether the Fertilizer Group will be able to maintain its position as a leading importer or producer of fertilizers in the PRC. Either or both positions could be threatened by the increasing commoditisation of the fertilizer business in the PRC, encouraged by a belief among many market participants that the PRC government will eventually loosen price controls and market accession restrictions, which in turn would likely lead to increased competition. The Fertilizer Group also faces the prospect of increasing competition from foreign entrants. If the Fertilizer Group fails to maintain its competitive position as an importer or producer of fertilizer, it could lose market share and suffer a decline in turnover.

Expansion and coverage of the sales and distribution network

Expansion of and improvement to the Fertilizer Group’s sales and distribution network have assisted the Fertilizer Group in increasing sales volume, and therefore turnover, as a result of improved access to end users. During the Track Record Period, the Fertilizer Group experienced a rapid expansion of its sales and distribution network. As at 30 April 2005, the sales and distribution network of the Fertilizer Group comprised 14 branch companies and 838 regional and local sales centres in 15 major agricultural provinces representing approximately 66.4% of the total cultivated area in the PRC. During the Track Record Period, sales made through the Fertilizer Group’s own sales and distribution network have grown rapidly, from 21.4% of total turnover in 2002 to 43.8% of total turnover in 2004. The Management of the Fertilizer Group believes that the success of the Fertilizer Group substantially depends on an extensive and effective sales and distribution network and envisages the further expansion of the sales and distribution network to be carried out primarily through (a) extension of its reach to more villages in rural areas through the establishment of more branch companies and sales centres at suitable and convenient locations in existing markets; and (b) expansion of the coverage of its current sales and distribution network to cover new markets.

Product mix

The Fertilizer Group’s ability to adjust its product mix to increase the proportion of sales of products with higher profit margins and decrease the proportion of sales of products with lower profit margins affects the Fertilizer Group’s overall profitability. The Management of the Fertilizer Group generally has the flexibility to adjust its product mix, subject to its ability to source adequate supplies of the desired products, either internationally or domestically, and to domestic demand. The Fertilizer Group continually manages its product portfolio in an effort to maximize its profitability.

Potash fertilizers are the major products of the Fertilizer Group, representing 41.1%, 46.4% and 46.1% of total turnover and 51.9%, 55.0% and 48.4% of sales volume, respectively for the three years ended 31 December 2004. Phosphate-based fertilizers, the Fertilizer Group’s next-most important product segment based on turnover and sales volume, have declined in relative importance over the Track Record Period, representing 36.6%, 32.4% and 26.1% of the total turnover and 27.7%, 24.1% and 19.4% of sales volume respectively, over the Track Record Period. The percentage of total turnover and sales volume represented by nitrogen-based fertilizers and compound fertilizers have been fairly stable over the Track Record Period, whereas other agriculture related products have grown in importance, representing 0.1%, 0.3% and 3.8% of total turnover and 0.1%, 1.4% and

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10.0% of total sales volume, respectively, over the Track Record Period. Although the growth in other agriculture related products has been significant, so far it is too early to tell whether it will become a significant part of the Fertilizer Group’s product mix.

The increase in the relative importance of potash fertilizer as a percentage of turnover and sales volume, and the decline in the relative importance of phosphate-based fertilizer as a percentage of turnover and sales volume, is primarily a result of management’s efforts to optimise the Fertilizer Group’s product mix based on considerations of gross profit margin and supply and demand. The gross profit margin of potash fertilizer was approximately 0.7%, 9.3% and 7.6%, respectively, for the three years ended 31 December 2004. In addition, there is frequently a shortage of supply in the PRC market for potash fertilizers, which generally creates a favorable selling environment, and the market for such fertilizers in the PRC is generally less fragmented than the market for nitrogen-based fertilizers and compound fertilizers. As a result, the Fertilizer Group has increasingly been focussed on expanding the proportion of its total sales represented by potash fertilizers. In contrast, the international market prices of phosphate-based fertilizers have been higher than domestic market prices in recent years. In order to minimise the negative impact on the Fertilizer Group’s gross profit margins, management reduced the import of phosphate-based fertilizers and, as a result, the turnover attributable to phosphate-based fertilizers and the sales volume of such fertilizers has shown a decreasing trend during the Track Record Period.

If the profit margins of the Fertilizer Group’s fertilizer products move in unanticipated directions, and in particular if the profit margin for potash fertilizers were to decline significantly for any reason, and management were unable to respond in a timely fashion by making the necessary adjustments to product mix, this could have an adverse effect on the Fertilizer Group’s profitability.

Seasonality and adverse weather conditions

Sales of fertilizer products to end-users are seasonal in nature. In the northern PRC, the Fertilizer Group generates a higher proportion of its turnover in spring and autumn when fertilizer sales are at their peak, while in the southern PRC such sales peaks are less pronounced. As a result of these seasonal fluctuations, the Fertilizer Group’s operating results may vary substantially between fiscal quarters. In addition, quarterly results may also vary significantly from one year to the next primarily due to weather-related shifts in planting schedules and purchase patterns.

In addition, adverse weather conditions or other natural disasters, such as droughts or floods, affecting one or more agricultural regions in the PRC, could have a negative effect on fertilizer demand either locally or throughout the PRC, which could, in turn, adversely affect the operating results and financial condition of the Fertilizer Group.

For a discussion of other factors and uncertainties that may affect the Fertilizer Group’s business operations, see the sections headed ‘‘Risk Factors’’ and ‘‘Information on the Fertilizer Group’’ in this circular.

CRITICAL ACCOUNTING POLICIES

The preparation of the Fertilizer Group’s financial statements requires the Fertilizer Group’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, turnover and expenses, and related disclosures of contingent assets and

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liabilities. Critical accounting policies are the accounting policies that are the most important to the portrayal and understanding of the Fertilizer Group’s financial condition and/or results of operations and require the most difficult, subjective or complex judgments of the Fertilizer Group’s management, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Certain accounting estimates are particularly sensitive because of their significance to the Fertilizer Group’s financial statements and because of the possibility that future events affecting the estimates may differ significantly from management’s current judgments.

The management bases the Fertilizer Group’s estimates on historical experience and assumptions, which the management believes to be reasonable under the circumstances. Actual results may differ from these estimates. The Management of the Fertilizer Group believes the following accounting policies are critical to the portrayal and understanding of the Fertilizer Group’s financial condition and results of operations and/or involve the most significant judgments and estimates used in the preparation of the Fertilizer Group’s financial statements.

Inventories

Inventories comprise stocks of fertilizer merchandise, raw materials and production supplies and work in progress and are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

The cost of inventories for the Fertilizer Group’s sourcing and distribution businesses is calculated on a first-in, first-out basis, whereas that for the Fertilizer Group’s production business is computed using the weighted average method. The Management of the Fertilizer Group believes that such difference in costing methods for computing inventories between manufacturing companies and sourcing and distribution companies is responsive to the difference in mode of operations and cost structures of inventories between manufacturing and sourcing and distribution companies. For sourcing and distribution companies, cost includes expenditure incurred in acquiring the inventories to bring them to their existing location and condition, and comprises mainly cost of purchases of fertilizers and related import duties and transportation costs. For manufacturing companies, the cost of manufactured inventories and work in progress comprises raw materials and conversion overhead, including direct labor and an appropriate share of production overheads based on normal operating capacity. In addition, the accounting systems of manufacturing and sourcing and distribution companies are independent from each other.

The Management of the Fertilizer Group periodically reviews the Fertilizer Group’s inventories for slow moving inventory, obsolescence or declines in market value. This review requires management to estimate the net realizable value based upon assumptions about future demand and market conditions. If management’s estimate of net realizable value is below the cost of inventory, the Fertilizer Group records a provision against the inventories for the difference between cost and net realizable value, which will result in a corresponding increase in cost of sales. If actual market conditions are less favourable than those projected by management, additional inventory provision or write-off may be required.

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As at 31 December 2002, 2003 and 2004, the carrying amount of inventories that were carried at net realisable value amounted to RMB250.8 million, RMB93.1 million and RMBnil, respectively. For the same periods, the Fertilizer Group did not make significant provisions for inventories.

Provision for bad and doubtful debts

The Fertilizer Group maintains an allowance for doubtful debts for estimated losses resulting from the inability of its customers to make the required payments. Considerable judgment is required in assessing the ultimate realisation of these receivables. The Fertilizer Group makes its estimates based on the aging of the Fertilizer Group’s trade receivable balance, customer creditworthiness, and historical bad debt experience.

The provisions for doubtful debts made by the Fertilizer Group represent specific provision for individual doubtful debts and general provision. At each balance sheet date, the Fertilizer Group determines the amount of general provision by applying specified percentage estimates of uncollectible amounts to the outstanding gross amount of trade receivables in each age category, generally in accordance with the following table:

Age of receivable

Amount of provision

1–12 months nil 13–24 months 25% 25–36 months 50% 36 months or more 100%

For each balance sheet date, the Fertilizer Group determines the amount of specific provision for trade receivables, other receivables and loans receivable primarily based on customer creditworthiness and historical bad debt experience.

The Fertilizer Group generally grants its important customers credit terms ranging from 7 to 60 days and a credit period of up to 120 days will be granted to a limited number of customers who have long business relationships with the Fertilizer Group. If the financial condition of the Fertilizer Group’s customers were to deteriorate, resulting in an impairment of their ability to make payments, actual write-offs might be higher than provisions already made, and the Fertilizer Group would be required to revise the basis of making the provision and may take additional charges to the profit and loss account in the period in which such determination is made.

Because of its stringent credit control policies, the Fertilizer Group is not generally subject to significant exposure for doubtful debts. The Fertilizer Group made a doubtful debts provision for the year ended 31 December 2002 of approximately RMB0.9 million, and had a write-back of provision for doubtful debts for the two years ended 31 December 2004 of RMB1.7 million and RMB3.0 million, respectively. The write-back of general provision for the two years ended 31 December 2004 was mainly due to improved settlement of trade receivables from customers as the market experienced a tightening of supply.

Taking into account the creditworthiness of its customers, its credit risk control measures and the historical levels of its bad debts, the Fertilizer Group considers its existing policy of provisioning for bad debts to be adequate.

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Impairment of property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that property, plant and equipment are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the combined profit and loss account.

During the track record period, no impairment of property plant and equipment has been charged to the profit and loss account. In the future, however, if the Fertilizer Group expands its production activities, it may invest more extensively in property, plant and equipment in connection with such expansion, and as a result, it may be more likely that the assessment of impairment and estimation of recoverable amount described above may lead to impairment of property, plant and equipment being charged to the profit and loss account.

The impact of adoption of new HKFRSs

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (‘‘HKAS’’) (collectively referred to as ‘‘new HKFRSs’’) which are effective for accounting periods beginning on or after 1 January 2005. The impact of adoption of new HKFRSs is set out in the section headed ‘‘Financial Information — The Enlarged Group’’ in this circular.

COMBINED RESULTS OF OPERATIONS

Basis of presentation

The financial information of the Fertilizer Group has been prepared as a reorganisation under common control. Accordingly, the assets and liabilities transferred to the Fertilizer Company have been stated at historical amounts. The Fertilizer Group’s financial information as set out in Appendix I to this circular has been prepared based on the financial information prepared by the directors of the Fertilizer Company in accordance with PRC GAAP for the three years ended 31 December 2004, after making such adjustments as are appropriate. The financial information of the Fertilizer Group presents the combined results, cash flows and financial position of the Fertilizer Group as if the Fertilizer Company had been in existence throughout the Track Record Period and as if the current structure of the Fertilizer Group had been in existence since the beginning of the earliest period presented or, with respect to individual members of the Fertilizer Group, since their respective dates of incorporation or establishment or effective dates of acquisition, whichever is the shorter period.

Description of selected income statement line items

Turnover

Turnover represents the net invoiced value of goods sold, after allowances for returns, trade discounts and value added tax. All significant intra-group transactions have been eliminated on combination.

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Cost of sales

Cost of sales mainly comprises cost of raw materials, direct labor cost, packaging and related expenses, freight rates directly relating to procurement and import tariffs.

Other revenues

Other revenues mainly comprise revenue from agency services, rental income, dividend income from unlisted investments and interest income from loans receivable and bank deposits.

Selling and distribution costs

Selling and distribution costs mainly comprise transportation expenses, insurance expenses and salaries of sales personnel.

Administrative expenses

Administrative expenses consist primarily of salaries and wages, pension costs, staff benefits and allowances and operating lease rental in respect of land and buildings.

Other operating income/expenses, net

Other operating income/expenses, net consist primarily of gain/loss on disposal of property, plant and equipment, income from successful claims against suppliers and services providers, payment of fines and penalties and government grants.

Finance costs

Finance costs mainly consist of interest on bank loans and other loans and bank charges for financing the operations of the Fertilizer Group.

Taxation

Taxation represents PRC enterprise income tax at the generally applicable rate on the Fertilizer Group’s pre-tax profit as adjusted for non-deductible expenses, income not subject to taxation, effect of different tax rates in other tax jurisdictions and deferred tax on unrealised profit in closing inventories.

Hong Kong profits tax has been provided at a rate of 16%, 17.5% and 17.5% on the assessable profits for the years ended 31 December 2002, 2003 and 2004, respectively.

Most members of the Fertilizer Group are domiciled and operate in China. Companies domiciled in China, except foreign invested enterprises and foreign enterprises, are taxed on a stand-alone basis and generally are subject to PRC enterprise income tax, a form of corporate income tax, at a statutory rate of 33%. However, the effective tax rate applied to the Fertilizer Group was 19.2%, 20.1%, and 21.1%, respectively, for the three years ended 31 December 2004, which was substantially lower than the statutory rate. This is mainly because the Fertilizer Group’s combined results included income which was not subject to taxation and the taxation effect of such non-taxable income, assuming the PRC income tax rate of 33% was applicable, amounted to RMB54.3 million, RMB53.5 million and RMB97.2 million for the

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three years ended 31 December 2004, respectively. This non-taxable income was primarily attributable to profit recorded by the Fertilizer Group’s wholly-owned subsidiary, Sinochem Bahamas, which is part of SINOCHEM Procurement. Sinochem Bahamas used to act as the purchasing arm of the Fertilizer Group, in respect of the purchases of fertilizer products from overseas suppliers for onward sales to Sinochem Fertilizer and Dohigh Trading. The profit derived from trading of fertilizers by Sinochem Bahamas was not subject to Bahamas income tax since the Bahamas is a tax-exempt jurisdiction. Sinochem Bahamas was dissolved on 15 April 2005 and did not carry on any business as at the Latest Practicable Date.

The slight increases in effective tax rates during the Track Record Period were mainly due to the increase in profit derived from the Fertilizer Group’s subsidiaries located in the PRC, which are subject to a statutory PRC enterprise tax rate of 33%, generally higher than the tax rates applicable to the overseas subsidiaries, as a result of the increase in sales of domestic products by the Fertilizer Group.

Sinochem Fuling, a 60% owned subsidiary of Sinochem Fertilizer, is currently subject to a preferential PRC enterprise income tax rate of 15% granted by the local tax bureau of Chongqing in July 2001. According to the policy for the development of the western region of the PRC promulgated by the State Council, Sinochem Fuling is entitled to this preferential treatment from 2001 to 2010 provided it is engaged in the projects listed in the Catalogue for Industries, Products and Technologies Currently and Particularly Encouraged by the State for Development (as amended in 2000) as its principal business and the revenue from the principal operations accounts for over 70% of its total revenue. The tax savings enjoyed by Sinochem Fuling for the two years ended 31 December 2004 amounted to RMBnil and RMB7.9 million, respectively.

Sinochem Kailin, in which Sinochem Fertilizer owns a 41% interest, is subject to a preferential enterprise income tax rate of 15% from 2003 to 2010 according to an approval issued by the State Tax Bureau of Guiyang under the policy for development of the western region of the PRC.

Sanhuan Sinochem Jiaji, in which Sinochem Fertilizer owns a 25% equity interest, was exempt from enterprise income tax for the two years ended 31 December 2004 according to the approval granted by the State Tax Bureau of Kunming. The tax savings enjoyed by Sanhuan Sinochem Jiaji for the two years ended 31 December 2004 amounted to approximately RMB7,484,000 and RMB54,562,000, respectively. However, any further preferential tax treatment is subject to annual review and approval from the State Tax Bureau of Kunming.

Sinochem Zhisheng, a member of the Fertilizer Group in which Sinochem Fertilizer has a 53% interest, is a large fertilizer manufacturer with an annual production capacity of 0.2 Mt, and is currently entitled to a preferential income tax treatment granted by the State Tax Bureau of Fujian province. Pursuant to such preferential income tax treatment, 40% of the amount invested in domestically made machinery by Sinochem Zhisheng under its technological renovation project for 0.2 Mt compound fertilizer production in a particular year can be applied to set off against the income tax of the preceding year. The tax savings enjoyed by Sinochem Zhisheng amounted to RMB1.3 million and RMB1.9 million for the two years ended 31 December 2004.

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Sinochem Dongfang, a jointly controlled entity being recognised by the relevant government authority as a high-technology enterprise in June 2002, is entitled to a preferential income tax treatment of ‘‘two-year exemption and three-year 50% reduction’’ since the commencement of its production operation, and was therefore exempt from PRC enterprise income tax for the two years ended 31 December 2004. Such preferential income tax treatment was accorded by the State Tax Bureau of Wuhan City in accordance with Provisional Regulations on Preferential Tax Treatments for High-Technology Enterprises and High-Technology Products in Hubei Province. The tax savings enjoyed by Sinochem Dongfang amounted to RMB0.2 million and RMB0.4 million, respectively, for the two years ended 31 December 2004.

Minority interests

Minority interests consist of the interests of minority shareholders in the net profits or losses of the Fertilizer Group’s subsidiaries.

REVIEW OF HISTORICAL OPERATING RESULTS

The following table sets out the Fertilizer Group’s combined profit and loss information.

Turnover
Cost of sales
Gross profit
Other revenues
Distribution costs
Administrative expenses
Other operating (expenses)/income, net
Operating profit
Finance costs
Share of profits less losses of jointly
controlled entities
Profit before taxation
Taxation
Profit after taxation
Minority interests
Profit attributable to shareholders
Distribution to Sinochem Corporation

Year ended 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
7,800,847
10,371,472
12,591,214
(7,390,221)
(9,523,785)
(11,500,845)
410,626
847,687
1,090,369
44,131
42,018
44,909
(69,219)
(257,590)
(336,267)
(54,474)
(74,043)
(126,367)
(1,627)
2,419
43,828
329,437
560,491
716,472
(32,154)
(45,381)
(50,116)
(222)
7,995
44,265
297,061
523,105
710,621
(57,012)
(105,321)
(150,252)
240,049
417,784
560,369
303
(1,938)
(17,005)
240,352
415,846
543,364
106,236
—
—

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

The following table sets out the Fertilizer Group’s gross profit margin, operating profit margin and net profit margin for the three years ended 31 December 2004.

	Year ended	31 December	31 December
	2002	2003	2004
Gross profit margin	5.3%	8.2%	8.7%
Operating profit margin	4.2%	5.4%	5.7%
Net profit margin	3.1%	4.0%	4.3%

Year ended 31 December 2004 compared to year ended 31 December 2003

Turnover

The table below sets out the revenue and the percentage of the Fertilizer Group’s total turnover attributable to the Fertilizer Group’s major product segments for the two years ended 31 December 2004.

Potash fertilizers Phosphate based fertilizers Nitrogen based fertilizers Compound fertilizers Others Total	Year ended 31 December 2003 2004 Revenue Revenue (RMB in millions) Percentage of Turnover (RMB in millions) Percentage of Turnover 4,812.0 46.4% 5,799.4 46.1% 3,360.0 32.4% 3,289.7 26.1% 954.7 9.2% 1,403.0 11.2% 1,208.7 11.7% 1,615.7 12.8% 36.1 0.3% 483.4 3.8% 10,371.5 100.0% 12,591.2 100.0%	Year ended 31 December 2003 2004 Revenue Revenue (RMB in millions) Percentage of Turnover (RMB in millions) Percentage of Turnover 4,812.0 46.4% 5,799.4 46.1% 3,360.0 32.4% 3,289.7 26.1% 954.7 9.2% 1,403.0 11.2% 1,208.7 11.7% 1,615.7 12.8% 36.1 0.3% 483.4 3.8% 10,371.5 100.0% 12,591.2 100.0%
		100.0%

The following table sets out the sales volume and the sales volume as a percentage of the total sales volume of the Fertilizers Group’s major product segments for the two years ended 31 December 2004.

Potash fertilizers Phosphate based fertilizers Nitrogen based fertilizers Compound fertilizers Others Total	Year ended 31 December 2003 2004 Sales volume (Tonnes) Percentage of total sales volume Sales volume (Tonnes) Percentage of total sales volume 4,184,437 55.0% 4,046,655 48.4% 1,833,483 24.1% 1,618,162 19.4% 800,651 10.5% 945,436 11.3% 682,015 9.0% 907,213 10.9% 101,611 1.4% 837,738 10.0% 7,602,197 100.0% 8,355,204 100.0%	Year ended 31 December 2003 2004 Sales volume (Tonnes) Percentage of total sales volume Sales volume (Tonnes) Percentage of total sales volume 4,184,437 55.0% 4,046,655 48.4% 1,833,483 24.1% 1,618,162 19.4% 800,651 10.5% 945,436 11.3% 682,015 9.0% 907,213 10.9% 101,611 1.4% 837,738 10.0% 7,602,197 100.0% 8,355,204 100.0%
		100.0%

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

The table below sets out the average selling price per tonne for the Fertilizer Group’s major product segments for the two years ended 31 December 2004.

	Year ended 31 December	Year ended 31 December
	2003	2004
	(RMB/tonne)
Potash fertilizers	1,150	1,433
Phosphate-based fertilizers	1,833	2,033
Nitrogen-based fertilizers	1,192	1,484
Compound fertilizers	1,772	1,781
Others	355	577

The Fertilizer Group’s turnover increased approximately 21.4%, from RMB10,371.5 million in 2003 to RMB12,591.2 million in 2004, primarily due to (i) increases in the average selling price per tonne of potash fertilizer, phosphate-based fertilizer and nitrogen-based fertilizer; and (ii) a substantial increase in sales volume of nitrogen-based fertilizers, compound fertilizers and other agriculture-related products, resulting from the expansion of the Fertilizer Group’s sales and distribution network, consisting of more regional and local sales centres, enabling the Fertilizer Group to reach a larger customer base in 2004 than 2003. The number of sales centres increased from 404 in 2003 to 552 in 2004.

The Fertilizer Group’s turnover from potash fertilizers increased approximately 20.5%, from RMB4,812.0 million in 2003 to RMB5,799.4 million in 2004, primarily due to significant increases in average selling price per tonne. The Fertilizer Group’s turnover from phospatebased fertilizers decreased approximately 2.1%, from RMB3,360.0 million in 2003 to RMB3,289.7 million in 2004, primarily due to a decline in sales volume because higher prices internationally than market prices in the PRC led to a decline in imports and therefore overall sales volume. The Fertilizer Group’s turnover from nitrogen-based fertilizers increased approximately 47.0%, from RMB954.7 million in 2003 to RMB1,403.0 million in 2004, primarily due to increases in average selling price per tonne and sales volume. The Fertilizer Group’s turnover from compound fertilizers increased approximately 33.7%, from RMB1,208.7 million in 2003 to RMB1,615.7 million in 2004, primarily due to increases in sales volume. The Fertilizer Group’s turnover from other agriculture-related products increased over 12 times, from RMB36.1 million in 2003 to RMB483.4 million in 2004, primarily due to increases in sales volume and the introduction of new products.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Cost of sales and gross profit

The tables below set out (i) the cost of sales and cost of sales as a percentage of total cost of sales; and (ii) the gross profit and gross profit margin of the Fertilizer Group’s major product segments for the two years ended 31 December 2004.

Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total	Year ended 31 December 2003 2004 Cost of sales (RMB in millions) Percentage of total cost of sales Cost of sales (RMB in millions) Percentage of total cost of sales 4,364.8 45.8% 5,358.0 46.6% 3,145.1 33.0% 2,972.8 25.9% 918.4 9.7% 1,312.5 11.4% 1,063.0 11.2% 1,381.6 12.0% 32.5 0.3% 475.9 4.1% 9,523.8 100.0% 11,500.8 100.0% Year ended 31 December 2003 2004 Gross profit Gross profit (RMB in million) Margin (RMB in million) Margin 447.2 9.3% 441.4 7.6% 214.9 6.4% 316.9 9.6% 36.3 3.8% 90.5 6.5% 145.7 12.1% 234.1 14.5% 3.6 10.0% 7.5 1.6% 847.7 8.2% 1,090.4 8.7%	Year ended 31 December 2003 2004 Cost of sales (RMB in millions) Percentage of total cost of sales Cost of sales (RMB in millions) Percentage of total cost of sales 4,364.8 45.8% 5,358.0 46.6% 3,145.1 33.0% 2,972.8 25.9% 918.4 9.7% 1,312.5 11.4% 1,063.0 11.2% 1,381.6 12.0% 32.5 0.3% 475.9 4.1% 9,523.8 100.0% 11,500.8 100.0% Year ended 31 December 2003 2004 Gross profit Gross profit (RMB in million) Margin (RMB in million) Margin 447.2 9.3% 441.4 7.6% 214.9 6.4% 316.9 9.6% 36.3 3.8% 90.5 6.5% 145.7 12.1% 234.1 14.5% 3.6 10.0% 7.5 1.6% 847.7 8.2% 1,090.4 8.7%


		8.7%

The table below sets out the average cost of sales per tonne for the Fertilizer Group’s major product segments for the two years ended 31 December 2004.

	Year ended 31 December	Year ended 31 December
	2003	2004
	(RMB/tonne)
Average cost of sales
Potash fertilizers	1,043	1,324
Phosphate-based fertilizers	1,715	1,837
Nitrogen-based fertilizers	1,147	1,388
Compound fertilizers	1,559	1,523
Others	320	568

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

The Fertilizer Group’s cost of sales increased approximately 20.8%, in line with the increase in turnover, from RMB9,523.8 million in 2003 to RMB11,500.8 million in 2004, primarily due to increases in the average cost of sales per tonne of potash fertilizer, phosphate-based fertilizer and nitrogen-based fertilizer, as well as increases in sales volumes as the Fertilizer Group expanded its sales and distribution network.

The Fertilizer Group’s gross profit increased approximately 28.6%, faster than the increase in turnover, from RMB847.7 million in 2003 to RMB1,090.4 million in 2004, primarily due to an increase in the gross profit of phosphate-based fertilizers, compound fertilizers and nitrogen-based fertilizers of RMB101.9 million, RMB88.5 million and RMB54.2 million respectively. There was a reversal of write-downs of inventories to net realizable value of RMB12.4 million in 2004 as a result of the increase in net realizable value from rising market prices. The Fertilizer Group’s gross profit margin remained relatively stable during this period, at 8.2% in 2003 and 8.7% in 2004.

The Fertilizer Group’s cost of sales from potash fertilizers increased approximately 22.8%, from RMB4,364.8 million in 2003 to RMB5,358.0 million in 2004, primarily due to increases in the international market price resulting from increases in shipping costs and raw material prices. Gross profit remained stable during this period, amounting to RMB447.2 million in 2003 and RMB441.4 million in 2004, and the gross profit margin of such products decreased from 9.3% in 2003 to 7.6% in 2004, due to a lag time in passing along the cost increases to the Fertilizer Group’s customers.

The Fertilizer Group’s cost of sales from phosphate-based fertilizers decreased approximately 5.5%, from RMB3,145.1 million in 2003 to RMB2,972.8 million in 2004, primarily due to a decline in sales volume which more than offset an increase in the average cost of sales per tonne. Gross profit increased approximately 47.5%, from RMB214.9 million in 2003 to RMB316.9 million in 2004, and the gross profit margin of such products increased from 6.4% in 2003 to 9.6% in 2004, primarily because the Fertilizer Group’s sales consisted in part of inventory acquired in 2003 at a lower cost.

The Fertilizer Group’s cost of sales from nitrogen-based fertilizers increased approximately 42.9%, from RMB918.4 million in 2003 to RMB1,312.5 million in 2004, primarily due to an increase in both domestic market price and sales volume. Gross profit increased approximately 149.3%, from RMB36.3 million in 2003 to RMB90.5 million in 2004, and the gross profit margin of such products increased from 3.8% in 2003 to 6.5% in 2004 as the average selling price per tonne increased faster than the average cost of sales per tonne, which in turn was primarily due to an increase in exports of nitrogen-based fertilizer sourced domestically in 2004 as the international market prices of nitrogen-based fertilizers were higher than domestic market prices.

The Fertilizer Group’s cost of sales from compound fertilizers increased approximately 30.0%, from RMB1,063.0 million in 2003 to RMB1,381.6 million in 2004, primarily due to increases in sales volume. Gross profit increased approximately 60.7%, from RMB145.7 million in 2003 to RMB234.1 million in 2004, and the gross profit margin of such products increased from 12.1% in 2003 to 14.5% in 2004, primarily due to a 2.3% decline in the average cost of sales per tonne of compound fertilizer and a 0.5% increase in the average selling price per tonne of compound fertilizer.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

The Fertilizer Group’s cost of sales from other agriculture-related products increased over 13 times, from RMB32.5 million in 2003 to RMB475.9 million in 2004, primarily due to increases in sales volume. Gross profit increased 108.3%, from RMB3.6 million in 2003 to RMB7.5 million in 2004, and the gross profit margin of such products decreased from 10.0% in 2003 to 1.6% in 2004.

Other revenues

The Fertilizer Group’s other revenues increased approximately 6.9%, from RMB42.0 million in 2003 to RMB44.9 million in 2004, primarily due to an increase in interest income from loans receivable.

Selling and distribution costs

The Fertilizer Group’s selling and distribution costs increased approximately 30.6%, from RMB257.6 million in 2003 to RMB336.3 million in 2004, primarily due to increased transportation costs and salaries for sales personnel due to the expansion of the sales and distribution network. Selling and distribution costs as a percentage of turnover was 2.7% in 2004, compared to 2.5% in 2003.

Administrative expenses

The Fertilizer Group’s administrative expenses increased approximately 70.8%, from RMB74.0 million in 2003 to RMB126.4 million in 2004, primarily due to an increase in salaries and benefits related to administrative personnel in connection with the expansion of the sales and distribution network. Depreciation costs relating to Sinochem Fuling, a subsidiary acquired in 2004, also contributed to the increase. Administrative expenses as a percentage of turnover were 0.7% in 2003, compared to 1.0% in 2004.

Other operating income/expenses, net

The Fertilizer Group’s other operating income, net increased from RMB2.4 million in 2003 to RMB43.8 million in 2004, primarily due to a government grant amounting to RMB32.8 million relating to a program to subsidize the import and production of a particular phosphatebased fertilizer.

Operating profit

The Fertilizer Group’s operating profit increased 27.8%, from RMB560.5 million in 2003 to RMB716.5 million in 2004.

Finance costs

The Fertilizer Group’s finance costs increased approximately 10.4%, from RMB45.4 million in 2003 to RMB50.1 million in 2004, primarily due to an increase of RMB8.2 million in interest on bank and other loans, partly offset by a decrease of RMB3.5 million in bank charges and bank overdrafts for financing the operations of the Fertilizer Group. Finance costs as a percentage of turnover remained stable during this period, at approximately 0.4% in both 2003 and 2004.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Share of profit less losses of jointly controlled entities

The Fertilizer Group’s share of profit less losses of jointly controlled entities increased significantly, from RMB8.0 million in 2003 to RMB44.3 million in 2004, primarily due to profit growth by Sanhuan Sinochem Jiaji, a joint venture of the Fertilizer Group engaged in the production of phosphate-based fertilizer.

Taxation

The Fertilizer Group’s tax increased approximately 42.7%, from RMB105.3 million in 2003 to RMB150.3 million in 2004 primarily because of an increase in profit before taxation and a deferred tax liability. The effective tax rates remained relatively constant during this period at 20.1% in 2003 and 21.1% in 2004.

Minority interests

Minority interests as a percentage of profit before minority interests was 0.5% in 2003, compared to 3.0% in 2004, due to the acquisition of a 60% equity interest in Sinochem Fuling in 2004.

Net profit

The Fertilizer Group’s net profit increased approximately 30.7%, from RMB415.8 million in 2003 to RMB543.4 million in 2004. The Fertilizer Group’s net profit margin increased from 4.0% in 2003 to 4.3% in 2004.

Year ended 31 December 2003 compared to year ended 31 December 2002

Turnover

Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total	Year ended 31 December 2002 2003 Revenue Revenue (RMB in millions) Percentage of Turnover (RMB in millions) Percentage of Turnover 3,208.4 41.1% 4,812.0 46.4% 2,860.3 36.6% 3,360.0 32.4% 675.0 8.7% 954.7 9.2% 1,050.1 13.5% 1,208.7 11.7% 7.0 0.1% 36.1 0.3% 7,800.8 100.0% 10,371.5 100.0%	Year ended 31 December 2002 2003 Revenue Revenue (RMB in millions) Percentage of Turnover (RMB in millions) Percentage of Turnover 3,208.4 41.1% 4,812.0 46.4% 2,860.3 36.6% 3,360.0 32.4% 675.0 8.7% 954.7 9.2% 1,050.1 13.5% 1,208.7 11.7% 7.0 0.1% 36.1 0.3% 7,800.8 100.0% 10,371.5 100.0%
		100.0%

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

The table below sets out the sales volume and the sales volume as a percentage of the total sales volume of the Fertilizer Group’s major product segments for the two years ended 31 December 2003.

Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total	Year ended 31 December 2002 2003 Sales volume (Tonnes) Percentage of total sales volume Sales volume (Tonnes) Percentage of total sales volume 3,029,942 51.9% 4,184,437 55.0% 1,613,684 27.7% 1,833,483 24.1% 580,588 9.9% 800,651 10.5% 605,076 10.4% 682,015 9.0% 6,777 0.1% 101,611 1.4% 5,836,067 100.0% 7,602,197 100.0%	Year ended 31 December 2002 2003 Sales volume (Tonnes) Percentage of total sales volume Sales volume (Tonnes) Percentage of total sales volume 3,029,942 51.9% 4,184,437 55.0% 1,613,684 27.7% 1,833,483 24.1% 580,588 9.9% 800,651 10.5% 605,076 10.4% 682,015 9.0% 6,777 0.1% 101,611 1.4% 5,836,067 100.0% 7,602,197 100.0%
		100.0%

The table below sets out the average selling price per tonne for the Fertilizer Group’s major product segments for the two years ended 31 December 2003.

	Year ended 31 December	Year ended 31 December
	2002	2003
	(RMB/tonne)
Potash fertilizers	1,059	1,150
Phosphate-based fertilizers	1,773	1,833
Nitrogen-based fertilizers	1,163	1,192
Compound fertilizers	1,735	1,772
Others	1,033	355

The Fertilizer Group’s turnover increased approximately 33.0%, from RMB7,800.8 million in 2002 to RMB10,371.5 million in 2003, primarily due to a substantial increase in sales volume, particularly of potash fertilizers resulting from an increase in the Fertilizer Group’s sales and distribution network, as the number of sales centres increased from 59 in 2002 to 404 in 2003. The increased sales volume of potash fertilizer also reflected the Fertilizer Group’s strategy to increase the proportion of sales of potash fertilizer in its product mix.

The Fertilizer Group’s turnover from potash fertilizers increased approximately 50.0%, from RMB3,208.4 million in 2002 to RMB4,812.0 million in 2003, the Fertilizer Group’s turnover from phosphate-based fertilizers increased approximately 17.5%, from RMB2,860.3 million in 2002 to RMB3,360.0 million in 2003, the Fertilizer Group’s turnover from nitrogenbased fertilizers increased approximately 41.4%, from RMB675.0 million in 2002 to RMB954.7 million in 2003, and the Fertilizer Group’s turnover from compound fertilizers increased approximately 15.1%, from RMB1,050.1 million in 2002 to RMB1,208.7 million in 2003, in each case primarily due to increased sales volume, and to a lesser extent, slight increases in average selling prices per tonne. The Fertilizer Group’s turnover from other agriculturerelated products increased over 4 times, from RMB7.0 million in 2002 to RMB36.1 million in 2003, primarily because this product segment was insignificant in 2002, which increased the magnitude of the growth rate in 2003.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Cost of sales and gross profit

The tables below set out (i) the cost of sales and cost of sales as a percentage of total cost of sales and (ii) the gross profit and gross profit margin of the Fertilizer Group’s major product segments for the two years ended 31 December 2003.

Potash fertilizers Phosphate-based fertilizers Nitrogen-based fertilizers Compound fertilizers Others Total Potash fertilizer Phosphate-based fertilizer Nitrogen-based fertilizer Compound fertilizer Others Total	Year ended 31 December 2002 2003 Cost of sales (RMB in millions) Percentage of total cost of sales Cost of sales (RMB in millions) Percentage of total cost of sales 3,185.7 43.1% 4,364.8 45.8% 2,725.4 36.8% 3,145.1 33.0% 639.5 8.7% 918.4 9.7% 832.6 11.3% 1,063.0 11.2% 7.0 0.1% 32.5 0.3% 7,390.2 100.0% 9,523.8 100.0% Year ended 31 December 2002 2003 Gross profit Gross profit (RMB in million) Margin (RMB in million) Margin 22.7 0.7% 447.2 9.3% 134.9 4.7% 214.9 6.4% 35.5 5.3% 36.3 3.8% 217.5 20.7% 145.7 12.1% — 0.0% 3.6 10.0% 410.6 5.3% 847.7 8.2%	Year ended 31 December 2002 2003 Cost of sales (RMB in millions) Percentage of total cost of sales Cost of sales (RMB in millions) Percentage of total cost of sales 3,185.7 43.1% 4,364.8 45.8% 2,725.4 36.8% 3,145.1 33.0% 639.5 8.7% 918.4 9.7% 832.6 11.3% 1,063.0 11.2% 7.0 0.1% 32.5 0.3% 7,390.2 100.0% 9,523.8 100.0% Year ended 31 December 2002 2003 Gross profit Gross profit (RMB in million) Margin (RMB in million) Margin 22.7 0.7% 447.2 9.3% 134.9 4.7% 214.9 6.4% 35.5 5.3% 36.3 3.8% 217.5 20.7% 145.7 12.1% — 0.0% 3.6 10.0% 410.6 5.3% 847.7 8.2%


		8.2%

The table below sets out the average cost of sales per tonne for the Fertilizer Group’s major product segments for the two years ended 31 December 2003.

	Year ended 31 December	Year ended 31 December
	2002	2003
	(RMB/tonne)
Average cost of sales
Potash fertilizers	1,051	1,043
Phosphate based fertilizers	1,689	1,715
Nitrogen based fertilizers	1,101	1,147
Compound fertilizers	1,376	1,559
Others	1,033	320

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

The Fertilizer Group’s cost of sales increased approximately 28.9%, from RMB7,390.2 million in 2002 to RMB9,523.8 million in 2003, primarily due to increased sales volume in all product segments.

The Fertilizer Group’s gross profit increased approximately 106.5%, from RMB410.6 million in 2002 to RMB847.7 million in 2003, primarily due to an increase of RMB424.5 million, or over 18 times, in the gross profit of potash fertilizers, partly offset by a RMB71.8 million, or 33.0%, decrease in the gross profit of compound fertilizers. The Fertilizer Group’s gross profit margin increased from 5.3% in 2002 to 8.2% in 2003, primarily due to an increase in the gross profit margin of potash fertilizers from 0.7% in 2002 to 9.3% in 2003 because of an improved selling environment in 2003, as there was a shortage of supply that contributed to average selling price increases in excess of average cost of sales.

The Fertilizer Group’s cost of sales from potash fertilizers increased approximately 37.0%, from RMB3,185.7 million in 2002 to RMB4,364.8 million in 2003, primarily due to increases in sales volume. Gross profit increased approximately 18 times, from RMB22.7 million in 2002 to RMB447.2 million in 2003, and the gross profit margin of such products increased from 0.7% in 2002 to 9.3% in 2003, primarily due to the reasons cited above.

The Fertilizer Group’s cost of sales from phosphate-based fertilizers increased approximately 15.4%, from RMB2,725.4 million in 2002 to RMB3,145.1 million in 2003, primarily due to increases in sales volume. Gross profit increased approximately 59.3%, from RMB134.9 million in 2002 to RMB214.9 million in 2003, and the gross profit margin of such products increased from 4.7% in 2002 to 6.4% in 2003 as the average selling price per tonne increased faster than the average cost of sales per tonne.

The Fertilizer Group’s cost of sales from nitrogen-based fertilizers increased approximately 43.6%, from RMB639.5 million in 2002 to RMB918.4 million in 2003, primarily due to increases in sales volume. Gross profit increased approximately 2.3%, from RMB35.5 million in 2002 to RMB36.3 million in 2003, but the gross profit margin of such products decreased from 5.3% in 2002 to 3.8% in 2003, primarily because adequate domestic supply was available to meet demand, limiting the Fertilizer Group’s ability to pass along increases in average cost of sales to customers.

The Fertilizer Group’s cost of sales from compound fertilizers increased approximately 27.7%, from RMB832.6 million in 2002 to RMB1,063.0 million in 2003, primarily due to a substantial increase in average cost of sales per tonne, as well as an increase in sales volume. Gross profit decreased approximately 33.0%, from RMB217.5 million in 2002 to RMB145.7 million in 2003, and the gross profit margin of such products decreased from 20.7% in 2002 to 12.1% in 2003, primarily due to unanticipated movements in international prices which caused average cost of sales per tonne to increase significantly faster than average selling price per tonne.

The Fertilizer Group’s cost of sales from other agriculture-related products increased significantly, from RMB7.0 million in 2002 to RMB32.5 million in 2003, primarily due to increases in sales volumes as the Fertilizer Group initiated sales of such products. Gross profit increased from approximately RMBnil in 2002 to RMB3.6 million in 2003.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Other revenues

The Fertilizer Group’s other revenues decreased approximately 4.8%, from RMB44.1 million in 2002 to RMB42.0 million in 2003, primarily due to a decrease in revenue from agency services as a result of the Fertilizer Group’s continuous efforts to sell more of its own fertilizers, partly offset by an increase in interest income from loans receivable.

Selling and distribution costs

The Fertilizer Group’s selling and distribution costs increased approximately 272.3%, from RMB69.2 million in 2002 to RMB257.6 million in 2003, primarily due to an increase in freight expenses and salaries and wages of sales personnel as the result of the expansion of the Fertilizer Group’s sales and distribution network. The number of regional and local sales centres increased from 59 in 2002 to 404 in 2003. Selling and distribution costs as a percentage of turnover was 0.9% in 2002, compared to 2.5% in 2003.

Administrative expenses

The Fertilizer Group’s administrative expenses increased approximately 35.8%, in line with the growth of the business, from RMB54.5 million in 2002 to RMB74.0 million in 2003, primarily due to an increase in salaries and wages of RMB25.0 million. Administrative expenses as a percentage of turnover remained stable during this period, at approximately 0.7% in both 2002 and 2003.

Other operating income/expenses, net

The Fertilizer Group had other operating expenses, net of RMB1.6 million in 2002, compared to other operating income, net of RMB2.4 million in 2003.

Operating profit

The Fertilizer Group’s operating profit increased 70.2%, from RMB329.4 million in 2002 to RMB560.5 million in 2003.

Finance costs

The Fertilizer Group’s finance costs increased approximately 41.0%, from RMB32.2 million in 2002 to RMB45.4 million in 2003, primarily due to an increase of RMB6.9 million in bank charges and bank overdrafts and an increase of RMB6.3 million in interest on bank loans for financing the operations of the Fertilizer Group. Finance costs as a percentage of turnover remained stable during this period, at approximately 0.4% for both 2002 and 2003.

Share of profit less losses of jointly controlled entities

The Fertilizer Group’s share of profit less losses of jointly controlled entities increased significantly, from a loss of RMB222,000 in 2002 to RMB8.0 million in 2003, primarily due to production output growth by Sanhuan Sinochem Jiaji, which began operations in 2002 and started to make a profit from 2003.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Taxation

The Fertilizer Group’s tax increased approximately 84.7%, from RMB57.0 million in 2002 to RMB105.3 million in 2003, primarily because of the increase in profit before taxation. The effective tax rates remained relatively constant during this period at 19.2% in 2002 and 20.1% in 2003.

Minority interests

Minority interests as a percentage of profit before minority interests was 0.1% in 2002, compared to 0.5% in 2004.

Net profit

The Fertilizer Group’s net profit increased approximately 73.0%, from RMB240.4 million in 2002 to RMB415.8 million in 2003. The Fertilizer Group’s net profit margin increased from 3.1% in 2002 to 4.0% in 2003.

LIQUIDITY AND CAPITAL RESOURCES

The Fertilizer Group has funded its growth principally from cash generated from operations and bank loans. The Fertilizer Group’s cash requirements relate primarily to production and operation activities, repayment of liabilities as they become due and capital expenditures.

The Fertilizer Group had cash and cash equivalents of RMB119.6 million, RMB275.1 million and RMB227.7 million as at 31 December 2002, 2003 and 2004 respectively. The Fertilizer Group’s cash and cash equivalents are held primarily in RMB and USD.

The Fertilizer Group’s liquidity position is affected by the following key factors, among others:

. The Fertilizer Group’s inventory levels, which are in turn driven by the seasonality of the fertilizer sales cycles. Inventories comprise mainly fertilizer products and raw materials. Because sales of fertilizers in northern China peak in spring and autumn, the Fertilizer Group builds up its inventory of fertilizer in the winter months, when sales of fertilizers are very slow. Higher inventories during this period frequently have a negative impact on cash flow at the end and beginning of the Fertilizer Group’s financial year.
. The Fertilizer Group’s level of payables and receivables. Increased payables generally have a positive impact on cashflow and increased receivables generally have a negative impact on cashflow. Most of the Fertilizer Group’s trade payables concern amounts owed to international suppliers. The amounts of these payables may vary depending upon the credit periods the Fertilizer Group has with such suppliers and the levels of inventory it sources from abroad. The Fertilizer Group’s other payables and accruals relate mainly to advance receipts from customers, consisting of prepayments from customers for fertilizer. Such prepayments from customers have a positive impact on the Fertilizer Group’s liquidity and cashflow position. Such prepayments from customers are generally driven by the prepayments that the Fertilizer Group’s domestic suppliers require it to make for

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

the purchase of fertilizer, in accordance with PRC market practice, resulting in other receivables and prepayments. As the Fertilizer Group increasingly sources fertilizer from domestic suppliers, this will likely result in increased prepayments and receivables, which will have a negative impact on cashflow.

. The Fertilizer Group’s ability to obtain access to financing. The Fertilizer Group’s liquidity and cashflow are enhanced to the extent it has ready access to capital. The Fertilizer Group has historically been able to access capital through bank loans and other sources. As of 30 April 2005, the Fertilizer Group had credit and working capital facilities of approximately RMB9.0 billion of which approximately RMB4.4 billion had been utilised. The utilised credit and working capital facilities comprised bank loans of RMB2,198.3 million, letter of credit facilities of RMB801.2 million and bills payables of RMB1,420.1 million. As of 30 April 2005, except for bank loans of RMB1,822.8 million and bills payables of RMB581.2 million, none of the utilised credit and working capital facilities were guaranteed by Sinochem Corporation. The guarantees provided by Sinochem Corporation will be released upon the Completion. For details of the bills payables guaranteed by Sinochem Corporation for the three years ended 31 December 2004, please refer to Note 19 of Appendix I to this circular.

Cash flow data

The following table sets out selected cash flow data from the Fertilizer Group’s combined cash flow statements for the periods indicated.

	Year	ended 31 December	ended 31 December	ended 31 December
	2002		2003	2004
		(RMB’000)
Net cash (outflow)/inflow from operating
activities	(1,332,359)		(61,452)	309,449
Net cash (outflow)/inflow from investing
activities	(243,846)		45,011	(215,858)
Net cash from inflow/(outflow) from
financing activities	1,474,730		171,429	(140,464)
(Decrease)/increase in cash and cash
equivalents	(101,475)		154,988	(46,873)

Operating activities

The Fertilizer Group had a net operating cash outflow of RMB61.5 million in 2003, compared to a net operating cash inflow of RMB309.4 million in 2004, primarily due to an increase of RMB170.0 million, or 31.3%, in operating profit before working capital changes, from RMB543.6 million in 2003 to RMB713.6 million in 2004, and decreased working capital changes from 2003 to 2004. Changes in working capital used cash of RMB540.4 million in 2003, compared to RMB228.2 million in 2004. While 2003 included positive contributions to cash flow from inventories and other receivables, deposits and prepayments, 2004 experienced negative contributions from these items. In addition, while 2003 included negative contributions to cash flow from trade and bills payables and other payables and accruals, 2004 experienced positive contributions from these items. While inventory turnover improved from 2003 to 2004, inventory increased by RMB833.8 million in 2004 mainly due to

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

large orders being placed at the end of 2004 in accordance with the Fertilizer Group’s build up in inventory for anticipated sales in 2005. Other receivables and prepayments increased by RMB744.0 million in 2004, primarily due to an increase in advance payments to domestic suppliers, in accordance with PRC market practice, to secure an adequate supply of certain fertilizers which were experiencing a shortage of supply. Trade and bills payables increased by RMB368.6 million in 2004, primarily due to increases in inventory as a result of increased sales volume. Other payables and accruals increased by RMB1048.0 million in 2004, primarily as a result of increases in advance receipts from customers, as a consequence of the increased advance payments to domestic suppliers made by the Fertilizer Group. In addition, the Fertilizer Group acquired inventory of RMB100.7 million, other receivables and prepayments of RMB75.4 million, trade payables of RMB116.6 million and other payables and accruals of RMB91.6 million upon the acquisition of Sinochem Fuling at nil consideration in 2004.

Net cash outflow from operating activities decreased 95.4%, from RMB1,332.4 million in 2002 to RMB61.5 million in 2003. This decrease of RMB1,270.9 million was primarily due to an increase of RMB223.6 million, or 69.9%, in operating profit before working capital changes, from RMB320.0 million in 2002 to RMB543.6 million in 2003, and decreased working capital changes. Changes in working capital used cash of RMB1,600.3 million in 2002, compared to RMB540.4 million in 2003. While 2002 included positive contributions to cash flow from trade receivables and trade and bills payables, 2003 experienced negative contributions from these items. In addition, while 2002 included negative contributions to cash flow from inventories and other receivables and prepayments, 2003 experienced decreases in these items. Inventories increased by RMB1,163.4 million in 2002 mainly due to an increase in imports of potash fertilizers as the PRC government loosened the import quota controls over potash fertilizers. The Management of the Fertilizer Group increased imports because it foresaw a strong demand and consequently sales growth potential. Trade and bills payables decreased by RMB556.9 million in 2003, primarily as a result of a decline in inventory in 2003 and an increase in the settlement of payables at year end. Inventory decreased by RMB82.7 million in 2003, as a result of the timing of shipments around year end. Other receivables and prepayments decreased by RMB454.2 million in 2003, primarily due to the settlement of other receivables from Sinochem International Information Company and Sinochem Hainan Company, related parties of the Fertilizer Group, of approximately RMB440.0 million.

Investing activities

Net cash outflow from investing activities in 2004 amounted to RMB215.9 million, primarily reflecting an increase in loans receivable of RMB196.7 million and an increase in investments in jointly controlled entities of RMB100.0 million, partially offset by proceeds from the disposal of investment securities of RMB105.5 million. The increase in loans receivable was primarily due to funds deposited with CETTI, a subsidiary of Sinochem Corporation, for the purpose of back-to-back lending to Sinochem Corporation. These were, in effect, indirect loans to the Fertilizer Group’s parent company. The increase in investments in jointly controlled entities resulted from investments in connection with the Sinochem Sanhuan Joint Venture. The disposal of investment securities was in connection with the sale of a 10% equity interest in CETTI.

Net cash inflow from investing activities in 2003 amounted to RMB45.0 million, primarily reflecting a decrease in loans receivable of RMB56.1 million. This decrease in loans receivable was primarily due to a decrease in funds deposited with CETTI.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Net cash outflow from investing activities in 2002 amounted to RMB243.8 million, primarily due to the purchase of investment securities of RMB109.0 million, an increase in loans receivable of RMB78.0 million and a purchase of fixed assets of RMB63.2 million. The purchase of investment securities was in connection with the purchase of a 10% equity interest in CETTI. Loans receivable increased primarily as a result of increased deposits with CETTI. The purchase of fixed assets was primarily attributable to an investment in Sinochem Zhisheng.

The loans receivable for the three years ended 31 December 2004, representing funds deposited with CETTI, carried interest rates of 2.5% to 2.7%, 2.5% and 2.5%, respectively. The arrangement of loans receivable from Sinochem Corporation was part of the centralised funding management regime of the Sinochem Corporation. Tianyuan Law Firm, the PRC legal advisor to the Company, has confirmed that such arrangements complied with the relevant laws and regulations of the PRC. All loans receivable have been fully settled as at the Latest Practicable Date and will not continue after completion of the Acquisition.

Financing activities

Net cash outflow from financing activities in 2004 amounted to RMB140.5 million, primarily reflecting net repayment of borrowings.

Net cash inflow from financing activities in 2003 amounted to RMB171.4 million, primarily reflecting net bank borrowings.

Net cash inflow from financing activities in 2002 amounted to RMB1,474.7 million, primarily reflecting net bank borrowings.

Key financial ratios

The following table sets out selected financial ratios for the periods indicated.

	As at	31 December
	2002	2003	2004
Inventory turnover (days)1	160.5	121.4	130.2
Receivables turnover (days)2	16.8	14.5	16.4
Payables turnover (days)3	78.7	39.8	48.3
Current ratio4	1.2	1.3	1.3
Gearing ratio (percent)5	203.1	144.9	93.1

Notes:

1 Based on the closing balance of inventories divided by cost of sales and multiplied by 365 days for the Track Record Period.
2 Based on the closing balance of trade and bills receivables divided by turnover and multiplied by 365 days for the Track Record Period.
3 Based on the closing balance of trade and bills payables divided by cost of sales and multiplied by 365 days for the Track Record Period.
4 Based on period end current assets divided by period end current liabilities.
5 Based on period end total debts divided by total shareholders’ equity.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

As at 31 December 2002, 2003 and 2004, the Fertilizer Group’s inventories, including fertilizer merchandise and raw materials, amounted to RMB3,250.1 million, RMB3,167.4 million and RMB4,101.9 million, respectively. The decrease from 2002 to 2003 was due to timing of shipments around year end of 2003 and the increase from 2003 to 2004 was due to increases in sales volume. The Fertilizer Group’s inventory level decreased from approximately 41.7% of the Fertilizer Group’s turnover in 2002 to approximately 32.6% of the Fertilizer Group’s turnover in 2004. The Fertilizer Group attributes the decrease in inventory as a percentage of turnover from 2002 to 2004 and the overall decrease in inventory turnover days from 2002 to 2004 to more efficient inventory management resulting from improvements to IT and logistics systems which were implemented in 2003.

The increase in the Fertilizer Group’s trade and bills receivables during the Track Record Period from RMB358.0 million as at 31 December 2002 to RMB412.9 million as at 31 December 2003 to RMB567.2 million as at 31 December 2004 was primarily due to increased sales. More specifically, trade receivables stayed relatively constant from 2002 to 2003, at RMB245.9 million and RMB249.4 million, respectively, and then decreased significantly in 2004 to RMB165.9 million, due to the imposition of stringent credit risk control measures, whereas bills receivable increased somewhat from 2002 to 2003, from RMB112.2 million and RMB163.6 million, respectively, but increased significantly in 2004 to RMB401.3 million, as customers increasingly financed purchases from the Fertilizer Group using bank bills. Receivables turnover decreased from 2002 to 2003 and increased from 2003 to 2004. Despite increased sales, receivables turnover did not increase overall from 2002 to 2004, primarily due to the imposition of stringent credit risk control measures.

The overall decrease in the Fertilizer Group’s payables turnover during the Track Record Period was primarily due to management’s increasing reliance on operating cash to pay suppliers in exchange for more favourable procurement terms. This practice is also in part a result of the Fertilizer Group’s increased focus on domestic suppliers, for whom prepayments are common market practice.

The Fertilizer Group’s current ratio remained relatively constant during the Track Record Period.

The decrease in the Fertilizer Group’s gearing ratio during the Track Record Period was primarily due to the increase in shareholders’ equity as a result of retention of profits generated in 2003 and 2004, the acquisition of Sinochem Fuling in 2004 and the acquisition of an equity interest in Sinochem Kailin in 2004.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Capital expenditures

The following table sets out the Fertilizer Group’s capital expenditures for the periods indicated. The following capital expenditures were funded primarily out of cash flows generated from operations and bank borrowings.

Purchase of investment securities Purchase of fixed assets Increase in investments in jointly controlled entities Total	Year ended 31 December 2002 2003 2004 (RMB in millions) 109.0 2.5 3.7 63.2 6.8 97.5 24.2 5.3 100.0 196.4 14.6 201.2	Year ended 31 December 2002 2003 2004 (RMB in millions) 109.0 2.5 3.7 63.2 6.8 97.5 24.2 5.3 100.0 196.4 14.6 201.2
		201.2

As at the Latest Practicable Date, the Fertilizer Group expects to incur approximately RMB384.7 million for the year ending 31 December 2005 in capital expenditures, of which RMB140.0 million is related to equity investments in Sinochem Sanhuan and approximately RMB244.7 million is related to the construction of production plants and the acquisition of fixed assets for Sinochem Fuling. The budgeted amounts may vary from the actual amounts of capital expenditures for a variety of reasons, including changes in market conditions and other factors. The Fertilizer Group expects to rely on proceeds from the proposed Placing and bank loans to fund such expenditures.

There is no guarantee that any of the planned capital expenditures outlined above will proceed as planned. As the Fertilizer Group continues to expand, it may incur additional capital expenditures. In the future, the Fertilizer Group may consider additional debt or equity financing, depending on market conditions, the Fertilizer Group’s financial performance and other relevant factors. The Fertilizer Group cannot assure that it will be able to raise additional capital, should that become necessary, on terms acceptable to it or at all.

Net current assets

As at 30 April 2005, the Fertilizer Group had net current assets of approximately RMB1,622.7 million. Current assets amounted to approximately RMB7,644.7 million, comprising inventories of approximately RMB5,282.6 million, loans receivable of approximately RMB39.5 million, trade and bills receivables of approximately RMB751.1 million, other receivables and prepayments of approximately RMB965.6 million and bank balances and cash of approximately RMB605.9 million. Current liabilities amounted to approximately RMB6,022.0 million, comprising trade and bills payables of approximately RMB2,904.6 million, other payables and accruals of approximately RMB695.0 million, taxation payable of approximately RMB153.1 million and short-term loans of approximately RMB2,269.3 million.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

INDEBTEDNESS

Borrowings

As of 31 December 2002, 2003 and 2004, and as of the close of business on 30 April 2005, being the latest practicable date prior to the printing of this document for the purpose of this indebtedness statement, the Fertilizer Group had the following outstanding interest bearing borrowings from banks and other financial institutions:

				As of
				30 April
	As of 31 December			2005
	2002	2003	2004	(Unaudited)
		(RMB in millions)
Secured loans	—	10.8	192.0	184.6
Guaranteed loans	1,435.9	1,621.0	1,413.6	1,838.4
Unsecured loans	116.9	79.3	276.8	375.9
Long-term loans1	96.8	100.9	145.0	129.6
Short-term loans2	1,456.0	1,610.2	1,737.4	2,269.3

Notes:

1 Long-term loans comprised long-term bank loans and a loan obtained from a bank by Sinochem Corporation for use by Sinochem Fertilizer.
2 Short-term loans comprised short-term bank loans of RMB1,405.3 million, RMB1,610.2 million, RMB1,572.1 million and RMB2,198.3 million as of 31 December 2002, 2003 and 2004 and 30 April 2005, respectively and short-term loans from CETTI of RMB50.7 million, RMBnil, RMB165.3 million and RMB71.0 million as of 31 December 2002, 2003 and 2004 and 30 April 2005, respectively.

The Fertilizer Group’s long-term loans comprised bank loans of RMB30.6 million, RMB21.6 million, RMB58.6 million and RMB47.6 million as of 31 December 2002, 2003 and 2004 and 30 April 2005, respectively. These borrowings are denominated principally in RMB. During the three years ended 31 December 2002, 2003 and 2004, the bank loans bore interest at a rate of 5.8% per annum. The Fertilizer Group’s long-term bank loans are mainly used to fund capital expenditures and short-term loans are used for working capital, specifically in connection with the Fertilizer Group’s fertilizer sourcing and distribution businesses.

In addition, the Fertilizer Group’s long-term loans also included a loan of RMB66.2 million, RMB79.3 million, RMB86.4 million and RMB82.0 million as of 31 December 2002, 2003 and 2004 and 30 April 2005, respectively. The loan, which was denominated in Euro, was made by the Import & Export Bank of China to Sinochem Corporation for use by Sinochem Fertilizer. Such loan was unsecured, bearing interest at a rate of 1% per annum and repayable in half-yearly instalments from 30 May 2008 to 30 November 2033. The loan was fully repaid in May 2005.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

As of 31 December 2003 and 2004 and 30 April 2005, land and buildings and plant, machinery and equipment with net book values amounting to RMB55.9 million, RMB257.5 million and RMB227.8, respectively, were pledged as security for bank loans of RMB10.8 million, RMB192.0 million and RMB184.6 million, respectively. No fixed assets were pledged for bank loans as of 31 December 2002.

As of 31 December 2002, 2003 and 2004 and 30 April 2005, loans of RMB1,405.3 million, RMB1,599.4 million, RMB1,392.1 million and RMB1,822.8 million, respectively, were guaranteed by Sinochem Corporation. The Fertilizer Group has entered into agreements with several banks in connection with the arrangement of its own banking facilities in order to be financially independent of Sinochem Corporation. The guarantees provided by Sinochem Corporation will be released upon the Completion.

In addition, as of 31 December 2002, 2003 and 2004 and 30 April 2005, bank loans of RMB30.6 million, RMB21.6 million, RMB21.6 million and RMB15.6 million, respectively, were guaranteed by a related company of a joint venture partner of Sinochem Zhisheng.

As of 30 April 2005, the Fertilizer Group had credit and working capital facilities of approximately RMB9.0 billion of which approximately RMB4.4 billion had been utilised. The utilised credit and working capital facilities comprised bank loans of RMB2,198.3 million, letter of credit facilities of RMB801.2 million and bills payables of RMB1,420.1 million. As of 30 April 2005, except for bank loans of RMB1,822.8 million and bills payables of RMB581.2 million, none of the utilised credit and working capital facilities were guaranteed by Sinochem Corporation. The guarantees provided by Sinochem Corporation will be released upon the Completion.

Long-term debt obligations, contingent liabilities and capital commitments

Long-term debt obligations

The following table sets out the Fertilizer Group’s principal long-term debt obligations as of 30 April 2005. The Fertilizer Group expects to fund such long-term debt obligations principally from bank loans and operating cashflow.

Long-term debt obligations	Total 129.6	Payments due by period Less than 1 year 1–3 years 3–5 years (RMB in millions) 8.0 27.6 18.3	More than 5 years 75.7

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Contingent liabilities

The following table sets out the aggregate amounts of the Fertilizer Group’s contingent liabilities as of 31 December 2002, 2003 and 2004 and 30 April 2005.

				As of
	As of 31 December			30 April
	2002	2003	2004	2005
		(RMB in millions)
Contingent liabilities1
Letter of credit facilities2	94.5	34.2	442.7	801.2

Notes:

1 As at 31 December 2004, Sinochem Fertilizer had contingent liabilities amounting to RMB26.2 million in respect of a litigation proceeding with a previous customer concerning compensation of insurance claims in relation to sourcing and distribution activities with Sinochem Fertilizer. The trade receivables due from the customer had been fully transferred to Sinochem International Information Company, a subsidiary of Sinochem Corporation, during the year ended 31 December 2002. In respect of this litigation proceeding, Sinochem Corporation has issued an undertaking to fully reimburse Sinochem Fertilizer should there be any loss to Sinochem Fertilizer as a result of the litigation. Accordingly, in the combined financial statements of the companies now comprising the Fertilizer Group prepared by the directors of Fertilizer Company, there is no provision for this pending litigation.
2 The contingent liabilities represent letter of credit facilities issued to suppliers for the purchase of fertilizer. Letter of credit facilities in issue as at 31 December 2002, 2003 and 2004 were guaranteed by Sinochem Corporation. Letters of credit in issue as at 30 April 2005 were issued from banking facilities available to the Fertilizer Group, without any guarantee from Sinochem Corporation. These letter of credit facilities were primarily issued in USD. The variation in the amounts of the letter of credit facilities from 2002 to 2004 was principally a function of the timing of shipments around year end in connection with which such letters were issued. The increase from 2004 to 30 April 2005 primarily reflected, in addition to the timing of shipments, the increase in price of imported fertilizers at the end of 2004 and the beginning of 2005.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

Capital commitments

The following table shows the Fertilizer Group’s capital commitments as at the balance sheet dates and for the periods indicated. The Fertilizer Group expects to fund such capital commitments as of 30 April 2005 principally from cash flows generated from operations and from bank borrowings.

Capital commitments Assets under construction1 Contracted, but not provided for Authorised, but not contracted for Investment in a jointly controlled entity, Sinochem Sanhuan Total Note:	As of 31 December 2002 2003 2004 (RMB in millions) — — 244.1 — — 18.5 — — 262.6 — — 140.0 — — 402.6	As of 30 April 2005 244.1 17.4
		261.5 140.0
		401.5

1 Assets under construction mainly represent the obligations estimated for the construction of Sinochem Production, in particular, Sinochem Fuling.

Other than intra-group liabilities and except disclosed above in reference to contingent liabilities, borrowings and contractual obligations as of the close of business on 30 April 2005, the Fertilizer Group did not have any outstanding loan capital (issued or agreed to be issued), bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase commitments, finance lease commitments, guarantees, indemnities or other material contingent liabilities.

Save as described above, there has been no material change in the indebtedness or the contingent liabilities of the Fertilizer Group since 30 April 2005.

INFLATION

According to the National Bureau of Statistics of China, the year-on-year change in the consumer price index in China was (0.8)%, 1.2% and 3.9%, respectively, for 2002, 2003 and 2004. Although the management believes demand for the Fertilizer Group’s products is relatively inelastic and therefore unlikely to be significantly affected by increases in inflation, a higher inflation rate could have a negative effect on the Fertilizer Group’s results of operations by eroding end-users’ buying power. The management believes that the Fertilizer Group has not been materially affected by any recent inflation or by deflation.

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FINANCIAL INFORMATION — THE FERTILIZER GROUP

MARKET RISKS

The Fertilizer Group is exposed to the following market risks.

Interest rate changes

In October 2004, the PBOC increased the interest rate of loans. The Fertilizer Group’s exposure to market risk for changes in interest rates related primarily to fluctuations in interest rates on the Fertilizer Group’s short-term and long-term debt and the Fertilizer Group’s ability to borrow further funds. Upward fluctuations in interest rates increase the cost of new debt and may increase the finance costs the Fertilizer Group incurs in discounting bills receivable. The Fertilizer Group does not currently hedge against interest rate risk. As a result, higher interest rates may adversely affect the Fertilizer Group’s results of operations and financial condition.

Foreign exchange rate risk

The Fertilizer Group is exposed to foreign exchange rate risk because substantially all of the Fertilizer Group’s sales are denominated in RMB while a significant portion of the Fertilizer Group’s cost of sales is denominated in foreign currencies, mainly USD. The Fertilizer Group does not engage in any formal foreign exchange hedging activities.

Any appreciation of the RMB against foreign currencies such as the USD may subject the Fertilizer Group to increased costs associated with raising capital denominated in such foreign currencies. Conversely, any devaluation of the RMB against the USD or other foreign currencies may increase the cost of sales of imported fertilizer and may adversely affect the value of the assets of the Fertilizer Group and any dividends payable on the ordinary shares of the Company after the Completion in foreign currency since the Fertilizer Group to be acquired by the Company receives most of its revenue and expresses its profits in RMB.

INTERNAL CONTROLS

Until recently, the Fertilizer Group did not prepare consolidated financial statements in accordance with HK GAAP. The Fertilizer Group is in the process of upgrading its internal reporting control, accounting and financial systems in order to strengthen the Fertilizer Group’s internal controls and management information system. For example, the management is further computerising the Fertilizer Group’s record keeping systems and introducing procedures to coordinate record keeping among the Fertilizer Group’s various subsidiaries, improving the Fertilizer Group’s inventory management systems and improving the Fertilizer Group’s oversight of the internal audit functions. The management believes that with those improvements the Fertilizer Group will be able to provide better quality and more timely information to management, which would also assist the Fertilizer Group in preparing financial statements.

PROPERTY INTERESTS

The property interests attributable to the Fertilizer Group have been valued at approximately HK$93.9 million as at 30 April 2005 by Chesterton Petty Limited, an independent property valuer. Details of the Fertilizer Group’s property interests are set out in the letter and valuation certificates of Chesterton Petty Limited contained in Appendix V to this circular.

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FINANCIAL INFORMATION — THE GROUP

This section entitled ‘‘Financial Information — the Group’’ should be read in conjunction with the audited financial statements of the Group, together with the accompanying notes, set out in the audited financial statements of the Group for the three years ended 31 March 2004 at Appendix II to this circular.

For the purpose of this section, unless the context otherwise requires, references to ‘‘2002’’, ‘‘2003’’ and ‘‘2004’’ refer to the Group’s financial year ended 31 March of such year.

AUDITED FINANCIAL STATEMENTS OF THE GROUP

Notes Turnover 1 Cost of properties sold and services rendered (Allowance for) reversal of estimated loss on properties held for sale Gross profit (loss) Other operating income Interest income Administrative expenses Property expenses (Deficit) surplus arising from revaluation of investment properties Impairment loss recognised for investments in securities Impairment of goodwill Bank borrowings and related accrued interest waived Loss from operations 2 Gain (loss) on disposal of subsidiaries Loss on disposal of an associate Finance costs Share of results of associates Loss before taxation Taxation (charge) credit Net loss for the year Dividend 3 Loss per share — Basic and diluted 4	2002 HK$’000 (restated) 58,310 (36,709) (2,915) 18,686 4,784 856 (44,274) (7,733) (61,020) — (25,675) — (114,376) — — (56,895) (2,814) (174,085) (504) (174,589) 136 (8.2 cents)	2003 HK$’000 (restated) 84,414 (80,079) (13,446) (9,111) 4,001 97 (27,719) (4,962) (79,600) — — — (117,294) 5,500 (9) (18,100) — (129,903) 20 (129,883) 1,126 (3.9 cents)	2004 HK$’000 99,483 (90,556) 37,771 46,698 3,193 34 (17,204) (3,103) 9,700 (140,400) — 9,608 (91,474) (400) — (10,180) — (102,054) 181 (101,873) 1,036 (2.8 cents)

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FINANCIAL INFORMATION — THE GROUP

Notes:

(1) Turnover represents proceeds from sales of properties, income from rental, building management and agency services.
(2) Loss from operations has been arrived at after charging auditors’ remuneration, allowance for doubtful debts, cost of properties held for sale recognized as an expense, depreciation, loss on disposal of tangible fixed assets other than properties, rental expense, staff costs and unrealized holding loss on investments in securities, and after crediting dividend income, gain on disposal of investments in securities, rental income net of outgoings and unclaimed obligations recognized as income.
(3) The payments of such dividends to preference shareholders were made in cash funded by internal resources of the Group and/or by crediting the same to such preference shareholders as fully paid.
(4) The calculation of basic loss per share for each of the three years 2002, 2003 and 2004 is based on the net loss from ordinary activities and dividends paid on preference shares for each of the respective years. The loss for each year for the purpose of basic loss per share was approximately HK$174.7 million, HK$131.0 million and HK$102.9 million, respectively. The calculation of basic loss per share for each of the three years 2002, 2003 and 2004 is also based on the weighted average of ordinary shares in issue for each of the three years: 2,135,225,748, 3,319,537,087 and 3,663,121,235, respectively. The computation of diluted loss per share for the years 2002, 2003 and 2004 does not assume the exercise of the conversion rights attached to the Company’s outstanding share options and convertible redeemable non-voting preference shares as these conversions would result in a decrease in loss per share.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATION OF THE GROUP (BASED ON THE AUDITED FINANCIAL STATEMENTS)

Overview

The following is a brief overview of the major revenues and expenses contributing to the audited trading record of the Group during the Track Record Period:

Turnover

The Group’s turnover was derived from activities carried out in Hong Kong. Turnover comprised proceeds from sales of properties, rental income and building management and agency fee income. For management purposes, during the Track Record Period, the Group was organised into four operating divisions, namely, sales of properties, rental services, building management services, and others.

Cost of properties sold and services rendered

The cost of properties sold and services rendered of the Group during the Track Record Period represented cost of properties sold.

Other operating income

Other operating income represented mainly income derived in connection with the provision of building management services (such as salary income from buildings under management of the Group and refund of building management fees paid).

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FINANCIAL INFORMATION — THE GROUP

Interest income

Interest income was derived mainly from bank deposits.

Administrative expenses

Administrative expenses mainly included auditors’ and directors’ remunerations, salaries, legal and professional fees, commissions and printing costs.

Property expenses

Property expenses represented mainly expenditures on production of rental income (such as building management fees, government rent and rates, utility expenses and renovation costs).

Finance costs

Finance costs mainly represent interest on bank borrowings wholly repayable within five years and interest on other borrowings.

Taxation

The Company and its subsidiaries are subject to Hong Kong Profits Tax calculated at the rates of 16% on the estimated assessable profits (if any) for both years ended 31 March 2002 and 2003, and 17.5% on the estimated assessable profits (if any) for the year ended 31 March 2004. The taxation charge represented provision for Hong Kong Profits Tax while the taxation credit represented overprovision for Hong Kong Profits Tax in previous year and deferred taxation credit arising from the difference between the taxable amount and carrying amount of the Group’s assets.

Financial performance of the financial year 2004 compared to the financial year 2003

Turnover

During 2004, turnover for the Group was approximately HK$99.5 million, an increase of approximately 18% as compared to turnover of HK$84.4 million during 2003. Proceeds from sale of properties, rental income and building management fee income which comprised the turnover were HK$87.8 million, HK$9.4 million and HK$2.3 million, representing an increase of 41%, a decrease of 47% and a decrease of 48% respectively as compared with the corresponding figures during 2003. The drops in rental income and building management fee income were within expectations as the number of investment properties held and managed by the Group declined upon disposal of properties in 2003 and 2004 in order to meet the financial obligations of the Group.

Gross profit (loss)

The change of the Group’s gross loss of approximately HK$9.1 million for 2003 to gross profit of approximately HK$46.7 million for 2004 was mainly caused by the increase in value of the Group’s properties held for sale as a result of the upturn of the property market during 2004.

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FINANCIAL INFORMATION — THE GROUP

Cost of properties sold and services rendered

As compared to 2003, the Group’s costs relating to properties sold and services rendered increased by approximately 13% from approximately HK$80.1 million to approximately HK$90.6 million, mainly because the gross floor areas of the properties sold in 2004 was higher than that sold in 2003.

Administrative expenses

The Group’s administrative expenses for 2004 were approximately HK$17.2 million, representing a decrease of approximately 38% as compared to that for 2003 of approximately HK$27.7 million. The reduction was mainly because of the implementation of various cost cutting measures since early 2004 such as reducing office headcounts and ceasing payment of remuneration to executive directors.

Property expenses

The property expenses of the Group for the years 2003 and 2004, mainly comprising expenditures on production of rental income, were approximately HK$5.0 million and HK$3.1 million respectively, representing a year on year decrease of approximately 38%. This was primarily because some rental income generating properties were disposed of over the year.

Finance costs and borrowings

The Group recorded approximately HK$10.2 million of finance costs for 2004, achieving a savings of approximately 44% as compared to that for 2003 of approximately HK$18.1 million. In order to alleviate financial commitments, the Group disposed of two investment properties during 2004. The aggregate amount received from such disposals was HK$87 million, which was applied towards repayment of the relevant bank loans of the Group for which those properties were secured. In addition, the Group also actively held discussions and negotiations with its bankers for the rescheduling of the Group’s remaining borrowings. Subsequently in September 2003, certain subsidiaries of the Company entered into settlement agreements with two of the Group’s banks under which the banks agreed, conditional upon certain conditions precedent, to deem the repayment obligation of the aggregate outstanding debts of these subsidiaries to have been fully discharged and released. The total amount of such debts at the time was in aggregate approximately HK$42.7 million, of which approximately HK$9.6 million was deemed to have been fully discharged. The remaining portion of debt outstanding as at 31 March 2004, together with its related interest accrued up to the balance sheet date (approximately HK$34.7 million in aggregate of which approximately HK$21.9 million was principal) included in the current liabilities of the financial statements were also deemed to have been fully discharged and released accordingly when all of the conditions to completion of the relevant settlement agreement had been satisfied.

Financial performance of the financial year 2003 compared to the financial year 2002

Turnover

During 2003, turnover of the Group was approximately HK$84.4 million, representing an increase of 45% as compared to the corresponding figure for the 2002 financial year. Sales of properties amounted to approximately HK$62.2 million for 2003, accounting for approximately

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FINANCIAL INFORMATION — THE GROUP

74% of the total turnover of the Group during the same period. Such sales continued to be the main source of income for the Group. Property sales increased by approximately 73% from 2002 to 2003. This increase in property sales was attributed to managements’ efforts to reduce the debts of the Group by disposing of heavily debt-laden properties.

Income derived from rentals, building management and agency fees was approximately HK$17.8 million and HK$4.4 million, accounting for approximately 21% and 5% of the Group’s total 2003 turnover respectively. During the 2003 financial year, no income was derived from the Group’s investment securities which carried a book value of HK$140.4 million as at 31 March 2003.

Gross profit (loss)

The change of the Group’s gross profit of approximately HK$18.7 million for 2002 to gross loss of approximately HK$9.1 million for 2003 was mainly due to sales of the Group’s properties at significantly below the carrying amount during 2003.

Cost of properties sold and services rendered

The cost of properties sold and services rendered of the Group increased by approximately 118% substantially from approximately HK$36.7 million for 2002 to approximately HK$80.1 million for 2003, mainly owing to disposal of some properties in 2003 as part of the Group’s debt restructuring exercise.

Administrative expenses

The Group’s administrative expenses decreased by approximately 37.5% from approximately HK$44.3 million for 2002 to approximately HK$27.7 million for 2003, mainly because of costs incurred for some major investments and transactions in 2002.

Property expenses

The Group’s property expenses decreased by approximately 35% from approximately HK$7.7 million for 2002 to approximately HK$5.0 million for 2003, mainly due to the disposal of a rental income generating property in 2003.

Finance costs and borrowings

In early 2002, certain subsidiaries of the Company entered into agreements with their respective creditor banks pursuant to which it was agreed that certain debts of the subsidiaries were to be assigned to Mr. Chu Yu Lin David, an executive Director. In consideration of Mr. Chu taking up the debts, the Company agreed to issue a number of Preference Shares with an aggregate nominal value equivalent to the face value of the debts assigned to Mr. Chu. Upon the issue of such Preference Shares to Mr. Chu, the corresponding amount of the debts assigned to him was settled and no further interest in relation to such debts was incurred. As a result, a significant savings of approximately 68% in finance costs as compared to 2002 was achieved. The Group only recorded finance costs of approximately HK$18.1 million for 2003 as compared to finance costs of approximately HK$56.9 million for 2002.

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FINANCIAL INFORMATION — THE GROUP

INDEBTEDNESS

Borrowings

As of 31 March 2003 and 2004, and as of the close of business on 30 April 2005, being the latest practicable date prior to the printing of this document for the purpose of this indebtedness statement, the Group had the following outstanding borrowings:

Secured loans Unsecured loans Total Long-term loans1 — Bank loans — Other loan Short-term loans2 — Other loan Total Notes:	As of 31 March As of 30 April 2005 2003 2004 (Unaudited) (HK$ in millions) 168.3 81.8 76.9 26.5 40.3 124.8 194.8 122.1 201.7 186.8 116.0 86.2 8.0 6.1 6.5 — — 109.0 194.8 122.1 201.7	As of 31 March As of 30 April 2005 2003 2004 (Unaudited) (HK$ in millions) 168.3 81.8 76.9 26.5 40.3 124.8 194.8 122.1 201.7 186.8 116.0 86.2 8.0 6.1 6.5 — — 109.0 194.8 122.1 201.7
		201.7
		86.2 6.5 109.0
		201.7

Long-term loans comprised long-term bank loans, amount due to a director, and loan of HK$3.0 million under a loan facility provided by Sinochem HK which will be fully settled on Completion.
Short-term loans amounted to HK$109.0 million and comprised an amount of HK$103.0 million payable to Sinochem HK for the redemption of the 103 Preference Shares and a principal amount of HK$6.0 million due under a loan facility provided by Sinochem HK. Such loans payable to Sinochem HK (including the HK$3.0 million mentioned in note 1 above) will be fully settled upon Completion.

The Group’s long-term bank loans represented loans to finance the purchase of properties and working capital of the Group. As of 31 March 2003 and 2004 and 30 April 2005, investment properties and properties held for sale with aggregate net book values amounting to HK$134.0 million, HK$145.0 million and HK$152.0 million, respectively, were pledged as security for bank loans of approximately HK$168.3 million, HK$81.8 million and HK$76.9 million, respectively. As of 31 March 2003 and 2004, bank loans of HK$146.2 million and HK$74.1 million, respectively, were guaranteed by the Directors, Mr Chu Yu Lin, David, Mrs Chu Ho Miu Hing and Mr. Chan King Hung (an ex-director of the Company). Subsequent to 2004, all personal guarantees provided by connected persons (as defined in the Listing Rules) of the Company for the benefit of the Group were released and, as at the Latest Practicable Date, there were no subsisting guarantees provided by any of the connected persons (as defined in the Listing Rules) of the Company. During the years ended 31 March 2003 and 2004, the bank loans bore interest at rates ranging from 0% to 7.125% per annum.

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FINANCIAL INFORMATION — THE GROUP

In 2003 and 2004, other loans (long-term) mainly represented amounts due to a director of approximately HK$3.5 million arising from debts assigned to and from salary and dividends payable to Mr Chu Yu Lin, David, respectively and which were non-interest bearing for the two years ended 31 March 2003 and 2004 plus a loan from a shareholder of HK$3.0 million that was classified as a long-term loan because it is not payable until the available amount in the facility, HK$6.0 million, is fully drawn or upon earlier termination of the facility by Sinochem HK. Such outstanding loan will be fully settled on Completion.

Other loans (short-term) comprised payables to Sinochem HK in respect of the proposed redemption of 103 Preference Shares amounting to HK$103.0 million and working capital loans in an aggregate principal amount of HK$6.0 million which will be fully settled on Completion.

Contingent liabilities

As of 31 March 2003 and 2004 and 30 April 2005, the Group did not have any contingencies.

Capital commitments

As of 31 March 2003 and 2004 and 30 April 2005, the Group did not have any capital commitments.

Other than intra-group liabilities and except disclosed above in reference to contingent liabilities, borrowings and contractual obligations as of the close of business on 30 April 2005, the Group did not have any outstanding loan capital (issued or agreed to be issued), bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase commitments, finance lease commitments, guarantees, indemnities or other material contingent liabilities.

Save as described above, there has been no material change in the indebtedness or the contingent liabilities of the Group since 30 April 2005.

The gearing ratio of the Group, defined as the total indebtedness over the total assets of the Group, was approximately 128% as at 30 April 2005.

Disclaimers

Save as otherwise disclosed herein, and apart from intra-group liabilities and normal trade payables, the Group did not have any outstanding loan capital issued and outstanding or agreed to be issued, bank overdrafts, charges or debentures, mortgages, loans, or other similar indebtedness or any finance lease commitments, hire purchase commitments, liabilities under acceptances (other than normal trade bills) or acceptance credits or any guarantees or other material contingent liabilities outstanding as at 30 April 2005.

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FINANCIAL INFORMATION — THE GROUP

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

Financial resources

The Group generally finances its operations with internally generated cash flow from operations, loans from shareholders and bank borrowings for its capital expenditures and other capital requirements.

Net current liabilities

In accordance with the unaudited management accounts of the Group as at 30 April 2005, the Group had net current liabilities of approximately HK$40.4 million. Current assets comprised properties held for sale of HK$84.0 million, trade and other receivables of approximately HK$4.0 million and bank balances and cash of approximately HK$1.5 million. Current liabilities included short-term loans of HK$109.0 million, HK$6.0 million of which refers to a principal amount due to a shareholder and HK$103.0 million of which refers to the principal amount payable to Sinochem HK in respect of the redemption of the Preference Shares. Current liabilities also comprised trade and other payables of approximately HK$4.3 million, deposits received of approximately HK$3.2 million, amounts due to a director of HK$2.4 million, amount due to Sinochem HK of approximately HK$1.7 million which comprised mainly dividend payable on Preference Shares and interest accrued on shareholder’s loans, and bank borrowings (due within one year) of approximately HK$9.3 million.

PROPERTIES

The Group currently holds two commercial properties for rental income. These comprise a building built in 1984 with a gross floor area of 3,587.43 sq.m. and various units of a building built in 1995 with an aggregate gross floor area of 3,113.81 sq.m. out of 5,124.53 sq.m. Details of the Group’s property interests are set out in the letter and valuation certificates of Chesterton Petty Limited contained in Appendix V to this circular.

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FINANCIAL INFORMATION — THE ENLARGED GROUP

PRINCIPAL ACCOUNTING POLICIES OF THE ENLARGED GROUP

The Acquisition will be accounted for as a reverse acquisition under the Financial Reporting Standards since the issuance of the Consideration Shares in exchange of the entire equity interests of Fertilizer Company will result in Sinochem HK holding 21.16% equity interests in the Company as at the Latest Practicable Date, becoming the controlling shareholder of the Company holding 94.65% equity interests upon Completion (on the basis that no Offering has taken place). For accounting purposes, the Company is deemed to have been acquired by Fertilizer Company as the acquirer. As such, the Enlarged Group will adopt the accounting policies of the Fertilizer Group as set out in section II note 2 of the accountants’ report on the Fertilizer Group included in Appendix I, after incorporating the new HKFRS which are effective for accounting periods beginning on or after 1 January 2005.

The Group and the Fertilizer Group have not early adopted these new HKFRSs in the financial statements for the three years ended 31 December 2004. The new HKFRSs to be adopted by the Enlarged Group for the year ending 31 December 2005 are not significantly different from the accounting policies as disclosed in section II note 2 of the accountants’ report included in Appendix I to this circular, other than those stated below:

1. HKFRS 2 — Share-based Payment

HKFRS 2 prescribes the recognition principles and fair value measurement basis for all share-based payment transactions, including (i) equity-settled transactions (ii) cashsettled transactions; and (iii) transactions with a choice of whether they are settled in cash (or other assets) or by issuing equity instruments. Prior to the implementation of HKFRS 2, there is no requirement to make any provision, and hence charge to the profit and loss account, for share options granted to employees.

For equity-settled share based compensation plans, it requires the fair value of the employee services received in exchange for the grant of the options to be recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any nonmarket vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the Enlarged Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the profit and loss account, and a corresponding adjustment to equity over the remaining vesting period.

2. HKFRS 3 — Business combinations

1. Intangible assets

Under HKFRS 3, intangible assets should be recognised separately from goodwill in a business combination when it arises from contractual or other legal rights, or if it is separable. This will result in more intangible assets and less goodwill being recognised on business combinations.

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FINANCIAL INFORMATION — THE ENLARGED GROUP

2. Goodwill

The Fertilizer Group will apply the purchase method of accounting for the deemed acquisition of the Group. In applying the purchase method, the cost of acquisition deemed to be given by Fertilizer Company is calculated based on the fair value of the proportion of Fertilizer Company at the date of Completion that would be given up to the existing shareholders of the Company (other than Sinochem HK). The identifiable assets and liabilities of the Group will be recorded on the balance sheet of the Enlarged Group at their fair values as at the date of Completion. Any goodwill arising from the Acquisition represents the excess of the deemed cost of acquisition over the fair value of the identifiable assets and liabilities of the Group at the date of Completion.

Under HKFRS 3, goodwill is no longer amortised. Instead, it is tested for impairment annually, or more frequently, if events or changes in circumstances indicate a possible impairment. Any excess of fair value of assets and liabilities acquired over cost is recognised immediately as income under HKFRS 3. However, HKFRS 3 requires, if an entity previously recognised goodwill as a deduction from equity, it shall not recognise that goodwill in the profit and loss account when it disposes of all or part of the business to which that goodwill relates or when a cash-generating unit to which the goodwill relates becomes impaired.

3. HKAS 17 — Leases

4. HKAS 32 and HKAS 39 — Financial instruments

Under HKAS 39 ‘‘Financial Instruments: Recognition and Measurement’’, financial instruments will be carried at either amortised cost or fair value, depending on their classification. Movements in fair value will be either charged to profit and loss account or taken to equity in accordance with the standard. In addition, all derivatives, including those embedded in non-derivatives host contracts will be recognised in the balance sheet at fair value.

1. Investments

Under HKAS 39, investment securities that are intended to be held on a continuing basis are currently stated at cost less provision for impairment losses, and will be classified as available-for-sale financial assets (the ‘‘AFS’’) and will be initially recognised at fair value plus transaction costs that are directly attributable to the acquisition. After initial recognition, the AFS should be measured at their fair value. The changes in the fair value should be recognised directly in equity until the AFS are sold or until they are determined to be impaired, at which time the cumulative fair value adjustments previously recognised in equity should be included in the profit and loss account as gains and losses from investment securities.

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FINANCIAL INFORMATION — THE ENLARGED GROUP

Loans and receivables and borrowings

Under HKAS 39, loans and receivables originated by the entity and not held for trading that are currently carried at nominal value less provision for bad debts will be carried at amortised cost using the effective interest method less provision for impairment. Borrowings that are presently carried at nominal value will be recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost, and any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method.

5. HKAS 40 — Investment properties

Under HKAS 40, investment properties can be carried at depreciated historical costs. In accordance with the transitional provision of HKAS 40, no retrospective application of this standard is required. An entity that has previously applied SSAP 13 and chooses to use the cost model under HKAS 40 is permitted to deem the carrying amount of the investment property immediately before applying this standard on its effective date as cost. Any adjustments, including the reclassification of any amount previously held in valuation reserve for investment property, shall be made to the opening balance of retained earnings for the period in which the standard is first made. Depreciation on deemed cost commences from the time at which this standard is first applied.

6. HKAS 21 — The Effects of Changes in Foreign Exchange Rates

The Enlarged Group has revaluated the functional currency of each of the consolidated entities based on HKAS 21. It has determined that Renminbi is the functional currency of the Enlarged Group.

WORKING CAPITAL

Taking into account the estimated net proceeds available to the Enlarged Group from the Placing, the Fertilizer Group’s cash and cash equivalents on hand, available banking facilities and cash generated from future operations, the Directors confirm that the Enlarged Group has sufficient working capital for the Enlarged Group’s present requirements, that is, for at least 12 months from the date of publication of this circular.

DIVIDEND POLICY AND DISTRIBUTABLE RESERVES

Shareholders will be entitled to receive dividends declared by the Board. The payment and the amount of any dividends will be at the discretion of the Directors and will depend upon the future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Directors deem relevant. In addition, subject to the Bye-laws, the controlling shareholders (as defined in the Listing Rules) upon Completion, namely Sinochem HK, will be able to influence the dividend policy of the Group.

The Fertilizer Group distributed RMB106.2 million to Sinochem Corporation in 2002. The source of funds for the distribution was cash.

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FINANCIAL INFORMATION — THE ENLARGED GROUP

Cash dividends on the ordinary shares of the Company, if any, will be paid in Hong Kong dollars. Other distributions, if any, will be paid to the Shareholders by any means as the Directors deem legal, fair and practical.

PRO FORMA NET TANGIBLE ASSETS

The unaudited pro forma net tangible assets of the Enlarged Group after Completion will amount to HK$1,933.5 million as set out in Appendix III ‘‘Unaudited Pro Forma Financial Information of the Enlarged Group’’ to this circular.

PROFIT FORECAST

The Directors and the directors of Sinochem HK forecast that, on the bases and assumptions set out in Appendix IV to this circular and in the absence of unforeseeable circumstances, the consolidated profit of the Enlarged Group attributable to shareholders of the Company for the year ending 31 December 2005 will amount to not less than RMB671 million (equivalent to approximately HK$633 million). The Directors and the directors of Sinochem HK are not aware of any extraordinary items which have arisen or are likely to arise during the year ending 31 December 2005.

DISCLOSURE UNDER RULES 13.13 TO 13.19 OF THE LISTING RULES

The Directors confirm that as at the Latest Practicable Date, the Directors were not aware of any circumstances which would give rise to the disclosure requirements under Rules 13.13 to 13.19 of the Listing Rules.

MISCELLANEOUS

According to Rule 11.3 of the Takeovers Code, there should normally be a statement in this circular regarding any potential tax liability which would arise if the assets of the Group and the Fertilizer Group, to which the valuation report as set out in Appendix V to this circular relates, were to be sold at the amount of the valuation.

The Group’s properties are all situated in Hong Kong and comprise investment properties and properties held for sale. Under Hong Kong tax system, sales of investment properties are not subject to taxation whereas sales of properties held for sales are subject to profits tax on income derived. The Fertilizer Group’s properties are principally situated in Chongqing Fuling of the PRC, and the types of taxation that could arise when those properties are sold include enterprise income tax, business tax, land appreciation tax and deed tax.

Assuming all the properties were to be sold, the potential tax liabilities which might be incurred by the Group and the Fertilizer Group are estimated to be HK$nil and approximately HK$20 million, respectively.

Since the Group’s properties held for sale are for trading purpose, the aforesaid potential tax liability of the Group is likely to be crystallised in the foreseeable future. On the other hand, the Fertilizer Group has no intention to sell any of its properties because they are held for its own business operations and not for investment purpose, and therefore, it is unlikely that the aforesaid potential tax liability of the Fertilizer Group would be crystallised in the foreseeable future.

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FINANCIAL INFORMATION — THE ENLARGED GROUP

NO MATERIAL CHANGE

The Directors have confirmed that, save for (a) a waiver by a bank of outstanding indebtedness and liabilities of a wholly owned subsidiary of the Company totalling approximately HK$36.1 million during the six months ended 30 September 2004 pursuant to a settlement agreement reached between them under circumstances where the bank concluded that this subsidiary held no asset of any substantial value that could be utilised to repay the relevant overdue sum to the bank (details of which are set out in the interim report of the Company for the six months ended 30 September 2004); and (b) Sinochem HK’s request for redemption of the 103 Preference Shares held by it which resulted in an increase in the Company’s liabilities by an amount of HK$103 million, there has been no material change in the financial or trading position or prospects of the Group since 31 March 2004, being the date to which the latest published audited financial statements of the Group were prepared as set out in Appendix II ‘‘Financial Information on the Group’’ to this circular, up to the Latest Practicable Date.

The Management of the Fertilizer Group has confirmed that there has been no material change in the financial or trading position or prospects of the Fertilizer Group since 31 December 2004, being the date to which the audited financial statements of the Fertilizer Group were prepared as set out in Appendix I ‘‘Accountants’ Report on the Fertilizer Group’’, up to the Latest Practicable Date.

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APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

The following is a text of a report, prepared for the purpose of incorporation in this Circular, received from the reporting accountants, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong.

13 June 2005

The Directors Sinochem Hong Kong Holdings Limited China Fertilizer (Holdings) Company Limited Cazenove Asia Limited Goldman Sachs (Asia) L.L.C.

Dear Sirs,

We set out below our report on the financial information relating to China Fertilizer (Holdings) Company Limited (‘‘Fertilizer Company’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Fertilizer Group’’) for each of the three years ended 31 December 2002, 2003 and 2004 (the ‘‘Relevant Periods’’), for inclusion in the circular of Sinochem Hong Kong Holdings Limited (‘‘Sinochem Hong Kong’’), a company listed on the Main Board of The Stock Exchange of Hong Kong Limited, dated 13 June 2005 (the ‘‘Circular’’) in connection with the proposed acquisition from Sinochem Hong Kong (Group) Company Limited (‘‘Sinochem HK’’) the entire issued share capital of the Fertilizer Company by Sinochem Hong Kong (the ‘‘Acquisition’’).

The Fertilizer Company was incorporated with limited liability in the British Virgin Islands (‘‘BVI’’) on 16 December 2004. Pursuant to a group reorganisation (the ‘‘Reorganisation’’) as detailed in note 1 of section II below, the Fertilizer Company became the holding company of its subsidiaries now comprising the Fertilizer Group.

As at the date of this report, the Fertilizer Company has direct or indirect interests in the principal subsidiaries and jointly controlled entities as set out in note 31 of section II below. All these companies have substantially the same characteristics as a Hong Kong incorporated private company. All companies now comprising the Fertilizer Group and its jointly controlled entities have adopted 31 December as their financial year end date. The management accounts of these companies were prepared in accordance with the relevant accounting principles and financial regulations applicable to companies established in the People’s Republic of China (the ‘‘PRC’’) (the ‘‘PRC GAAP’’) or other accounting principles applicable to those companies in their respective jurisdictions. Particulars of the principal subsidiaries and jointly controlled entities of the Fertilizer Group and details of the auditors of these companies are set out in note 31 of section II below.

— I-1 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

For the purpose of the Reorganisation, the directors of the Fertilizer Company have prepared combined financial statements of the companies now comprising the Fertilizer Group and its jointly controlled entities for the years ended 31 December 2002, 2003 and 2004 in accordance with the PRC GAAP (the ‘‘PRC GAAP Financial Statements’’). The PRC GAAP Financial Statements for the years ended 31 December 2002 and 2003 were audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company ( ).

The financial information as set out in sections I to IV below (the ‘‘Financial Information’’) has been prepared based on the PRC GAAP Financial Statements, after making such adjustments as are appropriate. The directors of the Fertilizer Company are responsible for preparing the PRC GAAP Financial Statements which give a true and fair view. In preparing these financial statements, it is fundamental that appropriate accounting policies are selected and applied consistently. For the purpose of this report, we have carried out independent audit procedures on the Financial Information in accordance with Statements of Auditing Standards issued by Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’), and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline ‘‘Prospectuses and the Reporting Accountant’’ issued by the HKICPA.

The directors of the Fertilizer Company are responsible for the Financial Information. It is our responsibilities to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion, the Financial Information, for the purpose of this report and prepared on the basis set out in note 1 of section II below, gives a true and fair view of the state of affairs of Fertilizer Company as at 31 December 2004 and the combined state of affairs of the Fertilizer Group as at 31 December 2002, 2003 and 2004 and of the combined results and cash flows of the Fertilizer Group for the Relevant Periods.

— I-2 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

I. FINANCIAL INFORMATION

Combined Profit and Loss Accounts

The following are the combined profit and loss accounts of the Fertilizer Group for the Relevant Periods, prepared on the basis set out in note 1 of section II below, after making adjustments as are appropriate:

Section II
Note
Turnover
3
Cost of sales
Gross profit
Other revenues
3
Distribution costs
Administrative expenses
Other operating (expenses)/
income, net
Operating profit
4
Finance costs
5
Share of profits less losses of jointly
controlled entities
Profit before taxation
Taxation
6
Profit after taxation
Minority interests
Profit attributable to shareholders
Distribution to owner
7

— I-3 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

Combined Balance Sheets

The following are the combined balance sheets of the Fertilizer Group as at 31 December 2002, 2003 and 2004, prepared on the basis set out in note 1 of section II below, after making adjustments as are appropriate:

Section II Note Non-current assets Property, plant and equipment 11 Interests in jointly controlled entities 12 Investment securities 13 Deferred tax assets 26 Total non-current assets Current assets Inventories 14 Loans receivable 15 Trade and bills receivables 16 Other receivables and prepayments 17 Bank balances and cash 18 Total current assets Current liabilities Trade and bills payables 19 Other payables and accruals 20 Taxation payable 21 Short-term loans 22 Current portion of long-term loans 25 Total current liabilities Net current assets Total assets less current liabilities Financed by: Combined capital 23(a) Reserves 24 Shareholders’ funds Minority interests Non-current liabilities Long-term loans 25 Deferred tax liabilities 26 Total non-current liabilities Equity and non-current liabilities	As 2002 RMB’000 81,361 66,941 114,432 6,783 269,517 3,250,101 78,000 358,047 803,831 119,551 4,609,530 1,594,212 875,480 62,947 1,456,015 9,000 3,997,654 611,876 881,393 116,337 648,245 764,582 29,008 87,803 — 87,803 881,393	at 31 December 2003 2004 RMB’000 RMB’000 83,037 585,729 76,736 374,101 116,932 15,103 — — 276,705 974,933 3,167,358 4,101,925 21,900 218,550 412,936 567,156 349,597 1,168,973 275,086 227,700 4,226,877 6,284,304 1,037,313 1,522,503 409,920 1,549,473 119,266 115,296 1,610,189 1,737,409 — 6,000 3,176,688 4,930,681 1,050,189 1,353,623 1,326,894 2,328,556 116,337 116,503 1,064,638 1,905,448 1,180,975 2,021,951 44,145 165,337 100,859 139,027 915 2,241 101,774 141,268 1,326,894 2,328,556	at 31 December 2003 2004 RMB’000 RMB’000 83,037 585,729 76,736 374,101 116,932 15,103 — — 276,705 974,933 3,167,358 4,101,925 21,900 218,550 412,936 567,156 349,597 1,168,973 275,086 227,700 4,226,877 6,284,304 1,037,313 1,522,503 409,920 1,549,473 119,266 115,296 1,610,189 1,737,409 — 6,000 3,176,688 4,930,681 1,050,189 1,353,623 1,326,894 2,328,556 116,337 116,503 1,064,638 1,905,448 1,180,975 2,021,951 44,145 165,337 100,859 139,027 915 2,241 101,774 141,268 1,326,894 2,328,556
			974,933
			4,101,925 218,550 567,156 1,168,973 227,700
			6,284,304
			1,522,503 1,549,473 115,296 1,737,409 6,000
			4,930,681
			1,353,623
			2,328,556
			116,503 1,905,448
			2,021,951
			165,337
			139,027 2,241
			141,268
			2,328,556

— I-4 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

Balance Sheet

The following is the balance sheet of Fertilizer Company as at 31 December 2004:

Section II Note Current assets Other receivables Financed by: Share capital 23(b)	As at 31 December 2004 RMB’000 83
	83

Combined Statements of Changes in Equity

The following are the combined statements of changes in equity of the Fertilizer Group for the Relevant Periods, prepared on the basis set out in note 1 of section II below, after making adjustments as are appropriate:

Section II Note Total equity at beginning of the year Profit for the year 24 Distribution to owner 24 Increase in capital of a subsidiary 23(a) Incorporation of companies 23(a) Contribution from owner 24 Merger reserve 24 Exchange difference arising from translation of accounts of overseas subsidiaries 24 Total equity at end of the year	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 406,138 764,582 1,180,975 240,352 415,846 543,364 (106,236) — — 90,000 — — — — 166 134,338 — 153,100 — — 144,859 (10) 547 (513) 764,582 1,180,975 2,021,951	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 406,138 764,582 1,180,975 240,352 415,846 543,364 (106,236) — — 90,000 — — — — 166 134,338 — 153,100 — — 144,859 (10) 547 (513) 764,582 1,180,975 2,021,951
		2,021,951

— I-5 —

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

APPENDIX I

Combined Cash Flow Statements

The following are the combined cash flow statements of the Fertilizer Group for the Relevant Periods, prepared on the basis set out in note 1 of section II below, after making adjustments as are appropriate:

Section II
Note
Operating activities
Net cash (outflow)/inflow from
operations
27(a)
Interest received
Interest paid
Income tax paid
Net cash (outflow)/inflow from
operating activities
Investing activities
Disposal of jointly controlled entities
Proceeds from disposal of investment
securities
Purchase of investment securities
Purchase of fixed assets
Proceeds from disposal of fixed assets
Additional investments in jointly
controlled entities
Acquisition of subsidiaries
27(c)
New loans receivable
Repayment of loans receivable
Net cash (outflow)/inflow from investing
activities
Net cash (outflow)/inflow before
financing
Financing activities
Increase in capital of a subsidiary/
incorporation of companies
27(b)
New loans
Repayment of loans borrowed
Distribution to owner
24
Capital injection by minority
shareholders
27(b)
Net cash inflow/(outflow) from financing
(Decrease)/increase in cash and cash
equivalents
Bank balances and cash at beginning of
year
Effect of foreign exchange rate changes
Bank balances and cash at end of year

As at 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
(1,280,369)
3,225
485,439
11,461
22,008
26,520
(32,154)
(45,381)
(50,116)
(31,297)
(41,304)
(152,394)
(1,332,359)
(61,452)
309,449
11,550
3,500
—
7,603
—
105,539
(109,039)
(2,500)
(3,710)
(63,223)
(6,820)
(97,486)
11,503
31
41,031
(24,240)
(5,300)
(100,000)
—
—
35,418
(2,589,000)
(7,079,500)
(7,134,250)
2,511,000
7,135,600
6,937,600
(243,846)
45,011
(215,858)
(1,576,205)
(16,441)
93,591
90,000
—
166
3,587,948
4,281,405
7,470,009
(2,126,293)
(4,123,175)
(7,611,800)
(106,236)
—
—
29,311
13,199
1,161
1,474,730
171,429
(140,464)
(101,475)
154,988
(46,873)
221,036
119,551
275,086
(10)
547
(513)
119,551
275,086
227,700

— I-6 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

II NOTES TO THE FINANCIAL INFORMATION

1. Reorganisation and basis of preparation of Financial Information

Fertilizer Company was incorporated with limited liability in the BVI on 16 December 2004 for the purpose of acting as the holding company of the fertilizer business of (Sinochem Corporation) (‘‘Sinochem Corporation’’), a State-owned enterprise established in the PRC. The fertilizer business of Sinochem Corporation includes the trading and production of fertilizers and related agricultural products.

Pursuant to the Reorganisation, Fertilizer Company became the holding company of the companies now comprising the Fertilizer Group and its jointly controlled entities. The Reorganisation involved the followings:

(a) The incorporation of Fertilizer Company and Sinochem Fertilizer (Overseas) Holdings Ltd. (‘‘Sinochem BVI’’) in the BVI as wholly owned subsidiaries of Sinochem HK, a wholly-owned subsidiary of Sinochem Corporation, on 16 December 2004 and 1 July 2004, respectively;
(b) The transfer of the equity interests in companies engaging in fertilizer operations from Sinochem Corporation to (formerly known as ) (Sinochem Fertilizer Company Limited) (‘‘Sinochem Fertilizer’’), a wholly-owned subsidiary of Sinochem Corporation engaging in the trading of fertilizers in the PRC. The transfers included:
(i) In September 2004, Sinochem Corporation entered into a transfer agreement in respect of the transfer to Sinochem Fertilizer a 60% equity interests in (Sinochem Chongqing Fuling Chemical Engineering Company Limited) (‘‘Sinochem Fuling’’), at nil consideration. Sinochem Corporation acquired the 60% equity interests in Sinochem Fuling from a third party in April 2004; and
(ii) In September 2004, Sinochem Corporation entered into a transfer agreement in respect of the transfer to Sinochem Fertilizer a 41% equity interests in (Guiyang Sinochem Kailin Chemical Fertilizer Company Limited) (‘‘Sinochem Kailin’’), at nil consideration;
(c) The transfer of Sinochem Corporation’s entire equity interest in Sinochem Fertilizer to Fertilizer Company according to approvals issued by the relevant PRC government authorities on 11 January 2005;
(d) The incorporation of Sinochem Fertilizer Macao Commercial Offshore Limited (‘‘Sinochem Macao’’) in Macao Special Administrative Region of the PRC as a wholly-owned subsidiary of Sinochem BVI on 16 November 2004;
(e) The transfer of Sinochem Corporation’s 100% shareholding in Sinochem Fertilizer (Overseas) Holdings Ltd. (‘‘Sinochem Bahamas’’), a company incorporated in the Republic of Bahamas, and Sinochem Hong Kong’s 100% shareholding in Dohigh Trading Limited, a company incorporated in Hong Kong, to Sinochem BVI on 17 September 2004 and 19 May 2005, respectively. Sinochem Bahamas was subsequently liquidated in April 2005; and
(f) The transfer of Sinochem HK’s 100% shareholding in Sinochem BVI to Fertilizer Company on 19 May 2005.

The Financial Information represents the combined results, cash flows and financial position of the Fertilizer Group as if Fertilizer Company had been in existence throughout the Relevant Periods, and as if the current group structure had been in existence since the beginning of the earliest period presented or their respective dates of incorporation/establishment or effective dates of acquisition, whichever is the shorter period. In respect of the acquisition of Sinochem Fuling, since both Sinochem Fuling and Sinochem Fertilizer are under the common control of Sinochem Corporation at the time of transfer, the Fertilizer Group accounts for Sinochem Fuling as a subsidiary under merger accounting and therefore includes its results in the Fertilizer Group since the date of acquisition by Sinochem Corporation from a third party in April 2004. In respect of the acquisition of Sinochem Kailin, the Fertilizer Group accounts for Sinochem Kailin as a jointly controlled entity under purchase method and therefore includes its results in the Fertilizer Group since the date of transfer from Sinochem Corporation to the Fertilizer Group in September 2004.

— I-7 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

2. Principal accounting policies

The Financial Information has been prepared based on the accounting policies described below which are in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the HKICPA. It has been prepared under the historical cost convention.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (‘‘HKAS’’) (collectively ‘‘new HKFRSs’’) which are effective for accounting periods beginning on or after 1 January 2005. The Fertilizer Group has not early adopted these new HKFRSs in the Financial Information during the Relevant Periods. The Fertilizer Group is in the process of making an assessment of the impact of these new HKFRSs and has so far concluded that the adoption of the new HKFRSs is unlikely to have a significant impact on the Fertilizer Group’s financial position as at 31 December 2004 and the Fertilizer Group’s results of operation for the year then ended. A summary of changes to the Fertilizer Group’s principal accounting policies as a result of the adoption of the new HKFRSs in 2005 are set out in Section III below.

The principal accounting policies adopted in the preparation of the Financial Information are set out as follows:

(a) Group accounting

(i) Basis of combination

The combined accounts include the accounts of the companies now comprising the Fertilizer Group made up to 31 December 2004. Apart from the Reorganisation referred to in note 1 above, the results of subsidiaries acquired or disposed of during the Relevant Periods are included in the combined profit and loss account from the effective dates of acquisition or up to the effective dates of disposal, as appropriate. The combined accounts also include the Fertilizer Group’s share of the post acquisition profits less losses, and reserves, of its jointly controlled entities.

(ii) Subsidiaries

Subsidiaries are those entities in which Fertilizer Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors.

All significant intercompany transactions and balances within the Fertilizer Group are eliminated on combination.

The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Fertilizer Group’s share of the subsidiary’s net assets and any related accumulated foreign currency translation reserve.

Minority interests represent the interests of outside shareholders in the operating results and net assets of the subsidiaries.

(iii) Jointly controlled entity

A jointly controlled entity is a contractual arrangement whereby the Fertilizer Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity.

The combined profit and loss accounts include the Fertilizer Group’s share of the results of jointly controlled entities for the year, and the combined balance sheets include the Fertilizer Group’s share of the net assets of the jointly controlled entities and goodwill/negative goodwill (net of accumulated amortisation) on acquisition.

— I-8 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

(iv) Translation of foreign currencies

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

The balance sheets of subsidiaries, jointly controlled entities and associated companies expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date whilst the profit and loss account is translated at an average rate. Exchange differences are dealt with as a movement in reserves.

(b) Property, plant and equipment

(i) Assets under construction

Assets under construction represent mainly buildings under construction and plant and equipment under and/or pending for installation, and are stated at cost less accumulated impairment losses. Cost includes all direct costs relating to the construction of the property, plant and equipment and acquisition costs.

No depreciation is provided for assets under construction until such time as the relevant assets are completed and ready for their intended use.

(ii) Other fixed assets

Other fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.

Leasehold land is amortised over the remaining period of respective leases while other fixed assets are depreciated at rates sufficient to write off their cost less accumulated impairment losses and residual value over their estimated useful lives on a straight-line basis. The useful lives are as follows:

Buildings 20–30 years Plant, machinery and equipment 10 years Motor vehicles 8 years Furniture and fixtures 4 years

Costs incurred in restoring property, plant and equipment to their normal working condition to allow continued use of the overall assets are charged to the profit and loss account. Improvements are capitalised and depreciated over their expected useful lives to the Fertilizer Group.

(c) Impairment and gain or loss on sale of property, plant and equipment

At each balance sheet date, both internal and external sources of information are considered to assess whether there is an indication that property, plant and equipment are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account.

The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account.

(d) Investment securities

Investment securities are stated at cost less provision for impairment losses.

— I-9 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. When an other than temporary decline has occurred, the carrying amount of such securities will be reduced to their fair value. The impairment loss is recognised as an expense in the profit and loss account. This impairment loss is written back to the profit and loss account when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future.

(e) Inventories

Inventories comprise stocks and work in progress and are stated at the lower of cost and net realisable value. For inventories of companies engaging in trading of fertilizers, their costs are calculated on the first-in, first-out basis, whereas for inventories of companies engaging in production of fertilizers, their costs are calculated on the weighted average basis and comprise raw materials, direct labour and an appropriate proportion of all production overhead expenditure. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(f) Trade receivables and loans receivable

Provision is made against trade receivables and loans receivable to the extent that they are considered to be doubtful. Trade receivables and loans receivable in the balance sheet are stated net of such provision.

(g) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at banks, cash investments with a maturity of three months or less from date of investment.

(h) Provisions

Provisions are recognised when the Fertilizer Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Fertilizer Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

(i) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the balance sheet date.

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

(ii) Pension obligations

In accordance with the rules and regulations in PRC, the employees of the Fertilizer Group participate in defined contribution retirement benefit plans organised by the relevant municipal and provincial governments in the PRC under which the Fertilizer Group and the employees are required to make monthly contributions to these plans calculated based on a percentage of the employees’ salaries during the Relevant Periods.

The municipal and provincial governments undertake to assume the retirement benefit obligations of all existing and future retired employees payable under the plans described above. Other than these monthly contributions, the Fertilizer Group has no further obligation for the payment of retirement and other post retirement benefits of its employees. The assets of these plans are held separately from those of the Fertilizer Group in independently administered funds managed by the PRC government.

— I-10 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

The Fertilizer Group also participates in a pension scheme under the Mandatory Provident Fund Scheme Ordinance (the ‘‘MPF Scheme’’) for all employees in Hong Kong. The contributions to the MPF Scheme are based on 5% of eligible employees’ relevant aggregate income up to a maximum of HK$1,000 per month per employee as defined under the Mandatory Provident Fund Scheme Ordinance.

The Fertilizer Group’s contributions to the defined contribution retirement schemes are expensed as incurred.

(j) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

(k) Contingent liabilities

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Fertilizer Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that the outflow is probable, it will then be recognised as a provision.

(l) Revenue recognition

Revenue from sale of fertilizers and agricultural related products is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when fertilizers and agricultural products are delivered to customers and title has passed.

Revenue from provision of agency services comprising commission income and agency fee income is recognised when the related services are performed.

Rental income is recognised on a straight-line basis according to terms of the leases.

Dividend income is recognised when the right to receive payment is established.

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

(m) Borrowing costs

All borrowing costs are charged to the profit and loss account in the year in which they are incurred.

(n) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received from the leasing company are charged to the profit and loss account on a straight-line basis over the lease periods.

— I-11 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

(o) Government grants

A government grant is recognised, when there is a reasonable assurance that the Fertilizer Group will comply with the conditions attaching with it and that the grant will be received.

Government grants relating to income are recognised as deferred income in the balance sheet and are credited to the profit and loss account over the period necessary to match them with the costs they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are recognised in noncurrent liabilities as deferred income and are credited to the profit and loss account on a straight-line basis over the expected lives of the related assets.

(p) Research and development costs

Research costs are expenses as incurred. Costs incurred on development projects relating to the design and testing of new or improved products are recognised as an intangible asset where the technical feasibility and intention of completing the product under development has been demonstrated and the resources are available to do so, costs are identifiable and there is an ability to sell or use the asset that will generate probable future economic benefits. Development costs that do not meet the above criteria are expensed as incurred.

(q) Related companies

Parties are considered to be related to the Fertilizer Group if the Fertilizer Group has the ability, directly or indirectly, to control the parties or exercise significant influence over the parties in making financial and operating decisions, or vice versa, or where the Fertilizer Group and the parties are subject to common control or common significant influence. Related parties may be individuals or entities.

(r) Segment information

A business segment is a distinguishable component of the Fertilizer Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments.

Unallocated costs represent corporate expenses. Segment assets consist primarily of property, plant and equipment, interests in jointly controlled entities, investment securities, inventories, receivables and operating cash, and mainly exclude deferred tax assets and certain investment securities. Segment liabilities comprise operating liabilities and exclude items such as taxation payable and deferred tax liabilities. Capital expenditure includes additions resulting from acquisitions through purchases of subsidiaries.

A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. The Fertilizer Group’s principal market is Mainland China and its sales to ultimate overseas customers contributed less than 10 percent of the revenues, results and total assets of the Fertilizer Group. Accordingly, no geographical segment is presented.

— I-12 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

3. Turnover, revenue and segment information

(a) Turnover and revenue

The Fertilizer Group is principally engaged in the sales and manufacturing of fertilizers and agricultural related products. Revenues recognised during the Relevant Periods are as follows:

Turnover Sales and manufacturing of fertilizers and agricultural related products Other revenues Revenue from agency services Rental income Dividend income from unlisted investments Interest income from — Loans receivable (note 15) — Bank deposits Total revenues	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 7,800,847 10,371,472 12,591,214 31,330 16,114 15,055 1,340 998 1,133 — 2,898 2,201 9,110 19,788 24,743 2,351 2,220 1,777 44,131 42,018 44,909 7,844,978 10,413,490 12,636,123	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 7,800,847 10,371,472 12,591,214 31,330 16,114 15,055 1,340 998 1,133 — 2,898 2,201 9,110 19,788 24,743 2,351 2,220 1,777 44,131 42,018 44,909 7,844,978 10,413,490 12,636,123
		15,055 1,133 2,201 24,743 1,777
		44,909
		12,636,123

— I-13 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

(b) Business segments

The Fertilizer Group is organised into two main business segments:

Sourcing and distribution — sourcing and distribution of fertilizers and agricultural related products Production — manufacturing and sales of fertilizers

Profit and loss account
Turnover
Segment results
Unallocated costs
Operating profit
Finance costs
Share of results of jointly controlled entities
Profit before taxation
Taxation
Profit after taxation
Minority interests
Profit attributable to shareholders
Balance sheet
Assets
Segment assets
Interests in jointly controlled entities
Investment securities
Unallocated assets
Total assets
Liabilities
Segment liabilities
Unallocated liabilities
Total liabilities
Other information
Capital expenditure
Non-cash expenses
— Depreciation
— Write-down of inventories to net realisable value
— Provision for trade receivables

Year ended and
as at 31 December 2002
Sourcing and
distribution
Production
Fertilizer
Group
RMB’000
RMB’000
RMB’000
7,712,982
87,865
7,800,847
336,423
765
337,188
(7,751)
329,437
(31,408)
(746)
(32,154)
—
(222)
(222)
297,061
(57,012)
240,049
311
(8)
303
240,352
4,587,797
103,094
4,690,891
—
66,941
66,941
8,894
—
8,894
112,321
4,879,047
3,969,876
52,634
4,022,510
62,947
4,085,457
63,223
—
63,223
1,884
641
2,525
4,814
—
4,814
911
22
933

— I-14 —

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

APPENDIX I

Profit and loss account External sales Intra-group sales Total turnover Segment results Unallocated costs Operating profit Finance costs Share of results of jointly controlled entities Profit before taxation Taxation Profit after taxation Minority interests Profit attributable to shareholders Balance sheet Assets Segment assets Interests in jointly controlled entities Investment securities Unallocated Total assets Liabilities Segment liabilities Unallocated Total liabilities Other information Capital expenditure Non-cash expenses — Depreciation — Write-down of inventories to net realisable value	a Sourcing and distribution RMB’000 10,182,518 8,031 10,190,549 563,958 (43,421) — (44) 4,196,473 — 11,393 3,108,070 6,047 2,446 5,350	Year ended and s at 31 December 2003 Production Elimination RMB’000 RMB’000 188,954 — 83,234 (91,265) 272,188 (91,265) 6,095 — (1,960) 7,995 (1,894) 113,441 76,736 — 50,211 773 2,668 —	Group RMB’000 10,371,472 — 10,371,472 570,053 (9,562) 560,491 (45,381) 7,995 523,105 (105,321) 417,784 (1,938) 415,846 4,309,914 76,736 11,393 105,539 4,503,582 3,158,281 120,181 3,278,462 6,820 5,114 5,350

— I-15 —

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

APPENDIX I

Profit and loss account External sales Intra-group sales Total turnover Segment results Unallocated costs Operating profit Finance costs Share of results of jointly controlled entities Profit before taxation Taxation Profit after taxation Minority interests Profit attributable to shareholders Balance sheet Assets Segment assets Interests in jointly controlled entities Investment securities Total assets Liabilities Segment liabilities Unallocated Total liabilities Other information Capital expenditure Non-cash expense — Depreciation — Provision for impairment of investment securities	a Sourcing and distribution RMB’000 11,825,568 42,495 11,868,063 670,988 (38,637) — (1,839) 5,867,685 — 15,103 4,260,866 94,248 3,095 5,691	Year ended and s at 31 December 2004 Production Elimination RMB’000 RMB’000 765,646 — 305,341 (347,836) 1,070,987 (347,836) 58,569 — (11,479) 44,265 (15,166) 1,002,348 374,101 — 693,546 3,238 19,883 —	Group RMB’000 12,591,214 — 12,591,214 729,557 (13,085) 716,472 (50,116) 44,265 710,621 (150,252) 560,369 (17,005) 543,364 6,870,033 374,101 15,103 7,259,237 4,954,412 117,537 5,071,949 97,486 22,978 5,691

— I-16 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

4. Operating profit

Operating profit is stated after crediting and charging the following:

Crediting: Government grants (note below) Charging: Salaries and wages Pension costs — defined contribution plans Staff welfare and allowance Total staff cost, including directors’ emoluments Cost of inventories sold Auditors’ remuneration Depreciation Operating lease rental in respect of land and buildings Write-down of inventories to net realisable value/(write back of provision for inventories) Provision for impairment of investment securities Provision/(write-back of provision) for doubtful trade receivables (Gain)/loss on disposal of property, plant and equipment Net exchange loss Research and development costs	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 32,754 17,769 42,846 60,192 486 1,032 1,504 2,126 1,867 20,625 20,381 45,745 82,321 7,390,221 9,523,785 11,500,845 86 84 185 2,525 5,114 22,978 5,730 7,743 8,248 4,814 5,350 (12,415 — — 5,691 933 (1,743) (3,011 (37) (1) 712 4,066 6,620 3,339 — 1,517 2,068	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 32,754 17,769 42,846 60,192 486 1,032 1,504 2,126 1,867 20,625 20,381 45,745 82,321 7,390,221 9,523,785 11,500,845 86 84 185 2,525 5,114 22,978 5,730 7,743 8,248 4,814 5,350 (12,415 — — 5,691 933 (1,743) (3,011 (37) (1) 712 4,066 6,620 3,339 — 1,517 2,068
		60,192 1,504 20,625
		82,321 11,500,845 185 22,978 8,248 (12,415 5,691 (3,011 712 3,339 2,068

Note: This represents government grants received by the Fertilizer Group in accordance with CaiQi[2004] Number 35 document issued by the Ministry of Finance on 31 March 2004, pursuant to which companies in the PRC engaging in the production and import of a particular phosphate-based fertilizer are entitled to government subsidy at RMB100 per ton subject to verification by the government authorities. The subsidy policy was valid for year 2004.

5. Finance costs

Interest on: — bank loans — other loans — wholly repayable within five years — not wholly repayable within five years Bank charges and others	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 24,791 33,025 40,280 2,669 601 1,507 635 757 809 4,059 10,998 7,520 32,154 45,381 50,116	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 24,791 33,025 40,280 2,669 601 1,507 635 757 809 4,059 10,998 7,520 32,154 45,381 50,116
		50,116

6. Taxation

Hong Kong profits tax PRC enterprise income tax Deferred taxation relating to the origination and reversal of temporary differences (note 26) Taxation charges	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 686 824 1,101 63,647 96,799 145,647 (7,321) 7,698 3,504 57,012 105,321 150,252	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 686 824 1,101 63,647 96,799 145,647 (7,321) 7,698 3,504 57,012 105,321 150,252
		150,252

— I-17 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

Hong Kong profits tax has been provided at a rate of 16%, 17.5% and 17.5% on the assessable profits for the years ended 31 December 2002, 2003 and 2004, respectively..

PRC enterprise income tax has been provided on the estimated assessable profits of subsidiaries operating in the PRC at the applicable rate of taxation of 33%. Certain subsidiaries of the Fertilizer Group in the PRC are entitled to preferential income tax treatments which are detailed below:

(a) Sinochem Fuling, a 60% owned subsidiary of the Fertilizer Group, is currently subject to a preferential PRC enterprise income tax rate of 15% granted by the local tax bureau of Chongqing City in July 2001. According to the policy for the development of the western region of the PRC promulgated by the State Council, Sinochem Fuling is entitled to this preferential treatment from 2002 to 2010 provided it is engaged in the projects listed in the Catalogue for Industries, Products and Technologies Currently and Particularly Encouraged by the State for Development (as amended in 2000) as its principal business and revenue from the principal operations accounts for over 70% of its total revenue (as reported under PRC GAAP).
(b) (Fujian Sinochem Zhisheng Chemical Fertilizer Company Limited) (‘‘Sinochem Zhisheng’’), a 53.19% owned subsidiary of the Fertilizer Group, is currently entitled to a preferential income tax treatment granted by the State Tax Bureau of Fujian province. Pursuant to such preferential income tax treatment, 40% of the amount invested in domestically made machinery by Sinochem Zhisheng in a particular year under its technological renovation project for compound fertilizer production can be applied to set off against the enterprise income tax of the preceding year.

There is no PRC enterprise income tax attributable to the jointly controlled entities of the Fertilizer Group since the companies were either newly set up or still in tax holidays during the Relevant Periods.

The overseas subsidiaries of the Fertilizer Group are subject to income tax at rates stipulated in the respective jurisdictions. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at rates of taxation prevailing in the countries in which the Fertilizer Group operates.

The taxation on the Fertilizer Group’s profit before taxation differs from the theoretical amount that would arise using the applicable tax rate of 33%, as follows:

Profit before taxation Tax calculated at an applicable taxation rate of 33% Expenses not deductible for taxation purpose Income not subject to taxation Effect of different tax rates in other tax jurisdictions Others Taxation charges	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 297,061 523,105 710,621 98,030 172,625 234,505 1,829 — 1,214 (54,252) (53,497) (97,184) (939) (847) (1,243) 12,344 (12,960) 12,960 57,012 105,321 150,252

7. Distribution to owner

No dividend has been paid or declared by the Fertilizer Company since its incorporation.

During the Relevant Periods, one of the subsidiaries of the Fertilizer Company distributed profits amounting to RMB106,236,000 to Sinochem Corporation for the year ended 31 December 2002.

The rates of distribution to owner and the number of shares ranking for distribution to owner are not presented as such information is not meaningful having regard to the purpose of this report.

— I-18 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

8. Earnings per share

No earnings per share information is presented as its inclusion, for the purpose of this report, is not considered meaningful due to the Reorganisation and the preparation of the results for the Relevant Periods on a combined basis as disclosed in note 1 above.

9. Emoluments for directors and five highest paid individuals

(a) Directors’ emoluments

The aggregate amounts of emoluments paid and payable to the directors of the Fertilizer Company by the companies now comprising the Fertilizer Group during the Relevant Periods are as follows:

Fees Salaries and allowances Discretionary bonuses Retirement benefit — defined contribution plans	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 645 768 901 920 786 905 — 29 57 1,565 1,583 1,863	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 645 768 901 920 786 905 — 29 57 1,565 1,583 1,863
		1,863

None of the directors of the Fertilizer Company waived any emoluments paid by the companies now comprising the Fertilizer Group during the Relevant Periods.

The emoluments of the directors of the Fertilizer Company fell within the following bands:

Emolument bands Nil–RMB1,060,000 (equivalent to Nil–HK$1,000,000)	Number of directors Year ended 31 December 2002 2003 2004 7 7 7

(b) Five highest paid individuals

During the Relevant Periods, three of the five highest paid individuals are directors, whose emoluments are included in note 9(a) above. The aggregate amounts of emoluments payable to the five individuals are as follows:

Fees Salaries and allowances Discretionary bonuses Retirement benefit — defined contribution plans	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 962 1,185 1,516 1,711 1,462 1,925 — 55 109 2,673 2,702 3,550	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 962 1,185 1,516 1,711 1,462 1,925 — 55 109 2,673 2,702 3,550
		3,550

— I-19 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

The emoluments of these individuals fell within the following bands:

Emolument bands Nil–RMB1,060,000 (equivalent to Nil–HK$1,000,000)	Number of individuals Year ended 31 December 2002 2003 2004 5 5 5

(c) During the Relevant Periods, no emoluments were paid by the companies now comprising the Fertilizer Group to any of the above directors or the five highest paid individuals as an inducement to join or upon joining the Fertilizer Group or as compensation for loss of office.

10. Retirement benefit schemes and housing benefits

The retirement benefits of full time employees of the Fertilizer Group are covered by various governmentsponsored pension plans under which the employees are entitled to a monthly pension contribution ranging from 18% to 20% of the employees’ basic salary for the Relevant Periods. Full time employees are also entitled to participate in various government-sponsored housing funds. The Fertilizer Group contributes on a monthly basis to these funds based on 5% of the salaries of the employees.

The Fertilizer Group has no other obligations for the payment of retirement and post-retirement benefits of employees or retirees other than the payments disclosed in notes 4 and 9 above.

— I-20 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

11. Property, plant and equipment

Cost At 1 January 2002 Additions Disposals At 31 December 2002 Accumulated depreciation At 1 January 2002 Charge for the year Disposals At 31 December 2002 Net book value At 31 December 2002 Cost At 1 January 2003 Additions Disposals Transfer from assets under construction At 31 December 2003 Accumulated depreciation At 1 January 2003 Charge for the year Disposals At 31 December 2003 Net book value At 31 December 2003	Land and buildings RMB’000 30,319 23,648 (11,576) 42,391 2,299 803 (231) 2,871 39,520 42,391 — — 1,688 44,079 2,871 1,945 — 4,816 39,263	Plant, machinery and equipment RMB’000 — 32,986 — 32,986 — 471 — 471 32,515 32,986 245 — 828 34,059 471 1,312 — 1,783 32,276	Motor vehicles RMB’000 4,925 2,824 (498) 7,251 2,612 605 (422) 2,795 4,456 7,251 337 — — 7,588 2,795 693 — 3,488 4,100	Furniture and fixtures RMB’000 3,551 1,506 (784) 4,273 1,755 646 (739) 1,662 2,611 4,273 3,928 (380) — 7,821 1,662 1,164 (350) 2,476 5,345	Assets under construction RMB’000 — 2,259 — 2,259 — — — — 2,259 2,259 2,310 — (2,516) 2,053 — — — — 2,053	Total RMB’000 38,795 63,223 (12,858) 89,160 6,666 2,525 (1,392) 7,799 81,361 89,160 6,820 (380) — 95,600 7,799 5,114 (350) 12,563 83,037

— I-21 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

Cost At 1 January 2004 Additions Transfer from assets under construction Acquisition of subsidiaries Disposals At 31 December 2004 Accumulated depreciation At 1 January 2004 Charge for the year Disposals At 31 December 2004 Net book value At 31 December 2004	Land and buildings RMB’000 44,079 492 53,835 114,571 (7,420) 205,557 4,816 6,200 (4,039) 6,977 198,580	Plant, machinery and equipment RMB’000 34,059 1,960 117,698 75,107 (3,682) 225,142 1,783 11,483 (3,327) 9,939 215,203	Motor vehicles RMB’000 7,588 4,692 — 6,885 (130) 19,035 3,488 1,432 (124) 4,796 14,239	Furniture and fixtures RMB’000 7,821 2,957 47,107 13,689 (620) 70,954 2,476 3,863 (527) 5,812 65,142	Assets under construction RMB’000 2,053 87,385 (218,640) 259,675 (37,908) 92,565 — — — — 92,565	Total RMB’000 95,600 97,486 — 469,927 (49,760)
						613,253
						12,563 22,978 (8,017)
						27,524
						585,729

Notes:

(a) The Fertilizer Group’s land and buildings are held in the PRC under long-term leases ranging from 50 to 70 years.
(b) As at 31 December 2004, certain land and buildings and plant, machinery and equipment with aggregate net book value amounting to RMB257,495,000 (2003: RMB55,868,000, 2002: Nil) had been pledged as securities for short-term bank loans of RMB160,000,000 (2003: RMB10,780,000, 2002: Nil) (note 22(a)), and long-term bank loans of RMB32,000,000 (2003: Nil, 2002: Nil) (note 25(a)) of the Fertilizer Group.
(c) There was no interest capitalised in assets under construction during the Relevant Periods.

12. Interests in jointly controlled entities

Share of net assets	As 2002 RMB’000 66,941	at 31 December 2003 2004 RMB’000 RMB’000 76,736 374,101

Details of the jointly controlled entities of the Fertilizer Group as at the date of this report are set out in note

— I-22 —

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

APPENDIX I

13. Investment securities

Unlisted shares, at cost Less: Provision for impairment	As 2002 RMB’000 114,432 — 114,432	at 31 December 2003 2004 RMB’000 RMB’000 116,932 20,794 — (5,691 116,932 15,103	at 31 December 2003 2004 RMB’000 RMB’000 116,932 20,794 — (5,691 116,932 15,103
			15,103

Investment securities mainly represent equity interests in other companies in which the Fertilizer Group has less than 20% shareholdings, or where the Fertilizer Group’s equity interests is over 20%, the Fertilizer Group does not have significant influence in the management of the companies.

The investment securities as at 31 December 2002 and 2003 included a 10% equity investment in (China Economy and Trade Trust Investment Company Limited) (‘‘CETTI’’), a wholly owned subsidiary of the ultimate holding company, Sinochem Corporation, amounting to RMB105,539,000. The investment was disposed of to a related company in 2004 (note 30(b)(xiv)).

14. Inventories

Fertilizer merchandise Raw materials Work in progress Production supplies	As 2002 RMB’000 3,240,641 9,204 186 70 3,250,101	at 31 December 2003 2004 RMB’000 RMB’000 3,152,824 3,981,716 11,772 109,786 926 8,343 1,836 2,080 3,167,358 4,101,925	at 31 December 2003 2004 RMB’000 RMB’000 3,152,824 3,981,716 11,772 109,786 926 8,343 1,836 2,080 3,167,358 4,101,925
			4,101,925

At 31 December 2002, 2003 and 2004, the carrying amount of inventories that are carried at net realisable value amounted to RMB250,832,000, RMB93,088,000 and Nil, respectively.

15. Loans receivable

The loans receivable represented funds deposited with CETTI for the purpose of the back-to-back lending to Sinochem Corporation. The loans to Sinochem Corporation were interest bearing at 2.5% (2003: 2.5%, 2002: 2.5% to 2.7%) per annum for the year ended 31 December 2004. The loans receivable have been fully settled subsequent to 31 December 2004.

16. Trade and bills receivables

Bills receivable Trade receivables Jointly controlled entity Related parties Third parties	As 2002 RMB’000 112,182 — 2,627 243,238 245,865 358,047	at 31 December 2003 2004 RMB’000 RMB’000 163,551 401,256 — 3,175 30,167 57 219,218 162,668 249,385 165,900 412,936 567,156	at 31 December 2003 2004 RMB’000 RMB’000 163,551 401,256 — 3,175 30,167 57 219,218 162,668 249,385 165,900 412,936 567,156
			3,175 57 162,668
			165,900
			567,156

— I-23 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

During the Relevant Periods, majority of the sales of the Fertilizer Group were made on cash delivery basis. Where credit terms are grant to customers, the credit terms granted by the Fertilizer Group are within 120 days. The ageing analysis of trade receivables at the respective balance sheet dates is as follows:

1 to 3 months 4 to 6 months 7 months to one year One to two years Over two years 17. Other receivables and prepayments Advance payments to suppliers Jointly controlled entities Related parties Third parties Prepaid expenses Other receivables and prepayments Related parties (Sinochem International Information Company) (note 30(b)(xiii)) (Sinochem Hainan Company Limited) Third parties	As 2002 RMB’000 171,959 50,205 986 22,715 — 245,865 As 2002 RMB’000 36,367 69,713 147,910 71,294 419,998 20,000 38,549 803,831	at 31 December 2003 2004 RMB’000 RMB’000 244,142 131,055 4,236 13,345 3 14,640 1,004 4,044 — 2,816 249,385 165,900 at 31 December 2003 2004 RMB’000 RMB’000 — 30,880 — 204,842 252,962 814,424 60,931 51,825 — — — — 35,704 67,002 349,597 1,168,973	at 31 December 2003 2004 RMB’000 RMB’000 244,142 131,055 4,236 13,345 3 14,640 1,004 4,044 — 2,816 249,385 165,900 at 31 December 2003 2004 RMB’000 RMB’000 — 30,880 — 204,842 252,962 814,424 60,931 51,825 — — — — 35,704 67,002 349,597 1,168,973
			1,168,973

The amounts are unsecured, interest free and have no fixed repayment terms.

18. Bank balances and cash

Bank balances and cash Deposits placed with CETTI Analysed the above as follows: Denominated in Renminbi Denominated in other currencies	As 2002 RMB’000 40,696 78,855 119,551 55,558 63,993 119,551	at 31 December 2003 2004 RMB’000 RMB’000 252,858 217,607 22,228 10,093 275,086 227,700 75,777 190,260 199,309 37,440 275,086 227,700	at 31 December 2003 2004 RMB’000 RMB’000 252,858 217,607 22,228 10,093 275,086 227,700 75,777 190,260 199,309 37,440 275,086 227,700
			227,700
			190,260 37,440
			227,700

Deposits placed with CETTI bore interest at 1.62% (2003: 1.62%, 2002: 1.62%) per annum, representing the prevailing market lending rate for deposits placed with trust investment companies in the PRC. The deposits have been fully withdrawn subsequent to 31 December 2004.

— I-24 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

The bank balances and cash denominated in Renminbi as at the 31 December 2002, 2003 and 2004 are kept in the bank accounts in the PRC. The conversion of Renminbi denominated balances into foreign currencies and the remittance of such foreign currencies denominated bank balances and cash out of the PRC are subject to the relevant rules and regulations of foreign exchange control promulgated by the PRC government.

19. Trade and bills payables

Jointly controlled entity (Hubei Sinochem Dongfang Chemical Fertilizer Company Limited) Related parties Third parties	As 2002 RMB’000 — 235,388 1,358,824 1,594,212	at 31 December 2003 2004 RMB’000 RMB’000 — 20 211,251 389,112 826,062 1,133,371 1,037,313 1,522,503	at 31 December 2003 2004 RMB’000 RMB’000 — 20 211,251 389,112 826,062 1,133,371 1,037,313 1,522,503
			1,522,503

Bills payables amounting to RMB573 million, RMB501 million and RMB579 million as at 31 December 2002, 2003 and 2004 were guaranteed by Sinochem Corporation, respectively. The guarantees provided by Sinochem Corporation have been fully released upon the repayment of the payables subsequent to 31 December 2004.

During the Relevant Periods, the credit terms granted to the Fertilizer Group by the suppliers usually range from 30 to 90 days. The ageing analysis of trade and bills payables at the respective balance sheet dates is as follows:

1 to 3 months 4 to 6 months 7 months to one year One to two years Over two years	As 2002 RMB’000 1,132,927 457,736 920 2,629 — 1,594,212	at 31 December 2003 2004 RMB’000 RMB’000 1,029,985 1,309,373 1,861 86,322 3,216 102,368 1,106 24,415 1,145 25 1,037,313 1,522,503	at 31 December 2003 2004 RMB’000 RMB’000 1,029,985 1,309,373 1,861 86,322 3,216 102,368 1,106 24,415 1,145 25 1,037,313 1,522,503
			1,522,503

20. Other payables and accruals

Advance receipts from customers Related parties Third parties Other payables and accruals Sinochem Corporation Third parties	As 2002 RMB’000 8,856 419,925 394,122 52,577 875,480	at 31 December 2003 2004 RMB’000 RMB’000 — 38,935 304,217 1,409,561 78,271 37,978 27,432 62,999 409,920 1,549,473	at 31 December 2003 2004 RMB’000 RMB’000 — 38,935 304,217 1,409,561 78,271 37,978 27,432 62,999 409,920 1,549,473
			1,549,473

The amounts are unsecured, interest free and have no fixed repayment terms. The other payables due to Sinochem Corporation have been fully repaid subsequent to 31 December 2004.

— I-25 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

21. Taxation payable

PRC enterprise income tax payable Other taxes payable/(prepaid) 22. Short-term loans	As 2002 RMB’000 28,782 34,165 62,947	at 31 December 2003 2004 RMB’000 RMB’000 82,128 123,005 37,138 (7,709) 119,266 115,296	at 31 December 2003 2004 RMB’000 RMB’000 82,128 123,005 37,138 (7,709) 119,266 115,296
			115,296

Bank loans Secured (note (a)) Guaranteed (note (b)) Unsecured Loans from CETTI Unsecured (note (c))	As 2002 RMB’000 — 1,405,334 — 1,405,334 50,681 1,456,015	at 31 December 2003 2004 RMB’000 RMB’000 10,780 160,000 1,599,409 1,392,069 — 20,000 1,610,189 1,572,069 — 165,340 1,610,189 1,737,409	at 31 December 2003 2004 RMB’000 RMB’000 10,780 160,000 1,599,409 1,392,069 — 20,000 1,610,189 1,572,069 — 165,340 1,610,189 1,737,409
			1,572,069 165,340
			1,737,409

Notes:

(a) As at 31 December 2004, certain land and buildings and plant, machinery and equipment of the Fertilizer Group had been pledged as securities for the short-term bank loans (note 11(b)).
(b) The short-term bank loans as at 31 December 2002, 2003 and 2004 were guaranteed by Sinochem Corporation (note 30(b)(xi)). As confirmed by the directors of Fertilizer company, the guarantees provided by Sinochem Corporation will be released before Completion.
(c) The loans from CETTI were unsecured, interest bearing at 4.8% (2003: Nil, 2002: 5.3%) per annum and repayable within one year from their respective drawdown date. The loans from CETTI have been fully repaid subsequent to 30 April 2005.

— I-26 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

23. Combined capital and share capital of Fertilizer Company

(a) Combined capital

For the purpose of this report, the combined capital of the Fertilizer Group represented the aggregate amount of registered capital of Fertilizer Company, Sinochem BVI, Sinochem Fertilizer, Sinochem Bahamas and Dohigh Trading Limited at the respective balance sheet dates. The movements of combined capital are set out below:

At beginning of the year Increase in capital of Sinochem Fertilizer Incorporation of companies At end of the year Share capital of Fertilizer Company At 16 December 2004 (date of incorporation) and at 31 December 2004 At 16 December 2004 (date of incorporation) and at 31 December 2004	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 26,337 116,337 116,337 90,000 — — — — 166 116,337 116,337 116,503 Authorised ordinary shares of US$1 Total Number of shares US$ US$ RMB 10,000 1 10,000 82,765 Issued ordinary shares of US$1 Total Number of shares US$ US$ RMB 10,000 1 10,000 82,765

(b) Share capital of Fertilizer Company

The movements of Fertilizer Company’s share capital are set out below:

(a) Fertilizer Company was incorporated on 16 December 2004 with authorised share capital of US$10,000 divided into 10,000 shares of US$1 each.
(b) On 19 May 2005, Fertilizer Company increased its authorised share capital from US$10,000 to US$20,000, by the creation of an additional 10,000 shares of US$1 each.
(c) In relation to the Reorganisation as detailed in note 1, on 11 January 2005 and 19 May 2005, Fertilizer Company acquired the entire issued share capital in Sinochem Fertilizer and Sinochem BVI for RMB772 million (equivalent to approximately US$93 million) and US$85 million (equivalent to approximately RMB705 million), which were satisfied by the allotment and issue of 1 share each to Sinochem HK, credited as fully paid up at par, resulting in the capitalisation of RMB772 million and RMB705 million standing to the credit of the share premium account of Fertilizer Company, respectively.

— I-27 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

24. Reserves

At 1 January 2002 Profit for the year Appropriation to reserves Capital reserve addition (note (a)) Distribution to owner Exchange from translation At 31 December 2002 Profit for the year Appropriation to reserves Exchange from translation At 31 December 2003 Profit for the year Appropriation to reserves Contribution from owner (note (b)) Exchange from translation At 31 December 2004	Merger reserve RMB’000 — — — — — — — — — — — — — 144,859 — 144,859	Capital reserve RMB’000 — — — 134,338 — — 134,338 — — — 134,338 — — 153,100 — 287,438	Statutory reserves RMB’000 189,612 — 20,478 — — — 210,090 — 9,390 — 219,480 — 70,553 — — 290,033	Exchange reserve RMB’000 87 — — — — (10) 77 — — 547 624 — — — (513) 111	Retained profits RMB’000 190,102 240,352 (20,478) — (106,236) — 303,740 415,846 (9,390) — 710,196 543,364 (70,553) — — 1,183,007	Total RMB’000 379,801 240,352 — 134,338 (106,236) (10) 648,245 415,846 — 547 1,064,638 543,364 — 297,959 (513) 1,905,448

Notes:

(a) Capital reserve represents contributions from owners. In December 2002, Sinochem Fertilizer entered into an agreement with (Sinochem International Information Company), a subsidiary of Sinochem Corporation, in respect of the transfer of certain accounts receivables with net book value of RMB287,492,000 (inclusive of a provision for doubtful debt of RMB132,506,000). The consideration is set at the gross value of the receivables of RMB419,998,000, resulting in a gain on disposal of RMB132,506,000, credited to the capital reserve of Sinochem Fertilizer as a contribution from owner. The proceeds of the transfer of RMB419,998,000 had been fully received in March 2003. In addition, there was an addition to capital reserve of RMB1,832,000 which represented the share of capital surplus of a subsidiary resulted from an excessive injection of capital by a minority shareholder of the subsidiary.
(b) As mentioned in note 1 above, in September 2004, Sinochem Corporation entered into transfer agreements with Sinochem Fertilizer in respect of the transfer of a 60% equity interests in Sinochem Fuling and a 41% equity interests in Sinochem Kailin to Sinochem Fertilizer at nil consideration. The difference between consideration and fair value of the identifiable assets and liabilities of Sinochem Fuling and Sinochem Kailin at their respective dates of acquisition are accounted for as credits to merger reserve of RMB144,859,000 and capital reserve of RMB153,100,000, respectively. Further details of the acquisitions of Sinochem Fuling and Sinochem Kailin are set out in note 1 above.
(c) Statutory reserves comprise statutory reserve fund and enterprise expansion fund. In accordance with relevant rules and regulation on foreign investment enterprise established in the PRC, the Company’s PRC subsidiaries are required to transfer an amount of their profit after taxation to the statutory reserve fund, until the accumulated total of the fund reaches 50% of their registered capital. The statutory reserve fund may be distributed to shareholders in the form of bonus issue.

The appropriation to the enterprise expansion fund is solely determined by the board of directors of the subsidiaries in the PRC.

— I-28 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

25. Long-term loans

Bank loans Secured (note (a)) Guaranteed (note (b)) Unsecured Other loan Unsecured (note (c)) Less: Amount repayable within one year — bank loans The analysis of the above is as follows:	As 2002 RMB’000 — 30,570 — 30,570 66,233 96,803 (9,000) 87,803	at 31 December 2003 2004 RMB’000 RMB’000 — 32,000 21,570 21,570 — 5,079 21,570 58,649 79,289 86,378 100,859 145,027 — (6,000 100,859 139,027	at 31 December 2003 2004 RMB’000 RMB’000 — 32,000 21,570 21,570 — 5,079 21,570 58,649 79,289 86,378 100,859 145,027 — (6,000 100,859 139,027
			58,649 86,378
			145,027 (6,000
			139,027

Bank loans Wholly repayable within five years Not wholly repayable within five years Other loan Not wholly repayable within five years	As 2002 RMB’000 30,570 — 30,570 66,233 96,803	at 31 December 2003 2004 RMB’000 RMB’000 21,570 26,649 — 32,000 21,570 58,649 79,289 86,378 100,859 145,027	at 31 December 2003 2004 RMB’000 RMB’000 21,570 26,649 — 32,000 21,570 58,649 79,289 86,378 100,859 145,027
			58,649 86,378
			145,027

As at the respective balance sheet dates, the Fertilizer Group’s bank loans were repayable as follows:

Within one year In the second year In the third to fifth year After the fifth year Notes:	As 2002 RMB’000 9,000 — 21,570 — 30,570	at 31 December 2003 2004 RMB’000 RMB’000 — 6,000 6,000 8,000 15,570 34,649 — 10,000 21,570 58,649	at 31 December 2003 2004 RMB’000 RMB’000 — 6,000 6,000 8,000 15,570 34,649 — 10,000 21,570 58,649
			58,649

(a) As at 31 December 2004, certain land and buildings and plant, machinery and equipment had been pledged as securities for long term bank loans (note 11(b)).

(b) As at 31 December 2002, 2003 and 2004, the long term bank loans were guaranteed by a related company of a joint venture partner of a subsidiary of the Fertilizer Group.

— I-29 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

(c) Other long term loan represented a loan borrowed from (The Import-Export Bank of China) by Sinochem Corporation for use by Sinochem Fertilizer. The loan was unsecured, interest bearing at 1% per annum and repayable in half-yearly instalments from 30 May 2008 to 30 November 2033. The loan had been fully repaid in May 2005.

26. Deferred taxation

Deferred taxation is calculated in full on temporary differences under the liability method using an effective taxation rate of 33% for each of the Relevant Periods.

The movement in deferred tax assets/(liabilities) is as follows:

At 1 January 2002 Credited to the combined profit and loss account At 31 December 2002 Charged to the combined profit and loss account At 31 December 2003 Charged to the combined profit and loss account Acquisition of subsidiaries At 31 December 2004	Impairment on property, plant and equipment RMB’000 — — — — — — 2,178 2,178	Adjustment to unrealized profit in inventories and others RMB’000 (538) 7,321 6,783 (7,698) (915) (3,504) — (4,419)	Total RMB’000 (538) 7,321 6,783 (7,698) (915) (3,504) 2,178 (2,241)

None of the amount of deferred tax assets are to be recovered after more than 12 months from the respective balance sheet dates.

27. Combined cash flow statements

(a) Reconciliation of operating profit to net cash (outflow)/inflow from operations is as follows:

Operating profit
Depreciation of property, plant and equipment
Interest income
Gain on disposal of investment securities
(Gain)/loss on disposal of property, plant and equipment
Operating profit before working capital changes
(Increase)/decrease in inventories
Decrease/(increase) in trade and bills receivables
(Increase)/decrease in other receivables and prepayments
Increase/(decrease) in trade and bills payables
(Decrease)/increase in other payables and accruals
Net cash (outflow)/inflow generated from operations

Year ended 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
329,437
560,491
716,472
2,525
5,114
22,978
(11,461)
(22,008)
(26,520)
(510)
—
—
(37)
(1)
712
319,954
543,596
713,642
(1,163,378)
82,743
(833,837)
112,959
(54,889)
(66,978)
(252,907)
454,234
(743,990)
22,976
(556,899)
368,630
(319,973)
(465,560)
1,047,972
(1,280,369)
3,225
485,439

— I-30 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

(b) Analysis of changes in financing during the Relevant Periods:

At 1 January 2002 Increase in capital of a subsidiary Share of loss for the year Non-cash transaction (note 24(a)) Net cash inflow from loans At 31 December 2002 Capital injection Share of profit for the year Net cash inflow from loans At 31 December 2003 Capital injection Acquisition of subsidiaries (note 27(c)) Share of profit for the year Non-cash transaction (note 24(b)) Incorporation of companies Net cash outflow from loans At 31 December 2004	Combined capital, merger and capital reserves RMB’000 26,337 90,000 — 134,338 — 250,675 — — — 250,675 — — — 297,959 166 — 548,800	Minority interests RMB’000 — 29,311 (303) — — 29,008 13,199 1,938 — 44,145 1,161 103,026 17,005 — — — 165,337	Long-term and short-term loans RMB’000 91,163 — — — 1,461,655 1,552,818 — — 158,230 1,711,048 — 313,179 — — — (141,791) 1,882,436

— I-31 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

(c) Major non-cash transactions
(i) In September 2004, Sinochem Fertilizer entered into a transfer agreement to transfer a 60% equity interest in Sinochem Fuling and its subsidiaries from Sinochem Corporation at nil consideration (note 1(b)(i)). The assets and liabilities of Sinochem Fuling as at the date of transfer attributable to the Fertilizer Group comprised:

Property, plant and equipment
Deferred tax assets
Inventories
Trade and bills receivables
Other receivables and prepayments
Bank balances and cash
Trade payables
Other payables and accruals
Current portion of long-term bank loans
Taxation payables
Short-term bank loans
Long-term bank loans
Minority interests
Net assets attributable to the Fertilizer Group (note 24(b))
Analysis of net inflow of cash and cash equivalents:
Bank balances and cash acquired

Year ended 31
December
2004
RMB’000
469,927
2,178
100,730
87,242
75,386
35,418
(116,560)
(91,581)
(8,000)
(1,676)
(255,200)
(49,979)
(103,026)
144,859
35,418

(ii) In September 2004, Sinochem Corporation entered into a transfer agreement in respect of the transfer to Sinochem Fertilizer a 41% equity interests in Sinochem Kailin at nil consideration (note 1(b)(ii)). The net assets of Sinochem Kailin attributable to the Fertilizer Group amounted to RMB153,100,000 as at the date of transfer (note 24(b)).

28. Contingent liabilities

(a) The Fertilizer Group had contingent liabilities in respect of letter of credit facilities in issue amounting to RMB94,470,000, RMB34,207,000 and RMB442,731,000 as at 31 December 2002, 2003 and 2004, respectively. The letter of credit facilities are used for the issue of letters of credit for purchases of fertilizer products. The relevant banking facilities are guaranteed by Sinochem Corporation (note 30(b)(xi)). The guarantees provided by Sinochem Corporation have been released subsequent to 31 December 2004.
(b) As at 31 December 2004, Sinochem Fertilizer had contingent liabilities amounting to RMB26,242,000 in respect of a litigation proceeding with a previous customer on dispute over the compensation of insurance claims in relation to trading activities with the customer. In respect of this litigation proceedings, the ultimate holding company, Sinochem Corporation, has issued an undertaking to fully reimburse Sinochem Fertilizer should there be any loss to Sinochem Fertilizer as a result of the litigation. Accordingly, the directors of Fertilizer Company do not make a provision for this pending litigation in the Financial Information.

— I-32 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

29. Commitments

(a) Capital commitments

Assets under construction Contracted but not provided for Authorised but not contracted for Investment in a jointly controlled entity, Yunnan Sanhuan Sinochem Chemical Fertilizer Company Limited	As 2002 RMB’000 — — — — —	at 31 December 2003 2004 RMB’000 RMB’000 — 244,117 — 18,464 — 262,581 — 140,000 — 402,581	at 31 December 2003 2004 RMB’000 RMB’000 — 244,117 — 18,464 — 262,581 — 140,000 — 402,581
			262,581 140,000
			402,581

(b) Operating lease commitments

The future aggregate minimum lease payments under non-cancellable operating leases in respect of land and buildings are as follows:

Within one year Between two to five years	As 2002 RMB’000 4,697 3,555 8,252	at 31 December 2003 2004 RMB’000 RMB’000 9,763 14,750 14,796 16,758 24,559 31,508	at 31 December 2003 2004 RMB’000 RMB’000 9,763 14,750 14,796 16,758 24,559 31,508
			31,508

30. Related party transactions

Parties are considered to be related to the Fertilizer Group if the Fertilizer Group has the ability, directly and indirectly, to control the parties or exercise significant influence over the parties in making financial and operating decisions, or vice versa, or where the Fertilizer Group and the parties are subject to common control or common significant influence.

(a) Name and relationship with related parties

Name	Relationship
U.S. Chemical Resources Inc. (Sinochem	Company beneficially owned by Sinochem Corporation Company beneficially owned by Sinochem Corporation
International Company Limited) (‘‘Sinochem
International’’)
(Sinochem Guangdong	Company beneficially owned by Sinochem Corporation
Import & Export Company) (‘‘Sinochem
Guangdong’’)

(Sinochem Shandong
Chemical Fertilizer Company Limited) (‘‘Sinochem Shandong’’)

Company beneficially owned by Sinochem Corporation

Sinochem (United Kingdom) Limited

Company beneficially owned by Sinochem Corporation

— I-33 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

Name

Relationship

(Qinghai Salt Lake
Potash Co. Ltd.) (‘‘Qinghai Salt Lake’’)

Company beneficially owned by Sinochem Corporation

(Sinochem

Company beneficially owned by Sinochem Corporation

Intertrans Shanghai Company Limited) (‘‘Sinochem Intertrans’’)
(Sinochem

Company beneficially owned by Sinochem Corporation

International Properties Hotel Management Company Limited) (‘‘Sinochem International Properties Hotel Management’’)
(Yongan Zhisheng
Chemical Company Limited)

Joint venture partner of Sinochem Zhisheng

(‘‘Yongan Zhisheng’’)
Sinochem Shandong Import & Export Group Corporation

Company beneficially owned by Sinochem Corporation

(Far East International
Leasing Company Limited) (‘‘Far East International’’)

Company beneficially owned by Sinochem Corporation

(Sinochem International
Information Company) (‘‘Sinochem International Information’’)

Company beneficially owned by Sinochem Corporation

CETTI

Company beneficially owned by Sinochem Corporation

(Hubei Sinochem
Dongfang Chemical Fertilizer Company Limited) (‘‘Sinochem Dongfang’’)

Jointly controlled entity of the Fertilizer Group

(Yunnan Sanhuan

Jointly controlled entity of the Fertilizer Group

Sinochem Jiaji Chemical Fertilizer Company Limited) (‘‘Sanhuan Sinochem Jiaji’’)

Sinochem Kailin Jointly controlled entity of the Fertilizer Group

(b) During the Relevant Periods, the Fertilizer Group had the following significant transactions with related parties:

Continuing transactions:

(i) Sale of fertilizers to: Sinochem Kailin (note (a) below) Sinochem Dongfang (ii) Purchases of fertilizers from: Qinghai Salt Lake Sinochem Kailin (note (a) below) — as a related party — as a jointly controlled entity Sinochem Shandong Sinochem Dongfang Sanhuan Sinochem Jiaji Yongan Zhisheng	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 4,433 — — 11,673 — — 263,461 — 37,087 82,585 — — 32,708 — — 693 — — 17,624 — 271,270 380,565 48,233 141,861 130,483	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 4,433 — — 11,673 — — 263,461 — 37,087 82,585 — — 32,708 — — 693 — — 17,624 — 271,270 380,565 48,233 141,861 130,483
		263,461 82,585 32,708 693 17,624 380,565 130,483

— I-34 —

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

APPENDIX I

(iii) Sales service fee from: Yongan Zhisheng (iv) Purchase of raw materials from: Yongan Zhisheng (v) Supply of utilities from: Yongan Zhisheng (vi) Lease of office premises from: Sinochem International Properties Hotel Management Discontinuing transactions:	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 211 541 143 14,310 28,120 31,526 96 2,513 2,092 4,981 3,102 4,676	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 211 541 143 14,310 28,120 31,526 96 2,513 2,092 4,981 3,102 4,676
		31,526
		2,092
		4,676

		Year ended 31 December	Year ended 31 December	Year ended 31 December
		2002	2003	2004
		RMB’000	RMB’000	RMB’000
(vii)	Sale of fertilizers to:
	U.S. Chemical Resources Inc. (note (b) below)	—	—	37,736
	Sinochem International	162,898	103,356	3,123
	Sinochem Guangdong	127,979	507,554	396,838
(viii)	Purchases of fertilizers from:
	Sinochem (United Kingdom) Limited (note (b) below)	1,405,558	1,909,118	1,863,838
	U.S. Chemical Resources Inc. (note (b) below)	2,292,469	1,878,663	512,913
	Sinochem International	—	—	184
(ix)	Customs declaration and transportation services from:
	Sinochem Intertrans	318	288	305
(x)	Interest income on loans receivable from:
	Sinochem Corporation (notes 3(a) and 15)	9,110	19,788	24,743
(xi)	Treasury related transactions with Sinochem Corporation and its related		companies

Sinochem Corporation provides guarantee in respect of the banking facilities made available to Sinochem Fertilizer. As at 31 December 2004, facilities utilised by the Fertilizer Group amounted to RMB2.41 billion (2003: RMB2.13 billion, 2002: RMB2.07 billion), comprising short-term bank loans of RMB1.39 billion (2003: RMB1.60 billion, 2002: RMB1.41 billion), bills payable of RMB0.58 billion (2003: RMB0.50 billion, 2002: RMB0.57 billion) and contingent liabilities in respect of letter of credit facilities utilised of RMB0.44 billion (2003: RMB0.03 billion, 2002: RMB0.09 billion). As confirmed by the directors of Fertilizer Company, the guarantees provided by Sinochem Corporation will be released upon completion of the Acquisition.

As mentioned in note 15 above, Sinochem Fertilizer made loans through CETTI to Sinochem Corporation. As at 31 December 2004, the loans amounted to RMB219 million (2003: RMB22 million, 2002: RMB78 million). The loans were interest bearing at a rate of 2.5% (2003: 2.5%, 2002: 2.5% to 2.7%), per annum. The interest income received during the Relevant Periods has been disclosed in note 3(a) above.

— I-35 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

As mentioned in note 25(c) above, a long term loan of RMB86 million (2003: RMB79 million, 2002: RMB66 million) borrowed from (The Import-Export Bank of China) by Sinochem Corporation was provided for use by Sinochem Fertilizer. The loan was unsecured, interest bearing at 1% per annum and repayable in half-yearly instalments from 30 May 2008 to 30 November 2033. The loan had been fully repaid subsequent to 31 December 2004.

(xii) Transfer of equity interests in Sinochem Fuling and Sinochem Kailin

As mentioned in note 1 above, in September 2004, Sinochem Corporation entered into transfer agreements with Sinochem Fertilizer to transfer a 60% equity interest in Sinochem Fuling and a 41% equity interest in Sinochem Kailin, at nil consideration.

(xiii) Transfer of accounts receivables

On 2 December 2002, Sinochem Fertilizer entered into an agreement with Sinochem International Information Company, a subsidiary of Sinochem Corporation, in respect of the transfer of certain accounts receivables with an aggregate net value of RMB287,492,000 (inclusive of a provision for doubtful debt of RMB132,506,000). The consideration is set at the gross value of the receivables of RMB419,998,000, resulting in a gain on disposal of RMB132,506,000 which has been credited to the capital reserve of Sinochem Fertilizer as a contribution from owner. The proceeds of the transfer of RMB419,998,000 had been fully received in March 2003.

(xiv) Disposal of investments

On 30 June 2004, pursuant to the Reorganisation, Sinochem Fertilizer entered into an agreement with Far East International, a subsidiary of Sinochem Corporation, to dispose of its 10% equity interest in CETTI to Far East International at book value of RMB105,539,000 (note 13), resulting in no gain or loss arising from the disposal.

(xv) Fertilizer purchase arrangement with Sinochem Corporation

During the Relevant Periods, certain fertilizers were purchased according to the specification of Sinochem Corporation. The relevant purchases and their subsequent sales amounted to RMB350,956,000 and RMB390,784,000, RMB428,031,000 and RMB463,460,000 and RMB402,777,000 and RMB413,156,000 for the years ended 31 December 2002, 2003 and 2004, respectively. After the completion of the Acquisition, such fertilizers will be directly purchased by Sinochem Corporation and sold to Sinochem Fertilizer before selling to the end customers.

Notes:

(a) As detailed in note 1 to the Financial Information, Sinochem Kailin became a 41% owned jointly controlled entity of Fertilizer Group since September 2004. Prior to that, the 41% equity interest was owned by Sinochem Corporation.
(b) Pursuant to agreements entered into between U.S. Chemical Resources Inc., Sinochem (United Kingdom) Limited and Sinochem Macao on 6 June 2005 respectively, U.S. Chemical Resources Inc. and Sinochem (United Kingdom) Limited shall provide local supplier relations and logistics services to Sinochem Macao in the United States and in Europe commencing on the respective agreement dates. Sales to and purchase from U.S. Chemical Resources Inc. and Sinochem (United Kingdom) Limited will be ceased accordingly.
(c) As at the respective balance sheet dates, the Fertilizer Group had balances with certain related parties, which have been set out in notes 15 to 20, 22 and 23.
(d) In the opinion of the directors of the Fertilizer Company, the above related party transactions were carried out in the Fertilizer Group’s ordinary and usual course of business, which are on normal commercial terms and in accordance with the terms of underlying agreements and/or the invoices issued by the respective parties.

— I-36 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

31. Particulars of principal subsidiaries and jointly controlled entities

Particulars of the principal subsidiaries and jointly controlled entities of the Fertilizer Group as at the date of this report are as follows:

==> picture [454 x 550] intentionally omitted <==

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

||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Place|and|date|of|Issued/registered|Effective|
|incorporation/|Place|of|Principal|and|fully|paid|interest|
|Company|name|establishment|operation|activities|share|capital|held|
|Subsidiaries|
|Directly|held:|
|Sinochem|Fertilizer|(Overseas)|British|Virgin|BVI|Investment|US$10,000|100.00%|
|Holdings|Ltd.|[#2]|Islands|(‘‘BVI’’),|holding|
|1|July|2004|
|(formerly|PRC,|PRC|Fertilizer|trading|RMB100,000,000|100.00%|
|)|5|April|1993|
|(Sinochem|Fertilizer|
|Company|Limited)|[#3]|
|Indirectly|held:|
|Dohigh|Trading|Limited|[#4]|Hong|Kong|(‘‘HK’’)|Hong|Kong|Fertilizer|trading|HK$15,000,000|100.00%|
|30|October|1987|
|Sinochem|Fertilizer|Macao|Macao,|Macao|Fertilizer|trading|MOP100,000|100.00%|
|Commercial|Offshore|Limited|16|November|2004|
|#1|
|PRC,|PRC|Fertilizer|trading|RMB5,000,000|100.00%|
|(Suifenhe|Xinkaiyuan|Trading|29|November|2002|
|Company|Limited)|[#5]|
|PRC,|PRC|Fertilizer|trading|RMB5,000,000|100.00%|
|(formerly|3|November|2003|
|)|
|(Sinochem|Chemical|
|Fertilizer|Erlianhaote|
|Company)|[#6]|
|PRC,|PRC|Sales|and|RMB47,000,000|53.19%|
|(Fujian|Sinochem|Zhisheng|5|August|2002|manufacturing|
|Chemical|Fertilizer|Company|of|fertilizers|
|Limited)|[#7]|
|PRC,|PRC|Sales|and|RMB80,000,000|60.00%|
|(Sinochem|Chongqing|Fuling|23|August|1999|manufacturing|
|Chemical|Fertilizer|Company|of|fertilizers|
|Limited)|[#8]|
|PRC,|PRC|Sales|and|US$4,241,000|51.00%|
|(Sinochem|Yantai|Crop|15|September|2004|manufacturing|
|Nutrition|Co.,|Ltd.)|[#1]|of|fertilizers|
|PRC,|PRC|Fertilizer|trading|RMB5,000,000|90.00%|
|(Manzhouli|Kaiming|Fertilizer|17|February|2005|
|Company|Limited)|[#1]|

----- End of picture text -----

— I-37 —

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

APPENDIX I

==> picture [446 x 325] intentionally omitted <==

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

|||||||||
|---|---|---|---|---|---|---|---|
|Place|and|date|of|Issued/registered|Effective|
|incorporation/|Place|of|Principal|and|fully|paid|interest|
|name|establishment|operation|activities|share|capital|held|
|controlled|entities|
|held:|
|PRC,|PRC|Sales|and|RMB10,000,000|55.00%|
|(Hubei|Sinochem|Dongfang|20|March|2002|manufacturing|
|Chemical|Fertilizer|Company|of|fertilizers|
|Limited)|
|PRC,|PRC|Fertilizer|RMB3,000,000|60.00%|
|(Tianjin|Beifang|Chemical|17|November|2003|logistics|
|Fertilizer|Logistics|and|
|Delivery|Company|Limited)|
|PRC,|PRC|Sales|and|RMB365,850,000|41.00%|
|(Guiyang|Sinochem|Kailin|5|March|2002|manufacturing|
|Chemical|Fertilizer|of|fertilizers|
|Company|Limited)|
|PRC,|PRC|Sales|and|US$29,800,000|25.00%|
|(Yunnan|Sanhuan|Sinochem|22|May|2001|manufacturing|
|Jiaji|Chemical|Fertilizer|of|fertilizers|
|Company|Limited)|
|PRC|PRC|Sales|and|RMB250,000,000|40.00%|
|(Yunnan|Sanhuan|Sinochem|5|April|2005|manufacturing|
|Chemical|Fertilizer|Company|of|fertilizers|
|Limited)|

----- End of picture text -----

Company name

Jointly controlled entities

Indirectly held:

Notes:

1 Newly incorporated/established company and therefore no audited accounts have been prepared since its respective date of incorporation/establishment.
2 No audit requirement.
3 The accounts of (Sinochem Fertilizer Company Limited) were audited by (Leanda Certified Public Accountants Company Limited) for the years
ended 31 December 2002, 2003 and 2004.
4 The accounts of Dohigh Trading Limited were audited by Deloitte Touche Tohmatsu, Hong Kong, for the years ended 31 December 2002, 2003 and 2004.
5 The accounts of (Suifenhe Xinkaiyuan Trading Company Limited) were audited by (Dongning Guangda Certified Public Accountants Company Limited) for the years
ended 31 December 2002 and 2003 and (Leanda Certified Public Accountants Company Limited) for the year ended 31 December 2004.
6 The accounts of (formerly ) (Sinochem Chemical Fertilizer Erlianhaote Company) were audited by (Neimenggu Xintonglianhe Certified Public Accountants) for the year ended 31 December 2003, being the first year of operation of the company, and (Leanda Certified Public Accountants Company Limited) for the year ended
31 December 2004.
7 The accounts of (Fujian Sinochem Zhisheng Chemical Fertilizer Company Limited) were audited by (Yonganyanjiang Certified Public Accountants) for the years ended 31 December 2002 and 2003 and (Leanda Certified Public Accountants Company Limited) for the year ended 31 December 2004.

— I-38 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

8 The accounts of (Sinochem Chongqing Fuling Chemical Fertilizer Company Limited) were audited by (Chongqing Boma Certified Public Accountants) for the years ended 31 December 2002, 2003 and 2004.

The English names of certain of the companies now comprising the Fertilizer Group referred to in the Financial Information represent management’s best efforts at translating the Chinese names of these companies as no English names have been registered.

32. Ultimate holding company

The directors regard Sinochem Corporation, a state-owned enterprise established in the PRC, as being the ultimate holding company.

33. Significant subsequent events

The Fertilizer Group completed the Reorganisation in preparation for the Acquisition by Sinochem Hong Kong. Details of the Reorganisation are set out in note 1 of Section II of this report. Save as disclosed above, there were no material transactions took place subsequent to 31 December 2004 and up to the date of this report.

III NEW ACCOUNTING STANDARDS

The HKICPA has issued a number of new HKFRSs which are effective for accounting periods beginning on or after 1 January 2005. The Fertilizer Group has not early adopted these new HKFRSs in the Financial Information during the Relevant Periods.

The applicable new HKFRSs are set out below:

HKAS 1 Presentation of Financial Statements HKAS 2 Inventories HKAS 7 Cash Flow Statements HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events After the Balance Sheet Date HKAS 12 Income Taxes HKAS 14 Segment Reporting HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 18 Revenue HKAS 19 Employee Benefits HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance HKAS 21 The Effects of Changes in Foreign Exchange Rates HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 31 Interests in Joint Ventures HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 33 Earnings Per Share HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 39 Financial Instruments: Recognition and Measurement HKFRS 2 Share-based Payment HKFRS 3 Business Combinations HKAS-INT 15 Operating Leases — Incentives

— I-39 —

APPENDIX I ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

In 2005, the Fertilizer Group has to adopt the new HKFRSs for the preparation of its accounts for the year ending 31 December 2005. The adoption of the new HKFRSs mentioned above may result in changes to the preparation and presentation of the Fertilizer Group’s results in the future. All new standards adopted by the Fertilizer Group require retrospective application other than those specifically allowed under the transitional provisions in the relevant standards. Accordingly, the 2004 accounts may have to be restated as required, in accordance with the relevant requirements.

The following is a summary of significant changes to the principal accounting policies adopted in the preparation of the Financial Information as set out in section II note 2 of this report as a result of the adoption of the new HKFRSs in 2005.

HKFRS 3 — Business combinations

Under HKFRS 3, intangible asset should be recognised separately from goodwill in a business combination when it arises from contractual or other legal rights, or if it is separable. This will result in more intangible assets and less goodwill will be recognised on business combinations. This new accounting policy will be applied to the accounting for business combinations for which the agreement date is on or after 1 January 2005, and therefore there is no impact on the accounts for the year ended 31 December 2004.

HKAS 17 — Leases

Under HKAS 17, leasehold land in Hong Kong and mainland China will no longer be accounted for as property, plant and equipment. Instead, it will be accounted for as prepayment of lease and stated at cost and recognised as an expense on a straight-line basis over the lease term under HKAS 17. This treatment will have no material impact on the net assets and profits of the Fertilizer Group for the Relevant Periods, as the leasehold land has been depreciated on a straight-line basis over the lease term under the current accounting policy.

HKAS 39 — Financial instruments

1. Investments

— I-40 —

APPENDIX I

ACCOUNTANTS’ REPORT ON THE FERTILIZER GROUP

Loans and receivables and borrowings

In accordance with the transitional provisions of HKAS 39, retrospective application of this standard is generally not permitted. The adoption of HKAS 39 requires the Fertilizer Group to re-measure all financial assets and liabilities as at 1 January 2005 and any differences are adjusted to opening retained earnings.

HKAS 21 — The Effects of Changes in Foreign Exchange Rates

The Fertilizer Group has revaluated the functional currency of each of its consolidated entities based on HKAS 21. It is determined that Renminbi is the functional currency of the Fertilizer Group.

IV. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for Fertilizer Company or its subsidiaries in respect of any period subsequent to 31 December 2004. In addition, save as disclosed above, no dividend or distribution has been declared, made or paid by Fertilizer Company or its subsidiaries in respect of any period subsequent to 31 December 2004.

Yours faithfully PricewaterhouseCoopers Certified Public Accountants Hong Kong

— I-41 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

1. FINANCIAL SUMMARY

The following is a summary of the published consolidated profit and loss accounts of the Group for the three years ended 31 March 2004, audited by Deloitte Touche Tohmatsu, as extracted from the respective annual reports of the Company:

Results

Turnover
Cost of properties sold and services rendered
(Allowance for) reversal of estimated loss on
properties held for sale
Gross profit (loss)
Other operating income
Interest income
Administrative expenses
Property expenses
(Deficit) surplus arising from revaluation of
investment properties
Impairment loss recognised for investments
in securities
Bank borrowings and related accrued
interest waived
Impairment of goodwill
Loss from operations
Gain (loss) on disposal of subsidiaries
Loss on disposal of an associate
Finance costs
Share of results of associates
Loss before taxation
Taxation (charge) credit
Loss before minority interests
Net loss for the year
Dividend
Loss per share
Basic and diluted

For the year ended 31 March
2002
2003
2004
HK$’000
HK$’000
HK$’000
(restated)
(restated)
58,310
84,414
99,483
(36,709)
(80,079)
(90,556)
(2,915)
(13,446)
37,771
18,686
(9,111)
46,698
4,784
4,001
3,193
856
97
34
(44,274)
(27,719)
(17,204)
(7,733)
(4,962)
(3,103)
(61,020)
(79,600)
9,700
—
—
(140,400)
—
—
9,608
(25,675)
—
—
(114,376)
(117,294)
(91,474)
—
5,500
(400)
—
(9)
—
(56,895)
(18,100)
(10,180)
(2,814)
—
—
(174,085)
(129,903)
(102,054)
(504)
20
181
(174,589)
(129,883)
(101,873)
(174,589)
(129,883)
(101,873)
136
1,126
1,036
(8.2 cents)
(3.9 cents)
(2.8 cents)

— II-1 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

In the annual report of the Company for the year ended 31 March 2003, the auditors of the Company, Deloitte Touche Tohmatsu, without qualifying their opinion, drew attention in their auditors’ report to the fundamental uncertainties of the Group relating to its going concern basis and the valuation of investments in securities, such report is reproduced below. The auditors’ report on the financial statements of the Group for the years ended 31 March 2002 and 2004 were unqualified and not modified.

==> picture [182 x 65] intentionally omitted <==

==> picture [103 x 59] intentionally omitted <==

TO THE SHAREHOLDERS OF WAH TAK FUNG HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

We have audited the financial statements on pages * to * (note) which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s directors are responsible for the preparation of the financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

FUNDAMENTAL UNCERTAINTY RELATING TO THE GOING CONCERN BASIS

In forming our opinion, we have considered the adequacy of the disclosures made in note 2 to the financial statements which explain that events of default have arisen under certain bank loans and credit facility agreements such that the relevant bank borrowings have become repayable on demand and have been classified as current liabilities. Although as explained in

— II-2 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

note 38, the Group has disposed of certain properties subsequent to the balance sheet date to realise the value of such properties to meet the relevant financial obligations and liabilities of the Group, the Group remains dependent upon the continued support of its bankers.

Against this background, the directors of the Company are actively holding negotiations with the Group’s bankers regarding the rescheduling of the Group’s remaining borrowings and at the same time to obtain additional finance for the Group. Provided that the negotiations with the Group’s bankers can be successfully completed, the directors are satisfied that the Group will be able to meet in full its financial obligations as they fall due for the foreseeable future. The financial statements have been prepared on a going concern basis, the validity of which depends upon future fundings being available. The financial statements do not include any adjustments that would result from a failure to obtain such funding. We consider that the fundamental uncertainty has been adequately disclosed in the financial statements and our opinion is not qualified in this respect.

FUNDAMENTAL UNCERTAINTY RELATING TO THE VALUATION OF INVESTMENTS IN SECURITIES

In forming our opinion, we have considered the adequacy of the disclosures made in note 17 to the financial statements which explain that no impairment loss has been recognised in respect of the Group’s investment in Hong Kong Satellite Technology Holdings Limited (‘‘Hong Kong Satellite’’) which is stated at cost of HK$140,400,000 as at 31 March 2003 on the basis that Hong Kong Satellite will be able to secure the required funds to develop its satellite communications platform in accordance with its business plan and projection. We consider that the fundamental uncertainty has been adequately accounted for and disclosed in the financial statements and our opinion is not qualified in this respect.

OPINION

In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 March 2003 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Deloitte Touche Tohmatsu Certified Public Accountants

Hong Kong, 25 July 2003

Note: Reference of page numbers of the Group’s audited financial statements is not shown above. Please refer to the Company’s annual report for the year ended 31 March 2003 for the audited financial statements.

— II-3 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Financial Position

Total assets Total liabilities Shareholders’ funds	2002 HK$’000 (restated) 532,530 (325,224) 207,306	At 31 March 2003 HK$’000 (restated) 334,606 (225,309) 109,297	2004 HK$’000 150,999 (142,552) 8,447

Comparative figures for 2003 and 2002 have been restated in accordance with the revised accounting policy adopted by the Group during 2004 in order to achieve a consistent presentation.

— II-4 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

2. FINANCIAL INFORMATION FOR THE YEAR ENDED 31 MARCH 2004

The financial information set out below is extracted from the financial statements audited by Deloitte Touche Tohmatsu included in the annual report of the Company for the year ended 31 March 2004:

Consolidated Income Statement

For the year ended 31 March 2004

Notes Turnover 4 Cost of properties sold and services rendered Reversal of (allowance for) estimated loss on properties held for sale Gross profit (loss) Other operating income Interest income Administrative expenses Property expenses Surplus (deficit) arising from revaluation of investment properties Impairment loss recognised for investments in securities Bank borrowings and related accrued interest waived Loss from operations 5 (Loss) gain on disposal of subsidiaries Loss on disposal of an associate Finance costs 6 Loss before taxation Taxation credit 8 Net loss for the year Dividend 9 Loss per share 10 Basic and diluted	2004 HK$’000 99,483 (90,556) 37,771 46,698 3,193 34 (17,204) (3,103) 9,700 (140,400) 9,608 (91,474) (400) — (10,180) (102,054) 181 (101,873) 1,036 (2.8 cents)	2003 HK$’000 (restated) 84,414 (80,079) (13,446) (9,111) 4,001 97 (27,719) (4,962) (79,600) — — (117,294) 5,500 (9) (18,100) (129,903) 20 (129,883) 1,126 (3.9 cents)

— II-5 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Balance Sheets

At 31 March 2004

Notes Non-current assets Investment properties 11 Tangible fixed assets 12 Goodwill 13 Interests in subsidiaries 14 Interests in an associate 15 Investments in securities 16 Current assets Properties held for sale 17 Investments in securities 16 Trade and other receivables 18 Taxation recoverable Bank balances and cash Current liabilities Trade and other payables 19 Deposits received Amount due to a director 20 Dividend payable Bank borrowings — due within one year 21 Net current assets (liabilities)	THE GROUP 2004 2003 HK$’000 HK$’000 (restated) 63,000 142,940 238 592 — — — — — — — 140,400 63,238 283,932 82,000 45,000 — 470 1,561 3,068 — 49 4,200 2,087 87,761 50,674 16,558 24,398 2,927 4,991 2,400 — 553 546 38,873 186,823 61,311 216,758 26,450 (166,084) 89,688 117,848	THE COMPANY 2004 2003 HK$’000 HK$’000 — — — — — — 470,594 488,389 — — — — 470,594 488,389 — — — — 47 54 — — 2,827 123 2,874 177 1,228 3,569 — — 2,400 — 553 546 — — 4,181 4,115 (1,307) (3,938) 469,287 484,451

— II-6 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Balance Sheets

At 31 March 2004

Notes Capital and reserves Share capital 22 Reserves 24 Non-current liabilities Bank borrowings — due after one year 21 Amount due to a director 20 Amounts due to subsidiaries 25 Deferred taxation liabilities 26	THE GROUP 2004 2003 HK$’000 HK$’000 (restated) 470,610 469,450 (462,163) (360,153) 8,447 109,297 77,162 — 3,725 8,016 — — 354 535 81,241 8,551 89,688 117,848	THE COMPANY 2004 2003 HK$’000 HK$’000 470,610 469,450 (462,780) (448,551) 7,830 20,899 — — 3,725 716 457,732 462,836 — — 461,457 463,552 469,287 484,451

— II-7 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Consolidated Statement of Changes in Equity For the year ended 31 March 2004

Balance at 1 April 2002 — as previously reported — prior period adjustment (note 2) — as restated Issue of shares Exercise of the conversion rights of convertible redeemable non-voting preference shares Net loss for the year Preference share dividend Balance at 1 April 2003 Exercise of share options Net loss for the year Preference share dividend Balance at 31 March 2004	Share capital HK$’000 440,102 — 440,102 33,000 (3,652) — — 469,450 1,160 — — 470,610	Share premium account HK$’000 744,631 — 744,631 — 3,652 — — 748,283 899 — — 749,182	Contributed surplus HK$’000 84,925 — 84,925 — — — — 84,925 — — — 84,925	Accumulated losses HK$’000 (1,061,871) (481) (1,062,352) — — (129,883) (1,126) (1,193,361) — (101,873) (1,036) (1,296,270)	Total HK$’000 207,787 (481) 207,306 33,000 — (129,883) (1,126) 109,297 2,059 (101,873) (1,036) 8,447

The contributed surplus of the Group represents the difference between the estimated fair value of the Company’s ordinary shares issued as purchase consideration of a subsidiary at the date of acquisition in 2002 over the nominal value of the Company’s ordinary share.

— II-8 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Consolidated Cash Flow Statement

For the year ended 31 March 2004

Note Operating Activities Loss before taxation Adjustments for: Depreciation Interest expenses Interest income Dividend income Gain on disposal of investments in securities Loss (gain) on disposal of subsidiaries Loss on disposal of an associate Loss on disposal of tangible fixed assets other than properties Unrealized holding loss on investments in securities (Surplus) deficit arising from revaluation of investment properties (Reversal of) allowance for estimated loss on properties held for sale Impairment loss recognised for investments in securities Bank borrowings and related accrued interest waived Allowance for doubtful debts Unclaimed obligations recognised as income Operating cash flows before movements in working capital Decrease in investment properties Decrease in properties held for sale Decrease in trade and other receivables (Decrease) increase in trade and other payables Decrease in deposits received Cash generated from operations Hong Kong Profits Tax refunded (paid) Net Cash Generated From Operating Activities Investing Activities Proceeds from disposal of subsidiaries 27 Acquisition of investments in securities Proceeds from disposal of investments in securities Purchase of tangible fixed assets Interest received Dividend received Net Cash Generated From Investing Activities	2004 HK$’000 (102,054) 120 10,180 (34) (10) (293) 400 — 246 — (9,700) (37,771) 140,400 (9,608) 514 — (7,610) 89,000 771 989 (4,177) (2,052) 76,921 49 76,970 231 — 763 (12) 34 10 1,026	2003 HK$’000 (129,903) 682 18,100 (97) — (583) (5,500) 9 17 289 79,600 13,446 — — 634 (1,646) (24,952) 73,000 6,554 2,396 1,587 (2,302) 56,283 (43) 56,240 5,000 (3,168) 6,184 (268) 97 — 7,845

— II-9 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Consolidated Cash Flow Statement

For the year ended 31 March 2004

Financing Activities Repayment to a director New bank loans raised Repayments of bank loans Dividend paid Proceeds from issue of shares Interest paid Net Cash Used in Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Year Cash and Cash Equivalents at the End of the Year Analysis of the Balances of Cash and Cash Equivalents Bank balances and cash Bank overdrafts	2004 HK$’000 (2,920) 50,000 (121,987) — 2,059 (2,940) (75,788) 2,208 1,992 4,200 4,200 — 4,200	2003 HK$’000 (524) — (76,744) (716) — (5,862) (83,846) (19,761) 21,753 1,992 2,087 (95) 1,992

— II-10 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31 March 2004

1. GENERAL

The Company is incorporated in Bermuda as an exempted company under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’).

The Company acts as an investment holding company. Its subsidiaries are principally engaged in property investment, provision of building management services and investment holding.

2. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has adopted, for the first time, the following Hong Kong Financial Reporting Standard (‘‘HKFRS’’) issued by the Hong Kong Society of Accountants (‘‘HKSA’’), the term of HKFRS is inclusive of Statements of Standard Accounting Practice (‘‘SSAP(s)’’) and Interpretations approved by the HKSA:

SSAP 12 (Revised)

‘‘Income taxes’’

The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred taxation. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred taxation is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively. Comparative amounts for prior period have been restated accordingly.

As a result of the adoption of SSAP 12 (Revised), the balance of accumulated losses at 1 April 2002 has been increased by HK$481,000, representing the cumulative effect on the results for the years prior to 1 April 2002. The adoption of SSAP 12 (Revised) has resulted in a decrease of HK$181,000 in the net loss for the year ended 31 March 2004 (2003: increase of HK$54,000 in the net loss for the year).

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention as modified for the revaluation of investment properties and investment securities.

The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 March each year.

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

All significant inter-company transactions and balances within the Group have been eliminated on consolidation.

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition.

— II-11 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Goodwill arising on acquisitions is capitalised and amortised on a straight line basis over its estimated economic life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet.

On disposal of a subsidiary or associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal.

Negative goodwill

Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition over the cost of acquisition.

Negative goodwill is presented as a deduction from assets and is released to income based on an analysis of the circumstances from which the balance resulted.

To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised as income immediately.

Negative goodwill arising on the acquisition of an associate is deducted from the carrying value of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the consolidated balance sheet as a deduction from assets.

Revenue recognition

Revenue from sales of properties is recognised on the execution of a legally binding purchase and sale agreement.

Rental income, including rentals invoiced in advance from properties let under operating leases, is recognised on a straight line basis over the respective leases.

Building management and agency fees are recognised when services are rendered.

Dividend income from investments is recognised when the Group’s rights to receive payment have been established.

Interest income is accrued on a time basis by reference to the principal outstanding and at the interest rate applicable.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss.

Investments in associates

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, investments in associates are stated at the Group’s share of the net assets of the associates plus goodwill on acquisition less any identified impairment loss.

— II-12 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Investments in securities

Investments in securities are recognised on a trade date basis and are initially measured at cost.

At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost less any impairment loss. The annual amortisation of any discount or premium on the acquisition of a held-tomaturity security is aggregated with other investment income receivable over the term of the instrument so that the revenue recognised in each period represents a constant yield on the investment.

Investments other than held-to-maturity debt securities are classified as investment securities and other investments.

Investment securities, which are securities held for an identified long-term strategic purpose, are measured at subsequent reporting dates at cost, as reduced by any impairment loss that is other than temporary.

Other investments are measured at fair value, with unrealized gains and losses included in net profit or loss for the period.

Tangible fixed assets

Tangible fixed assets, other than investment properties, are stated at cost less depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of tangible fixed assets, other than investment properties, over their estimated useful lives and after taking into account their estimated residual value, using the straight line method, at the following rates per annum:

Furniture, fixtures and equipment 20% Leasehold improvements 20% Motor vehicles 20%–25%

The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement.

Investment properties

Investment properties are completed properties which are held for their investment potential, any rental income being negotiated at arm’s length.

Investment properties are stated at their open market value based on professional valuations at the balance sheet date.

Any revaluation increase or decrease arising on the revaluation of investment properties is credited or charged to the investment property revaluation reserve unless the balance on this reserve is insufficient to cover a revaluation decrease, in which case the excess of the revaluation decrease over the balance on the investment property revaluation reserve is charged to the income statement. Where a decrease has previously been charged to the income statement and a revaluation increase subsequently arises, this increase is credited to the income statement to the extent of the decrease previously charged.

On disposal of an investment property, the balance on the investment property revaluation reserve attributable to that property is transferred to the income statement.

No depreciation is provided on investment properties except where the unexpired term of the relevant lease is 20 years or less.

— II-13 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Properties held for sale

Properties held for sale are stated at the lower of cost and net realisable value. Cost includes interest, finance charges, professional fees and other direct costs attributable to such properties until they reach a marketable state. Net realisable value represents the estimated selling price less all costs to completion and costs to be incurred in marketing and selling.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

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

Taxation

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

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes income statement items that are never taxable or deductible.

Deferred taxation is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred taxation liabilities are generally recognised for all taxable temporary differences, and deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred taxation liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred taxation assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deferred taxation is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred taxation is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred taxation is also dealt with in equity.

Operating leases

Rental expenses under operating leases are charged to the income statement on a straight line basis over the period of the relevant leases.

— II-14 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Retirement benefit scheme

The retirement benefit costs charged in the income statement represent the contributions payable in respect of the current year to the Group’s defined contribution scheme and Mandatory Provident Fund Scheme.

4. TURNOVER AND SEGMENTAL INFORMATION

Business segments

The Group’s turnover and net loss for the year were derived from activities carried out in Hong Kong. The Group’s assets were all located in Hong Kong. For management purposes, the Group is currently organised into four operating divisions, namely, sales of properties, rental service, building management services, and others. These divisions are the basis on which the Group reports its primary segment information.

Segment information about these businesses is presented below:

Income statement

External revenue Inter-segment revenue Segment result Unallocated other operating income Interest income Unallocated corporate expenses Impairment loss recognised for investments in securities Bank borrowings and related accrued interest waived Loss from operations Loss on disposal of a subsidiary Finance costs Loss before taxation Taxation credit Net loss for the year	Sales of properties HK$’000 87,770 — 87,770 34,984 — —	Rental service HK$’000 9,392 225 9,617 10,986 (400) (5,303)	2004 Building management services Others HK$’000 HK$’000 2,321 — 203 — 2,524 — (779) — — — — (4,877)	Eliminations HK$’000 — (428) (428) — — —	Consolidated HK$’000 99,483 — 99,483 45,191 3,193 34 (9,100) (140,400) 9,608 (91,474) (400) (10,180) (102,054) 181 (101,873)

Inter-segment revenue are charged at prevailing market rates.

— II-15 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Income statement

External revenue Inter-segment revenue Segment result Unallocated other operating income Interest income Unallocated corporate expenses Loss from operations Gain on disposal of subsidiaries Loss on disposal of an associate Finance costs Loss before taxation Taxation credit Net loss for the year	Sales of properties HK$’000 62,166 — 62,166 (31,358) — — —	Rental service HK$’000 17,802 1,481 19,283 (73,667) — — (15,642)	2003 Building management and agency services Others HK$’000 HK$’000 4,446 — 591 — 5,037 — (784) — — 5,500 — (9) — (2,458)	Eliminations HK$’000 — (2,072) (2,072) — — — —	Consolidated HK$’000 (restated) 84,414 —
					84,414
					(105,809) 4,001 97 (15,583)
					(117,294) 5,500 (9) (18,100)
					(129,903) 20
					(129,883)

Inter-segment revenue are charged at prevailing market rates.

Balance sheet

Sales of properties Rental service Building management and agency services Others Other corporate assets/liabilities	2004 Segment assets Segment liabilities HK$’000 HK$’000 82,042 29,094 64,228 32,112 168 653 — — 4,561 80,693 150,999 142,552	2003 Segment assets Segment liabilities HK$’000 HK$’000 (restated) 45,060 31,258 144,825 135,549 155 888 140,400 — 4,166 57,614 334,606 225,309	2003 Segment assets Segment liabilities HK$’000 HK$’000 (restated) 45,060 31,258 144,825 135,549 155 888 140,400 — 4,166 57,614 334,606 225,309
			225,309

— II-16 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Other information

Capital additions Sales of properties Rental service Other corporate assets Depreciation Sales of properties Rental service Other corporate assets Other information Allowance for doubtful debts Rental service Other Loss on disposal of tangible fixed assets other than properties Sales of properties Other Surplus (deficit) arising from revaluation of investment properties Rental service Reversal of (allowance for) estimated loss on properties held for sale Sales of properties	2004 HK$’000 5 7 — 12 24 9 87 120 14 500 514 96 150 246 9,700 37,771	2003 HK$’000 21 117 130 268 30 469 183 682 634 — 634 — 17 17 (79,600) (13,446)

— II-17 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

5. LOSS FROM OPERATIONS

Loss from operations has been arrived at after charging: Auditors’ remuneration Allowance for doubtful debts Cost of properties held for sale recognised as an expense Depreciation Loss on disposal of tangible fixed assets other than properties Rental expense Staff costs — Directors’ emoluments (note 7a) — Staff wages and salaries — Provident fund — Staff messing and welfare Unrealized holding loss on investments in securities and after crediting: Dividend income Gain on disposal of investments in securities Rental income, net of outgoings of approximately HK$483,000 (2003: HK$433,000) Unclaimed obligations recognised as income FINANCE COSTS Interest on bank borrowings wholly repayable within five years Interest on other borrowings	2004 HK$’000 463 514 771 120 246 554 5,151 6,306 62 6 11,525 — 10 293 8,909 — 2004 HK$’000 (10,180) — (10,180)	2003 HK$’000 515 634 6,554 682 17 166 8,546 8,984 293 22 17,845 289 — 583 17,369 1,646 2003 HK$’000 (16,773) (1,327) (18,100)

6. FINANCE COSTS

— II-18 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

7. EMOLUMENTS OF DIRECTORS AND EMPLOYEES

(a) Directors’ emoluments are analysed as follows:

Fees: Executive Non-executive Independent non-executive Other emoluments: Salaries and other benefits to executive directors Contributions to retirement benefit scheme Total directors’ emoluments	2004 HK$’000 — — 483 483 4,667 1 4,668 5,151	2003 HK$’000 — — 520
		520
		8,000 26
		8,026
		8,546

The emoluments of the directors were within the following bands:

Nil to HK$1,000,000 HK$1,500,001 to HK$2,000,000 HK$2,000,001 to HK$2,500,000 HK$3,000,001 to HK$3,500,000 HK$4,000,001 to HK$4,500,000	2004 Number of directors 11 1 1 — — 13	2003 Number of directors 11 — — 1 1
		13

(b) Employees’ emoluments

The five highest paid individuals included 3 (2003: 3) directors, details of whose emoluments are included in the amounts disclosed in (a) above. The emoluments of the remaining 2 (2003: 2) highest paid individuals are as follows:

Salaries and other benefits Retirement benefit scheme contributions	2004 HK$’000 1,348 72 1,420	2003 HK$’000 1,500 78
		1,578

The emoluments of each of the highest paid employees were within the band of nil to HK$1,000,000.

— II-19 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

8. TAXATION CREDIT

The credit comprises: Overprovision in prior year — Hong Kong Profits Tax Deferred taxation (note 26) — current year — attributable to a change in tax rate	2004 HK$’000 — 231 (50) 181 181	2003 HK$’000 (restated) 74 (54) — (54) 20

No provision for Hong Kong Profits Tax has been made in the financial statements as the Group had no assessable profit for the year.

The taxation credit for the year can be reconciled to the loss before taxation per consolidated income statement as follows:

Loss before taxation Tax at the domestic income tax rate of 17.5% (2003: 16%) Tax effect of income not taxable for tax purpose Tax effect of expenses not deductible for tax purpose Tax effect of tax losses not recognised Utilization of tax losses previously not recognised Increase in opening deferred taxation liability resulting from an increase in applicable tax rate Overprovision in prior year Others Taxation credit for the year	2004 HK$’000 (102,054) 17,859 16,407 (25,881) (8,715) 271 (50) — 290 181	2003 HK$’000 (129,903) 20,784 3,584 (18,136) (6,516) 229 — 74 1 20

9. DIVIDEND

Dividend for preference shares of approximately HK$1,036,000 (2003: HK$1,126,000) was appropriated during the year to the preference shareholders in accordance with the rights of preference shareholders of the Company.

— II-20 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

10. LOSS PER SHARE

The calculation of the basic loss per share is based on the following data:

Net loss for the year Dividend on preference shares Loss for the purposes of basic loss per share Weighted average number of ordinary shares for the purposes of basic loss per share	THE GROUP 2004 2003 HK$’000 HK$’000 (restated) (101,873) (129,883) (1,036) (1,126) (102,909) (131,009) 3,663,121,235 3,319,537,087	THE GROUP 2004 2003 HK$’000 HK$’000 (restated) (101,873) (129,883) (1,036) (1,126) (102,909) (131,009) 3,663,121,235 3,319,537,087
		(131,009)
		3,319,537,087

No change has been made to the loss per share figure reported for 2003 as a result of the prior period adjustment set out in note 2 because the effect to this figure is insignificant.

The computation of diluted loss per share for the year ended 31 March 2004 and 31 March 2003 does not assume the exercise of the conversion rights attached to the Company’s outstanding share options and convertible redeemable non-voting preference shares as these conversions would result in a decrease in loss per share.

11. INVESTMENT PROPERTIES

At 1 April 2003 Disposal of a subsidiary Disposals Surplus arising from revaluation At 31 March 2004	THE GROUP HK$’000 142,940 (640) (89,000) 9,700
	63,000

The carrying amount of the Group’s investment properties comprises:

Properties situated in Hong Kong and held under: — Long leases — Medium-term leases	2004 HK$’000 — 63,000 63,000	2003 HK$’000 89,640 53,300
		142,940

The investment properties were revalued at 31 March 2004 by CB Richard Ellis Limited, a firm of independent professional valuers, on an open market value basis, resulting in a surplus of HK$9,700,000 (2003: deficit of HK$79,600,000) which has been credited (charged) to the consolidated income statement.

At the balance sheet date, investment properties amounting to approximately HK$49,877,000 (2003: HK$93,888,000) were rented out under operating leases. Particulars of the investment properties are set out on page 51 of the annual report.

— II-21 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

12. TANGIBLE FIXED ASSETS

THE GROUP Cost At 1 April 2003 Additions Disposal of a subsidiary Disposals At 31 March 2004 Depreciation At 1 April 2003 Charge for the year Eliminated on disposal of a subsidiary Eliminated on disposals At 31 March 2004 Net Book Values At 31 March 2004 At 31 March 2003 13. GOODWILL	Furniture, fixtures and equipment HK$’000 9,391 12 (4) (8,408) 991 8,912 81 (4) (8,162) 827 164 479	Leasehold improvements HK$’000 3,965 — — (1,826) 2,139 3,965 — — (1,826) 2,139 — —	Motor vehicles HK$’000 701 — — — 701 588 39 — — 627 74 113	Total HK$’000 14,057 12 (4) (10,234)
				3,831
				13,465 120 (4) (9,988)
				3,593
				238
				592

Cost Balance at 1 April 2003 and at 31 March 2004 Amortisation and Impairment Balance at 1 April 2003 and at 31 March 2004 Net Book Value At 31 March 2004 and 2003	THE GROUP HK$’000 25,675 25,675
	—

— II-22 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

14. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Amounts due from subsidiaries Less: Impairment losses recognised	THE COMPANY 2004 2003 HK$’000 HK$’000 1,071,061 1,071,061 1,691,444 1,709,239 (2,291,911) (2,291,911) 470,594 488,389

The cost of the unlisted shares is based on the carrying values or the underlying net tangible assets of the subsidiaries attributable to the Group at the date on which the Company became the ultimate holding company of the Group under the group reorganisation taken place in September 1996.

The amounts due from subsidiaries are unsecured and do not have fixed repayment terms. Of the amounts due from subsidiaries of approximately HK$35,058,000 (2003: HK$41,053,000) is interest bearing at prevailing market rates and the remaining balances are non-interest bearing. In the opinion of the directors of the Company, no demand for repayment will be made by the Company in the next twelve months. Accordingly, the amounts are shown as non-current assets.

Particulars of the Company’s principal subsidiaries at 31 March 2004 are set out in note 33.

15. INTERESTS IN AN ASSOCIATE

Share of net assets Premium arising from acquisition of an associate Accumulated amortisation of goodwill Impairment loss recognised in respect of goodwill	THE GROUP 2004 2003 HK$’000 HK$’000 — — 23,441 23,441 (5,860) (5,860) (17,581) (17,581) — —

Particulars of the Company’s associate at 31 March 2004 are set out in note 34.

— II-23 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

16. INVESTMENTS IN SECURITIES

THE GROUP

Equity securities: Listed Unlisted (Note) Less: Impairment loss recognised Market value of listed securities Carrying amount analysed for reporting purposes as: Current Non-current	Investment 2004 HK$’000 — 140,400 (140,400) — — — — —	securities 2003 HK$’000 — 140,400 — 140,400 — — 140,400 140,400	Other investments 2004 2003 HK$’000 HK$’000 — 470 — — — — — 470 — 470 — 470 — — — 470	Total 2004 2003 HK$’000 HK$’000 — 470 140,400 140,400 (140,400) — — 140,870 — 470 — 470 — 140,400 — 140,870	Total 2004 2003 HK$’000 HK$’000 — 470 140,400 140,400 (140,400) — — 140,870 — 470 — 470 — 140,400 — 140,870
					140,870
					470
					470 140,400
					140,870

Details of the investment securities which accounts for more than 10% of the assets of the Group are as follows:

		Percentage of
		nominal value
		of issued share
Name of the		capital held	Issued and
investment	Place of	indirectly by	fully paid up
securities	incorporation	the Company	share capital	Principal activities
Hong Kong Satellite	British Virgin	1.99%	Ordinary	Investment holding
Technology	Islands		US$10,050	company whose
Holdings Limited				subsidiaries are
(‘‘Hong Kong				principally engaged
Satellite’’)				in the development
				of a satellite
				communications
				platform

Note: The directors of the Company have considered the carrying value of its investment in Hong Kong Satellite with reference to the valuation report dated 22 July 2004 prepared by Grant Sherman Appraisal Limited, a firm of independent valuers, in respect of the value of Hong Kong Satellite as at 31 March 2004. The value of Hong Kong Satellite as set out in the valuation report has been prepared after taking into consideration of various principal factors and major assumptions, one of which being the availability of finance to fund the forecast growth of Hong Kong Satellite’s operations in accordance with its business plan and projection. On this basis, the directors of the Company identified an impairment loss of HK$140,400,000 on the investment securities.

— II-24 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

17. PROPERTIES HELD FOR SALE

Properties situated in Hong Kong and held under: — Long leases	THE GROUP 2004 2003 HK$’000 HK$’000 82,000 45,000

The above properties are stated at net realisable value with reference to valuations carried out by a firm of independent professional valuers.

18. TRADE AND OTHER RECEIVABLES

Included in trade and other receivables are trade receivables of approximately HK$1,075,000 (2003: HK$987,000) which comprises mainly rental receivables. Monthly rents are billed in advance and in respect of which settlement is expected upon receipt of billings. The following is an aged analysis of trade receivables at the balance sheet date:

Within 60 days Between 61–90 days Over 90 days	THE GROUP 2004 2003 HK$’000 HK$’000 679 750 156 198 240 39 1,075 987	THE GROUP 2004 2003 HK$’000 HK$’000 679 750 156 198 240 39 1,075 987
		987

19. TRADE AND OTHER PAYABLES

The following is an analysis of trade and other payables at the balance sheet date:

Trade payables with age of 91 days or above Accrued bank loan interest Other payables	THE GROUP 2004 2003 HK$’000 HK$’000 80 80 12,823 16,485 3,655 7,833 16,558 24,398	THE GROUP 2004 2003 HK$’000 HK$’000 80 80 12,823 16,485 3,655 7,833 16,558 24,398
		24,398

20. AMOUNT DUE TO A DIRECTOR

Unsecured and non-interest bearing Less: Amount due within one year shown under current liabilities Amount due after one year	THE GROUP 2004 2003 HK$’000 HK$’000 6,125 8,016 (2,400) — 3,725 8,016	THE COMPANY 2004 2003 HK$’000 HK$’000 6,125 716 (2,400) — 3,725 716	THE COMPANY 2004 2003 HK$’000 HK$’000 6,125 716 (2,400) — 3,725 716
			716

— II-25 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

21. BANK BORROWINGS

Bank loans Bank overdrafts Analysed as: Secured Unsecured	THE GROUP 2004 2003 HK$’000 HK$’000 116,035 186,728 — 95 116,035 186,823 81,793 168,316 34,242 18,507 116,035 186,823	THE GROUP 2004 2003 HK$’000 HK$’000 116,035 186,728 — 95 116,035 186,823 81,793 168,316 34,242 18,507 116,035 186,823
		186,823
		168,316 18,507
		186,823

The bank borrowings bear interest at prevailing market rates and were repayable as follows:

22.

Within one year Between one to two years Between two to five years More than five years Less: Amounts due within one year and included in current liabilities Amounts due after one year SHARE CAPITAL	38,873 21,970 23,020 32,172 116,035 (38,873) 77,162	186,823 — — —
		186,823 (186,823
		—

(a) Ordinary shares

Ordinary shares of HK$0.1 each Authorised: At the beginning and at the end of the year Issued and fully paid: At the beginning of the year Exercise of the conversion rights of convertible redeemable non-voting preference shares (‘‘Preference Shares’’) (note i) Exercise of share options (note ii) At the end of the year	Number of shares 2004 2003 ’000 ’000 6,840,000 6,840,000 3,654,498 3,201,020 10,000 453,478 11,600 — 3,676,098 3,654,498	Share capital 2004 2003 HK$’000 HK$’000 684,000 684,000 365,450 320,102 1,000 45,348 1,160 — 367,610 365,450	Share capital 2004 2003 HK$’000 HK$’000 684,000 684,000 365,450 320,102 1,000 45,348 1,160 — 367,610 365,450
			320,102 45,348 —
			365,450

— II-26 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(b) Preference Shares

Preference Shares of HK$1,000,000 each Authorised: At the beginning and at the end of the year Issued and fully paid: At the beginning of the year Issue of shares Conversion of shares (note i) At the end of the year Total share capital	Number of shares 2004 2003 316 316 104 120 — 33 (1) (49) 103 104	Share capital 2004 2003 HK$’000 HK$’000 316,000 316,000 104,000 120,000 — 33,000 (1,000) (49,000) 103,000 104,000 470,610 469,450

The Preference Shares are issued with the following principal rights and restrictions:

(a) the Preference Shares will confer upon its holder the right to receive, in priority to the holders of any other class of shares in the capital of the Company, a fixed cumulative cash dividend payable on the principal amount outstanding under the Preference Shares at the rate of 1% per annum;
(b) unless previously converted, the Company may by written notice to a holder of the Preference Shares redeem all but not part of the Preference Shares at their total outstanding principal amount on the third anniversary from the date of issue of the Preference Shares;
(c) unless previously converted or redeemed, a holder of the Preference Shares may convert all or any part of the principal amount of the Preference Shares into ordinary shares at a conversion price which is the lower of (i) HK$0.40 and (ii) the average of the 10 lowest daily closing prices per ordinary share on the Stock Exchange during the 30 days immediately prior to the date of issue of conversion notice (subject to adjustments) at any time from the business day after the date of issue of the Preference Shares but prior to the seventh business day before the third anniversary of the date of issue of the Preference Shares;
(d) on a return of capital on a winding-up or otherwise, the Preference Shares will rank in priority to any other class of shares in the capital of the Company provided that the assets of the Company available for distribution to its members will be applied first towards arrears of accruals of the fixed dividend payable on the Preference Shares before repaying the capital paid up on any Preference Shares or any other class of shares in the capital of the Company;
(e) all ordinary shares to be issued on conversion of the Preference Shares will be issued free from all claims, charges, lien, encumbrances and equities and be identical and will rank pari passu in all respects with the ordinary shares then in issue;
(f) a holder of the Preference Shares will not be entitled to attend or vote at any general meetings of the Company by reason only of it being a holder of the Preference Shares, except on a resolution of the ordinary shareholders to vary or abrogate the rights of the holders of Preference Shares;
(g) no application will be made for the listing of or permission to deal in any of the Preference Shares on the Stock Exchange or any other stock exchange; and
(h) the Preference Shares may be assigned or transferred with the prior approval from the Stock Exchange, if so required.

— II-27 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Changes in the share capital of the Company during the year are as follows:

(i) During the year, 1 Preference Share was converted into 10,000,000 ordinary shares of HK$0.1 each of the Company. The converted ordinary shares ranked pari passu in all respects with the then existing ordinary shares of the Company.
(ii) During the year, 11,600,000 option shares were exercised resulting in issue of 11,600,000 ordinary shares of HK$0.1 each of the Company. The issued ordinary shares ranked pari passu in all respects with the then existing ordinary shares of the Company.

The holder of the Preference Shares has indicated that it currently has no intention to serve notice to the Company on the third anniversary from the date of issue of the Preference Shares to redeem all or any part of the Preference Shares.

23. SHARE OPTION SCHEME

The share option scheme adopted by the Company on 11 September 1996 (‘‘Old Share Option Scheme’’) was terminated on 26 August 2002.

A new share option scheme (‘‘New Share Option Scheme’’) was approved and adopted on 26 August 2002 by the Company in place of the Old Share Option Scheme. The purpose of the New Share Option Scheme is to provide incentives or rewards to the eligible persons as defined in the scheme for their contribution or would be contribution to the Group and/or to enable the Group to recruit and retain high-calibre employee and attract human resources that are valuable to the Group. No options have been granted under the New Share Option Scheme since its adoption.

The movements of option shares granted under the Old Share Option Scheme are as follows:

Balance at 1 April 2002 and 2003 Exercise of option shares Lapsed during the year Cancelled during the year Balance at 31 March 2004	Number of option shares 78,500,000 (11,600,000) (25,700,000) (22,200,000)
	19,000,000

Details of the outstanding option shares under the Old Share Option Scheme as at 31 March 2004 comprises:

Date of option shares granted Exercisable period 1 August 2001 1 February 2002 to 31 January 2005 8 December 2001 8 June 2002 to 7 June 2005	Number of total option shares granted Exercise price HK$ 15,000,000 0.255 4,000,000 0.378 19,000,000

The vesting period for option shares granted is six months from date of acceptance of the grant of the option shares to the third anniversary of the date of acceptance of the grant.

— II-28 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Details of the option shares held by the directors of the Company included in the above table are as follows:

Outstanding at 1 April 2002 and 2003 71,100,000	Exercised during the year (11,600,000)	Lapsed during the year (25,700,000)	Cancelled during the year (22,200,000)	Outstanding at 31 March 2004 11,600,000

The financial impact of share options granted is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recognised in the income statement in respect of the value of options granted in the year. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which lapsed or are cancelled prior to their exercise date are deleted from the register of outstanding options.

The consideration received during the year was Nil (2003: Nil).

The share prices on the dates of issue of shares upon exercise of options on 2 January 2004 and 12 January 2004 were HK$0.295 and HK$0.345, respectively.

24. RESERVES

Included in the Group’s accumulated losses is an amount of losses of HK$11,581,000 (2003: HK$11,581,000) which is attributable to the Group’s share of results of its associates.

THE COMPANY At 1 April 2002 Issue of shares Net loss for the year Preference share dividend At 31 March 2003 Issue of shares Net loss for the year Preference share dividend At 31 March 2004	Share premium account HK$’000 744,631 3,652 — — 748,283 899 — — 749,182	Contributed surplus HK$’000 1,114,686 — — — 1,114,686 — — — 1,114,686	Accumulated losses HK$’000 (2,091,632) — (218,762) (1,126) (2,311,520) — (14,092) (1,036) (2,326,648)	Total HK$’000 (232,315) 3,652 (218,762) (1,126)
				(448,551) 899 (14,092) (1,036)
				(462,780)

The contributed surplus of the Company represents the aggregate of the difference between the consolidated shareholders’ funds of the subsidiaries at the date on which they were acquired by the Company, and the nominal amount of the Company’s ordinary shares issued for the acquisition at the time of the group reorganisation prior to the listing of the Company’s ordinary shares on the Stock Exchange and the difference between the estimated fair value of the Company’s ordinary shares issued as purchase consideration of a subsidiary at the date of acquisition in 2002 over the nominal value of the Company’s ordinary share.

— II-29 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

In addition to the retained profits, under the Companies Act 1981 of Bermuda (as amended), contributed surplus is also available for distribution. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if:

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium account.

In the opinion of the directors, the Company had no reserves available for distribution to shareholders at 31 March 2004 and 2003.

25. AMOUNTS DUE TO SUBSIDIARIES

THE COMPANY

The amounts are unsecured, non-interest bearing and do not have fixed repayment terms. No part of the amounts will be repayable within the next twelve months and, accordingly, the amounts are shown as non-current liabilities.

26. DEFERRED TAXATION

The following are the major deferred taxation liabilities recognised and movements thereon during the current and prior reporting periods:

THE GROUP

At 1 April 2002 — as previously reported — adjustment on adoption of SSAP 12 (Revised) — as restated Charge to consolidated income statement At 31 March 2003 Credit to consolidated income statement Effect of change in tax rate At 31 March 2004	Accelerated tax depreciation HK$’000 — (481) (481) (54) (535) 231 (50) (354)

At the balance sheet date, the Group and the Company had unused tax losses of approximately HK$617,886,000 (2003: HK$548,925,000) and HK$3,196,000 (2003: HK$2,113,000) respectively available for offset against future profits. No deferred taxation asset has been recognised in respect of the unused tax losses due to the unpredictability of future profit streams. The tax losses can be carried forward indefinitely.

— II-30 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

27. DISPOSAL OF SUBSIDIARIES

In November 2003, the Group disposed of its subsidiary, Deep Plan Investments Limited, to an independent third party.

Net Liabilities Disposed of Investment property Trade and other receivables Trade and other payables Deposits received Amounts due to immediate holding companies Assignment of intercompany accounts (Loss) gain on disposal of subsidiaries Total consideration Satisfied by: Cash Deferred consideration Net cash inflow arising on disposal: Cash consideration Less: Balance included in trade and other receivables	2004 HK$’000 640 4 (1) (12) (1,666) (1,035) 1,666 (400) 231 231 — 231 231 — 231	2003 HK$’000 — — — — (26,803) (26,803) 26,803 5,500 5,500 5,000 500 5,500 5,500 (500) 5,000

The subsidiaries disposed of in 2004 and 2003 did not contribute significantly to the Group’s cashflows or operating results.

28. MAJOR NON-CASH TRANSACTION

In 2003, 33 Preference Shares were issued to Mr. Chu Yu Lin, David as settlement of the amount of HK$33,000,000 due to him by a subsidiary.

29. PLEDGE OF ASSETS

At 31 March 2004, the general credit facilities of the Group were secured by the Group’s investment properties and properties held for sale with a carrying value of HK$63,000,000 (2003: HK$89,000,000) and HK$82,000,000 (2003: HK$45,000,000), respectively.

— II-31 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

30. OPERATING LEASE ARRANGEMENTS

The Group as lessee

At the balance sheet date, the Group had future minimum lease payments payable under noncancellable operating leases in respect of land and buildings which fall due as follows:

Within one year	THE GROUP 2004 2003 HK$’000 HK$’000 452 —

Operating lease payments represent rentals payable by the Group for its office premises. Leases are negotiated for a term of one to two years.

The Group as lessor

Property rental income earned during the year was approximately HK$9 million (2003: HK$18 million). Certain of the Group’s properties are held for rental purposes. With a carrying amount of HK$89 million (2003: HK$73 million) have been disposed of during the year, the remaining properties are expected to generate rental yields of approximately 7%, on an ongoing basis. Leases are generally negotiated for an average terms of one to two years.

At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments.

Within one year In the second to fifth year inclusive	THE GROUP 2004 2003 HK$’000 HK$’000 8,137 11,760 4,117 4,611 12,254 16,371	THE GROUP 2004 2003 HK$’000 HK$’000 8,137 11,760 4,117 4,611 12,254 16,371
		16,371

31. CONTINGENT LIABILITIES

At 31 March 2004, the Company provided guarantees to banks to the extent of approximately HK$203,750,000 (2003: HK$203,750,000) in respect of banking facilities granted to certain subsidiaries and an aggregate amount of approximately HK$64,575,000 (2003: HK$94,483,000) was utilised by those subsidiaries.

— II-32 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

32. RELATED PARTY TRANSACTIONS

During the year, the Group had the following transactions with related parties:

Name of company/director Nature of transaction Cymbeline Limited Rental expenses paid by the Group (notes a and c) Good Harvest Securities Company Limited Rental income received by the Group (notes b and c) Mr. Chu Yu Lin, David Rental income received by the Group (note c) Interest expenses paid by the Group (note d) Preference share dividend paid (note e) Issue of the Preference Shares by the Company	2004 HK’000 72 62 42 — 1,030 —	2003 HK$’000 96 219 148 1,327 716 33,000

Notes:

(a) Mr. Chan King Hung has a beneficial interest in Cymbeline Limited.
(b) Mrs. Chu Ho Miu Hing has a beneficial interest in Good Harvest Securities Company Limited.
(c) The above transactions were carried out with reference to the market price.
(d) The interest expenses were calculated at prevailing market rates.
(e) The preference share dividend was calculated at 1% per annum on the aggregate par value of the Preference Shares outstanding.

In addition, certain banking facilities of the Group are secured by personal guarantees given by Messrs. Chan King Hung and Chu Yu Lin, David and Mrs. Chu Ho Miu Hing, on which no charge was paid by the Group.

— II-33 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

33. SUBSIDIARIES

Particulars of the Company’s principal subsidiaries at 31 March 2004 are as follows:

		Percentage of
		nominal value of
	Place of	issued share	Issued and
	incorporation	capital held by	fully paid up
Name of subsidiary	and operation	the Company	share capital	Principal activities
Calorie Limited	Hong Kong	100%	Ordinary	Investment holding
			HK$20,000
			Deferred*
			HK$14,000
Fine Point Properties	Hong Kong	100%	Ordinary	Investment holding
Limited			HK$1,955
			Deferred*
			HK$45
Fine Straight	Hong Kong	100%	Ordinary	Property investment
Investments			HK$2
Limited			Deferred*
			HK$10,000
Mass Come	Hong Kong	100%	Ordinary	Property investment and
Development			HK$200,000	provision of building
Limited				management services
				but has become
				inactive during the year
Sanmark Investments	Hong Kong	100%	Ordinary	Property trading
Limited			HK$200
			Deferred*
			HK$82
Star Cherry	British Virgin	100%	Ordinary	Investment holding
Investments Limited	Islands		US$100
Tucknam Property	Hong Kong	100%	Ordinary	Property management but
Management Limited			HK$10,000	has become inactive
				during the year
WTF Digital Technology	British Virgin	100%	Ordinary	Investment holding
Limited	Islands		US$100
Wah Tak Fung (B.V.I.)	British Virgin	100%	Ordinary	Investment holding
Limited **	Islands		US$1,000,000
WTF Technology	Hong Kong	100%	Ordinary	Investment holding
Limited			HK$2
Well Trade	Hong Kong	100%	Ordinary	Property investment and
Development Limited			HK$2	provision of building
			Deferred*	management services
			HK$2	but has become
				inactive during the year

— II-34 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The non-voting deferred shares practically carry no rights to dividends or to receive notice of or to attend or vote at any general meeting of the respective companies or to participate in any distributions on winding up.
** Directly held by the Company.

The directors are of the opinion that a complete list of the particulars of all subsidiaries would be of excessive length and therefore the above list discloses only the particulars of those subsidiaries as at 31 March 2004 which principally affect the results or assets of the Group.

None of the subsidiaries had any debt securities outstanding at the end of the year or at any time during the year.

34. ASSOCIATE

Particulars of the principal associate held indirectly by the Company at 31 March 2004 is as follows:

		Percentage of
		nominal value of
		issued share capital	Issued and
	Place of	held indirectly by	fully paid up
Name of associate	incorporation	the Company	share capital	Principal activities
M.POS (HK) Limited	Hong Kong	25%	Ordinary	Provision of mobile
			HK$10,000	point of sale service

35. RETIREMENT BENEFIT SCHEME

With the implementation of Mandatory Provident Fund Scheme in Hong Kong on 1 December 2000, the Group has maintained the defined contribution scheme registered under the Occupational Retirement Schemes Ordinance (‘‘ORSO Scheme’’) and has obtained an exemption satisfying the requirements of the Mandatory Provident Fund Scheme Ordinance (‘‘MPFO’’).

To comply with MPFO, a Mandatory Provident Fund Scheme with voluntary contributions has been established. Existing ORSO Scheme Members has been given a one-off choice on the MPF Exempted ORSO Scheme and the MPF Scheme. New Employees must join MPF Scheme when it commenced on 1 December 2000.

The amount charged to the income statement represents contributions payable of approximately HK$270,000 (2003: HK$450,000) to the schemes by the Group at rates specified in the rules of the schemes less forfeitures of approximately HK$207,000 (2003: HK$131,000) arising from employees leaving the Group prior to completion of qualifying service period.

At the balance sheet date, the total amount of forfeited contributions, which arose upon employees leaving the retirement benefits schemes and which are available to reduce the contributions payable in future years was approximately HK$nil (2003: HK$6,000).

— II-35 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

3. FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2004

The financial information set out below is extracted from the interim report of the Company for the six months ended 30 September 2004. The unaudited consolidated results of the Group have been reviewed by the Company’s external auditors, Deloitte Touche Tohmatsu and the relevant review report prepared by the auditors is reproduced as follows:

==> picture [128 x 58] intentionally omitted <==

INDEPENDENT REVIEW REPORT

TO THE BOARD OF DIRECTORS OF SINOCHEM HONG KONG HOLDINGS LIMITED

Introduction

We have been instructed by Sinochem Hong Kong Holdings Limited (the ‘‘Company’’) to review the interim financial report set out on pages * to * (note).

Directors’ responsibilities

The Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited require the preparation of an interim financial report to be in compliance with Statement of Standard Accounting Practice No. 25 ‘‘Interim financial reporting’’ issued by the Hong Kong Institute of Certified Public Accountants and the relevant provisions thereof. The interim financial report is the responsibility of, and has been approved by, the directors.

It is our responsibility to form an independent conclusion, based on our review, on the interim financial report, and to report our conclusion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Review work performed

We conducted our review in accordance with Statement of Auditing Standards No. 700 ‘‘Engagements to review interim financial reports’’ issued by the Hong Kong Institute of Certified Public Accountants. A review consists principally of making enquiries of Group management and applying analytical procedures to the interim financial report and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the interim financial report.

— II-36 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Review conclusion

On the basis of our review which does not constitute an audit, we are not aware of any material modifications that should be made to the interim financial report for the six months ended 30 September 2004.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong 17 December 2004

Note: Reference of page numbers of the Group’s unaudited interim financial report is not shown above. Please refer to the Company’s interim report for the six months ended 30 September 2004 for the interim financial report.

— II-37 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Condensed Consolidated Income Statement

For the six months ended 30 September 2004

Notes Turnover 3 Cost of properties sold Reversal of estimated loss on properties held for sale Other operating income Interest income Administrative expenses Property expenses Surplus arising from revaluation of investment properties Bank borrowings and related accrued interest waived 13 Profit (loss) from operations 4 Finance costs Profit (loss) before taxation Taxation 5 Net profit (loss) for the period Dividend 6 Earnings (loss) per share 7 Basic Diluted	1.4.2004 to 30.9.2004 (unaudited) HK$’000 4,906 — 1,500 6,406 1,025 1 (4,081) (1,515) 2,500 36,089 40,425 (2,827) 37,598 — 37,598 (515) 1.01 cents 0.95 cent	1.4.2003 to 30.9.2003 (unaudited) HK$’000 94,088 (89,626) — 4,462 849 28 (11,766) (1,718) — — (8,145) (7,037) (15,182) (80) (15,262) (520) (0.43 cent) N/A

— II-38 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Condensed Consolidated Balance Sheet

At 30 September 2004

Notes Non-current assets Investment properties Tangible fixed assets 8 Current assets Properties held for sale Trade and other receivables 9 Bank balances and cash Current liabilities Trade and other payables 10 Deposits received Amount due to a director 11 Amount due to a shareholder 12 Dividend payable Bank borrowings — due within one year 13 Net current assets Capital and reserves Share capital 14 Reserves Non-current liabilities Bank borrowings — due after one year 13 Amount due to a director 11 Amount due to a shareholder 12 Deferred taxation liabilities	30 September 2004 (unaudited) HK$’000 65,500 217 65,717 83,500 1,436 3,907 88,843 4,599 3,021 2,400 1,191 — 9,462 20,673 68,170 133,887 470,810 (424,770) 46,040 82,021 2,472 3,000 354 87,847 133,887	31 March 2004 (audited) HK$’000 63,000 238 63,238 82,000 1,561 4,200 87,761 16,558 2,927 2,400 — 553 38,873 61,311 26,450 89,688 470,610 (462,163) 8,447 77,162 3,725 — 354 81,241 89,688

— II-39 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Condensed Consolidated Statement of Changes in Equity For the six months ended 30 September 2004

Balance at 1 April 2003 Net loss for the period Preference share dividend Balance at 30 September 2003 Exercise of share options Net loss for the period Preference share dividend Balance at 1 April 2004 Exercise of share options Net profit for the period Preference share dividend Balance at 30 September 2004	Share capital HK$’000 469,450 — — 469,450 1,160 — — 470,610 200 — — 470,810	Share premium account HK$’000 748,283 — — 748,283 899 — — 749,182 310 — — 749,492	Contributed surplus HK$’000 84,925 — — 84,925 — — — 84,925 — — — 84,925	Accumulated losses HK$’000 (1,193,361) (15,262) (520) (1,209,143) — (86,611) (516) (1,296,270) — 37,598 (515) (1,259,187)	Total HK$’000 109,297 (15,262) (520) 93,515 2,059 (86,611) (516) 8,447 510 37,598 (515) 46,040

— II-40 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

Condensed Consolidated Cash Flow Statement

For the six months ended 30 September 2004

Net cash inflow from operating activities Net cash (outflow) inflow from investing activities Net cash outflow from financing activities: New bank loan raised Repayments of bank loans Other financing cash flows Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period	1.4.2004 to 30.9.2004 (unaudited) HK$’000 1,486 (36) 53,000 (46,953) (7,790) (1,743) (293) 4,200 3,907	1.4.2003 to 30.9.2003 (unaudited) HK$’000 57,554 38 20,000 (72,582) (5,863) (58,445) (853) 1,992 1,139

— II-41 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements

For the six months ended 30 September 2004

1. BASIS OF PREPARATION

The condensed financial statements have been prepared in accordance with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and with Statement of Standard Accounting Practice (‘‘SSAP’’) No. 25 ‘‘Interim Financial Reporting’’ issued by the Hong Kong Institute of Certified Public Accountants.

2. ACCOUNTING POLICIES

The condensed financial statements have been prepared under the historical cost convention, as modified for the revaluation of investment properties.

The accounting policies adopted are consistent with those followed in the preparation of the Group’s annual audited financial statements for the year ended 31 March 2004.

3. SEGMENT INFORMATION

For management purposes, the Group is currently organised into three operating divisions, namely, sales of properties, rental service and others. These divisions are the basis on which the Group reports its primary segment information.

For the period ended 30 September 2003, the Group was also involved in the building management services. That operation was discontinued during the six months ended 30 September 2004.

Business segments:

For the six months ended 30 September 2004

Turnover Segment result Unallocated other operating income Interest income Unallocated corporate expenses Bank borrowings and related accrued interest waived Profit from operations Finance costs Profit before taxation Taxation Net profit for the period	Continuing operations Sales of properties Rental service Others HK$’000 HK$’000 HK$’000 — 4,906 — 1,500 3,954 — — (1,147) (1,680)	Continuing operations Sales of properties Rental service Others HK$’000 HK$’000 HK$’000 — 4,906 — 1,500 3,954 — — (1,147) (1,680)	Discontinuing operation Building management services HK$’000 — 67 —	Consolidated HK$’000 4,906 5,521 1,025 1 (2,211) 36,089 40,425 (2,827) 37,598 — 37,598
	Sales of properties HK$’000 — 1,500 —	Rental service HK$’000 4,906 3,954 (1,147)

— II-42 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

For the six months ended 30 September 2003

Turnover External Inter-segment Total Segment result Unallocated other operating income Interest income Unallocated corporate expenses Loss from operations Finance costs Loss before taxation Taxation Net loss for the period	Continuing operations Sales of properties Rental service Others HK$’000 HK$’000 HK$’000 87,000 5,552 — — 255 — 87,000 5,807 — (2,626) 3,015 — — (4,992) (2,045)	Continuing operations Sales of properties Rental service Others HK$’000 HK$’000 HK$’000 87,000 5,552 — — 255 — 87,000 5,807 — (2,626) 3,015 — — (4,992) (2,045)	Discontinuing operation Building management services HK$’000 1,536 174 1,710 161 —	Eliminations HK$’000 — (429) (429) — —	Consolidated HK$’000 94,088 — 94,088 550 849 28 (9,572) (8,145) (7,037) (15,182) (80) (15,262)
	Sales of properties HK$’000 87,000 — 87,000 (2,626) —	Rental service HK$’000 5,552 255 5,807 3,015 (4,992)

Inter-segment sales were charged at prevailing market rates.

4. PROFIT (LOSS) FROM OPERATIONS

Profit (loss) from operations has been arrived at after charging: Depreciation of plant and equipment Provision for severance payment Loss on disposal of tangible fixed assets TAXATION Deferred taxation Current period	1.4.2004 to 30.9.2004 HK$’000 58 — — 1.4.2004 to 30.9.2004 HK$’000 —	1.4.2003 to 30.9.2003 HK$’000 78 1,213 141 1.4.2003 to 30.9.2003 HK$’000 (80)

5. TAXATION

No provision for Hong Kong Profits Tax has been made in the condensed financial statements as the estimated assessable profits for both periods have been wholly absorbed by the tax losses brought forward.

— II-43 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

6. DIVIDEND

Dividend for preference shares of approximately HK$515,000 (six months ended 30.9.2003: HK$520,000) was paid during the period to a preference shareholder in accordance with the rights of preference shareholders of the Company.

7. EARNINGS (LOSS) PER SHARE

The calculation of the basic and diluted earnings (loss) per share is based on the following data:

Net profit (loss) for the period
Dividend on convertible preference shares
Earnings (loss) for the purpose of calculating basic earnings (loss) per
share
Effect of dilutive potential ordinary shares:
Dividend on convertible preference shares
Earnings (loss) for the purpose of calculating diluted earnings (loss) per
share
Weighted average number of ordinary shares for the purpose of
calculating basic earnings (loss) per share
Effect of dilutive potential ordinary shares:
Options
Convertible preference shares
Weighted average number of ordinary shares for the purpose of
calculating diluted earnings (loss) per share

1.4.2004 to
30.9.2004
1.4.2003 to
30.9.2003
HK$’000
HK$’000
37,598
(15,262)
(515)
(520)
37,083
(15,782)
515
—
37,598
(15,782)
Number of shares
1.4.2004 to
30.9.2004
1.4.2003 to
30.9.2003
’000
’000
3,676,208
3,656,356
4,073
—
293,447
—
297,520
—
3,973,728
3,656,356

The computation of diluted loss per share for the period ended 30 September 2003 does not assume the exercise of the conversion rights attached to the Company’s outstanding share options and convertible redeemable non-voting preference shares as these conversions would result in a decrease in loss per share.

8. ADDITION TO TANGIBLE FIXED ASSETS

During the six months ended 30 September 2004, the Group spent approximately HK$37,000 (31.3.2004: HK$12,000) on acquisition of tangible fixed assets.

9. TRADE AND OTHER RECEIVABLES

Included in trade and other receivables are trade receivables of approximately HK$997,000 (31.3.2004: HK$1,075,000) which comprises mainly rental receivables. Monthly rents are billed in advance and in respect of which settlement is expected upon receipts of billings.

— II-44 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

The following is an aged analysis of trade receivables at the reporting date:

Within 60 days Between 61–90 days Over 90 days Trade receivables	30 September 2004 HK$’000 426 106 465 997	31 March 2004 HK$’000 679 156 240
		1,075

10. TRADE AND OTHER PAYABLES

The following is an aged analysis of trade payables included in trade and other payables at the reporting date:

Trade payables with age of 91 days or above Accrued bank loan interest Other payables AMOUNT DUE TO A DIRECTOR Unsecured and non-interest bearing Less: Amount due within one year shown under current liabilities AMOUNT DUE TO A SHAREHOLDER Unsecured and interest bearing at prevailing market rates Unsecured and non-interest bearing Less: Amount due within one year shown under current liabilities	30 September 2004 HK$’000 80 28 4,491 4,599 30 September 2004 HK$’000 4,872 (2,400) 2,472 30 September 2004 HK$’000 3,000 1,191 4,191 (1,191) 3,000	31 March 2004 HK$’000 80 12,823 3,655
		16,558
		31 March 2004 HK$’000 6,125 (2,400)
		3,725
		31 March 2004 HK$’000 — —
		— —
		—

11. AMOUNT DUE TO A DIRECTOR

12. AMOUNT DUE TO A SHAREHOLDER

13. BANK BORROWINGS

During the six months ended 30 September 2004, the Group obtained new bank borrowings amounting to HK$53,000,000. The loan bears interest at prevailing market rates and is repayable within 7 years. The fund raised was used to settle the outstanding bank loans. The bank loans of HK$46,953,000 were repaid during the six months ended 30 September 2004.

— II-45 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

An amount of HK$21,892,000 was waived by a bank upon fulfillment of certain conditions as agreed between the bank and a subsidiary within the Group during the six months ended 30 September 2004. The related accrued bank interest of HK$14,197,000 was also waived. Accordingly, an aggregate amount of HK$36,089,000 was credited to the condensed consolidated income statement for the six months ended 30 September 2004.

14. SHARE CAPITAL

Number of	Share
shares	capital
’000	HK$’000

(a) Ordinary shares Ordinary shares of HK$0.1 each Issued and fully paid: At 1 April 2004 Exercise of share options At 30 September 2004 (b) Convertible redeemable non-voting preference shares (‘‘Preference Shares’’) Preference Shares of HK$1,000,000 each Issued and fully paid: At 1 April 2004 and 30 September 2004 Total share capital	3,676,098 2,000 3,678,098 103	367,610 200
		367,810
		103,000
		470,810

During the six months ended 30 September 2004, 2,000,000 option shares were exercised resulting in issue of 2,000,000 ordinary shares of HK$0.10 each of the Company. The newly issued ordinary shares ranked pari passu in all respects with the then existing ordinary shares of the Company.

The holder of the Preference Shares has indicated that it currently has no intention to serve notice to the Company upon the maturity of the Preference Shares which is on the third anniversary from the issue date of 27 February 2002, to redeem all or any part thereof.

15. PLEDGE OF ASSETS

The general credit facilities and bank borrowings of the Group are secured by the Group’s investment properties and properties held for sale with a carrying value of HK$65,500,000 (31.3.2004: HK$63,000,000) and HK$83,500,000 (31.3.2004: HK$82,000,000), respectively.

— II-46 —

APPENDIX II

FINANCIAL INFORMATION OF THE GROUP

16. RELATED PARTY TRANSACTIONS

During the period, the Group had the following transactions with related parties:

Name of related party Nature of transaction Cymbeline Limited Rental expenses paid by the Group (notes a and c) Good Harvest Securities Company Limited Rental income received by the Group (notes b and c) Mr. Chu Yu Lin, David Rental income received by the Group (note c) Preference share dividend paid by the Group (note d) Sinochem Hong Kong (Holdings) Co., Ltd. Rental expenses paid by the Group (notes c and e) Preference share dividend paid by the Group (note d)	1.4.2004 to 30.9.2004 HK$’000 — — — — 227 515	1.4.2003 to 30.9.2003 HK$’000 48 62 42 520 — —

Notes:

(a) Mr. Chan King Hung, a former director of the Company, has a beneficial interest in Cymbeline Limited.
(b) Mrs. Chu Ho Miu Hing, a director of the Company, has a beneficial interest in Good Harvest Securities Company Limited.
(c) The above transactions were carried out with reference to the market price.
(d) The preference share dividend was calculated at 1% per annum on the aggregate par value of the preference shares outstanding.
(e) Sinochem Hong Kong (Holdings) Co., Ltd. is the substantial shareholder of the Company.

— II-47 —

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

For illustrative purpose only, set out below is the unaudited pro forma financial information of the Group after Completion of the Acquisition (the ‘‘Enlarged Group’’). The pro forma financial information is prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of providing investor with information to illustrate the effect of the Acquisition on (a) financial information of the Enlarged Group, (b) net tangible assets of the Enlarged Group, and (c) earnings per New Share of the Enlarged Group.

I. UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma financial information of the Enlarged Group has been prepared on the basis of preparation as stated in note 1 of section (d) below and is derived after a number of adjustments. As it has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the financial performance and position of the Enlarged Group immediately following the Completion or at any future date.

(a) Pro forma profit and loss account

The following pro forma profit and loss account has been prepared based on the consolidated profit and loss account of the Group for the year ended 31 March 2004 as extracted from section 2 of Appendix II, and the combined profit and loss account of the Fertilizer Group for the year ended 31 December 2004 as extracted from Appendix I, after making certain pro forma adjustments relating to the Acquisition as if the Completion had taken place at 1 January 2004.

Turnover Cost of sales Reversal of estimated loss on properties held for sales Gross profit Other revenues Distribution costs Administrative expenses Other operating income, net Property expenses Surplus arising from revaluation of investment properties Impairment loss recognised for investments in securities Bank borrowings and related accrued interest waived	Year ended 31 March 2004 Group HK$’000 99,483 (90,556) 37,771 46,698 34 — (17,204) 3,193 (3,103) 9,700 (140,400) 9,608	Year ended 31 December 2004 Fertilizer Group HK$’000 11,878,504 (10,849,854) — 1,028,650 42,367 (317,233) (119,215) 41,347 — — — —	Aggregated Pro forma adjustments Note HK$’000 HK$’000 11,977,987 — (10,940,410) — 37,771 — 1,075,348 42,401 — (317,233) — (136,419) (25,932) (a) 44,540 (3,503) (b) (3,103) 3,103 (b) 9,700 — (140,400) — 9,608 —	Pro forma Enlarged Group HK$’000 11,977,987 (10,940,410) 37,771 1,075,348 42,401 (317,233) (162,351) 41,037 — 9,700 (140,400) 9,608

— III-1 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(Loss)/profit from operations Loss on disposal of subsidiaries Finance costs Share of profits less losses of jointly controlled entities (Loss)/profit before taxation Taxation credit/(charge) (Loss)/profit after taxation Minority interests Net (loss)/profit attributable to shareholders	Year ended 31 March 2004 Group HK$’000 (91,474) (400) (10,180) — (102,054) 181 (101,873) — (101,873)	Year ended 31 December 2004 Fertilizer Group HK$’000 675,916 — (47,280) 41,759 670,395 (141,747) 528,648 (16,042) 512,606	Aggregated Pro forma adjustments Note HK$’000 HK$’000 584,442 (400) 400 (b) (57,460) — 41,759 — 568,341 (141,566) — 426,775 (16,042) — 410,733	Pro forma Enlarged Group HK$’000 558,110 — (57,460) 41,759 542,409 (141,566) 400,843 (16,042) 384,801

The pro forma adjustments reflect:

(a) The amortisation of goodwill over an estimated useful life of 10 years in accordance with the accounting policy of the Enlarged Group. Details of the goodwill arising from the deemed acquisition are set out in note 2(a) and (b) of section (d) below.
(b) The reclassification of the profit and loss account balances to conform with the presentation of the profit and loss account of the Enlarged Group.

The above pro forma adjustments will not have continuing profit and loss effect on the Enlarged Group, except that upon the adoption of the new accounting standards (effective for accounting periods commencing 1 January 2005) by the Enlarged Group for the year ending 31 December 2005, assuming completion of the Acquisition, amortisation of goodwill will be prohibited, instead, goodwill will be tested for impairment annually, or more frequently if events or changes in circumstances that indicate a possible impairment. Where impairment exists, the impairment loss will be charged to the profit and loss account.

— III-2 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(b) Pro forma balance sheet

The following pro forma balance sheet has been prepared based on the consolidated balance sheet of the Group as at 30 September 2004 as extracted from section 3 of Appendix II and the combined balance sheet of the Fertilizer Group as at 31 December 2004 as extracted from Appendix I, after making certain pro forma adjustments relating to the Acquisition as if the Completion had taken place at 31 December 2004.

Goodwill Investment properties Property, plant and equipment Interests in jointly controlled entities Investment securities Current assets Properties held for sales Inventories Loans receivable Trade and bills receivables Other receivables and prepayments Bank balances and cash Current liabilities Deposits received Trade and bills payable Other payables and accruals Taxation payable Amount due to a director Amount due to a shareholder Short-term bank loans Current portion of long-term bank loans Net current assets Financed by: Share capital Ordinary shares Preference shares (Note 2(d)) Capital reserve Other reserves Accumulated (losses)/profits Shareholders’ funds Long-term loans Amount due to a director Amount due to a shareholder Deferred tax liabilities Minority interests	30 September 2004 Group HK$’000 — 65,500 217 — — 65,717 83,500 — — 997 439 3,907 88,843 3,021 80 4,519 — 2,400 1,191 — 9,462 20,673 68,170 133,887 367,810 103,000 470,810 749,492 1,220,302 84,925 (1,259,187) 46,040 82,021 2,472 3,000 354 — 133,887	31 December 2004 Fertilizer Group HK$’000 — — 552,574 352,925 14,248 919,747 — 3,869,741 206,179 535,053 1,102,805 214,811 5,928,589 — 1,436,324 1,461,767 108,770 — — 1,639,065 5,660 4,651,586 1,277,003 2,196,750 109,909 — 109,909 407,670 517,579 273,877 1,116,044 1,907,500 131,157 — — 2,115 155,978 2,196,750	Aggregated Pro forma adjustments Note HK$’000 HK$’000 — 259,323 (a) 65,500 — 552,791 — 352,925 — 14,248 — 985,464 83,500 — 3,869,741 — 206,179 — 536,050 — 1,103,244 — 218,718 — 6,017,432 3,021 — 1,436,404 — 1,466,286 20,000 (b) 108,770 — 2,400 — 1,191 — 1,639,065 — 15,122 — 4,672,259 1,345,173 2,330,637 477,719 103,000 580,719 1,157,162 1,737,881 285,363 (c) (1,220,302) (d) 358,802 (84,925) (d) (143,143) 1,259,187 (d) 1,953,540 213,178 — 2,472 — 3,000 — 2,469 — 155,978 — 2,330,637	Pro forma Enlarged Group HK$’000 259,323 65,500 552,791 352,925 14,248
				1,244,787
				83,500 3,869,741 206,179 536,050 1,103,244 218,718
				6,017,432
				3,021 1,436,404 1,486,286 108,770 2,400 1,191 1,639,065 15,122
				4,692,259
				1,325,173
				2,569,960
				802,942 273,877 1,116,044
				2,192,863 213,178 2,472 3,000 2,469 155,978
				2,569,960

— III-3 —

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The pro forma adjustments reflect:

(a) Goodwill arising from the deemed acquisition as detailed in note 2(a) and (b) of paragraph (d) below.
(b) Expenses to be incurred in relation to the Acquisition, estimated at HK$20,000,000.
(c) This represents the cost of acquisition deemed to be given by Fertilizer Company and is calculated based on the fair value of the proportion of Fertilizer Company at the date of Completion that would be given up to the existing shareholders of the Company other than Sinochem HK.
(d) The deemed elimination of the share capital and reserves of the Group on consolidation, and the creation of capital reserve due to the reverse acquisition method of accounting.

These pro forma adjustments will not have continuing profit and loss effect on the Enlarged Group, except that upon the adoption of the new accounting standards (effective for accounting periods commencing 1 January 2005) by the Enlarged Group for the period ending 31 December 2005, assuming completion of the Acquisition, amortisation of goodwill will be prohibited, instead, goodwill will be tested for impairment annually, or more frequently if events or changes in circumstances that indicate a possible impairment. Where impairment exists, the impairment loss will be charged to the profit and loss account.

— III-4 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(c) Pro forma cash flow statement

The following pro forma cash flow statement has been prepared based on the consolidated cash flow statement of the Group for the year ended 31 March 2004 as extracted from section 2 of Appendix II, and the combined cash flow statement of the Fertilizer Group for the year ended 31 December 2004 as extracted from Appendix I, as if the Completion had taken place at 1 January 2004.

Net cash generated from operations Interest paid Hong Kong profits tax refunded PRC enterprise income tax paid Net cash inflow from operating activities Investing activities Acquisition of subsidiaries Dividends received Proceeds from disposal of fixed assets Proceeds from disposal of subsidiaries Proceeds from disposal of investments in securities Increase in investments in jointly controlled entities Purchase of fixed assets Interest received (Note) Purchase of investment securities New loans receivable Repayment of loans receivable Net cash inflow/(outflow) from investing activities Net cash inflow before financing Financing activities Increase in capital of a subsidiary/incorporation of companies Repayment to a director New loans Repayment of loans borrowed Capital injection by minority shareholders Proceeds from issue of shares Interest paid Net cash outflow from financing Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign exchange rate changes Cash and cash equivalent at end of the year Analysis of balances of cash and cash equivalents Bank balances and cash	Year ended 31 March 2004 Group HK$’000 76,921 — 49 — 76,970 — 10 — 231 763 — (12) 34 — — — 1,026 77,996 — (2,920) 50,000 (121,987) — 2,059 (2,940) (75,788) 2,208 1,992 — 4,200 4,200	Year ended 31 December 2004 Fertilizer Group HK$’000 457,961 (47,279) — (143,768) 266,914 33,413 — 38,708 — 99,566 (94,340) (91,968) 25,019 (3,500) (6,730,425) 6,544,906 (178,621) 88,293 157 — 7,047,178 (7,180,943) 1,095 — — (132,513) (44,220) 259,515 (484) 214,811 214,811	Pro forma Enlarged Group HK$’000 534,882 (47,279) 49 (143,768) 343,884 33,413 10 38,708 231 100,329 (94,340) (91,980) 25,053 (3,500) (6,730,425) 6,544,906 (177,595) 166,289 157 (2,920) 7,097,178 (7,302,930) 1,095 2,059 (2,940) (208,301) (42,012) 261,507 (484) 219,011 219,011

Note: The interest received of the Fertilizer Group has been reclassified from operating activities to investing activities in order to achieve a consistent presentation with the Group.

— III-5 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(d) Notes to unaudited pro forma financial information

1. Basis of preparation

For the purpose of the pro forma financial information, the Enlarged Group referred to hereinafter includes Sinochem Hong Kong Holdings Limited (the ‘‘Company’’) and its subsidiaries (the ‘‘Group’’) and China Fertilizer (Holdings) Company Limited (‘‘Fertilizer Company’’) and its subsidiaries (the ‘‘Fertilizer Group’’).

On 28 January 2005, the Company entered into an acquisition agreement with Sinochem Hong Kong (Group) Company Limited (‘‘Sinochem HK’’) to acquire the Fertilizer Group from Sinochem HK at a consideration of HK$5,050 million. The consideration will be settled in full by the allotment and issue of 5,050,000,000 new shares of the Company to Sinochem HK at the issue price of HK$1 per share (‘‘Consideration Share’’).

The pro forma profit and loss account, the pro forma balance sheet and the pro forma cash flow statement of the Enlarged Group presented in sections (a) to (c) above have been prepared based on the audited financial statements of the Group for the year ended 31 March 2004 as set out on pages II-5 to II-35 of this circular, the unaudited interim financial statements of the Group for the six months ended 30 September 2004 as set out on pages II-38 to II-47 of this circular, and the audited financial information of the Fertilizer Group as set out in the Accountants’ Report on the Fertilizer Group in Appendix I of this circular, after making certain pro forma adjustments.

For the purpose of the pro forma financial information, the financial information of the Fertilizer Group stated in Renminbi as set out in Appendix I have been translated into Hong Kong dollar at an exchange rate of HK$1 = RMB1.06.

2. Reverse acquisition and goodwill

(a) The acquisition will be accounted for as a reverse acquisition under generally accepted accounting principles in Hong Kong since the issuance of the Consideration Shares in exchange of the entire equity interests in Fertilizer Company will result in Sinochem HK, presently holding 21.16% equity interests in the Company, becoming the controlling shareholder of the Company holding 94.65% equity interests upon completion of the Acquisition. For accounting purpose, the Company is deemed to have been acquired by Fertilizer Company as the acquirer.

Fertilizer Company will apply the purchase method of accounting for the deemed acquisition of the Group. In applying the purchase method, the cost of acquisition deemed to be given by Fertilizer Company is calculated based on the fair value of the proportion of Fertilizer Company at the date of Completion that would be given up to the existing shareholders of the Company (other than Sinochem HK). The identifiable assets and liabilities of the Group will be recorded on the balance sheet of the Enlarged Group at their fair values as at the date of

— III-6 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Completion. Any goodwill or negative goodwill arising from the Acquisition represents the excess or deficit of the deemed cost of acquisition over the fair value of the identifiable assets and liabilities of the Group at the date of Completion.

(b) For the purpose of preparation of the pro forma financial information and for illustrative purpose, the goodwill arising from the Acquisition is estimated to be HK$259,323,000. The goodwill is determined as the excess of the deemed cost of acquisition of HK$285,363,000 and an estimated transaction costs of HK$20,000,000 to be incurred in relation to the Acquisition, totalling approximately HK$305,363,000, over the fair value of the identifiable assets and liabilities of the Group at the date of Completion of approximately HK$46,040,000, which is taken to be the book value of the assets and liabilities of the Group as stated in its published unaudited financial statements as at 30 September 2004. At completion of the Acquisition, an assessment of the fair value of the separable assets and liabilities of the Group will be undertaken, as a result of which, the fair value of the assets and liabilities may be different from their book values as at 30 September 2004. Accordingly, the actual goodwill at date of completion may be different from that presented above.
(c) For the purpose of the unaudited pro forma financial information of the Enlarged Group, the accounting treatment in respect of goodwill is in accordance with Hong Kong Statements of Standard Accounting Practices (‘‘HKSSAP’’) 29, 30 and 31 (‘‘Existing Policies’’). The Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’) issued a number of policies (including Hong Kong Financial Reporting Standard 3 ‘‘Business Combinations’’, Hong Kong Accounting Standard (‘‘HKAS’’) 36 ‘‘Impairment of Assets’’ and HKAS 38 ‘‘Intangible Assets’’ (‘‘New Policies’’)), which are effective for accounting period commencing 1 January 2005. The acquisition of the Fertilizer Group will be accounted for by the Group using the New Policies, for the year ending 31 December 2005. Under New Policies, amortisation of goodwill is prohibited, instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment. In addition, under New Policies, certain new intangible assets in addition to the ones which are recognised under the Existing Policies will be identified and recognised.
(d) As mentioned in the subsection headed ‘‘Preference Shares’’ on pages VII-2 and VII-3 of Appendix VII of this circular, pursuant to the Company’s Bye-law, unless previously converted into the Company’s ordinary shares, all of the preference shares of the Company may be redeemed at their aggregate nominal value on the maturity date of 27 February 2005. As at 27 February 2005, there were 103 preferences shares remained outstanding and had not been converted into the Company’s ordinary shares. The holder of the preference shares, Sinochem HK, has requested redemption of all of the outstanding preference shares. On

— III-7 —

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

the basis that all of the outstanding preference shares have been requested for redemption at their aggregate nominal value of HK$103 million, the net assets value of the Group as at 30 September 2004 would decrease by HK$103 million. The decrease in net assets value of the Group resulting from the redemption would have a corresponding upward adjustment of HK$103 million to the goodwill arising from the Acquisition.

II. UNAUDITED PRO FORMA NET TANGIBLE ASSETS STATEMENT OF THE ENLARGED GROUP BEFORE AND AFTER COMPLETION

The following unaudited pro forma net tangible assets statement of the Group before and after Completion has been prepared based on the published unaudited consolidated financial statements of the Group as at 30 September 2004 as set out in Appendix II to this circular and of the Enlarged Group after completion based on the unaudited pro forma balance sheet as set out in section I of this Appendix.

The statement is prepared for illustrative purpose only and, because of its nature, it may not give a true picture of the financial position of the Enlarged Group immediately following the Completion or at any future date.

Before Completion

Unaudited consolidated net tangible assets of the Group as at 30 September 2004 before Completion HK’000 (Note 1) 46,040	Unaudited consolidated net tangible assets per Ordinary Share of the Company as at 30 September 2004 before Completion HK$ (Note 2) 0.01

After Completion

Unaudited pro forma net assets of the Enlarged Group after Completion HK$’000 (Note 3) 2,192,863	Less: Goodwill arising from the Acquisition HK$’000 259,323	Unaudited pro forma net tangible assets of the Enlarged Group after Completion HK$’000 1,933,540	Unaudited pro forma net tangible assets per Ordinary Share of the Company after completion of the Acquisition HK$ (Note 4) 0.04	Unaudited pro forma net tangible assets per New Share of the Company after completion of the Acquisition and Capital Reorganisation HK$ (Note 5) 0.36

— III-8 —

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes:

The unaudited adjusted consolidated net tangible assets of the Group as at 30 September 2004 is extracted from the interim financial statements of the Group as set out in section 3 of Appendix II.
The unaudited consolidated net tangible assets per Ordinary Share of the Company as at 30 September 2004 is calculated based on 3,679,498,284 ordinary shares of the Group prior to the completion of the Acquisition, Capital Reduction and Share Consolidation.
The unaudited pro forma net assets of the Enlarged Group is extracted from the unaudited pro forma balance sheet as set out in section I(b) of this Appendix.
Unaudited pro forma net tangible assets per Ordinary Share of the Company after completion of the Acquisition is calculated based on 54,179,498,284 Ordinary Shares of the Company assuming the completion of the Acquisition but before Capital Reorganisation.
Unaudited pro forma net tangible assets per New Share of the Company after completion of the Acquisition and Capital Reorganisation is calculated based on 5,417,949,828 Ordinary Shares of the Company assuming the completion of the Acquisition and Capital Reorganisation.

III UNAUDITED PRO FORMA EARNINGS PER NEW SHARE

The following unaudited pro forma earnings per New Share has been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the Acquisition as if the Completion had taken place on 1 January 2004. The pro forma earnings per New Share has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial results of the Enlarged Group following the Completion of the Acquisition.

Pro forma net profit attributable to shareholders (Note 1) Pro forma earnings per New Share — basic (Note 2) Pro forma earnings per New Share — fully diluted (Note 3)	HK$’000 384,801
	HK$0.07
	HK$0.07

Notes:

(1) The pro forma net profit attributable to shareholders is extracted from the pro forma profit and loss account as set out in section I (a) of this Appendix.
(2) The calculation of the ‘‘Pro forma earnings per New Share — basic’’ is based on the pro forma net profit attributable to shareholders, assuming that the Acquisition, Capital Reduction and Share Consolidation had been completed on 1 January 2004 and a total of 5,417,949,828 New Shares in issue during the entire year.
(3) The ‘‘Pro forma earnings per New Share — fully diluted’’ for the year ended 31 December 2004, assuming that the Acquisition, Capital Reduction and Share Consolidation had been completed on 1 January 2004, is the same as the ‘‘Pro forma earnings per New Share — basic’’ as all potential ordinary shares are anti-dilutive.

— III-9 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

IV. REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of a report received from the Company’s reporting accountants, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular. As there is no specific guidance on the reporting on pro forma financial information under the Auditing Guidelines issued by the Hong Kong Institute of Certified Public Accountants, this report is prepared with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 ‘‘Reporting on pro forma financial information pursuant to the Listing Rules’’ issued by the Auditing Practices Board in the United Kingdom.

13 June 2005

The Directors

Sinochem Hong Kong Holdings Limited China Fertilizer (Holdings) Company Limited

Dear Sirs,

We report on the unaudited pro forma financial information of Sinochem Hong Kong Holdings Limited (the ‘‘Company’’) and its subsidiaries and China Fertilizer (Holdings) Company Limited (‘‘Fertilizer Company’’) and their subsidiaries (hereinafter collectively referred to as the ‘‘Enlarged Group’’) set out on pages III-1 to III-9 under the headings of ‘‘Unaudited Pro Forma Financial Information’’, ‘‘Unaudited Pro Forma Net Tangible Assets Statement of The Enlarged Group Before and After Completion’’ and ‘‘Unaudited Pro Forma Earnings Per New Share’’ in Section I, II and III respectively of Appendix III to the Company’s circular dated 13 June 2005, in connection with the proposed acquisition by the Company of the entire shareholdings of Fertilizer Company (the ‘‘Acquisition’’). The unaudited pro forma financial information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Acquisition might have affected the relevant financial information of the Enlarged Group.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 13 of Appendix 1B and paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’).

— III-10 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

It is our responsibility to form an opinion, as required by paragraph 4.29 of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of opinion

We conducted our work with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 ‘‘Reporting on pro forma financial information pursuant to the Listing Rules’’ issued by the Auditing Practices Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company.

Our work does not constitute an audit or review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express any such assurance on the unaudited pro forma financial information.

The unaudited pro forma financial information has been prepared on the bases set out on pages III-1 to III-9 for illustrative purpose only and, because of its nature, it may not be indicative of: (a) The results and cash flows of the Enlarged Group for any future periods;

(b) The financial position of the Enlarged Group as at any future date; or
(c) the earnings per share of the Enlarged Group for any future periods.

Our work has not been carried out in accordance with auditing standards generally accepted in the United States of America and accordingly should not be relied upon as if it has been carried out in accordance with those standards.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Enlarged Group; and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29 of the Listing Rules.

Yours faithfully,

PricewaterhouseCoopers Certified Public Accountants Hong Kong

— III-11 —

PROFIT FORECAST

APPENDIX IV

The forecast of the consolidated profit of the Enlarged Group attributable to shareholders of the Company for the year ending 31 December 2005 is set out in the section headed ‘‘Financial information — The Enlarged Group — Profit Forecast’’ in this circular.

1. BASES AND ASSUMPTIONS

The Acquisition will be accounted for as a reverse acquisition under the Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) since the issuance of the Consideration Shares in exchange of the entire equity interests of Fertilizer Company will result in Sinochem HK, presently holding 21.16% equity interests in the Company, becoming the controlling shareholder of the Company holding 94.65% equity interests. For accounting purpose, the Company is deemed to have been acquired by Fertilizer Company as the acquirer. Fertilizer Company will apply the purchase method of accounting for the deemed acquisition of the Group.

The Directors and directors of Sinochem HK together have prepared the forecast of the consolidated profit of the Enlarged Group attributable to shareholders of the Company for the year ending 31 December 2005 based on the unaudited combined results of the Fertilizer Group for the three months ended 31 March 2005, a forecast of the consolidated results of the Fertilizer Group for the remaining nine months ending 31 December 2005 and a forecast of the consolidated results of the Group for the period from the date of completion of the Acquisition to 31 December 2005, on the basis that the Acquisition will be accounted for as a reverse acquisition under the HKFRSs. The Directors and directors of Sinochem HK are not aware of any extraordinary items which have arisen or are likely arise during the year ending 31 December 2005. The principal assumptions adopted by the Directors and directors of Sinochem HK in preparing the Profit Forecast are set out below:

(a) there will be no material changes in the existing political, legal, fiscal, market or economic conditions in China, Hong Kong, or any other country or territory in which the Enlarged Group currently operates or which are otherwise material to the Enlarged Group’s revenues or results;
(b) there will be no material changes in the bases or rates of taxation in the countries or territories in which the Enlarged Group operates, except as otherwise disclosed in the Circular; and
(c) there will be no material changes in interest rates or foreign currency exchange rates from those prevailing as at the last audited balance sheet date.

The Profit Forecast has been prepared on a basis consistent in all material respects with the accounting policies presently adopted by the Fertilizer Group as set out in section II note 2 of the Accountants’ Report included in Appendix I to this circular, after incorporation of the changes due to the application of the new HKFRSs as set out in the section headed ‘‘Financial Information — the Enlarged Group — Principal Accounting Policies of the Enlarged Group’’ in this circular.

— IV-1 —

APPENDIX IV

PROFIT FORECAST

2. LETTERS

Set out below is the texts of the letters, prepared for inclusion in this circular, received from the reporting accountants, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, and from the Sponsors in connection with the forecast of the consolidated profit of the Enlarged Group attributable to shareholders of the Company for the year ending 31 December 2005, respectively.

(i) Letter from PricewaterhouseCoopers

13 June 2005

The Directors Sinochem Hong Kong Holdings Limited Sinochem Hong Kong (Group) Company Limited Cazenove Asia Limited Goldman Sachs (Asia) L.L.C.

Dear Sirs,

We have reviewed the calculations of and accounting policies adopted in arriving at the forecast of the consolidated profit attributable to shareholders of Sinochem Hong Kong Holdings Limited (the ‘‘Company’’) for the year ending 31 December 2005 (the ‘‘Profit Forecast’’) as set out in the subsection headed ‘‘Profit Forecast’’ in the section headed ‘‘Financial Information — the Enlarged Group’’ in the circular (the ‘‘Circular’’) of the Company dated 13 June 2005, in connection with the Company’s proposed acquisition from Sinochem Hong Kong (Group) Company Limited (‘‘Sinochem HK’’) the entire issued share capital of China Fertilizer (Holdings) Company Limited (‘‘Fertilizer Company’’) (the ‘‘Acquisition’’).

We conducted our work in accordance with the Auditing Guideline 3.341 on ‘‘Accountants’ report on profit forecasts’’ issued by the Hong Kong Institute of Certified Public Accountants.

The Profit Forecast, for which the directors of the Company and the directors of Sinochem HK are solely responsible, has been prepared by them based on the unaudited combined results of Fertilizer Company and its subsidiaries (the ‘‘Fertilizer Group’’) for the three months ended 31 March 2005, a forecast of the consolidated results of the Fertilizer Group for the nine months ending 31 December 2005, and a forecast of the consolidated results of the Company and its subsidiaries for the period from the date of completion of the Acquisition to 31 December 2005, on the basis that the Acquisition will be accounted for as a reverse acquisition under the Hong Kong Financial Reporting Standards.

— IV-2 —

APPENDIX IV

PROFIT FORECAST

In our opinion, the Profit Forecast, so far as the calculation and accounting policies are concerned, has been properly compiled in accordance with the bases and assumptions made by the directors of the Company and the directors of Sinochem HK as set out on page IV-1 of the Circular, and is presented on a basis consistent in all material respects with the accounting policies presently adopted by the Fertilizer Group as set out in Section II note 2 of our Accountants’ Report on the Fertilizer Group dated 13 June 2005, the text of which is set out in Appendix I to the Circular.

Yours faithfully PricewaterhouseCoopers Certified Public Accountants Hong Kong

— IV-3 —

PROFIT FORECAST

APPENDIX IV

(ii) Letter from the Sponsors

13 June 2005

The Directors

Sinochem Hong Kong Holdings Limited Sinochem Hong Kong (Group) Company Limited

Dear Sirs,

We refer to the forecast of the consolidated profit attributable to shareholders of Sinochem Hong Kong Holdings Limited (the ‘‘Company’’) for the year ending 31 December 2005 (the ‘‘Profit Forecast’’) as set out in the subsection headed ‘‘Project Forecasts’’ in the section headed ‘‘Financial Information — the Enlarged Group’’ in the circular of the Company dated 13 June 2005, in connection with the Company’s proposed acquisition from Sinochem Hong Kong (Group) Company Limited (‘‘Sinochem HK’’) of the entire shareholdings of the China Fertilizer (Holdings) Company Limited (‘‘Fertilizer Company’’) (the ‘‘Acquisition’’).

The Profit Forecast, for which the directors of the Company and the directors of Sinochem HK are solely responsible, has been prepared by them based on (i) the unaudited combined results of the Fertilizer Company and its subsidiaries (collectively the ‘‘Fertilizer Group’’) for the three months ended 31 March 2005; and (ii) a forecast of the consolidated results of the Fertilizer Group for the nine months ending 31 December 2005, and (iii) a forecast of the consolidated results of the Company and its subsidiaries for the period from the date of completion of the Acquisition to 31 December 2005, on the basis that the Acquisition will be accounted for as a reverse acquisition under the Hong Kong Financial Reporting Standards.

We have discussed with you the basis upon which the Profit Forecast has been made. We have also considered the letter dated 13 June 2005 addressed to you and us from PricewaterhouseCoopers regarding the accounting policies and calculations upon which the Profit Forecast has been made.

We are of the opinion that the Profit Forecast, for which you as the directors of the Company and the directors of Sinochem HK are solely responsible, has been made after due and careful enquiry.

Yours faithfully,

For and on behalf of For and on behalf of Cazenove Asia Limited Goldman Sachs (Asia) L.L.C. Michael Ngai Gigi Woo Director Executive Director

— IV-4 —

APPENDIX V

PROPERTY VALUATION

The following is the text of the letter, summary of values and valuation certificate received from Chesterton Petty Limited, an independent property valuer, prepared for the purpose of incorporation in this Circular, in connection with their valuation of the property interests held and to be acquired by the Group as at 30 April 2005.

==> picture [186 x 71] intentionally omitted <==

==> picture [92 x 75] intentionally omitted <==

13 June 2005

The Directors Sinochem Hong Kong Holdings Limited Unit 4603, 46th Floor Office Tower, Convention Plaza 1 Harbour Road Wanchai Hong Kong

Dear Sirs,

In accordance with your instructions to us to value the property interests to be acquired by Sinochem Hong Kong Holdings Limited (hereinafter referred to as the ‘‘Company’’) from Sinochem Hong Kong (Group) Company Limited (‘‘Sinochem HK’’) which are originally held by China Fertilizer (Holdings) Company Limited (the ‘‘Fertilizer Company’’) and its subsidiaries (hereinafter referred to as the ‘‘Fertilizer Group’’) in the People’s Republic of China (‘‘The PRC’’) and those property interests held by the Company and its subsidiaries (hereinafter together referred to as the ‘‘Group’’) in Hong Kong, we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the open market values of the property interests as at 30 April 2005.

Our valuation is our opinion of the open market value which we would define as intended to mean ‘‘the best price at which the sale of an interest in a property would have been completed unconditionally for cash consideration on the date of valuation assuming:

(a) a willing seller;
(b) that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of price and terms and for the completion of the sale;

— V-1 —

APPENDIX V

PROPERTY VALUATION

(c) that the state of the market, level of values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;
(d) that no account is taken of any additional bid by a prospective purchaser with a special interest; and
(e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion’’.

Our valuation has been made on the assumption that the owner sells the property interest in the open market without the benefit of a deferred term contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to increase the values of the property interests. In addition, no account has been taken of any option or right of pre-emption concerning or affecting the sale of the property interest and no forced sale situation in any manner is assumed in our valuation.

Due to the specific purposes for which most of the buildings and structures to be acquired in Group I have been constructed except for property no. 1, there are no readily identifiable market comparables available, thus the buildings and structures cannot be valued on the basis of direct comparison. They have therefore been valued on the basis of their depreciated replacement cost. We would define depreciated replacement cost to be our opinion of the land value in its existing use together with an estimate of the new replacement costs of the buildings and structures, including fees and finance charges, from which deductions are then made to allow for age, condition and functional obsolescence. The depreciated replacement cost approach generally provides the most reliable indication of value for property in the absence of a known market based on comparable sales. We have valued property no. 1 in Group I in the PRC by using ‘‘Direct Comparison Approach’’ whenever market comparable transactions are available and where appropriate on the basis of capitalisation of the net income shown on the documents handed to us. We have allowed for outgoings and, in appropriate cases, made provisions for reversionary income potential.

We have valued the property interests in Group III in Hong Kong with reference to evidence of sales as available on the market and where appropriate on the basis of capitalization of the net income shown on schedules handed to us. We have allowed for outgoings and, in appropriate cases, made provisions for reversionary income potential.

The properties in Group II which are to be rented by the Company and those in Group IV which are rented by the Group in Hong Kong have been assigned no commercial value due to the short term nature or the prohibition against assignment or sub-letting, or lack of substantial profit rent.

In valuing the property interests, we have complied with the requirements contained within the relevant provisions as stipulated in Chapter 5 and Practice Note 12 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, except to those in respect of which waiver in respect of Rules 5.01, 5.06 (1) and (2) and paragraphs 3 (a) and (b) of Practice Note 16 of the Listing Rules have been applied for due to the large number of land and buildings to be rented by the Company involved in the Acquisition.

We have been provided with copies of extracts of title documents relating to the property interests in Groups I & II and for the property interests in Groups III & IV, we have caused land searches on the titles of the property interests at the Land Registry. However, we have

— V-2 —

APPENDIX V

PROPERTY VALUATION

not inspected the original documents to verify the ownership or to verify any amendments which may not appear on the copies handed to us. We have relied to a considerable extent on information given by the Group and its PRC legal advisers on the PRC laws, Tianyuan Law Firm, and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, particulars of occupancy, identification of the property, development proposals, completion dates of buildings, floor and site areas, construction costs incurred, attributable interests and all other relevant information. Dimensions, measurements and areas included in the valuation certificate are based on information contained in the documents provided to us and are therefore only approximations. We have not been able to carry out on-site measurements to verify the correctness of the site and floor areas of the properties and we have assumed that the site and floor areas shown on the documents handed to us are correct.

We have inspected the exteriors and, where possible, the interiors of the properties. However, we have not carried out any site investigations to determine the suitability of the ground conditions and the services etc, for any future development. Our valuation is prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred during the construction period. Moreover, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are not, however, able to report that the properties are free of rot, infestation, or any other structural defects. No test has been carried out to any of the services.

No allowance has been made in our valuation for any charges, mortgages or amounts owing on any property or for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their values.

Unless otherwise stated, all money amounts are stated in Renminbi. The exchange rates used in calculating the values of the property interests in Groups I and II into Renminbi, being HK$1 = RMB1.06 and they have no significant fluctuation between the date of valuation and the date of this letter.

We enclose herewith a summary of values and valuation certificate.

Yours faithfully For and on behalf of Chesterton Petty Limited Charles C K Chan Chartered Estate Surveyor MSc FRICS FHKIS MCIArb RPS(GP) Executive Director

Note: Charles C K Chan, MSc, FRICS, FHKIS, MCIArb, RPS (GP), has been a qualified valuer with Chesterton since June 1987 and has about 20 years’ experience in the valuation of properties in Hong Kong and extensive experience in the valuation of properties in the People’s Republic of China and the Asia Pacific regions.

— V-3 —

APPENDIX V

PROPERTY VALUATION

		SUMMARY OF VALUES	SUMMARY OF VALUES
			Open market		Capital value
			value in existing	Interest	attributable to
			state as at	attributable	the Group as at
	Property		30 April 2005	to the Group	30	April 2005
			HK$			HK$
Group I — Properties		to be acquired by the Company		from Sinochem	HK
1.	15 office units on		13,740,000	100%		13,740,000
	5th Floor
	New Henderson Centre
	3 Maizidian West Road
	Chaoyang District
	Beijing
	The PRC
2.	Various properties	located in	133,170,000	60%		79,900,477
	Chongqing
	The PRC
3.	An industrial complex		No commercial	36%	No	commercial
	at Nan An Pu		value			value
	Fuling District
	Chongqing
	The PRC
4.	An industrial complex		24,550,000	53.19%		13,058,145
	at No. 90 Banwei
	Yongan
	Fujian Province
	The PRC
		Sub-total:	171,460,000		106,698,622
Group II — Properties		to be rented	by the Company
5.	Various properties to be rented		No commercial	100%	No	commercial
	by the Company		value			value
	in Anhui Province
	The PRC
6.	Various properties to be rented		No commercial	100%	No	commercial
	by the Company		value			value
	in Hainan Province
	The PRC

— V-4 —

APPENDIX V

PROPERTY VALUATION

		Open market		Capital value
		value in existing	Interest	attributable to
		state as at	attributable	the Group as at
	Property	30 April 2005	to the Group	30 April 2005
		HK$		HK$
7.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Hebei Province
	The PRC
8.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Henan Province
	The PRC
9.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Heilongjiang Province
	The PRC
10.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Hubei Province
	The PRC
11.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Hunan Province
	The PRC
12.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Jilin Province
	The PRC
13.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Liaoning Province
	The PRC
14.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Shandong Province
	The PRC
15.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Jiangsu Province
	The PRC

— V-5 —

APPENDIX V

PROPERTY VALUATION

		Open market		Capital value
		value in existing	Interest	attributable to
		state as at	attributable	the Group as at
	Property	30 April 2005	to the Group	30 April 2005
		HK$		HK$
16.	Various properties to be rented	No commercial	100%	No commercial
	by the Company	value		value
	in Jiangxi Province
	The PRC
17.	Units 501 and 701	No commercial	100%	No commercial
	Sinochem Building A2	value		value
	Fuxingmen Wai Da Jie
	West Urban District
	Beijing
	The PRC
18.	Two Units on 3rd Floor	No commercial	90%	No commercial
	13 Qianjin Road	value		value
	Er Lian Hao Te
	Inner Mongolia
	The PRC
19.	Unit A 411	No commercial	60%	No commercial
	77 Dongfang Main Avenue	value		value
	Tianjin Free Trade Zone
	Tianjin
	The PRC
20.	Two properties to be rented by	No commercial	66%	No commercial
	the Company	value		value
	in Suifenhe
	Heilongjiang Province
	The PRC
21.	1st Floor, 90 Ban Wei	No commercial	53.19%	No commercial
	Yan Bei Street	value		value
	Yongan
	Fujian Province
	The PRC
22.	Two properties to be	No commercial	55%	No commercial
	rented by the Company	value		value
	in Hubei Province
	The PRC

— V-6 —

APPENDIX V

PROPERTY VALUATION

			Open market		Capital value
			value in existing	Interest	attributable to
			state as at	attributable	the Group as at
	Property		30 April 2005	to the Group	30 April 2005
			HK$		HK$
23.	Unit 906, Qili Building		No commercial	51%	No commercial
	Chaoyang Street		value		value
	Yantai, Shandong Province
	The PRC
24.	Three properties to be		No commercial	36%	No commercial
	rented by the Company		value		value
	in Chongqing
	The PRC
25.	Two properties to be rented by		No commercial	90%	No commercial
	the Company		value		value
	in Inner Mongolia
	The PRC
26.	Various properties	to be rented	No commercial	100%	No commercial
	by the Company		value		value
	in Guangdong Province
	The PRC
27.	Various properties	to be rented	No commercial	100%	No commercial
	by the Company		value		value
	in Fujian Province
	The PRC
		Sub-total:	No commercial		No commercial
			value		value

— V-7 —

APPENDIX V

PROPERTY VALUATION

				Open market		Capital	value
				value in existing	Interest	attributable to
				state as at	attributable	the Group	as at
	Property			30 April 2005	to the Group	30 April	2005
				HK$			HK$
Group III — Properties held			by the	Company in Hong	Kong
28.	Wallpark Commercial Building			68,000,000	100%	68,000,000
	10–12 Chatham Court
	Tsim Sha Tsui
	Kowloon
29.	Various Office Units	in		84,000,000	100%	84,000,000
	Workingbond Commercial
	Centre
	162 Prince Edward Road West
	Mongkok
	Kowloon
		Sub-total:		152,000,000		152,000,000
Group IV — Property rented by the				Company from Sinochem HK in		Hong Kong
30.	Unit 3 on 46th Floor			No commercial	100%	No commercial
	Office Tower of			value			value
	Convention Plaza
	1 Harbour Road
	Wanchai
	Hong Kong
		Sub-total:		No commercial		No commercial
				value			value
			Total:	323,460,000		258,698,622

— V-8 —

PROPERTY VALUATION

APPENDIX V

VALUATION CERTIFICATE

Group I — Properties to be acquired by the Company from Sinochem HK

				Open market value
				in existing
			Particulars of	state as at
	Properties	Description and tenure	occupancy	30 April 2005
				HK$
1.	15 office units on	The property comprises 15 office	Portion of the	13,740,000
	5th Floor	units on 5th floor of a 13-storey	property is currently	(100% interest to be
	New Henderson	office building named New	leased under various	attributable to the
	Centre	Henderson Centre. The building was	tenancies for various	Group: 13,740,000)
	3 Maizidian West	completed in 1995 of reinforced	terms with the latest
	Road	concrete structure.	expiry date on 9
	Chaoyang District		September 2007
	Beijing	The property has a total gross floor	yielding a total
	The PRC	area of 1,103.90 sq.m. (11,882	monthly rental of
		sq.ft.).	approximately
			RMB81,642 exclusive
		The land upon which the property	of management fees
		currently erected comprises portion	for office uses. The
		land interest of New Henderson	remaining portion of
		Centre with a total apportioned area	the property is
		of 98.13 sq.m. (1,056 sq.ft.).	vacant.

The land use rights of the properties are held for a term of 43 years expiring on 9 December 2043.

Notes:

(1) Pursuant to the 15 Building Ownership Certificates and the 15 State-owned Land Use Right Certificates, the property with a total gross floor area of 1,103.90 sq.m. and a total site area of 98.13 sq.m. is held by the Fertilizer Company for a term of 43 years expiring on 9 December 2043 for office use.

Unit No. Gross floor area (sq.m.) Site area (sq.m.) 318 66.13 5.88 320 70.16 6.24 322 69.28 6.16 328 68.43 6.09 518 66.13 5.88 520 68.87 6.12 521 87.14 7.75 522 69.28 6.16 523 87.30 7.76	Land Use Right Certificate No. 0580065 0580066 0580067 0580068 0580069 0580071 0580072 0580073 0580074

Building Ownership Certificate No.

0580065 0580066 0580067 0580068 0580069 0580071 0580072 0580073 0580074

==> picture [69 x 183] intentionally omitted <==

— V-9 —

APPENDIX V

PROPERTY VALUATION

Unit No. 524 525 526 527 528 529 Total	Gross floor area (sq.m.) 68.87 87.30 67.71 87.44 68.43 71.43 1,103.90	Site area (sq.m.) 6.12 7.76 6.02 7.78 6.09 6.35 98.13	Land Use Right Certificate No. Building Ownership Certificate No. 0580075 0580075 0580076 0580076 0580077 0580077 0580078 0580078 0580079 0580079 0580080 0580080

(2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Tian Yuan Law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:
i. The property is not subject to any liens, mortgages and pledges.
ii. The Fertilizer Company possesses the property legally and is entitled to use, mortgage, lease or dispose of the property.

— V-10 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties The properties comprises 140 various located in operational and ancillary buildings and Chongqing structures completed in various stages The PRC between 1973 and 2004 with a total gross floor area of approximately 116,540.86 sq.m. (1,254,445 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$

The properties 133,170,000 currently are occupied (60% interest to be by the Fertilizer attributable to the Group for office, Group: 79,900,477) workshop, storage and other ancillary uses.

Details of gross floor areas of the properties are listed as follows:

Use Office Workshop Warehouse Others Total	Approximate Gross Floor Area sq.m. sq.ft. 9,464.22 101,873 65,806.13 708,337 24,341.27 262,009 16,929.24 182,226 116,540.86 1,254,445	Approximate Gross Floor Area sq.m. sq.ft. 9,464.22 101,873 65,806.13 708,337 24,341.27 262,009 16,929.24 182,226 116,540.86 1,254,445
		1,254,445

The land upon which the properties currently erected comprises 33 parcels of land with a total area of 413,530.25 sq.m. (4,451,240 sq.ft.).

The land use rights of 32 parcels of land of the property are held for various terms ranging from 50 years to 70 years, the remaining 1 parcel of land is allocated land with an area of 5.37 sq.m. held under an unspecified term.

— V-11 —

APPENDIX V

PROPERTY VALUATION

Notes:

(1) Pursuant to the 33 State-owned Land Use Right Certificates, 11 parcels of land with a total area of approximately 349,069.57 sq.m. are held by Sinochem Chongqing Fuling Chemical Fertiliser Company (‘‘Sinochem Fuling’’), a 60% directly owned subsidiary of the Fertilizer Company. The remaining 22 parcels of land with a total area of approximately 64,460.68 sq.m. are being transferred to Sinochem Fuling according to the (Share Transferring Contract of Fuling Chemical Fertiliser Company). Among the 33 parcels of land, there are 32 parcels of land with a total area of approximately 413,524.88 sq.m. which have been granted for various terms ranging from 50 to 70 years for industrial, office and residential uses and, the remaining 1 parcel of land with an area of 5.37 sq.m. which has been allocated for path use. The details of the land use right certificates are listed as follows:

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17	Land Use Right Certificate No. (2001) 007974 (2004) 16293 (2004) 16292 (1998) 0466 (1998) 0457 (2004) 16291 (1998) 0455 (2004) 16285 (1998) 0456 (2001) 02130 (2003) 11011 (2004) 21528 (2004) 21529 (2004) 21530 (2003) 006373 (2003) 004015 (1998) 0454	Site Area (sq.m.) No. Land Use Right Certificate No. Site Area (sq.m.) 1,759.53 18 (2000) 06082 9,003.60 55,616.70 19 (2001) 02133 328.79 40,148.84 20 (2003) 004207 5.37 (Allocated land) 5,291.62 21 (1998) 0463 1,701.49 1,895.40 22 (2003) 006374 159.71 48,534.46 23 (2003) 006376 28.16 1,826.44 24 (2003) 006375 371.28 38,563.64 25 (1998) 0961 22,116.21 1,620.47 26 (1998) 0450 2,423.24 92.34 27 (2004) 16198 40,365.63 57,543.00 28 (1998) 0448 1,340.31 206.54 29 (1998) 0464 71.72 1,332.04 30 (2004) 16290 60,215.69 1,332.04 31 (2004) 16283 5,210.99 33.20 32 (1998) 0453 1,521.17 54.65 33 (1998) 0478 12,639.27 176.71

(2) According to the information provided by Sinochem Fuling, Sinochem Fuling has 140 buildings with a total gross floor area of approximately 116,540.86 sq.m.. Among the buildings, 83 buildings with a total gross floor area of approximately 53,320.69 sq.m. have obtained building ownership certificates and the remaining 57 buildings with a with a total gross floor area of approximately 63,220.17 sq.m. have not obtained building ownership certificates.
(3) We have been provided with a copy of the legal opinion on the title to the properties prepared by Tian Yuan, the Company’s PRC legal adviser, which contains, inter alia, the following information:

Land Use Rights

i. Sinochem Fuling legally possesses the 11 parcels of land as stated in note 1 and is entitled to use, mortgage, lease or dispose of these land use rights.
ii. According to the confirmation of Sinochem Fuling, Sinochem Fuling is applying for the change of the registration of the land use rights of the 22 parcels of land in its name. There is no material legal impediments for Sinochem Fuling to complete the procedures for this issue of the land use rights changes. Upon completion of the procedure, Sinochem Fuling is entitled to use, mortgage, lease or dispose of these land use rights except for the lands which are subject to mortgage shall obtain prior approval from the relevant banks.
iii. According to the laws of the PRC, Sinochem Fuling can use the 1 parcel allocated land but not entitled to freely transfer, mortgage or dispose of in other means.

— V-12 —

APPENDIX V

PROPERTY VALUATION

Buildings

iv. Sinochem Fuling legally possesses 55 buildings out of the 83 buildings as stated in note 2 and is entitled to use, mortgage, lease or dispose of these land use rights.
v. According to the confirmation of Sinochem Fuling, Sinochem Fuling is applying for the change of the registration of the 28 buildings’ ownership out of the 83 buildings as stated in note 2 in its name. There is no material legal impediments for Sinochem Fuling to complete the procedures for this issue of the building ownership changes. Upon completion of the procedure, Sinochem Fuling is entitled to use, mortgage, lease or dispose of these buildings except for the buildings which are subject to mortgage shall obtain prior approval from the relevant banks.
vi. The buildings without building ownership certificates mentioned in note 2 are built and held by Sinochem Fuling. Sinochem Fuling should apply the building ownership certificates for these buildings. Currently, there may be impediment for Sinochem Fuling to apply for the proper title documents due to incomplete construction procedures. Before obtaining building ownership certificates for these buildings, there are legal impediment for Sinochem Fuling to transfer and mortgage these buildings.
(4) Portion of the property of 6 parcels of land with a total site area of approximately 89,346.41 sq.m. and 5 buildings with a total gross floor area of approximately 5,671.30 sq.m. is pledged as securities to securing loan facilities from Agriculture Bank of China, Fuling Branch, Chongqing for a term from 8 April, 2003 to 8 April, 2006. Otherwise, the property is not subject to any liens, mortgages or pledges.
(5) We have assigned no commercial value to the allocated land due to its non-transferability in the open market. We have also assigned no commercial value to the buildings with a total gross floor area of approximately 63,220.17 sq.m. with no building ownership certificates.
(6) According to the information provided by Sinochem HK, among the 33 parcels of land, there is a parcel of vacant land with a site area of approximately 12,639.27 sq.m.. Currently, as advised by Sinochem HK, there is no special development plan for this vacant site.

— V-13 —

APPENDIX V

PROPERTY VALUATION

				Open market value
				in existing
			Particulars of	state as at
	Properties	Description and tenure	occupancy	30 April 2005
				HK$
3.	An industrial complex	The property comprises a one-storey	The properties are	No commercial value
	at Nan An Pu	factory building and various	occupied by the	(36% interest to be
	Fuling District	structures completed in various	Fertilizer Group for	attributable to the
	Chongqing	stages between 1998 and 2002 with	production use.	Group: No
	The PRC	a total gross floor area of		commercial value)
		approximately 2,449 sq.m. (26,361		(please see note 3)
		sq.ft.).
		The land upon which the properties
		currently erected comprises 1 parcel
		of land with a total area of 5,210.99
		sq.m. (56,091 sq.ft.).
		The land use rights of the property
		are held for a term of 70 years
		expiring on 18 January 2066 for
		industrial use.

Notes:

(1) Pursuant to the State-owned Land Use Right Certificate No. Fau Guo Yong (2004) Zi Di 16283 dated 28 February 2005 issued by Chongqing Land and Resources Administration Bureau, the land use rights of the property with a site area of 5,210.99 sq.m. is held by Sinochem Fuling for a term expiring on 18 January 2066 for industrial use.
(2) We have been provided with a copy of the legal opinion on the title to the properties prepared by Tian Yuan Law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:
i. The property with a gross floor area of approximately 2,449 sq.m. is currently occupied by Chongqing Fuyin Plastic Co., Ltd (‘‘Chongqing Fuyin’’), a 36% indirectly owned subsidiary of the Fertilizer Company, without obtaining any title documents.
ii. Chongqing Fuyin is required to process the application of title documents pertaining to the property, but may subject to failure as a result of imperfect documents that are required in the application. Accordingly, there shall be legal impediments for Chongqing Fuyin to freely transfer or mortgage the property in the market.
iii. Currently, the property is not subject to any liens, mortgages or pledges.
(3) In the course of our valuation, the value of the land use right of the property has been included in the value of property no. 2 due to the land use rights are held by Sinochem Fuling.
(4) Due to insufficient title proof to the building of the property with a total gross floor area of approximately 2,449 sq.m., we have attributed no commercial value to the building.

— V-14 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$

An industrial complex The property comprises 4 operational at No. 90 Banwei and ancillary buildings and various Yongan structures completed in various stages Fujian Province between 2001 and 2003 with a total The PRC gross floor area of approximately 15,197.25 sq.m. (163,583 sq.ft).

24,550,000

The properties are 24,550,000 occupied by the (53.19% interest to be Fertilizer Group for attributable to the workshops and Group: 13,058,145) warehouses uses.

Details of gross floor areas of the property are listed as follows:

Use Workshop Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 8,076.95 86,940 7,120.30 76,643 15,197.25 163,583	Approximate Gross Floor Area sq.m. sq.ft. 8,076.95 86,940 7,120.30 76,643 15,197.25 163,583
		163,583

The land upon which the property currently erected comprises a parcel of land with a total area of 36,769.63 sq.m. (395,788 sq.ft.).

The land use rights of the property are held for a term expiring on 17 May 2050 for industrial use.

Notes:

(1) Pursuant to the State-owned Land Use Right Certificate No. Yong Guo Yong 2002 Zi Di 40407 issued by Yongan People’s Government dated November 2002, the land use rights of the property with an area of 36,769.63 sq.m. is held by Fujian Sinochem Zhisheng Chemical Fertiliser Company Limited (‘‘Sinochem Zhisheng’’), a 53.19%-owned subsidiary of the Fertilizer Company, for a term expiring on 17 May 2005 for industrial use.
(2) Pursuant to the Building Ownership Certificate Nos. 20023586, 20023587, 20023588, 20023589 all dated 24 February 2004 and issued by Yongan Building Administration Bureau, the property with a total gross floor area of 15,197.25 sq.m. is held by Sinochem Zhisheng.
(3) Pursuant to the Loan Agreement Nos. 05774501 and 05774502 entered into between Sinochem Zhisheng (‘‘Party A’’) and (Bank of China Yongan Sub-branch) (‘‘Party B’’) dated 23 December 2003, the land use rights and the buildings of the property were mortgaged to Party B as partial security for banking facilities. The mortgage has been registered in Yongan Land Administration Bureau.
(4) We have been provided with a copy of the legal opinion on the title to the property prepared by Tian Yuan, the Company’s PRC legal adviser, which contains, inter alia, the following information:
i. The Loan Agreements are binding and valid and have been processed relevant registered procedure with relevant authority.
ii. Sinochem Zhisheng possesses the property legally and is entitled to use, mortgage, lease or dispose of the property after obtaining a prior approval from Party B.

— V-15 —

APPENDIX V

PROPERTY VALUATION

Group II — Properties interests to be rented by the Company

Properties Description and tenure
1. Various properties to The properties comprise 211 various be rented by the operational and ancillary buildings Company in completed in various stages between Anhui Province 1979 and 2002 with a total gross floor The PRC area of approximately 50,846.19 sq.m. (547,309 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial currently occupied by value the Fertilizer Group for retail outlets and warehouses uses.

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 10,936.69 117,723 39,909.50 429,586 50,846.19 547,309	Approximate Gross Floor Area sq.m. sq.ft. 10,936.69 117,723 39,909.50 429,586 50,846.19 547,309
		547,309

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB1,283,960.

Notes:

We have been provided with a copy of the legal opinion on the lease agreements to the properties prepared by Tian Yuan Law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 185 buildings of the properties with a total gross floor area of approximately 37,106.29 sq.m.. If any landlords of any of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 26 buildings of the leased properties with a total gross floor area of approximately 13,739.90 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. Among the leased properties, lease term of a property with a gross floor area of approximately 50 sq.m. has expired. However, the property is currently still being occupied by the Fertilizer Group. According to the relevant laws of the PRC, the leasehold term in relation to this property has thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iv. The lease agreements in respect of the 211 buildings with a total gross floor area of approximately 50,846.19 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-16 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 59 various be rented by the operational and ancillary buildings Company in completed in various stages between Hainan Province 1952 and 2004 with a total gross floor The PRC area of approximately 29,168.28 sq.m. (313,968 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial currently occupied by value the Group for retail outlets and warehouses uses.

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 6,539.00 70,386 22,629.28 243,582 29,168.28 313,968	Approximate Gross Floor Area sq.m. sq.ft. 6,539.00 70,386 22,629.28 243,582 29,168.28 313,968
		313,968

The buildings will be leased by the Company from Sinochem Group under various lease agreements for various terms at an aggregate annual rental of RMB1,006,120.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 55 buildings of the properties with a total gross floor area of approximately 26,258.28 sq.m.. If any landlords of any of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 4 building of the leased properties with a gross floor area of approximately 2,910 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of the 59 buildings with a total gross floor area of approximately 29,168.28 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-17 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 116 various be rented by the operational and ancillary buildings Company in completed in various stages between Hebei Province 1970 and 2003 with a total gross floor The PRC area of approximately 491,631.36 sq.m. (5,291,920 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial currently occupied by value Fertilizer Group for retail outlets and warehouses uses.

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 12,809.86 137,885 478,821.50 5,154,035 491,631.36 5,291,920	Approximate Gross Floor Area sq.m. sq.ft. 12,809.86 137,885 478,821.50 5,154,035 491,631.36 5,291,920
		5,291,920

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB3,589,561.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 93 buildings of the properties with a total gross floor area of approximately 471,281.26 sq.m.. If any landlords of any of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Of the leased properties, there are 23 buildings with a total gross floor area of approximately 20,350.10 sq.m. which have not been obtained with any signed lease agreements, or have the terms of leases expired. According to the relevant laws of the PRC, the leasehold term in relation to these buildings have been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iii. Among the leased properties, a property with a gross floor area of approximately 100 sq.m. has expired. However, the property is currently still being occupied by the Fertilizer Group. According to the relevant laws of the PRC, the leasehold term in relation to this property has thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iv. The lease agreements in respect of the 116 buildings with a total gross floor area of approximately 491,631.36 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-18 —

APPENDIX V

PROPERTY VALUATION

Properties Description and tenure

Various properties to The properties comprise 131 various be rented by the operational and ancillary buildings Company in completed in various stages between Henan Province 1989 and 2004 with a total gross floor The PRC area of approximately 67,515.59 sq.m. (726,738 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial currently occupied by value the Fertilizer Group retail outlets and warehouses uses.

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 8,895.59 95,752 58,620.00 630,986 67,515.59 726,738	Approximate Gross Floor Area sq.m. sq.ft. 8,895.59 95,752 58,620.00 630,986 67,515.59 726,738
		726,738

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB2,815,270.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 97 buildings of the properties with a total gross floor area of approximately 44,402 sq.m.. If any landlords of any of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 34 buildings of the leased properties with a total gross floor area of approximately 23,113.59 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. Among the leased properties, signed lease agreements of three properties with a total gross floor area of approximately 2,570 sq.m. have not been obtained, or have the terms of leases expired. According to the relevant laws of the PRC, the leasehold terms in relation to these properties have thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iv. The lease agreements in respect of the 131 buildings with a total gross floor area of approximately 67,515.59 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-19 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 57 various be rented by the operational and ancillary buildings Company in completed in various stages between Heilongjiang Province 1973 and 2002 with a total gross floor The PRC area of approximately 398,390.77 sq.m. (4,288,278 sq.ft.).

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 3,122.53 33,611 395,268.24 4,254,667 398,390.77 4,288,278	Approximate Gross Floor Area sq.m. sq.ft. 3,122.53 33,611 395,268.24 4,254,667 398,390.77 4,288,278
		4,288,278

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB9,021,132.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 32 buildings of the properties with a total gross floor area of approximately 321,505.49 sq.m.. If any landlords of any of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 25 buildings of the leased properties with a total gross floor area of approximately 76,885.28 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of the 57 buildings with a total gross floor area of approximately 398,390.77 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-20 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 160 various be rented by the operational and ancillary buildings Company in completed in various stages between Hubei Province 1980 and 2000 with a total gross floor The PRC area of approximately 380,776.88 sq.m. (4,098,683 sq.ft.).

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 8,117.58 87,378 372,659.30 4,011,305 380,776.88 4,098,683	Approximate Gross Floor Area sq.m. sq.ft. 8,117.58 87,378 372,659.30 4,011,305 380,776.88 4,098,683
		4,098,683

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB7,343,408.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 91 buildings of the properties with a total gross floor area of approximately 332,189.26 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 69 buildings of the leased properties with a total gross floor area of approximately 48,587.62 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of the 160 buildings with a total gross floor area of approximately 380,776.88 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-21 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 203 various be rented by the operational and ancillary buildings Company in completed in various stages between Hunan Province 1975 and 2002 with a total gross floor The PRC area of approximately 426,165.72 sq.m. (4,587,247 sq.ft.).

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 14,508.67 156,171 411,657.05 4,431,076 426,165.72 4,587,247	Approximate Gross Floor Area sq.m. sq.ft. 14,508.67 156,171 411,657.05 4,431,076 426,165.72 4,587,247
		4,587,247

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB1,846,997.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 122 buildings of the properties with a total gross floor area of approximately 337,739.70 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 81 buildings of the leased properties with a total gross floor area of approximately 88,426.02 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of the 203 buildings with a total gross floor area of approximately 426,165.72 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-22 —

APPENDIX V

PROPERTY VALUATION

Properties Description and tenure

Various properties to The properties comprise 68 various be rented by the operational and ancillary buildings Company in completed in various stages between Jilin Province 1983 and 2004 with a total gross floor The PRC area of approximately 286,534.75 sq.m. (3,084,260 sq.ft.).

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 2,931.99 31,560 283,602.76 3,052,700 286,534.75 3,084,260	Approximate Gross Floor Area sq.m. sq.ft. 2,931.99 31,560 283,602.76 3,052,700 286,534.75 3,084,260
		3,084,260

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB2,051,973.

Notes:

(1) We have been provided with a copy of the legal opinion on the lease agreements to the properties prepared by Tian Yuan law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:
i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 51 buildings of the properties with a total gross floor area of approximately 256,858.65 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 17 buildings of the leased properties with a total gross floor area of approximately 29,676.10 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. Among the leased properties, lease term of a property with a gross floor area of approximately 91.55 sq.m. has expired. However, the property is currently still being occupied by the Fertilizer Group. According to the relevant laws of the PRC, the leasehold term in relation to this property has thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iv. The lease agreements in respect of the 57 buildings with a total gross floor area of approximately 262,378.01 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-23 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 39 various be rented by the operational and ancillary buildings Company in completed in various stages between Liaoning Province 1954 and 2003 with a total gross floor The PRC area of approximately 331,974.63 sq.m. (3,573,375 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial currently occupied by value the Group for retail outlets warehouses uses.

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 1,408.30 15,159 330,566.33 3,558,216 331,974.63 3,573,375	Approximate Gross Floor Area sq.m. sq.ft. 1,408.30 15,159 330,566.33 3,558,216 331,974.63 3,573,375
		3,573,375

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB5,526,220.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 10 buildings of the properties with a total gross floor area of approximately 282,285 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 29 buildings of the leased properties with a total gross floor area of approximately 49,689.63 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of the 39 buildings with a total gross floor area of approximately 331,974.63 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-24 —

APPENDIX V

PROPERTY VALUATION

Open market value in existing Particulars of state as at Properties Description and tenure occupancy 30 April 2005 HK$ 14. Various properties to The properties comprise 151 retail outlets The properties are No commercial be rented by the in various buildings completed in various currently occupied by value Company in stages between 1954 and 2002 with a the Fertilizer Group for Shandong Province total gross floor area of approximately retail outlets uses. The PRC 88,895.70 sq.m. (956,874 sq.ft.).

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 29,403.82 316,503 59,491.88 640,371 88,895.70 956,874	Approximate Gross Floor Area sq.m. sq.ft. 29,403.82 316,503 59,491.88 640,371 88,895.70 956,874
		956,874

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB2,928,458.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 114 buildings of the properties with a total gross floor area of approximately 44,029.85 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 37 buildings of the leased properties with a total gross floor area of approximately 44,865.85 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. Among the leased properties, lease term of a property with a gross floor area of approximately 160 sq.m. has expired. However, the property is currently still being occupied by the Fertilizer Group. According to the relevant laws of the PRC, the leasehold term in relation to this property has thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iv. The lease agreements in respect of the 151 buildings with a total gross floor area of approximately 88,895.70 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-25 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The properties comprise 131 various be rented by the operational and ancillary buildings Company in completed in various stages between Jiangsu Province 1985 and 2003 with a total gross floor The PRC area of approximately 435,929.02 sq.m. (4,692,339 sq.ft.).

Details of the gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 12,370.14 133,152 423,558.88 4,559,187 435,929.02 4,692,339	Approximate Gross Floor Area sq.m. sq.ft. 12,370.14 133,152 423,558.88 4,559,187 435,929.02 4,692,339
		4,692,339

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB1,825,745.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 63 buildings of the properties with a total gross floor area of approximately 36,172.22 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 68 buildings of the leased properties with a total gross floor area of approximately 399,756.80 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. Among the leased properties, signed lease agreements of two properties with a total gross floor area of approximately 1,900 sq.m. have not been obtained, or have the terms of leases expired. According to the relevant laws of the PRC, the leasehold terms in relation to these properties have thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iv. The lease agreements in respect of the 131 buildings with a total gross floor area of approximately 435,929.02 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-26 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The property comprises 42 operational be rented by the and ancillary buildings completed in Company in various stages between 1986 and 2002 Jiangxi Province with a total gross floor area of The PRC approximately 3,739.22 sq.m. (40,249 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial occupied by the value Fertilizer Group for retail outlets and warehouses uses.

Details of gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 3,659.22 39,388 80.00 861 3,739.22 40,249	Approximate Gross Floor Area sq.m. sq.ft. 3,659.22 39,388 80.00 861 3,739.22 40,249
		40,249

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB264,652.

Notes:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of 23 buildings of the properties with a total gross floor area of approximately 2,153 sq.m.. If any landlords or/and of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases in respect of the remaining 19 buildings of the leased properties with a total gross floor area of approximately 1,586.22 sq.m. are valid and binding to the contracting parties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of the 42 buildings with a total gross floor area of approximately 3,739.22 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-27 —

APPENDIX V

PROPERTY VALUATION

				Open market value
				in existing
			Particulars of	state as at
	Properties	Description and tenure	occupancy	30 April 2005
				HK$
17.	Units 501 and 701	Sinochem Building is a 16-storey	The property is	No commercial value
	Sinochem Building	office building of reinforced concrete	currently occupied by
	A2 Fuxingmen Wai	structure completed in 1995. The	the Fertilizer Group
	Da Jie	property comprises two office units	for office use.
	West Urban District	on 5th floor and 7th floor,
	Beijing	respectively.
	The PRC
		The property has a total gross floor
		area of approximately 1,642 sq.m.
		(17,674 sq.ft.).
		The property will be leased by the
		Company from Sinochem
		Corporation under a lease agreement
		and its eight supplementary
		agreements for a term expiring on 31
		December 2005 at an aggregate
		annual rental of RMB3,588,154.

Note:

i. The lease agreement is valid and binding to the contracting parties. The Fertilizer Company shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
ii. As verified and checked by both the Fertilizer Company and the PRC legal adviser, the lease agreement has not been registered with relevant authorities. Pursuant to the PRC Laws, the registration of lease agreement shall not affect its validity.

— V-28 —

APPENDIX V

PROPERTY VALUATION

Properties Description and tenure 18. Two Units on 3rd The property comprises two office Floor and residential units on 3rd floor of a 13 Qianjin Road 6-storey office building of reinforced Er Lian Hao Te concrete structure completed in Inner Mongolia 2002. The PRC The property has a total gross floor area of approximately 40 sq.m. (431 sq.ft.). The property will be leased by the Company from Sinochem Corporation under a lease agreement for a term expiring on 30 June 2005 at an aggregate annual rental of RMB23,332.

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The property is No commercial value currently occupied by the Fertilizer Group for office/residential uses.

Note:

i. The lease agreement is valid and binding to the contracting parties. Sinochem Chemical Fertiliser Erlianhaote Company (‘‘Sinochem Erlianhaote’’), a member of the Fertilizer Group, shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
ii. As verified and checked by both Sinochem Erlianhaote and the PRC legal adviser, the lease agreement has not been registered with relevant authorities. Pursuant to the PRC Laws, the registration of lease agreement shall not affect its validity.

— V-29 —

PROPERTY VALUATION

APPENDIX V

Open market value in existing Particulars of state as at Properties Description and tenure occupancy 30 April 2005 HK$ 19. Unit A 411 The property comprises an office unit The property is No commercial value 77 Dongfang Main on 3rd Floor of a 4-storey office currently occupied by Avenue building of reinforced concrete the Fertilizer Group Tianjin Free Trade structure completed in 2000. for office use. Zone Tianjin The property has a gross floor area The PRC of approximately 29.10 sq.m. (313 sq.ft.). The property will be leased by the Company from Sinochem Corporation under a lease agreement for a term of a year expiring on 7 December 2005 at an annual rental of RMB3,000.

Note:

We have been provided with a copy of the legal opinion on the lease agreements to the property prepared by Tian Yuan Law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:

The lease agreement is valid and binding to the contracting parties. Tianjin Beifang Chemical Fertiliser Logistics and Delivery Company Limited (‘‘Tianjin Beifang’’), a member of the Fertilizer Group, shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties. The lease agreement has been registered with Tianjin Free Trade Zone Real Estate Administration Bureau.

— V-30 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Two properties to be The property comprises two properties of rented by the reinforced concrete structure completed in Company in Suifenhe 1998 with a total gross floor area of Heilongjiang Province approximately 100 sq.m. (1,076 sq.ft.). The PRC

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial currently occupied by value the Fertilizer Group for office and staff quarter uses.

Details of the gross floor areas of the properties are listed as follows:

Use Office Staff quarter Total:	Approximate Gross Floor Area sq.m. sq.ft. 30.00 323 70.00 753 100.00 1,076	Approximate Gross Floor Area sq.m. sq.ft. 30.00 323 70.00 753 100.00 1,076
		1,076

The properties will be leased by the Company under various lease agreements for various terms at an aggregate annual rental of RMB4,500.

Note:

i. The property with a gross floor area of 30 sq.m. (‘‘Property A’’) is held by (the ‘‘Lessor’’).
ii. According to the Certificate issued the Lessor dated 26 January 2003, the Lessor agreed to grant the rights for use and occupation of the property to Sinochem Fertilizer Suifenhe Company Limited (the ‘‘Sinochem Suifenhe’’), a member of the Fertilizer Group, as office at no consideration.
iii. Sinochem Suifenhe is entitled to freely use Property A, but the Lessor may terminate this right by serving reasonable prior notice to Sinochem Suifenhe.
iv. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of the property with a gross floor area of 70 sq.m. (‘‘Property B’’). If the landlords of Property B does not have the building ownership certificate, then the relevant lease agreement maybe invalid and unenforceable under the laws of the PRC.
v. The lease agreements of these two properties have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-31 —

APPENDIX V

PROPERTY VALUATION

Properties Description and tenure

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$

1st Floor The property comprises 1st Floor of 90 Ban Wei a 3-storey office building of Yan Bei Street reinforced concrete structure Yongan completed in 1999. Fujian Province The PRC The property has a gross floor area of approximately 493.58 sq.m. (5,313 sq.ft.).
The property is No commercial value currently occupied by the Fertilizer Group for office use.

The property will be leased by the Company from Sinochem Corporation under a lease agreement for a term expiring on 31 December 2005 at an annual rental of RMB25,824.

Note:

i. The lease agreement is valid and binding to the contracting parties. Sinochem Zhisheng shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
ii. As verified and checked by both Sinochem Zhisheng and the PRC legal adviser, the lease agreement has not been registered with relevant authorities. Pursuant to the PRC Laws, the registration of lease agreement shall not affect its validity.

— V-32 —

APPENDIX V

PROPERTY VALUATION

Properties Description and tenure 22. Two properties to be The property comprises two various rented by the Company properties completed in 1964 and in Hubei Province 2003. The PRC The property has a gross floor area of approximately 8,296.50 sq.m. (89,304 sq.ft.). The property will be leased by the Company from Sinochem Corporation under two lease agreements for various terms at an total annual rental of RMB361,180 with a latest expiry date on 31 May 2010.

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The property is No commercial currently occupied value by the Fertilizer Group for office and storage uses.

Note:

i. The lease agreement is valid and binding to the contracting parties. Hubei Sinochem Dongfang Chemical Fertiliser Company Limited (the ‘‘Sinochem Dongfang’’), a member of the Fertilizer Group, shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
ii. As verified and checked by both Sinochem Dongfang and the PRC legal adviser, the lease agreements in respect of the properties above have not been registered with relevant authorities. Pursuant to the PRC Laws, the registration of lease agreement shall not affect its validity.

— V-33 —

APPENDIX V

PROPERTY VALUATION

Properties Description and tenure
1. Unit 906, Qili Building The property comprises an office unit Chaoyang Street in a 19 storey building completed in Yantai 1995. Shandong Province The PRC The property has a gross floor area of approximately 67 sq.m. (721 sq.ft.).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The property is No commercial value currently occupied by the Fertilizer Group for office use.

The property will be leased by the Company from Sinochem Corporation under a lease agreement for a term expiring on 31 December 2005 at an annual rental of RMB46,900.

Note:

We have been provided with a copy of the legal opinion on the lease agreement to the property prepared by Tian Yuan Law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:

i. The lease agreement is valid and binding to the contracting parties. Sinochem Yantai Crop Nutrition Co., Ltd. (‘‘Sinochem Yantai’’), a member of the Fertilizer Group, shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
ii. As verified and checked by both Sinochem Yantai and the PRC legal adviser, the lease agreement has not been registered with relevant authorities. Pursuant to the PRC Laws, the registration of lease agreement shall not affect its validity.

— V-34 —

APPENDIX V

PROPERTY VALUATION

Open market value in existing Particulars of state as at Properties Description and tenure occupancy 30 April 2005 HK$ 24. Three properties to be The property comprises three various The property is No commercial rented by the Company properties completed in 2002 and currently occupied value in Chongqing 2003. by the Fertilizer The PRC Group for office The property has a total gross floor and production area of approximately 4,150 sq.m. uses. (44,671 sq.ft.). The property will be leased by the Company from Sinochem Corporation under three lease agreements for various terms at an annual rental of RMB84,000 with a latest expiry date of December 2007.

Note:

i. Of the lease properties, Chongqing Fuyin is unable to ascertain whether the landlords have building ownership certificates of the 3 buildings with a total gross floor area of approximately 4,150 sq.m.. If any landlords of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. As verified and checked by both Chongqing Fuyin and the PRC legal adviser, the lease agreements in respect of the properties above have not been registered with relevant authorities. Pursuant to the PRC laws, the registration of lease agreement shall not affect its validity.

— V-35 —

APPENDIX V

PROPERTY VALUATION

				Open market
				value in existing
			Particulars of	state as at
	Properties	Description and tenure	occupancy	30 April 2005
				HK$
25.	Two properties to be rented	The properties comprise two units in	The properties are	No commercial
	by the Company	various buildings completed in	occupied by the	value
	in Inner Mongolia	various stages between 1992 and	Fertilizer Group for
	The PRC	1996.	representative
			office and staff
		The properties have a total gross	quarter uses.
		floor area of approximately 110
		sq.m. (1,184 sq.ft).
		The properties will be leased by the
		Company from Sinochem
		Corporation under two lease
		agreements for various terms at an
		aggregate annual rental of
		RMB24,000.

Note:

We have been provided with a copy of the legal opinion on the lease agreements to the properties prepared by Tian Yuan law Firm, the Company’s PRC legal adviser, which contains, inter alia, the following information:

i. Of the leased properties, Manzhouli Kaiming Fertiliser Company Limited (‘‘Manzhouli Kaiming’’), a member of the Fertilizer Group, is unable to ascertain whether the landlords have building ownership certificates of the 2 properties with a total gross floor area of approximately 110 sq.m.. If any landlords of these lease properties do not have the building ownership certificates, then the relevant lease agreements maybe invalid and unenforceable under the laws of the PRC.
ii. As verified and checked by both Manzhouli Kaiming and the PRC legal adviser, the lease agreements in respect of the properties above have not been registered with relevant authorities. Pursuant to the PRC laws, the registration of lease agreement shall not affect its validity.

— V-36 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The property comprises 27 operational be rented by the and ancillary buildings completed in Company in various stages between 1996 and 2002 Guangdong Province with a total gross floor area of The PRC approximately 38,383.18 sq.m. (413,156 sq.ft).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial occupied by the value Fertilizer Group for retail outlets, warehouses and offices uses.

Details of gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Offices Total:	Approximate Gross Floor Area sq.m. sq.ft. 750.18 8,075 37,501.00 403,661 132.00 1,420 38,383.18 413,156	Approximate Gross Floor Area sq.m. sq.ft. 750.18 8,075 37,501.00 403,661 132.00 1,420 38,383.18 413,156
		413,156

The buildings will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB1,984,660.

Note:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of these 27 properties with a gross floor area of 38,383.18 sq.m.. If the landlords or/ and of these properties do not have the building ownership certificates, then the relevant lease agreement maybe invalid and unenforceable under the laws of the PRC.
ii. Among the leased properties, signed lease agreements of 4 buildings with a total gross floor area of approximately 9,900 sq.m. have not been obtained, or have the terms of leases expired. According to the relevant laws of the PRC, the leasehold term in relation to these buildings have thus been created and both the lessor or the lessee can terminate the lease by serving reasonable prior notice to the other.
iii. The lease agreements in respect of these 27 buildings with a total gross floor area of approximately 38,383.18 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-37 —

APPENDIX V

PROPERTY VALUATION

Properties

Description and tenure

Various properties to The property comprises 12 operational be rented by the and ancillary buildings completed in Company in various stages between 1994 and 2003 Fujian Province with a total gross floor area of The PRC approximately 9,326.11 sq.m. (100,387 sq.ft).

Open market value in existing Particulars of state as at occupancy 30 April 2005 HK$ The properties are No commercial occupied by the value Fertilizer Group for representative office and staff quarter uses.

Details of gross floor areas of the properties are listed as follows:

Use Retail outlets Warehouses Total:	Approximate Gross Floor Area sq.m. sq.ft. 898.51 9,672 8,427.60 90,715 9,326.11 100,387	Approximate Gross Floor Area sq.m. sq.ft. 898.51 9,672 8,427.60 90,715 9,326.11 100,387
		100,387

The properties will be leased by the Company from Sinochem Corporation under various lease agreements for various terms at an aggregate annual rental of RMB554,088.

Note:

i. The Company is unable to ascertain whether the landlords have obtained building ownership certificates of the 5 properties with a total gross floor area of 7,233 sq.m.. If the landlords or/and of these properties do not have the building ownership certificates, then the relevant lease agreement maybe invalid and unenforceable under the laws of the PRC.
ii. Save and except the buildings of the leased properties as mentioned in (i) above, the leases inspect of the remaining 7 buildings of the leased properties with a total gross floor area of approximately 2,093.11 sq.m. are valid and binding to the contracting arties. The Fertilizer Company and its subsidiaries shall be entitled to and enjoy the full right in its position as tenant to the lease at law and shall be free from disturbance or interruption caused by third parties.
iii. The lease agreements in respect of these 12 buildings with a total gross floor area of approximately 9,326.11 sq.m. have not been registered with the relevant authorities. Pursuant to the judicial interpretation of the Supreme Court of the PRC, the registration of lease agreement shall not affect its validity.

— V-38 —

APPENDIX V

PROPERTY VALUATION

Group III — Properties held by the Company in Hong Kong

				Open market value
				in existing
			Particulars of	state as at
	Property	Description and tenure	occupancy	30 April 2005
				HK$
28.	Wallpark Commercial	The property comprises a rectangular	The property is let under	68,000,000
	Building	site with a registered area of	various tenancies for	(100% interest
	10–12 Chatham Court	approximately 274.15 sq.m.	terms of one to three	attributable to the
	Tsim Sha Tsui	(2,951 sq.ft.).	years with the latest	Group: 68,000,000)
	Kowloon		expiring in April 2007
		Currently erected on the site is a	yielding a total monthly
	Kowloon Inland Lot Nos	commercial building known as	rent of approximately
	9921 and 10562	Wallpark Commercial Building. It is a	HK$393,000 mostly
		14-storey office building built over a	inclusive of rates and
		5-storey commercial podium	management fees. The
		(including a basement) completed in	current occupancy rate
		1984. The basement to 3rd Floor of	of the property is
		the building are designated for retail	approximately 96%.
		uses whilst the remaining upper
		floors from the 4th to 17th Floors for
		office uses.

The gross floor areas of the property are shown as follows:

Floor Basement G/F 1/F–3/F 4/F–17/F Total	Gross Floor Area sq.m. sq.ft. 190.64 2,052 192.03 2,067 944.54 10,167 2,260.22 24,329 3,587.43 38,615	Gross Floor Area sq.m. sq.ft. 190.64 2,052 192.03 2,067 944.54 10,167 2,260.22 24,329 3,587.43 38,615
		38,615

Kowloon Inland Lot Nos. 9921 and 10562 are held under Conditions of Regrant Nos. 10003 and 10562 respectively, each for a term of 150 years from 1 October 1901 at a total annual Government rent of HK$1,168.

Notes:

(1) The registered owner of the property is Fine Straight Investments Limited, a wholly-owned subsidiary of the Group and will be a wholly-owned subsidiary of the Enlarged Group immediately after Completion.
(2) The property is subject to a mortgage and an assignment of rentals both in favour of Dah Sing Bank Limited.

— V-39 —

APPENDIX V

PROPERTY VALUATION

				Open market value
				in existing
			Particulars of	state as at
	Property	Description and tenure	occupancy	30 April 2005
				HK$
29.	Various Office Units	Workingbond Commercial Centre is a	The property is let	84,000,000
	in Workingbond	14-storey office building built over a	under various	(100% interest
	Commercial Centre	2-storey commercial podium plus a	tenancies for terms of	attributable to the
	162 Prince Edward	basement carpark completed in 1995	one to two years with	Group:
	Road West	(4th and 14th Floors are omitted for floor	the latest expiring in	84,000,000)
	Mongkok	numbering). The ground and 1st floors	December 2007
	Kowloon	of the building are designated for retail	yielding a total
		uses whilst the remaining upper floors	monthly rent of
	4,740/10,000 shares	from the 2nd to 17th Floors for office	approximately
	of and in the	uses.	HK$500,000 inclusive
	Remaining Portion of		of rates and
	Section A, the	The property comprises various office	management fees.
	Remaining Portion of	units within the building with a total	The property is fully
	Section A of	gross floor area of approximately	let.
	Sub-section 1 of	3,113.81 sq.m. (33,517 sq.ft.).
	Section A and the
	Remaining Portions of	Kowloon Inland Lot No. 2357 is held
	Sub-sections 2 and 3	under a Government lease for a term of
	of Section A of	75 years renewable for a further term of
	Kowloon Inland Lot	75 years from 23 June 1930. The annual
	No. 2357	Government rent for the lot is HK$80.

Notes:

(1) The property comprises the following office units:

Floor			Unit No.
2/F			1, 2, 3, 5, 6, 7, 8, 10 and 11
3/F			1, 2, 3, 5, 6, 7, 8, 9, 10, 11 and 12
5/F			1, 2, 3, 5, 6, 7, 8, 11 and 12
7/F			6
8/F			3
9/F			1, 3, 5, 6, 7, 8, 10 and 12
10/F			3, 5, 6, 7 and 11
11/F			1, 9, 10, 11, 12 and 13
12/F			1, 2, 3, 5, 9, 12 and 13
13/F			1, 5, 6, 7, 8, 10, 11 and 12
15/F			1, 2, 5, 6, 7, 8, 9, 10, 11 and 12
16/F			1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12 and 13
17/F			2, 3, 5, 6, 7, 8, 9, 10, 11, 12 and 13
(Unit	4	is	omitted for unit numbering)

(2) The registered owner of the property is Sanmark Investments Limited, a wholly-owned subsidiary of the Group and will be a wholly-owned subsidiary of the Enlarged Group immediately after Completion.
(3) The property is subject to a mortgage to secure general banking facilities and an assignment of rentals both in favour of Bank of America (Asia) Limited.

— V-40 —

APPENDIX V

PROPERTY VALUATION

Group IV — Property rented by the Company from Sinochem HK in Hong Kong

				Open market value
				in existing
			Particulars of	state as at
	Property	Description and tenure	occupancy	30 April 2005
				HK$
30.	Unit 3 on 46th Floor	Convention Plaza is a development	The property is	No commercial value
	Office Tower of	comprising two hotels, an apartment	currently occupied by
	Convention Plaza	tower surmounting a common podium	the Group as an
	1 Harbour Road	which accommodates an exhibition and	office.
	Wanchai	convention center, shopping arcades,
	Hong Kong	private club and carparks. It was
		completed in 1990.
		The property comprises an office unit on
		the 46th Floor of the office tower of the
		development with a gross floor area of
		approximately 234.11 sq.m. (2,520
		sq.ft.).
		The property is rented by Wah Tak Fung
		(BVI) Limited (a wholly-owned subsidiary
		of the Company) from Sinochem HK
		under a tenancy agreement for a term
		from 1 March 2005 to 28 February 2006
		at a monthly rent of HK$20,000
		exclusive of rates and management
		fees.

Note:

According to The Land Registry record, there are no material encumbrances registered against the property.

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SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

Set out below is a summary of certain provisions of the memorandum of association (the ‘‘Memorandum of Association’’) and bye-laws (the ‘‘Bye-laws’’) of the Company and of certain aspects of Bermuda company law.

1. MEMORANDUM OF ASSOCIATION

The Memorandum of Association states, inter alia, that the liability of members of the Company is limited to the amount, if any, for the time being unpaid on the Shares respectively held by them and that the Company is an exempted company as defined in the Companies Act. The Memorandum of Association also sets out the objects for which the Company was formed, including acting as a holding and investment company, and its powers, including the powers set out in the First Schedule to the Companies Act, excluding paragraph 8 thereof. As an exempted company, the Company will be carrying on business outside Bermuda from a place of business within Bermuda.

In accordance with and subject to section 42A of the Companies Act, the Memorandum of Association empowers the Company to purchase its own shares and pursuant to its Byelaws, this power is exercisable by the board of Directors (the ‘‘board’’) upon such terms and subject to such conditions as it thinks fit.

2. BYE-LAWS

The Bye-laws were adopted on 11 September, 1996 and amended on 20 February, 2002 and 30 August, 2004. The following is a summary of certain provisions of the Bye-laws:

(a) Directors

(i) Power to allot and issue shares and warrants

Subject to any special rights conferred on the holders of any shares or class of shares, any share (whether forming part of the present capital or not) may be issued with such rights, or such restrictions, whether with regard to dividend, voting, return of capital, distribution of assets or otherwise, as the Company may from time to time by ordinary resolution determine (or, in the absence of any such determination or so far as the same may not make specific provision, as the board may determine) and any preference share may, subject to the provisions of the Companies Act and with the sanction of an ordinary resolution, be issued or converted into shares that are liable to be redeemed, at a determinable date or at the option of the Company or, if so authorised by the Memorandum of Association, at the option of the holder, on such terms and in such manner as the Company before the issue or conversion may determine. The board may issue warrants conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on such terms as it may from time to time determine.

Subject to the provisions of the Companies Act, the Bye-laws and, where applicable, the rules of any Designated Stock Exchange (as defined in the Bye-laws) and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, all unissued shares of the Company (whether forming part of the original or any increased capital) shall be at the disposal of the board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and on such terms and conditions as it in its absolute discretion determines, but so that no shares shall be issued at a discount.

The Directors shall as regards any offer or allotment of shares comply with the provisions of the Companies Act, if and so far as such provisions may be applicable thereto. Neither the Company nor the board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such offer, option or shares to members or others with

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APPENDIX VI

SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.

(ii) Power to dispose of the assets of the Company or any of its subsidiaries

There are no specific provisions in the Bye-laws relating to the disposal of the assets of the Company or any of its subsidiaries.

Note: The Directors may, however, exercise all powers and do all acts and things which may be exercised or done or approved by the Company and which are not required by the Bye-laws or the Companies Act to be exercised or done by the Company in general meeting.

(iii) Compensation or payments for loss of office

Payments to any Director or past Director of any sum by way of compensation for loss of office or as consideration for or in connection with his retirement from office (not being a payment to which the Director is contractually entitled) must be approved by the Company in general meeting.

(iv) Loans and provision of security for loans to Directors

There are no provisions in the Bye-laws relating to the making of loans to Directors. However, the Companies Act contains restrictions on companies making loans or providing security for loans to their directors, the relevant provisions of which are summarised in the paragraph headed ‘‘Bermuda Company Law’’ in this Appendix.

(v) Financial assistance to purchase shares of the Company

Neither the Company nor any of its subsidiaries shall directly or indirectly give financial assistance to a person who is acquiring or proposing to acquire shares in the Company for the purpose of that acquisition whether before or at the same time as the acquisition takes place or afterwards, provided that the Bye-laws shall not prohibit transactions permitted under the Companies Act.

(vi) Disclosure of interests in contracts with the Company or any of its subsidiaries

A Director may hold any other office or place of profit with the Company (except that of auditor of the Company) in conjunction with his office of Director for such period and, subject to the Companies Act, upon such terms as the board may determine, and may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) in addition to any remuneration provided for by or pursuant to any other Bye-laws. A Director may be or become a director or other officer of, or a member of, any company promoted by the Company or any other company in which the Company may be interested, and shall not be liable to account to the Company or the members for any remuneration, profits or other benefits received by him as a director, officer or member of, or from his interest in, such other company. Subject as otherwise provided by the Bye-laws, the board may also cause the voting power conferred by the shares in any other company held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favour of any resolution appointing the Directors or any of them to be directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company.

Subject to the Companies Act and to the Bye-laws, no Director or proposed or intending Director shall be disqualified by his office from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatsoever, nor shall any such contract or any other contract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company or the members for any remuneration, profit or other benefits realised by any such contract or arrangement by reason of such Director holding that office or the fiduciary relationship thereby

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SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

established. A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company shall declare the nature of his interest at the meeting of the board at which the question of entering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case, at the first meeting of the board after he knows that he is or has become so interested.

A Director shall not vote (nor be counted in the quorum) on any resolution of the board in respect of any contract or arrangement or other proposal in which he or any of his associate(s) is materially interested but this prohibition shall not apply to any of the following matters, namely:

(aa) any contract or arrangement for the giving of any security or indemnity either:
(1) to the Director or his associate(s) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries; or
(2) to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his associate(s) has himself/themselves assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;
(bb) any proposal concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase where the Director or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer;
(cc) any proposal concerning any other company in which the Director or his associate(s) is/are interested only, whether directly or indirectly, as an officer or executive or shareholder or in which the Director or his associate(s) is/are beneficially interested in shares of that company, provided that the Director and any of his associates are not in aggregate beneficially interested in 5% or more of the issued shares, or of the voting rights, of any class of shares of such company (or of any third company through which his interest or that of his associate(s) is derived);
(dd) any proposal or arrangement concerning the adoption, modification or operation of any share scheme or any share incentive or share option scheme or pension fund or retirement, death or disability benefits scheme which relates both to Directors, his associates and employees of the Company or any of its subsidiaries and does not provide in respect of any Director, or his associate(s), as such any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates; and
(ee) any contract or arrangement in which the Director of his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company.

(vii) Remuneration

The ordinary remuneration of the Directors shall from time to time be determined by the Company in general meeting, such remuneration (unless otherwise directed by the resolution by which it is voted) to be divided amongst the Directors in such proportions and in such manner as the board may agree or, failing agreement, equally, except that any Director holding office for part only of the period in respect of which the remuneration is payable shall only rank in such division in proportion to the time during such period for which he held office. The Directors shall also be entitled to be prepaid or repaid all travelling, hotel and incidental expenses reasonably incurred or expected to be incurred by them in attending any

— VI-3 —

SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

board meetings, board committee meetings or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties as Directors.

Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration provided for by or pursuant to any other Bye-law. A Director appointed to be a managing director, joint managing director, deputy managing director or other executive officer shall receive such remuneration (whether by way of salary, commission or participation in profits or otherwise or by all or any of those modes) and such other benefits (including pension and/or gratuity and/or other benefits on retirement) and allowances as the board may from time to time decide. Such remuneration may be either in addition to or in lieu of his remuneration as a Director.

The board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in business) in establishing and making contributions out of the Company’s monies to any schemes or funds for providing pensions, sickness or compassionate allowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or ex-Director who may hold or have held any executive office or any office of profit with the Company or any of its subsidiaries) and ex-employees of the Company and their dependants or any class or classes of such persons.

The board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions, pensions or other benefits to employees and exemployees and their dependants, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or ex-employees or their dependants are or may become entitled under any such scheme or fund as is mentioned in the previous paragraph. Any such pension or benefit may, as the board considers desirable, be granted to an employee either before and in anticipation of, or upon or at any time after, his actual retirement.

(viii) Retirement, appointment and removal

At each annual general meeting, one third of the Directors for the time being (or if their number is not a multiple of three, then the number nearest to but not greater than one third) will retire from office by rotation provided that no Director holding office as chairman and/or managing director shall be subject to retirement by rotation, or be taken into account in determining the number of Directors to retire. The Directors to retire in every year will be those who have been longest in office since their last re-election or appointment but as between persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise agree among themselves) be determined by lot.

Note: There are no provisions relating to retirement of Directors upon reaching any age limit.

The Directors shall have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy on the board or, subject to authorization by the members in general meeting, as an addition to the existing board but so that the number of Directors so appointed shall not exceed any maximum number determined from time to time by the members in general meeting. Any Director so appointed shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election at the meeting. Neither a Director nor an alternate Director is required to hold any shares in the Company by way of qualification.

A Director may be removed by a special resolution of the Company before the expiration of his period of office (but without prejudice to any claim which such Director may have for damages for any breach of any contract between him and the Company) provided that the notice of any such meeting convened for the purpose of removing a Director shall contain a statement of the intention to do so and be served on such Director 14 days before the meeting and, at such meeting, such Director shall be

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APPENDIX VI

SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

entitled to be heard on the motion for his removal. Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than two. There is no maximum number of Directors unless otherwise determined from time to time by members of the Company.

The board may from time to time appoint one or more of its body to be managing director, joint managing director, or deputy managing director or to hold any other employment or executive office with the Company for such period (subject to their continuance as Directors) and upon such terms as the board may determine and the board may revoke or terminate any of such appointments (but without prejudice to any claim for damages that such Director may have against the Company or visa versa). The board may delegate any of its powers, authorities and discretions to committees consisting of such Director or Directors and other persons as the board thinks fit, and it may from time to time revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or purposes, but every committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations that may from time to time be imposed upon it by the board.

(ix) Borrowing powers

The board may from time to time at its discretion exercise all the powers of the Company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to the Companies Act, to issue debentures, bonds and other securities of the Company, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.

Note: These provisions, in common with the Bye-laws in general, can be varied with the sanction of a special resolution of the Company.

(b) Alterations to constitutional documents

The Bye-laws may be rescinded, altered or amended by the Directors subject to the confirmation of the Company in general meeting. The Bye-laws state that a special resolution shall be required to alter the provisions of the Memorandum of Association, to confirm any such rescission, alteration or amendment to the Bye-laws or to change the name of the Company.

(c) Alteration of capital

The Company may from time to time by ordinary resolution in accordance with the relevant provisions of the Companies Act:

(i) increase its capital by such sum, to be divided into shares of such amounts as the resolution shall prescribe;
(ii) consolidate and divide all or any of its capital into shares of larger nominal amount than its existing shares;
(iii) divide its shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares as the directors may determine;
(iv) sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum of Association;
(v) change the currency denomination of its share capital;
(vi) make provision for the issue and allotment of shares which do not carry any voting rights; and

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APPENDIX VI

SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

(vii) cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its capital by the amount of the shares so cancelled.

The Company may, by special resolution, subject to any confirmation or consent required by law, reduce its authorised or issued share capital or any share premium account or other undistributable reserve in any manner permitted by law.

(d) Variation of rights of existing shares or classes of shares

Subject to the Companies Act, all or any of the special rights attached to the shares or any class of shares may (unless otherwise provided for by the terms of issue of that class) be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths of the aggregate nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate general meeting the provisions of the Bye-laws relating to general meetings will mutatis mutandis apply, but so that the necessary quorum (other than at an adjourned meeting) shall be two persons (or in the case of a member being a corporation, its duly authorised representative) holding or representing by proxy not less than one-third in nominal value of the issued shares of that class and at any adjourned meeting two holders present in person (or in the case of a member being a corporation, its duly authorised representative) or by proxy (whatever the number of shares held by them) shall be a quorum. Every holder of shares of the class shall be entitled on a poll to one vote for every such share held by him, and any holder of shares of the class present in person or by proxy may demand a poll.

(e) Special resolution-majority required

A special resolution of the Company must be passed by a majority of not less than three-fourths of the votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their duly authorised representatives or, where proxies are allowed, by proxy at a general meeting of which not less than 21 clear days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given. Provided that, except in the case of an annual general meeting, if it is so agreed by a majority in number of the members having a right to attend and vote at such meeting, being a majority together holding not less than 95 per cent. in nominal value of the shares giving that right and, in the case of an annual general meeting, if so agreed by all Members entitled to attend and vote thereat, a resolution may be proposed and passed as a special resolution at a meeting of which less than 21 clear days’ notice has been given.

(f) Voting rights (generally and on a poll) and right to demand a poll

Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with the Bye-laws, at any general meeting on a show of hands, every member who is present in person (or being a corporation, is present by its duly authorised representative) or by proxy shall have one vote and on a poll every member present in person or by proxy or, being a corporation, by its duly authorised representative shall have one vote for every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or installments is treated for the foregoing purposes as paid up on the share. Notwithstanding anything contained in the Bye-laws, where more than one proxy is appointed by a member which is a clearing house (as defined in the Bye-laws) (or its nominee(s)), each such proxy shall have one vote on a show of hands. On a poll, a member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

At any general meeting a resolution put to the vote of the meeting is to be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded by (i) the chairman of the meeting or (ii) at least three members present in person or, in the case of a member being a corporation, by its duly authorised representative or by proxy for the time being entitled to vote at the meeting or (iii) any member or members present in person or, in the case of a member being a corporation, by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting or (iv) a

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SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

member or members present in person or, in the case of a member being a corporation, by its duly authorised representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

Where any member is, under the Listing Rules (as defined in the Bye-laws) required to abstain from voting or any particular resolution or restricted to voting only for or only against any particular resolution, any votes cast by or on behalf of such member in contravention of such requirement or restriction shall not be counted.

If a recognised clearing house (or its nominee(s)) is a member of the Company it may authorise such persons as it thinks fit to act as its representative(s) at any meeting of the Company or at any meeting of any class of members of the Company provided that, if more than one person is so authorised, the authorization shall specify the number and class of shares in respect of which each such person is so authorised. A person authorised pursuant to this provision shall be entitled to exercise the same powers on behalf of the recognised clearing house (or its nominee(s)) as if such person was the registered holder of the shares held by that clearing house (or its nominee(s)) in respect of the number and class of shares specified in the relevant authorization including the right to vote individually on a show of hands.

(g) Requirements for annual general meetings

An annual general meeting of the Company must be held in each year other than the year in which its statutory meeting is convened at such time (within a period of not more than 15 months after the holding of the last preceding annual general meeting unless a longer period would not infringe the rules of any Designated Stock Exchange (as defined in the Bye-laws)) and place as may be determined by the board.

(h) Accounts and audit

The board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the provisions of the Companies Act or necessary to give a true and fair view of the Company’s affairs and to explain its transactions.

The accounting records shall be kept at the registered office or, subject to the Companies Act, at such other place or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director) shall have any right of inspecting any accounting record or book or document of the Company except as conferred by law or authorised by the board.

Subject to the Companies Act, a printed copy of the Directors’ report, accompanied by the balance sheet and profit and loss account, including every document required by law to be annexed thereto, made up to the end of the applicable financial year and containing a summary of the assets and liabilities of the Company under convenient heads and a statement of income and expenditure, together with a copy of the auditors’ report, shall be sent to each person entitled thereto at least 21 days before the date of the general meeting and laid before the Company in general meeting in accordance with the requirements of the Companies Act provided that this provision shall not require a copy of those documents to be sent to any person whose address the Company is not aware or to more than one of the joint holders of any shares or debentures.

Subject to the Companies Act, at the annual general meeting or at a subsequent special general meeting in each year, the members shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until the members appoint another auditor. Such auditor may be a member but no Director or officer or employee of the Company shall, during his continuance in office, be eligible to act as an auditor of the Company. The remuneration of the auditor shall be fixed by the Company in general meeting or in such manner as the members may determine.

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SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

The financial statements of the Company shall be audited by the auditor in accordance with generally accepted auditing standards. The auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the auditor shall be submitted to the members in general meeting. The generally accepted auditing standards referred to herein may be those of a country or jurisdiction other than Bermuda. If the auditing standards of a country or jurisdiction other than Bermuda are used, the financial statements and the report of the auditor should disclose this fact and name such country and jurisdiction.

(i) Notices of meetings and business to be conducted thereat

An annual general meeting and any special general meeting at which it is proposed to pass a special resolution shall (save as set out in sub-paragraph (e) above) be called by at least 21 clear days’ notice in writing, and any other special general meeting shall be called by at least 14 clear days’ notice (in each case exclusive of the day on which the notice is given or deemed to be given and of the day for which it is given or which it is to take effect). The notice must specify the time and place of the meeting and, in the case of special business, the general nature of that business. The notice convening an annual general meeting shall specify the meeting as such.

(j) Transfer of shares

All transfers of shares may be effected by an instrument of transfer in the usual or common form or in a form prescribed by the Designated Stock Exchange (as defined in the Bye-laws) or in such other form as the board may approve and which may be under hand or, if the transferor or transferee is a clearing house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the board may approve from time to time. The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the board may dispense with the execution of the instrument of transfer by the transferee in any case in which it thinks fit, in its discretion, to do so and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the register of members in respect thereof. The board may also resolve either generally or in any particular case, upon request by either the transferor or the transferee, to accept mechanically executed transfers.

The board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon the principal register to any branch register or any share on any branch register to the principal register or any other branch register.

Unless the board otherwise agrees, no shares on the principal register shall be transferred to any branch register nor may shares on any branch register be transferred to the principal register or any other branch register. All transfers and other documents of title shall be lodged for registration and registered, in the case of shares on a branch register, at the relevant registration office and, in the case of shares on the principal register, at the registered office in Bermuda or such other place in Bermuda at which the principal register is kept in accordance with the Companies Act.

The board may, in its absolute discretion, and without assigning any reason, refuse to register a transfer of any share (not being a fully paid up share) to a person of whom it does not approve or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists, and it may also refuse to register any transfer of any share to more than four joint holders or any transfer of any share (not being a fully paid up share) on which the Company has a lien.

The board may decline to recognise any instrument of transfer unless a fee of such maximum sum as any Designated Stock Exchange (as defined in the Bye-laws) may determine to be payable or such lesser sum as the Directors may from time to time require is paid to the Company in respect thereof, the instrument of transfer, if applicable, is properly stamped, is in respect of only one class of share and is lodged at the relevant registration office or registered office or such other place at which the principal register is kept accompanied by the relevant share certificate(s) and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer (and if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do).

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The registration of transfers may be suspended and the register closed on giving notice by advertisement in an appointed newspaper and, where applicable, any other newspapers in accordance with the requirements of any Designated Stock Exchange (as defined in the Bye-laws), at such times and for such periods as the board may determine and either generally or in respect of any class of shares. The register of members shall not be closed for periods exceeding in the whole 30 days in any year.

(k) Power for the Company to purchase its own shares

The Bye-laws supplement the Company’s Memorandum of Association (which gives the Company the power to purchase its own shares) by providing that the power is exercisable by the board upon such terms and conditions as it thinks fit.

(l) Power for any subsidiary of the Company to own shares in the Company

There are no provisions in the Bye-laws relating to ownership of shares in the Company by a subsidiary.

(m) Dividends and other methods of distribution

Subject to the Companies Act, the Company in general meeting may declare dividends in any currency to be paid to the members but no dividend shall be declared in excess of the amount recommended by the board. The Company in general meeting may also make a distribution to its members out of contributed surplus (as ascertained in accordance with the Companies Act). No dividend shall be paid or distribution made out of contributed surplus if to do so would render the Company unable to pay its liabilities as they become due or the realisable value of its assets would thereby become less than the aggregate of its liabilities and its issued share capital and share premium account.

Except in so far as the rights attaching to, or the terms of issue of, any share may otherwise provide, (i) all dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid but no amount paid up on a share in advance of calls shall for this purpose be treated as paid up on the share and (ii) all dividends shall be apportioned and paid pro rata according to the amount paid up on the shares during any portion or portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or other monies payable to a member by the Company on or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment, or (b) that shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as the board may think fit. The Company may also upon the recommendation of the board by an ordinary resolution resolve in respect of any one particular dividend of the Company that it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive such dividend in cash in lieu of such allotment.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared the board may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind.

All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and shall revert to the Company.

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(n) Proxies

Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company. In addition, a proxy or proxies representing either a member who is an individual or a member which is a corporation shall be entitled to exercise the same powers on behalf of the member which he or they represent as such member could exercise.

(o) Call on shares and forfeiture of shares

Subject to the Bye-laws and to the terms of allotment, the board may from time to time make such calls upon the members in respect of any monies unpaid on the shares held by them respectively (whether on account of the nominal value of the shares or by way of premium). A call may be made payable either in one lump sum or by installments. If the sum payable in respect of any call or instalment is not paid on or before the day appointed for payment thereof, the person or persons from whom the sum is due shall pay interest on the same at such rate not exceeding 20 per cent. per annum as the board may agree to accept from the day appointed for the payment thereof to the time of actual payment, but the board may waive payment of such interest wholly or in part. The board may, if it thinks fit, receive from any member willing to advance the same, either in money or money’s worth, all or any part of the monies uncalled and unpaid or installments payable upon any shares held by him, and upon all or any of the monies so advanced the Company may pay interest at such rate (if any) not exceeding 20 percent per annum as the board may decide.

If a member fails to pay any call on the day appointed for payment thereof, the board may serve not less than 14 clear days’ notice on him requiring payment of so much of the call as is unpaid, together with any interest which may have accrued and which may still accrue up to the date of actual payment and stating that, in the event of non-payment at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited.

If the requirements of any such notice are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the board to that effect. Such forfeiture will include all dividends and bonuses declared in respect of the forfeited share and not actually paid before the forfeiture.

A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him to the Company in respect of the shares, together with (if the board shall in its discretion so require) interest thereon from the date of forfeiture until the date of actual payment at such rate not exceeding 20 per cent. per annum as the board determines.

(p) Inspection of register of members

The register and branch register of members shall be open to inspection between 10: 00 a.m. and 12: 00 noon on every business day by members without charge, or by any other person upon a maximum payment of five Bermuda dollars, at the registered office or such other place in Bermuda at which the register is kept in accordance with the Companies Act or, upon a maximum payment of $10, at the Registration Office (as defined in the Bye-laws), unless the register is closed in accordance with the Companies Act.

(q) Quorum for meetings and separate class meetings

For all purposes the quorum for a general meeting shall be two members present in person (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote. In respect of a separate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights the necessary quorum shall be two persons holding or representing by proxy not less than onethird in nominal value of the issued shares of that class.

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(r) Rights of the minorities in relation to fraud or oppression

There are no provisions in the Bye-laws relating to rights of minority shareholders in relation to fraud or oppression. However, certain remedies are available to shareholders of the Company under Bermuda law, as summarised in paragraph 4(e) of this Appendix.

(s) Procedures on liquidation

A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.

If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Companies Act, divide among the members in specie or kind the whole or any part of the assets of the Company whether the assets shall consist of property of one kind or shall consist of properties of different kinds and the liquidator may, for such purpose, set such value as he deems fair upon any one or more class or classes of property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority, shall think fit, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.

(t) Untraceable members

The Company may sell any of the shares of a member who is untraceable if (i) all cheques or warrants (being not less than three in total number) for any sum payable in cash to the holder of such shares have remained uncashed for a period of 12 years; (ii) upon the expiry of the 12 year period, the Company has not during that time received any indication of the existence of the member; and (iii) the Company has caused an advertisement to be published in accordance with the rules of the Designated Stock Exchange (as defined in the Bye-laws) giving notice of its intention to sell such shares and a period of three months, or such shorter period as may be permitted by the Designated Stock Exchange (as defined in the Bye-laws), has elapsed since such advertisement and the Designated Stock Exchange (as defined in the Bye-laws) has been notified of such intention. The net proceeds of any such sale shall belong to the Company and upon receipt by the Company of such net proceeds, it shall become indebted to the former member of the Company for an amount equal to such net proceeds.

(u) Other provisions

The Bye-laws provide that to the extent that it is not prohibited by and is in compliance with the Companies Act, if warrants to subscribe for shares have been issued by the Company and the Company does any act or engages in any transaction which would result in the subscription price of such warrants being reduced below the par value of a share, a subscription rights reserve shall be established and applied in paying up the difference between the subscription price and the par value of a share on any exercise of the warrants.

The Bye-laws also provide that the Company is required to maintain at its registered office a register of directors and officers in accordance with the provisions of the Companies Act and such register is open to inspection by members of the public without charge between 10: 00 a.m. and 12: 00 noon on every business day.

3. VARIATION OF MEMORANDUM OF ASSOCIATION AND BYE-LAWS

The Memorandum of Association may be altered by the Company in general meeting. In certain circumstances, consent to the amendment must be obtained from the Minister of Finance of Bermuda. The Bye-laws may be amended by the Directors subject to the resolution shall be required to alter the provisions of the Memorandum of Association or to confirm any amendment to the Bye-laws or to change the name of the Company. For these purposes, a resolution is a special resolution if it has been passed by a majority of not less

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SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

than three-fourths of the votes cast by such members of the Company as, being entitled to do so, vote in person or, in the case of such members as are corporations, by their respective duly authorised representatives or, where proxies are allowed, by proxy at a general meeting of which not less than 21 clear days’ notice specifying the intention to propose the resolution as a special resolution has been duly given. Except in the case of an annual general meeting, the requirement of 21 clear days’ notice may be waived by a majority in number of the members having the right to attend and vote at the relevant meeting, being a majority together holding not less than 95 percent in nominal value of the shares giving that right.

4. BERMUDA COMPANY LAW

The Company is incorporated in Bermuda and, therefore, operates subject to Bermuda law. Set out below is a summary of certain provisions of Bermuda company law, although this does not purport to contain all applicable qualifications and exceptions or to be a complete review of all matters of Bermuda company law and taxation, which may differ from equivalent provisions in jurisdictions with which interested parties may be more familiar:

(a) Share capital

The Companies Act provides that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called the ‘‘share premium account’’, to which the provisions of the Companies Act relating to a reduction of share capital of a company shall apply as if the share premium account were paid up share capital of the company except that the share premium account may be applied by the company:

(i) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;
(ii) in writing off:
(aa) the preliminary expenses of the company; or
(bb) the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or
(iii) in providing for the premiums payable on redemption of any shares or of any debentures of the company.

In the case of an exchange of shares the excess value of the shares acquired over the nominal value of the shares being issued may be credited to a contributed surplus account of the issuing company.

The Companies Act permits a company to issue preference shares and subject to the conditions stipulated therein to convert those preference shares into redeemable preference shares.

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The Companies Act includes certain protections for holders of special classes of shares, requiring their consent to be obtained before their rights may be varied. Where provision is made by the memorandum of association or bye-laws for authorising the variation of rights attached to any class of shares in the company, the consent of the specified proportions of the holders of the issued shares of that class or the sanction of a resolution passed at a separate meeting of the holders of those shares is required, and where no provision for varying such rights is made in the memorandum of association or bye-laws and nothing therein precludes a variation of such rights, the written consent of the holders of three-fourths of the issued shares of that class or the sanction of a resolution passed as aforesaid is required.

(b) Financial assistance to purchase shares of a company or its holding company

A company is prohibited from providing financial assistance for the purpose of an acquisition of its own or its holding company’s shares unless there are reasonable grounds for believing that the company is, and would after the giving of such financial assistance be, able to pay its liabilities as they become due. In certain circumstances, the prohibition from giving financial assistance may be excluded such as where the assistance is only an incidental part of a larger purpose or the assistance is of an insignificant amount such as the payment of minor costs. In addition, the Companies Act expressly permits the grant of financial assistance where (i) the financial assistance does not reduce the company’s net assets or, to the extent the net assets are reduced, such financial assistance is provided for out of funds of the company which would otherwise be available for dividend or distribution; (ii) an affidavit of solvency is sworn by the directors of the company; and (iii) the financial assistance is approved by resolution of shareholders of the company.

(c) Purchase of shares and warrants by a company and its subsidiaries

A company may, if authorised by its memorandum of association or bye-laws, purchase its own shares. Such purchases may only be effected out of the capital paid up on the purchased shares or out of the funds of the company otherwise available for dividend or distribution or out of the proceeds of a fresh issue of shares made for the purpose. Any premium payable on a purchase over the par value of the shares to be purchased must be provided for out of funds of the company otherwise available for dividend or distribution or out of the company’s share premium account. Any amount due to a shareholder on a purchase by a company of its own shares may (i) be paid in cash; (ii) be satisfied by the transfer of any part of the undertaking or property of the company having the same value; or (iii) be satisfied partly under (i) and partly under (ii). Any purchase by a company of its own shares may be authorised by its board of directors or otherwise by or in accordance with the provisions of its bye-laws. Such purchase may not be made if, on the date on which the purchase is to be effected, there are reasonable grounds for believing that the company is, or after the purchase would be, unable to pay its liabilities as they become due. The shares so purchased will be treated as cancelled and the company’s issued but not its authorised, capital will be diminished accordingly.

A company is not prohibited from purchasing and may purchase its own warrants subject to and in accordance with the terms and conditions of the relevant warrant instrument or certificate. There is no requirement under Bermuda law that a company’s

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memorandum of association or its bye-laws contain a specific provision enabling such purchases and the directors of a company may rely upon the general power contained in its memorandum of association to buy and sell and deal in personal property of all kinds.

Under Bermuda law, a subsidiary may hold shares in its holding company and in certain circumstances, may acquire such shares. The holding company is, however, prohibited from giving financial assistance for the purpose of the acquisition, subject to certain circumstances provided by the Companies Act. A company, whether a subsidiary or a holding company, may only purchase its own shares for cancellation if it is authorised to do so in its memorandum of association or bye-laws pursuant to section 42A of the Companies Act.

(d) Dividends and distributions

A company may not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realisable value of the company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Contributed surplus is defined for purposes of section 54 of the Companies Act to include the proceeds arising from donated shares, credits resulting from the redemption or conversion of shares at less than the amount set up as nominal capital and donations of cash and other assets to the company.

(e) Protection of minorities

Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong done to the company where the act complained of is alleged to be beyond the corporate power of the company or is illegal or would result in the violation of the company’s memorandum of association and bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than actually approved it.

Any member of a company who complains that the affairs of the company are being conducted or have been conducted in a manner oppressive or prejudicial to the interests of some part of the members, including himself, may petition the court which may, if it is of the opinion that to wind up the company would unfairly prejudice that part of the members but that otherwise the facts would justify the making of a winding up order on just and equitable grounds, make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future or for the purchase of shares of any members of the company by other members of the company or by the company itself and in the case of a purchase by the company itself, for the reduction accordingly of the company’s capital, or otherwise. Bermuda law also provides that the company may be wound up by the Bermuda court, if the court is of the opinion that it is just and equitable to do so. Both these provisions are available to minority shareholders seeking relief from the oppressive conduct of the majority, and the court has wide discretion to make such orders as it thinks fit.

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Except as mentioned above, claims against a company by its shareholders must be based on the general laws of contract or tort applicable in Bermuda.

A statutory right of action is conferred on subscribers of shares in a company against persons, including directors and officers, responsible for the issue of a prospectus in respect of damage suffered by reason of an untrue statement therein, but this confers no right of action against the company itself. In addition, such company, as opposed to its shareholders, may take action against its officers including directors, for breach of their statutory and fiduciary duty to act honestly and in good faith with a view to the best interests of the company.

(f) Management

The Companies Act contains no specific restrictions on the power of directors to dispose of assets of a company, although it specifically requires that every officer of a company, which includes a director, managing director and secretary, in exercising his powers and discharging his duties must do so honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Furthermore, the Companies Act requires that every officer should comply with the Companies Act, regulations passed pursuant to the Companies Act and the bye-laws of the company.

(g) Accounting and auditing requirements

The Companies Act requires a company to cause proper records of accounts to be kept with respect to (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company and (iii) the assets and liabilities of the company.

Furthermore, it requires that a company keeps its records of account at the registered office of the company or at such other place as the directors think fit and that such records shall at all times be open to inspection by the directors or the resident representative of the company. If the records of account are kept at some place outside Bermuda, there shall be kept at the office of the company in Bermuda such records as will enable the directors or the resident representative of the company to ascertain with reasonable accuracy the financial position of the company at the end of each three month period, except that where the company is listed on an appointed stock exchange, there shall be kept such records as will enable the directors or the resident representative of the company to ascertain with reasonable accuracy the financial position of the company at the end of each six month period.

The Companies Act requires that the directors of the company must, at least once a year, lay before the company in general meeting financial statements for the relevant accounting period. Further, the company’s auditor must audit the financial statements so as to enable him to report to the members. Based on the results of his audit, which must be made in accordance with generally accepted auditing standards, the auditor must then make a report to the members. The generally accepted auditing standards may be those of a country or jurisdiction other than Bermuda or such other generally accepted auditing standards as may be appointed by the Minister of Finance of Bermuda under the Companies Act; and where the generally accepted auditing standards used are other

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than those of Bermuda, the report of the auditor shall identify the generally accepted auditing standards used. All members of the company are entitled to receive a copy of every financial statement prepared in accordance with these requirements, at least five days before the general meeting of the company at which the financial statements are to be tabled. A company the shares of which are listed on an appointed stock exchange may send to its members summarized financial statements instead. The summarized financial statements must be derived from the company’s financial statements for the relevant period and contain the information set out in the Companies Act. The summarized financial statements sent to the company’s members must be accompanied by an auditor’s report on the summarized financial statements and a notice stating how a member may notify the company of his election to receive financial statements for the relevant period and/or for subsequent periods.

The summarized financial statements together with the auditor’s report thereon and the accompanied notice must be sent to the members of the company not less than 21 days before the general meeting at which the financial statements are laid. Copies of the financial statements must be sent to a member who elects to receive the same within 7 days of receipt by the company of the member’s notice of election.

(h) Auditors

At each annual general meeting, a company must appoint an auditor to hold office until the close of the next annual general meeting; however, this requirement may be waived if all of the shareholders and all of the directors, either in writing or at the general meeting, agree that there shall be no auditor.

A person, other than an incumbent auditor, shall not be capable of being appointed auditor at an annual general meeting unless notice in writing of an intention to nominate that person to the office of auditor has been given not less than 21 days before the annual general meeting. The company must send a copy of such notice to the incumbent auditor and give notice thereof to the members not less than 7 days before the annual general meeting. An incumbent auditor may, however, by notice in writing to the secretary of the company waive the requirements of the foregoing.

Where an auditor is appointed to replace another auditor, the new auditor must seek from the replaced auditor a written statement as to the circumstances of the latter’s replacement. If the replaced auditor does not respond within 15 days, the new auditor may act in any event. An appointment as auditor of a person who has not requested a written statement from the replaced auditor is voidable by a resolution of the shareholders at a general meeting. An auditor who has resigned, been removed or whose term of office has expired or is about to expire, or who has vacated office is entitled to attend the general meeting of the company at which he is to be removed or his successor is to be appointed; to receive all notices of, and other communications relating to, that meeting which a member is entitled to receive; and to be heard at that meeting on any part of the business of the meeting that relates to his duties as auditor or former auditor.

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(i) Exchange control

An exempted company is usually designated as ‘‘non-resident’’ for Bermuda exchange control purposes by the Bermuda Monetary Authority. Where a company is so designated, it is free to deal in currencies of countries outside the Bermuda exchange control area which are freely convertible into currencies of any other country. The permission of the Bermuda Monetary Authority is required for the issue of shares and warrants by the company and the subsequent transfer of such shares and warrants. In granting such permission, the Bermuda Monetary Authority accepts no responsibility for the financial soundness of any proposals or for the correctness of any statements made or opinions expressed in any document with regard to such issue. Before the company can issue or transfer any further shares and warrants in excess of the amounts already approved, it must obtain the prior consent of the Bermuda Monetary Authority.

Permission of the Bermuda Monetary Authority will normally be granted for the issue and transfer of shares and warrants to and between persons regarded as resident outside Bermuda for exchange control purposes without specific consent for so long as the shares and warrants are listed on an appointed stock exchange (as defined in the Companies Act). Issues to and transfers involving persons regarded as ‘‘resident’’ for exchange control purposes in Bermuda will be subject to specific exchange control authorization.

(j) Taxation

Under present Bermuda law, no Bermuda withholding tax on dividends or other distributions, nor any Bermuda tax computed on profits or income or on any capital asset, gain or appreciation will be payable by an exempted company or its operations, nor is there any Bermuda tax in the nature of estate duty or inheritance tax applicable to shares, debentures or other obligations of the company held by non-residents of Bermuda. Furthermore, a company may apply to the Minister of Finance of Bermuda for an assurance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that no such taxes shall be so applicable until 28th March 2016, although this assurance will not prevent the imposition of any Bermuda tax payable in relation to any land in Bermuda leased or let to the company or to persons ordinarily resident in Bermuda.

(k) Stamp duty

An exempted company is exempt from all stamp duties except on transactions involving ‘‘Bermuda property’’. This term relates, essentially, to real and personal property physically situated in Bermuda, including shares in local companies (as opposed to exempted companies). Transfers of shares and warrants in all exempted companies are exempt from Bermuda stamp duty.

(l) Loans to directors

Bermuda law prohibits the making of loans by a company to any of its directors or to their families or companies in which they hold more than a 20 per cent. interest, without the consent of any member or members holding in aggregate not less than ninetenths of the total voting rights of all members having the right to vote at any meeting of the members of the company. These prohibitions do not apply to anything done to

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provide a director with funds to meet the expenditure incurred or to be incurred by him for the purposes of the company, provided that the company gives its prior approval at a general meeting or, if not, the loan is made on condition that it will be repaid within six months of the next following annual general meeting if the loan is not approved at or before such meeting. If the approval of the company is not given for a loan, the directors who authorised it will be jointly and severally liable for any loss arising therefrom.

(m) Inspection of corporate records

Members of the general public have the right to inspect the public documents of a company available at the office of the Registrar of Companies in Bermuda which will include the company’s certificate of incorporation, its memorandum of association (including its objects and powers) and any alteration to the company’s memorandum of association. The members of the company have the additional right to inspect the byelaws of a company, minutes of general meetings and the company’s audited financial statements, which must be presented to the annual general meeting. Minutes of general meetings of a company are also open for inspection by directors of the company without charge for not less than two hours during business hours each day. The register of members of a company is open for inspection by members without charge and to members of the general public for a fee. The company is required to maintain its share register in Bermuda but may, subject to the provisions of the Companies Act, establish a branch register outside Bermuda. Any branch register of members established by the company is subject to the same rights of inspection as the principal register of members of the company in Bermuda. Any person may require a copy of the register of members or any part thereof which must be provided within fourteen days of a request. Bermuda law does not, however, provide a general right for members to inspect or obtain copies of any other corporate records.

A company is required to maintain a register of directors and officers at its registered office and such register must be made available for inspection for not less than two hours in each day by members of the public without charge. If summarized financial statements are sent by a company to its members pursuant to section 87A of the Companies Act, a copy of the summarized financial statements must be made available for inspection by the public at the registered office of the company in Bermuda.

(n) Winding up

A company may be wound up by the Bermuda court on application presented by the company itself, its creditors or its contributors. The Bermuda court also has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the Bermuda court, just and equitable that such company be wound up.

A company may be wound up voluntarily when the members so resolve in general meeting, or, in the case of a limited duration company, when the period fixed for the duration of the company by its memorandum expires, or the event occurs on the occurrence of which the memorandum provides that the company is to be dissolved. In the case of a voluntary winding up, such company is obliged to cease to carry on its business from the time of passing the resolution for voluntary winding up or upon the

— VI-18 —

SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

expiry of the period or the occurrence of the event referred to above. Upon the appointment of a liquidator, the responsibility for the company’s affairs rests entirely in his hands and no future executive action may be carried out without his approval.

Where, on a voluntary winding up, a majority of directors make a statutory declaration of solvency, the winding up will be a members’ voluntary winding up. In any case where such declaration has not been made, the winding up will be a creditors’ voluntary winding up.

In the case of a members’ voluntary winding up of a company, the company in general meeting must appoint one or more liquidators within the period prescribed by the Companies Act for the purpose of winding up the affairs of the company and distributing its assets. If the liquidator at any time forms the opinion that such company will not be able to pay its debts in full, he is obliged to summon a meeting of creditors.

As soon as the affairs of the company are fully wound up, the liquidator must make up an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon call a general meeting of the company for the purposes of laying before it the account and giving an explanation thereof. This final general meeting requires at least one month’s notice published in an appointed newspaper in Bermuda.

In the case of a creditors’ voluntary winding up of a company, the company must call a meeting of creditors of the company to be summoned on the day following the day on which the meeting of the members at which the resolution for winding up is to be proposed is held. Notice of such meeting of creditors must be sent at the same time as notice is sent to members. In addition, such company must cause a notice to appear in an appointed newspaper on at least two occasions.

The creditors and the members at their respective meetings may nominate a person to be liquidator for the purposes of winding up the affairs of the company provided that if the creditors nominate a different person, the person nominated by the creditors shall be the liquidator. The creditors at the creditors’ meeting may also appoint a committee of inspection consisting of not more than five persons.

If a creditors’ winding up continues for more than one year, the liquidator is required to summon a general meeting of the company and a meeting of the creditors at the end of each year to lay before such meetings an account of his acts and dealings and of the conduct of the winding up during the preceding year. As soon as the affairs of the company are fully wound up, the liquidator must make an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon shall call a general meeting of the company and a meeting of the creditors for the purposes of laying the account before such meetings and giving an explanation thereof.

— VI-19 —

SUMMARY OF THE CONSTITUTION OF THE COMPANY AND BERMUDA COMPANY LAW

APPENDIX VI

5. GENERAL

Conyers Dill & Pearman, the Company’s legal advisers on Bermuda law, have sent to the Company a letter of advice summarising certain aspects of Bermuda company law. This letter, together with a copy of the Companies Act, is available for inspection as referred to in the paragraph headed ‘‘Documents available for inspection’’ in Appendix VIII. Any person wishing to have a detailed summary of Bermuda company law or advice on the differences between it and the laws of any jurisdiction with which he is more familiar is recommended to seek independent legal advice.

— VI-20 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

1. RESPONSIBILITY STATEMENTS

This circular includes particulars given in compliance with the Takeovers Code and the Listing Rules for the purpose of giving information with regard to the Enlarged Group. The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than that in relation to the Sinochem Group and the Fertilizer Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed by them in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular the omission of which would make any statement contained in this circular (other than those in relation to the Sinochem Group and the Fertilizer Group) misleading. In respect of the information set out in the section headed ‘‘Fertilizer Industry and Regulatory Overview’’ of this circular, the Directors only take responsibility for, and confirm, the correctness and fairness of the reproduction and presentation of such information from the sources referred to therein.

The directors of Sinochem HK jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than that in relation to the Group, but including its intentions with respect to the Enlarged Group) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed by them in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular the omission of which would make any statement contained in this circular (other than those in relation to the Group, but including its intentions with respect to the Enlarged Group) misleading. In respect of the information set out in the section headed ‘‘Fertilizer Industry and Regulatory Overview’’ of this circular, the directors of Sinochem HK only take responsibility for, and confirm, the correctness and fairness of the reproduction and presentation of such information from the sources referred to therein.

2. FURTHER INFORMATION ABOUT THE GROUP

(a) Incorporation

The Company was incorporated in Bermuda under the Companies Act as an exempted company with limited liability on 26 May 1994 and its ordinary shares have been listed on the Main Board of the Stock Exchange since 30 September 1996. As at the Latest Practicable Date, Sinochem HK held approximately 21.16% of the existing issued ordinary share capital of the Company and is a substantial shareholder of the Company.

— VII-1 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

(b) Changes in share capital of the Group

(i) the Company

	Ordinary	Shares	Preference	Shares
	No. of shares	HK$	No. of shares	HK$
Issued share capital:
As at 31/3/2004	3,676,098,284	367,609,828	103	103,000,000
21/9/2004
Issue of 2,000,000 Ordinary
Shares upon exercise of
Share Options	2,000,000	200,000	—	—
15/11/2004
Issue of 600,000 Ordinary
Shares upon exercise of
Share Options	600,000	60,000	—	—
17/01/2005
Issue of 800,000 Ordinary
Shares upon exercise of
Share Options	800,000	80,000	—	—
As at Latest Practicable
Date	3,679,498,284	367,949,828	103	103,000,000

As at the Latest Practicable Date, the authorised and issued share capital of the Company were as follows:

HK$ Authorised 6,840,000,000 Ordinary Shares 684,000,000 316 Preference Shares 316,000,000 Issued and fully paid or credited as fully-paid: 3,679,498,284 Ordinary Shares 367,949,828 103 Preference Shares 103,000,000

Ordinary Shares

There were 3,400,000 Ordinary Shares with total par value of HK$340,000 (as detailed above) issued since 31 March 2004 (being the date to which the latest audited financial statements of the Company were made up). The issued Ordinary Shares rank pari passu with each other and entitle their holders to vote at general meetings of the Company and to receive dividend and capital distribution.

Preference Shares

The Preference Shares in issue were convertible into Ordinary Shares by no later than the 7th business day before the maturity date of 27 February 2005 at an initial conversion price per Ordinary Share equal to the lower of (i) HK$0.40 and (ii) the average of the 10 lowest daily closing prices per Ordinary Share on the Stock Exchange during the 30 days immediately prior to the date of issue of the conversion notice (subject to adjustments). Unless previously

— VII-2 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

converted into Ordinary Shares, all but not part of the Preference Shares may be redeemed at their aggregate nominal value on the maturity date at the option of the holder or the Company. As at the Latest Practicable Date, none of the Preference Shares in issue had been converted into Ordinary Shares and such conversion rights have lapsed. The holder of the outstanding Preference Shares, Sinochem HK, has requested redemption of all such Preference Shares. The redemption amount of HK$103 million will be fully settled upon Completion from internal resources following the consolidation of the Fertilizer Group into the Enlarged Group.

The Preference Shares confer upon their holder the right to receive, in priority to the holders of any other class of shares in the capital of the Company, a fixed cumulative cash dividend payable on the aggregate par value of the Preference Shares at the rate of 1% per annum. On a return of capital on a winding-up or otherwise, the Preference Shares will rank in priority to any other class of shares in the capital of the Company, provided that the assets of the Company available for distribution to its members shall be applied first towards arrears or accruals of the fixed dividend payable on the Preference Shares before repaying the capital paid up on any Preference Share or any other class of shares in the capital of the Company.

The Preference Shares do not entitle its holder to any voting rights at general meetings of the Company, except on a resolution of the Shareholders to vary or abrogate the rights of the holders of Preference Shares.

Share Options

As at the Latest Practicable Date, there were no outstanding Share Options granted and yet to be exercised.

Other than as disclosed above, there were no outstanding options, warrants or any conversion rights affecting the shares of the Company as at the Latest Practicable Date.

Between 31 March 2004 (being the date to which the latest audited financial statements of the Company were made up) and the Latest Practicable Date, other than disclosed above or in the section headed ‘‘Share Option Scheme’’ in this Appendix or as contemplated under the Acquisition or the Offering, there is no change of share capital in the Company, no share or loan capital of the Company has been issued or is proposed to be issued for cash or otherwise, or has been put under option or agreed conditionally or unconditionally to be put under option, and no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of any such capital and no options, warrants, derivatives, convertible securities or conversion rights affecting Ordinary Shares have been issued or granted or agreed conditionally or unconditionally to be issued or granted.

As at the Latest Practicable Date, other than disclosed above and save for the transactions contemplated in relation to the Acquisition or the Offering and as disclosed in this circular, no share or loan capital of the Company has

— VII-3 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

been issued or is proposed to be issued for cash or otherwise, or has been put under option or agreed conditionally or unconditionally to be put under option, and no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of any such capital and no options, warrants, derivatives, convertible securities or conversion rights affecting Ordinary Shares were in issue or granted or agreed conditionally or unconditionally to be issued or granted.

(ii) Subsidiaries of the Company

The principal subsidiaries of the Company are referred to in note 33 accompanying the audited financial statements of the Group for the year ended 31 March 2004 as set out in Appendix II to this circular.

Save as disclosed in this Appendix, there has been no change of share capital in any subsidiary of the Company and no share or loan capital of any subsidiary of the Company has been issued or is proposed to be issued for cash or otherwise between 31 March 2004 (being the date to which the latest audited financial statements of the Company were made up) and the Latest Practicable Date. As at the Latest Practicable Date, no capital of any subsidiary of the Company has been put under option or agreed conditionally or unconditionally to be put under option. No commission, discount, brokerage or other special term has been granted between 31 March 2004 and the Latest Practicable Date in connection with the issue or sale of any capital of any member of the Group.

(c) Intellectual property rights of the Group

As at the Latest Practicable Date, the Group is the registered proprietor and beneficial owner of the following trade marks:

		Place of			Validity
Trademark	Registrant	Registration	Class	Registration No.	Period
	The Company	Hong Kong	36 (Part A)	04499 of 1997	25/11/1994–
					24/11/2015
	The Company	Hong Kong	37 (Part A)	04500 of 1997	25/11/1994–
					24/11/2015
	The Company	Hong Kong	19 (Part A)	08673 of 1996	25/11/1994–
					24/11/2015

— VII-4 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

FURTHER INFORMATION RELATING TO THE COMPANY AND THE WHITEWASH WAIVER

(a) the Company

As at the Latest Practicable Date:

(i) the Company did not have any interests in any securities, shares, options, warrants, derivatives or convertible securities of Sinochem HK;
(ii) save as disclosed in Section 5 of this Appendix and save that Mr. Liu De Shu, a Director, held one share in Sinochem HK as a bare trustee for the sole benefit of Sinochem Corporation, none of the Directors had any interests in the securities, shares, options, warrants, derivatives or convertible securities of the Company or Sinochem HK;
(iii) none of the subsidiaries of the Company, nor pension funds of the Company or of a subsidiary of the Company nor advisers to the Company as specified in class (2) of the definition of ‘‘associate’’ in the Takeovers Code but excluding persons enjoying exempt principal trader status under the Takeovers Code, owned or controlled any securities, shares, options, warrants, derivatives or convertible securities of the Company;
(iv) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code (which arrangement includes any indemnity or option arrangement, or any agreement or understanding, formal or informal, by whatever nature, relating to shares or other securities of the Company which may be an inducement to deal or refrain from dealing) with the Company, or with any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of ‘‘associate’’ in the Takeovers Code; and
(v) there was no shareholdings in the Company which are managed on a discretionary basis by fund managers (other than fund managers enjoying exempt fund manager status) connected with the Company.

(b) Sponsors

As at the Latest Practicable Date,

(i) none of the Sponsors, nor any persons controlling, controlled by or under the same control as either of them owned or controlled any securities, shares, options, warrants, derivatives or convertible securities of the Company;
(ii) none of the Sponsors, nor any persons controlling, controlled by or under the same control as either of them had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code (which arrangement includes any indemnity or option arrangement, or any agreement or understanding, formal or informal, by whatever nature, relating to shares or other securities in the Company which may be an inducement to deal or refrain from dealing) with any persons; and

— VII-5 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

(iii) there was no agreement, arrangement or understanding between either of the Sponsors or persons controlling, controlled by or under the same control as either of the Sponsors on the one part and any of the directors, recent directors, shareholders or recent shareholders of the Company on the other part, which was conditional on the outcome of or otherwise connected with or dependent upon, the Acquisition Agreement and/or the acquisition of the Consideration Shares by Sinochem HK and/or the Whitewash Waiver.

(c) Others

As at the Latest Practicable Date,

(i) none of Somerley, nor any persons controlling, controlled by or under the same control as Somerley, any bank, financial and professional advisers to the Company in relation to the Acquisition Agreement and the Whitewash Waiver and any persons controlling, controlled by or under the same control as such banks, financial and professional advisers, owned or controlled any securities, shares, options, warrants, derivatives or convertible securities of the Company;
(ii) none of BOCI Asia, nor any persons controlling, controlled by or under the same control as BOCI Asia, owned or controlled any securities, shares, options, warrants, derivatives, or convertible securities of the Company, other than any holding of such securities by certain entities controlling, controlled by or under the same control as BOCI Asia pursuant to a consent granted by the Executive to BOCI Asia in relation to the exemption of the disclosure requirements under the Takeovers Code; and
(iii) apart from Mr. Chu Yu Lin, David and Mrs. Chu Ho Miu Hing who are required to abstain from voting on the Acquisition and the Whitewash Waiver, no Director held any shareholding in the Company.

(d) Dealings in securities

(i) The Company had not dealt in any securities, shares, options, warrants, derivatives or convertible securities of Sinochem HK during the period between 28 July 2004, being six months prior to the date of the Announcement, and the Latest Practicable Date.

— VII-6 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

(ii) As at the Latest Practicable Date, Mrs. Chu Ho Miu Hing was beneficially interested in 64,304,000 Ordinary Shares. During the period between 28 July 2004, being six months prior to the date of the Announcement, and the Latest Practicable Date, dealings for value in the Ordinary Shares by Mrs. Chu Ho Miu Hing were as follows:

			Dealing price	Dealing price
	Number of Ordinary Shares		per	Ordinary
Date	Purchased	Sold	Share (HK$)
12 November 2004	—	15,398,000		0.46
	—	15,176,000		0.465
	—	3,000,000		0.47
	—	1,324,000		0.475
	—	58,700,000		0.43
15 November 2004	—	5,000,000		0.445
	—	5,000,000		0.45
	—	17,000,000		0.455
	—	4,327,668		0.46
	—	2,000,000		0.465
22 December 2004	—	1,000,000		0.445
	—	1,300,000		0.45
23 December 2004	—	10,932,000		0.44
24 December 2004	—	2,030,000		0.44
	—	6,868,000		0.435
28 December 2004	—	3,000,000		0.44
	—	3,140,000		0.445
	—	910,000		0.45
29 December 2004	—	500,000		0.435
	—	5,200,000		0.44
18 January 2005	—	2,000,000		0.445
19 January 2005	—	2,300,000		0.445
	—	86,000		0.45
20 January 2005	—	1,500,000		0.44
	—	3,000,000		0.445
	—	3,930,000		0.45

(iii) Save as disclosed in sub-paragraph (ii) above, none of the Directors had dealt in any securities, shares, options, warrants, derivatives or convertible securities of the Company during the period between 28 July 2004, being six months prior to the date of the Announcement, and the Latest Practicable Date.
(iv) None of the Directors had dealt in any securities, shares, options, warrants, derivatives or convertible securities of Sinochem HK during the period between 28 July 2004, being six months prior to the date of the Announcement, and the Latest Practicable Date.
(v) None of Cazenove Asia, Goldman Sachs, BOCI Asia nor persons controlling, controlled by or under the same control as Cazenove Asia, Goldman Sachs, or BOCI Asia had dealt in any securities, shares, options, warrants, derivatives or convertible securities of the Company during the period between 28 July 2004, being six months prior to the date of the Announcement, and the Latest Practicable Date where such dealings require disclosure under the Takeovers

— VII-7 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

Code other than the dealings of such securities by the exempt fund managers granted by the Executive under the Takeovers Code to Goldman Sachs and certain entities controlling, controlled by or under the same control as BOCI Asia pursuant to a consent granted by the Executive to BOCI Asia in relation to the exemption of the disclosure requirements under the Takeovers Code.

4. SHARE OPTION SCHEME

The Old Share Option Scheme adopted by the Company on 11 September 1996 was terminated and the existing Share Option Scheme was adopted by the Company on 26 August 2002 to comply with those amendments to the Listing Rules that came into force on 1 September 2001 in respect of the share option schemes of a listed company. As a result, the Company may no longer grant further share options under the Old Share Option Scheme. Unless otherwise terminated, the Share Option Scheme will remain in force for 10 years from the date of adoption. As at the Latest Practicable Date, there were no outstanding Share Options granted and yet to be exercised under the Old Share Option Scheme and no options had been granted under the Share Option Scheme.

The purpose of the Share Option Scheme is to provide incentives and rewards to the eligible participants under the scheme for their contribution or would be contribution to the Group and/or to enable the Group to recruit and retain high-calibre employees and attract human resources that are valuable to the Group and any entity in which any member of the Group holds any equity interest. Eligible participants under the Share Option Scheme include employees or proposed employees, executive and non-executive directors, suppliers and customers of, persons that provide research, development or technological or financial support to, and holders of shares or securities issued by, any member of the Group or any entity in which any member of the Group holds any equity interest.

Subject to the terms of the Share Option Scheme, the maximum number of ordinary shares of the Company which may be issued upon exercise of all options to be granted under the Share Option Scheme and any other schemes should not in aggregate exceed 333,449,828 ordinary shares, being 10% of the total number of its ordinary shares in issue as at the date of adoption of the Share Option Scheme, unless approval from the Shareholders is obtained to renew such limit. Notwithstanding the above, the maximum number of ordinary shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Share Option Scheme and any other share option schemes of the Company must not exceed 30% of the total number of its ordinary shares in issue from time to time. The number of ordinary shares in respect of which options may be granted to each participant in aggregate in any 12-month period shall not exceed 1% of the total number of ordinary shares of the Company in issue and any further grant of options to that particular participant shall be subject to the issue of a circular by the Company to the Shareholders and approval of the Shareholders in general meeting with such participant and his or her Associates abstaining from voting.

Options granted to a Director, chief executive or substantial shareholder of the Company, or to any of their respective Associates, are subject to the prior approval of the independent non-executive Directors, excluding any independent non-executive Director who is the grantee of the options. In addition, where any grant of option to a substantial shareholder or an independent non-executive Director, or to any of their respective Associates, would result in the ordinary shares issued and to be issued upon exercise of all options already granted and to be granted (including options exercised, cancelled and

— VII-8 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

outstanding) to such person exceeding 0.1% of the ordinary shares of the Company in issue at the date of such grant or having an aggregate value (based on the closing price of the ordinary shares of the Company at the date of each grant) in excess of HK$5 million, within any 12-month period, are subject to the issue of a circular by the Company to the Shareholders and prior approval of the Shareholders voting by poll in general meeting where all connected persons of the Company must abstain from voting in favour at such general meeting.

An offer of grant of an option pursuant to the Share Option Scheme may be accepted within 28 days from the date of the offer, upon payment of a consideration of HK$1 by the grantee. The exercise period of the options granted shall be such period as the Board may determine, save that such period may not be more than 10 years from the date of grant of the options subject to the provisions for early termination thereof and to such minimum period for which the options have to be held before it can be exercised as the Board may determine. The exercise price per ordinary share shall be determined by the Board, but in any event shall not be less than the highest of (i) the closing price of the ordinary shares of the Company as stated in the Stock Exchange’s daily quotation sheet on the date of the offer of grant, which must be a trading day; (ii) the average closing price of the ordinary shares of the Company as stated in the Stock Exchange’s daily quotation sheets for the five trading days immediately preceding the date of grant, and (iii) the nominal value of an ordinary share of the Company.

No options have been granted under the Share Option Scheme since its adoption.

— VII-9 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

Details of the movements of Share Options under the Old Share Option Scheme for the period from 1 April 2003 to the Latest Practicable Date were as follows:

				Price of
				the
				Ordinary
				Shares as
				at
				exercise
	Date of			date of		Number of Share Options				As at the
	grant of		Exercise	Share		Exercised	Lapsed	Cancelled		Latest
Ex-Directors/	Share	Exercisable	price	Options		during the	during the	during	the	Practicable
Directors	Options	period	(Note 1)	(Note 2)	At 1/4/2003	period	period	period		Date
Mr. Chan Fook Lai	1/2/2000	28/8/2000 to	0.228	N/A	1,100,000	—	1,100,000		—	—
(resigned on		27/8/2003
10/12/2003)
	2/3/2001	15/9/2001 to	0.10	N/A	2,000,000	—	—	2,000,000		—
		14/9/2004
	1/8/2001	1/2/2002 to	0.255	N/A	5,800,000	—	—	5,800,000		—
		31/1/2005
Mr. Chan King Hung	20/10/1999	28/4/2000 to	0.17	N/A	20,000,000	—	20,000,000		—	—
(resigned on		27/4/2003
10/12/2003)
	1/2/2000	28/8/2000 to	0.228	N/A	3,000,000	—	3,000,000		—	—
		27/8/2003
	2/3/2001	15/9/2001 to	0.10	N/A	1,000,000	—	—	1,000,000		—
		14/9/2004
	16/5/2001	18/11/2001 to	0.10	N/A	7,600,000	—	—	7,600,000		—
		17/11/2004
	1/8/2001	1/2/2002 to	0.255	N/A	5,800,000	—	—	5,800,000		—
		31/1/2005
Mr. Lu Xin	16/5/2001	18/11/2001 to	0.10	0.275	5,800,000	5,800,000	—		—	—
(resigned on		17/11/2004
8/1/2004)
	1/8/2001	1/2/2002 to	0.255	0.320	5,800,000	5,800,000	—		—	—
		31/1/2005
Mrs. Chu Ho Miu	1/2/2000	28/8/2000 to	0.228	N/A	1,600,000	—	1,600,000		—	—
Hing		27/8/2003
	1/8/2001	1/2/2002 to	0.255	N/A	5,800,000	—	5,800,000		—	—
		31/1/2005
Mr. Chu Yu Lin,	1/8/2001	1/2/2002 to	0.255	N/A	5,800,000	—	5,800,000		—	—
David		31/1/2005			- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -		- - - - - - - - - - - -
					71,100,000	11,600,000	37,300,000	22,200,000		—
					- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -		- - - - - - - - - - - -
Employees	1/8/2001	1/2/2002 to	0.255	0.379	3,400,000	3,400,000	—		—	—
		31/1/2005
	8/12/2001	8/6/2002 to	0.378	N/A	4,000,000	—	2,000,000	2,000,000		—
		7/6/2005
					- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -		- - - - - - - - - - - -
					7,400,000	3,400,000	2,000,000	2,000,000		—
					- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -	- - - - - - - - - - - -		- - - - - - - - - - - -
					78,500,000	15,000,000	39,300,000	24,200,000		—

Notes:

The exercise price of the Share Options is subject to adjustments in the case of a rights issue, consolidation, sub-division or other similar changes in the share capital of the Company.
The price of the Ordinary Shares as at the date of exercise of the Share Options is the weighted average of the closing prices of the Ordinary Shares as listed on the Stock Exchange on the trading day immediately before the relevant date on which the Share Options were exercised.

— VII-10 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

5. DISCLOSURE OF INTERESTS

(a) Shareholdings after the Acquisition but prior to any Offering

Set out below is a table showing, for the purpose of illustration, the shareholding structures of the Company (a) as at the Latest Practicable Date; (b) assuming the Share Consolidation has become effective but before Completion; and (c) assuming the Consideration Shares have been issued after the Share Consolidation, in each case assuming no Offering has taken place:

Sinochem HK and its concert parties Mr. Chu Yu Lin, David (Note 2) Mrs. Chu Ho Miu Hing (Note 2) Public Total	As at the Latest Practicable Date Number of Ordinary Shares % 778,477,633 21.16 312,876,297 8.50 64,304,000 1.75 2,523,840,354 68.59 - - - - - - - - - - - - - - - - - - - - - - - 3,679,498,284 100.00	Assuming Share Consolidation has become effective but before Completion (Note 1) Number of New Shares % 77,847,763 21.16 31,287,629 8.50 6,430,400 1.75 252,384,036 68.59 - - - - - - - - - - - - - - - - - - - - - - - 367,949,828 100.00	Assuming the Consideration Shares have been issued after Share Consolidation (Note 1) Number of New Shares % 5,127,847,763 94.65 31,287,629 0.58 6,430,400 0.11 252,384,036 4.66 - - - - - - - - - - - - - - - - - - - - - - - 5,417,949,828 100.00

Set out below is a table showing, for the purpose of illustration, the shareholding structures of the Company (a) as at the Latest Practicable Date; and (b) assuming the Consideration Shares have been issued, in each case in the absence of the Share Consolidation and the Offering:

Sinochem HK and its concert parties Mr. Chu Yu Lin, David (Note 2) Mrs. Chu Ho Miu Hing (Note 2) Public Total	As at the Latest Practicable Date Number of Ordinary Shares % 778,477,633 21.16 312,876,297 8.50 64,304,000 1.75 2,523,840,354 68.59 - - - - - - - - - - - - - - - - - - - - - - - - - 3,679,498,284 100.00	Assuming the Consideration Shares have been issued (Note 1) Number of Ordinary Shares % 51,278,477,633 94.65 312,876,297 0.58 64,304,000 0.11 2,523,840,354 4.66 - - - - - - - - - - - - - - - - - - - - - - - - - 54,179,498,284 100.00

Notes:

Assumes no further shares other than those described in the tables above will be issued after the Latest Practicable Date until Completion; and no Offering has taken place.
Mr. Chu Yu Lin, David is an executive Director and is the husband of Mrs. Chu Ho Miu Hing, also an executive Director.

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APPENDIX VII

STATUTORY AND GENERAL INFORMATION

To maintain the Company’s public float at 25% upon Completion, the Company and Sinochem HK have undertaken to the Stock Exchange to ensure that the public float of the ordinary shares of the Company then in issue shall not be less than 25% upon Completion to comply with the requirements of the Listing Rules.

(b) Interests and short positions in the shares, underlying shares and debentures of the Company and its associated corporations

As at the Latest Practicable Date, the Directors and the chief executive of the Company and any of their respective Associates had the following interests and short positions in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which had to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he/she was taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO, to be entered in the register of the Company referred to therein or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company and the Stock Exchange:

Long positions in the Ordinary Shares

	Number of Ordinary Shares	Number of Ordinary Shares	Approximate
	beneficially held and nature		percentage of
	of interest		total ordinary
Name of Director	Personal	Family	shareholding
			(%)
Chu Yu Lin, David	312,876,297	64,304,000	10.25
		(Note 1)
Chu Ho Miu Hing	64,304,000	312,876,297	10.25
		(Note 2)

Notes:

(1) The family interests of 64,304,000 Ordinary Shares represent the interest of Mrs. Chu Ho Miu Hing, the wife of Mr. Chu Yu Lin, David.
(2) The family interests of 312,876,297 Ordinary Shares represent the interest of Mr. Chu Yu Lin, David, the husband of Mrs. Chu Ho Miu Hing.

Long positions in the shares of associated corporations of the Company

	Name of		Number of	Approximate
	associated		non-voting	percentage of
	corporation	Nature	deferred shares	total
Name of Director	(Note 1)	of interest	(Note 2)	shareholding
				%
Chu Yu Lin, David	Calorie Limited	Personal	20	5.88
		interest
Chu Ho Miu Hing	Calorie Limited	Family interest	20	5.88
		(Note 3)

— VII-12 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

Notes:

(1) Calorie Limited is a wholly owned subsidiary of the Company.
(2) The non-voting deferred shares practically carry no rights to dividends or to receive notice of or to attend or vote at any general meeting of Calorie Limited or to participate in any distributions on winding up.
(3) The family interest represents the personal interest of Mr. Chu Yu Lin, David, the husband of Mrs. Chu Ho Miu Hing.

(c) Persons or entities who have interests and short positions in the Ordinary Shares or underlying Ordinary Shares

As at the Latest Practicable Date, so far as was known to, or could be ascertained after reasonable enquiry by, the Directors and the chief executive of the Company, the following persons (other than the Directors or the chief executive of the Company) had an interest or a short position in the Ordinary Shares or underlying Ordinary Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

Long positions in Ordinary Shares

		Approximate
		percentage of total
		shareholding based on
		issued ordinary share
		capital of the Company
	Number of	as at the Latest
Name of Shareholder	Ordinary Shares	Practicable Date
		(%)
Sinochem HK	51,278,477,633 (Note 2)	1,393.63
Sinochem Corporation (Note 1)	51,278,477,633 (Note 2)	1,393.63
The Investor	11,615,899,657 (Note 3)	315.69

Notes:

(1) Sinochem Corporation is taken to be interested in the Ordinary Shares in which Sinochem HK, its wholly-owned subsidiary, holds an interest.
(2) The number of Ordinary Shares consists of (a) 778,477,633 Ordinary Shares beneficially owned by Sinochem HK as at the Latest Practicable Date and (b) a maximum of 50,500,000,000 new Ordinary Shares issuable to Sinochem HK pursuant to the Acquisition Agreement if the Capital Reorganisation has not been given effect to on or before Completion.
(3) The number specified represents the total interest in Ordinary Shares (assuming no Share Consolidation) which the Investor is taken to have under the agreement relating to the Strategic Placing, pursuant to which Sinochem HK has conditionally agreed to sell to the Investor, and has

— VII-13 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

granted an option to the Investor to purchase from Sinochem HK, ordinary shares of the Company that in aggregate represents 20% of the enlarged issued ordinary share capital of the Company on Completion and completion of the Offering.

Short positions in Ordinary Shares

Approximate percentage based on issued ordinary share capital of the Company Number of Ordinary as at the Latest Name of Shareholder Shares (Note 2) Practicable Date (%) Sinochem HK 11,615,899,657 315.69 Sinochem Corporation (Note 1) 11,615,899,657 315.69

Notes:

(1) Sinochem Corporation is taken to have a short position in the Ordinary Shares in which Sinochem HK, its wholly-owned subsidiary, holds a short position.
(2) The number specified represents the total short position in Ordinary Shares (assuming no Share Consolidation) which Sinochem HK is taken to have under the agreement relating to the Strategic Placing, pursuant to which Sinochem HK has conditionally agreed to sell to the Investor, and has granted an option to the Investor to purchase from Sinochem HK, ordinary shares of the Company that in aggregate represents 20% of the enlarged issued ordinary share capital of the Company on Completion and completion of the Offering.

— VII-14 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

(d) Directors’ remuneration

The following table summarises the directors’ remuneration of the Company for the three years ended 31 March 2004:

Executive Directors: Fees Other emoluments: — salaries and other benefits — contributions to retirement benefit scheme Independent non-executive Directors: Fees Total	2002 HK$’000 — 12,800 36 12,836 525 13,361	2003 HK$’000 — 8,000 26 8,026 520 8,546	2004 HK$’000 —
			4,667 1
			4,668
			483
			5,151

Save as disclosed above, no other payments have been paid or are payable, in respect of the three years ended 31 March 2004, by the Company or any of its subsidiaries to the Directors.

No Director’s service contracts were in force between the Company and the Directors as at the Latest Practicable Date. Under the arrangement currently in force, other than fees payable to the independent non-executive Directors and prior outstanding salaries due to Mr. Chu Yu Lin, David, an executive Director, no remuneration will be payable by the Company to the Directors for the year ended 31 March 2005.

The aggregate of the remuneration payable to and benefits in kind receivable by the Directors will not be varied in consequence of the Acquisition.

(e) Competing interests

As disclosed in the paragraph headed ‘‘Remaining Fertilizer Business’’ in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in this circular, Mr. Du Ke Ping, a proposed Director, is also a director of Sinochem Shandong and US Agri-Chemicals, members of the Sinochem Group which will continue to engage in the Remaining Fertilizer Business. Save as disclosed, as at the Latest Practicable Date, none of the existing and proposed Directors and their respective Associates was interested in any business apart from the business of the Enlarged Group, which competes or is likely to compete, either directly or indirectly, with the business of the Enlarged Group.

— VII-15 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

FURTHER INFORMATION RELATING TO SINOCHEM HK AND THE WHITEWASH WAIVER

Directors or principal members of the ‘‘concert group’’

The directors of Sinochem HK are: Liu De Shu, Song Yu Qing and Li Lun

Negative statements

As at the Latest Practicable Date:

(a) save as disclosed in paragraph ‘‘5. Disclosure of Interests’’ above and save for the 103 Preference Shares held by Sinochem HK, none of Sinochem HK, its directors nor any persons acting in concert with Sinochem HK owned or controlled any shares or convertible securities, warrants, options and derivatives of the Company;
(b) neither Sinochem HK nor any person acting in concert with Sinochem HK had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code (which arrangement includes any indemnity or option arrangement, or any agreement or understanding, formal or informal, by whatever nature, relating to the shares or other securities in the Company which may be an inducement to deal or refrain from dealing) with any person;
(c) neither Sinochem HK nor any director of Sinochem HK nor any person acting in concert with Sinochem HK has dealt for value in any shares or convertible securities, warrants, options and derivatives of the Company during the period between 28 July 2004, being six months prior to the date of the Announcement, and the Latest Practicable Date;
(d) there was no agreement, arrangement or understanding between Sinochem HK or any person acting in concert with it, and any of the directors, recent directors, shareholders or recent shareholders of the Company, having any connection with or dependence upon the Acquisition and/or the acquisition by Sinochem HK of the Consideration Shares and/or the Whitewash Waiver;
(e) no person has made an irrevocable commitment to Sinochem HK to vote for or against the Acquisition and/or the Whitewash Waiver; and
(f) except in respect of the Placing, the Strategic Placing, the Option and the Preferential Offer, there was no agreement, arrangement or understanding under which the Consideration Shares acquired by Sinochem HK will be transferred to any other persons.

— VII-16 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

7. MARKET PRICES

The table below shows the closing prices of the Ordinary Shares as recorded on the Stock Exchange on (a) the last day on which dealings took place in each of the six months immediately preceding the date of the Announcement; (b) 26 January 2005, being the last trading day prior to the suspension of trading in Ordinary Shares pending the issue of the Announcement; and (c) 25 May 2005, being the last trading day prior to the Latest Practicable Date.

	Closing price of Ordinary
	Shares on the last trading
	day of each of the six
	months immediately
	preceding the date of the
	Announcement
	HK$
30 July 2004	0.390
31 August 2004	0.360
30 September 2004	0.355
29 October 2004	0.390
30 November 2004	0.440
31 December 2004	0.460
26 January 2005	0.475
25 May 2005, last trading day prior to the Latest
Practicable Date	0.290

25 May 2005, last trading day prior to the Latest Practicable Date

The highest and lowest closing prices of the Ordinary Shares as recorded on the Stock Exchange during the period between 28 July 2004, being the date six months prior to the date of the Announcement, and ending on the Latest Practicable Date were HK$0.500 on 8 November 2004 and HK$0.241 on 6 April 2005, respectively.

8. DISCLAIMERS

As at the Latest Practicable Date:

(i) save as disclosed in Section 5 of this Appendix, none of the Directors or the chief executive of the Company or any of their respective Associates had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) which had to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he/she was taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO, to be entered in the register of the Company referred to therein or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company and the Stock Exchange;

— VII-17 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

(ii) none of the Directors is materially interested in any contract or arrangement subsisting at the date of this circular which is significant in relation to the business of the Group;
(iii) there was no agreement or arrangement between any Director and any other person which was conditional on or dependent upon the outcome of or otherwise connected with the Acquisition Agreement and/or the acquisition of the Consideration Shares by Sinochem HK and/or the Whitewash Waiver;
(iv) there was no service contract with the Company or any of its subsidiaries or associated companies in force for any of the Directors which has more than 12 months to run;
(v) there was no service contract for Directors which has been entered into or amended within 6 months before the date of the Announcement;
(vi) none of the Directors had entered, or proposed to enter, into a service contract with any member of the Group which is not determinable by the relevant member of the Group within one year without payment of compensation, other than statutory compensation;
(vii) none of the Directors had any direct or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group, since 31 March 2004, being the date to which the latest published audited financial statements of the Group were made up;
(viii) save as disclosed in the Section 2 of this Appendix, no share or loan capital of the Company or any of its subsidiaries was under option or was agreed conditionally or unconditionally to be put under option; and
(ix) the Company has not issued nor agreed to issue any founder shares, management shares or deferred shares of the Company.

9. EXPLANATORY STATEMENT FOR REPURCHASE MANDATE

This section includes information required by the Listing Rules to be included in an explanatory statement to enable Shareholders to make an informed view on whether to vote for or against the resolution to be proposed at the SGM in relation to the Repurchase Mandate.

The Listing Rules permit companies whose primary listings are on the Stock Exchange to repurchase its securities on the Stock Exchange subject to certain restrictions, the most important of which are summarised below:

(i) Shareholders approval

All repurchases on the Stock Exchange by a company with its primary listing on the Stock Exchange must be approved in advance by an ordinary resolution of the shareholders, either by way of general mandate or by specific approval in relation to a particular transaction.

— VII-18 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

(ii) Sources of funds

Repurchases must be funded out of funds legally available for the purpose in accordance with the Bye-laws and the laws of Bermuda. Bermuda laws provide that funds used for a share repurchase may only be paid out of the capital paid up on the relevant shares, or the funds of the Company that would otherwise be available for dividend or distribution, or the proceeds of a fresh issue of shares made for the purpose. The amount of premium, if any, payable on a repurchase may only be paid out of either the funds of the Company that would otherwise be available for dividend or distribution or out of the share premium account of the Company before the shares are repurchased.

(iii) Share capital

Subject to the passing of the resolution granting the Repurchase Mandate and conditional on Completion taking place, the Directors would be authorised to repurchase on the Stock Exchange ordinary shares of the Company of up to a maximum of 10% of the aggregate of (a) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of the relevant resolution granting this mandate and, subject to the Share Consolidation taking effect, as adjusted to reflect the effects of the Share Consolidation; and (b) the nominal amount of the ordinary shares of the Company to be issued pursuant to the Acquisition Agreement.

As at the Latest Practicable Date, the issued ordinary share capital of the Company comprised 3,679,498,284 Ordinary Shares. Assuming Completion takes place after the Share Consolidation has become effective and on the basis that no further Ordinary Shares are issued or repurchased before the SGM, the Company would be allowed to repurchase a maximum of 541,794,982 New Shares during the period ending on the earlier of the conclusion of the next annual general meeting of the Company, the date by which the next annual general meeting of the Company is required to be held by law or the Bye-laws, and the date on which such authority is revoked or varied by an ordinary resolution of the Shareholders in general meeting. Assuming Completion takes place in the absence of the Share Consolidation and on the basis that no further Ordinary Shares are issued or repurchased before the SGM, the Company would be allowed to repurchase a maximum of 5,417,949,828 Ordinary Shares during that same period.

(iv) Reasons for repurchases

The Directors believe that it is in the best interests of the Company and the Shareholders as a whole to seek a general authority from the Shareholders to enable the Company to repurchase its ordinary shares on the Stock Exchange. Such repurchases may, depending on market conditions, and funding arrangements at the time, lead to an enhancement of the net asset value of the Company and/or earnings per ordinary share and will only be made when the Directors believe that such a repurchase will benefit the Company and the Shareholders as a whole.

The Directors have no present intention to repurchase any ordinary shares of the Company and they would only exercise the power to repurchase in circumstances where they consider that the repurchase would be in the best interests of the Company. The Directors consider that there might be an adverse impact on the working capital or gearing position of the Company, as compared solely with the positions disclosed in the audited accounts contained in the annual report of the Company for the year ended 31

— VII-19 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

March 2004 and disregarding any effects brought about by the Proposals, in the event that the Repurchase Mandate were to be exercised in full at any time during the proposed repurchase period. The Directors, however, do not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital of the Company or its gearing levels which in the opinion of the Directors are from time to time appropriate for the Company.

(v) Share prices

The following table shows the highest and lowest prices at which the Ordinary Shares have been traded on the Stock Exchange in each of the last twelve months before the Latest Practicable Date.

Month	Highest	Lowest
	HK$	HK$
2004
June	0.355	0.275
July	0.410	0.350
August	0.385	0.330
September	0.375	0.345
October	0.450	0.355
November	0.540	0.385
December	0.480	0.420
2005
January	0.485	0.280
February	0.330	0.225
March	0.285	0.240
April	0.265	0.237
May	0.305	0.240

(vi) Takeovers Code and public float

If as a result of a repurchase of ordinary shares, a Shareholder’s proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition for the purposes of the Takeovers Code. Accordingly, a Shareholder, or group of Shareholders acting in concert, depending on the level of increase of the Shareholders’ interest, could obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with Rule 26 of the Takeovers Code.

As at the Latest Practicable Date and so far as was known to the Directors, Sinochem HK was interested in a total of 778,477,633 Ordinary Shares, representing approximately 21.16% of the issued ordinary share capital of the Company. Immediately following Completion and assuming no further Ordinary Shares are issued or repurchased after the Latest Practicable Date and no Offering has taken place, its interest in the issued ordinary share capital of the Company would increase to approximately 94.65%. Any subsequent increase in Sinochem HK’s shareholdings in the Company would not trigger any further obligation under Rule 26 of the Takeovers

— VII-20 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

Code to make a general offer. The Directors are not aware of any consequences to make such an offer under the Takeovers Code in the event of a repurchase of shares pursuant to the Repurchase Mandate.

However, immediately upon Completion and assuming no further Ordinary Shares are issued or repurchased after the Latest Practicable Date and no Offering has taken place, the public float for the ordinary shares of the Company will be reduced to approximately 4.66% of its then issued ordinary share capital. On this basis and assuming no shares would be repurchased from any connected person of the Company, an exercise of the Repurchase Mandate to the fullest extent possible would result in there being no ordinary shares of the Company held in public hands. The Listing Rules prohibit a company from making repurchase on the Stock Exchange if the result of the repurchase would be that less than 25% (or such other prescribed minimum percentage as determined by the Stock Exchange) of its listed securities would be in public hands. The Directors do not propose to repurchase shares which would directly result in less than the prescribed minimum percentage of the Company’s ordinary shares in public hands.

(vii) General

None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their Associates have any present intention to sell to the Company any of its ordinary shares in the event that the Repurchase Mandate is approved.

The Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules and the applicable laws of Bermuda.

No connected person (as defined in the Listing Rules) of the Company has notified the Company that he has a present intention to sell to the Company any of its ordinary shares, or has undertaken not to do so, in the event that the Repurchase Mandate is approved.

The Company has not repurchased any Ordinary Shares, whether on the Stock Exchange or otherwise, in the six months preceding the Latest Practicable Date.

10. MATERIAL CHANGE

The Directors have confirmed that, save for (a) a waiver by a bank of outstanding indebtedness and liabilities of a wholly owned subsidiary of the Company totalling approximately HK$36,089,000 during the six months ended 30 September 2004 pursuant to a settlement agreement reached between them under circumstances where the bank concluded that this subsidiary held no asset of any substantial value that could be utilised to repay the relevant overdue sum to the bank (details of which are set out in the interim report of the Company for the six months ended 30 September 2004); and (b) Sinochem HK’s request for redemption of the 103 Preference Shares held by it which resulted in an increase in the Company’s liabilities by an amount of HK$103 million, there has been no material change in the financial or trading position or prospects of the Group since 31 March 2004, being the date to which the latest published audited financial statements of the Group were made up, up to the Latest Practicable Date.

— VII-21 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

11. LITIGATION

On 17 March 2000, Star Cherry Investments Limited (a subsidiary of the Company) as purchaser, Costa Investments Limited as vendor and the Company as surety for the purchaser entered into a conditional sale and purchase agreement for the acquisition of 99 shares in Union View Investments Holdings Limited. As announced by the Company on 12 October 2000, some of the conditions contained in that agreement were not fulfilled and accordingly the agreement lapsed whereupon a deposit of HK$20 million paid by Star Cherry Investments Limited to Costa Investments Limited became refundable to Star Cherry Investments Limited. The Company and Star Cherry Investments Limited are currently involved in legal proceedings with Costa Investments Limited for the purpose of recovering the deposit paid. In 2001, the parties made discovery of the documents related to the proceedings and were at the stage of preparing the matter for trial. However, since December 2001 up to the Latest Practicable Date, Costa Investments Limited has taken no further action in relation to the proceedings.

Save as disclosed, as at the Latest Practicable Date, there was no litigation or claim of material importance known to the Directors to be pending or threatened by or against any member of the Group and there was no litigation or claim of material importance known to the directors of Sinochem HK to be pending or threatened by or against any member of the Fertilizer Group.

12. SUMMARY OF MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Group after the date two years immediately preceding the issuance of the Announcement and up to the Latest Practicable Date and are or may be material:

a deed of settlement entered into on 8 September 2003 between Rich Mode Development Limited, a wholly owned subsidiary of the Company, and DBS Bank (Hong Kong) Limited in respect of the discharge and release of all liabilities of Rich Mode Development Limited to DBS Bank (Hong Kong) Limited in the aggregate amount of approximately HK$9,600,000 as at the time such discharge and release took effect;
a deed of settlement entered into on 10 September 2003 between Mass Come Development Limited and Calorie Limited, both wholly owned subsidiaries of the Company, and Bank of China (Hong Kong) Limited in respect of the discharge and release of all their indebtedness and liabilities to Bank of China (Hong Kong) Limited in the aggregate amount of approximately HK$36,089,000 as at the time such discharge and release took effect;
the agreement entered into on 12 April 2003 between Mass Come Development Limited as vendor and Wong Ling Ling (or as she may nominate) as purchaser for the disposal of the property known as Workington Tower at Nos.76–80 Bonham Strand, Sheung Wan, Hong Kong for a total cash consideration of HK$61,000,000;

— VII-22 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

the agreement entered into on 9 July 2003 between Well Trade Development Limited, a wholly owned subsidiary of the Company, as vendor and Kinco Investment Holding Limited as purchaser for the disposal of the property known as Workingson Centre at Nos.110–112 Chun Yeung Street, North Point, Hong Kong for a total cash consideration of HK$26,000,000;
the Acquisition Agreement;
a Non-competition Undertaking entered into on 6 June 2005 between Sinochem Corporation and the Company in relation to Sinochem Corporation’s undertaking not to compete with the Company in the fertilizer business;
the information technology services agreement entered into on 6 June 2005 between Sinochem Corporation and the Company in relation to the provision of certain information technology services; and
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and the Company in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC.

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Fertilizer Group after the date two years immediately preceding the issuance of the Announcement and up to the Latest Practicable Date and are or may be material:

the trademark license agreement dated 25 August 2003 between Sinochem Fertilizer and Yongan Zhisheng in relation to the licencing of the non-exclusive and non-transferable use of a trademark;
the agreement entered into on 17 September 2004 between Sinochem Corporation as seller and Sinochem BVI as purchaser in relation to the transfer of 50,000 ordinary shares in Sinochem Fertilizer (Overseas) Holdings Ltd., a company incorporated under the laws of Bahamas;
a deed of indemnity entered into on 1 February 2005 between Sinochem Corporation as indemnifier and Fertilizer Company in relation to the indemnity against (i) any depletion in, loss or diminution in the value of Fertilizer Company’s assets resulting from any taxation claim against Sinochem Bahamas, as well as (ii) any actions, claims, losses, damages, costs, charges and expenses made against, suffered or incurred by Fertilizer Company in connection with any taxation or taxation claim covered by indemnity under (i) or other claim or payment payable by Sinochem Bahamas and relating to claim for which Sinochem Corporation is liable under (i);
the management agreement entered into on 30 March 2005 between Sinochem Corporation and Sinochem Fertilizer in respect of the entrustment of Sinochem Corporation’s rights in its equity interest in Sinochem Shandong to Sinochem Fertilizer;

— VII-23 —

STATUTORY AND GENERAL INFORMATION

APPENDIX VII

the management agreement entered into on 30 March 2005 between Sinochem Corporation and Sinochem Fertilizer in respect of the entrustment of Sinochem Corporation’s rights in its equity interest in Tianji JV to Sinochem Fertilizer;
the port service agreement entered into on 16 May 2005 between Tianjin Beifang and Tianjin Port in relation to the provision of certain port services;
the letter of amendment dated 19 May 2005 from Sinochem Corporation to Sinochem BVI and acknowledged and agreed to by Sinochem BVI in relation to the agreement entered into between Sinochem Corporation and Sinochem BVI relating to the transfer of 50,000 ordinary shares in Sinochem Fertilizer (Overseas) Holdings Ltd., a company incorporated under the laws of Bahamas;
the agreement of assumption and discharge of payment obligation dated 19 May 2005 entered into between Sinochem Corporation as seller, Sinochem BVI as purchaser and Sinochem HK in relation to the transfer of 50,000 ordinary shares in Sinochem Fertilizer (Overseas) Holdings Ltd., a company incorporated under the laws of Bahamas;
the agreement entered into on 19 May 2005 between Sinochem Corporation as Seller and Sinochem BVI as purchaser in relation to the transfer of one ordinary share in Dohigh Trading;
the agreement entered into on 19 May 2005 between Sinochem HK as seller and Sinochem BVI as purchaser in relation to the transfer of 14,999,999 ordinary shares in Dohigh Trading;
the agreement entered into on 19 May 2005 between Sinochem HK as seller and Fertilizer Company as purchaser in relation to the transfer of 10,002 shares in Sinochem BVI;
the lease agreement entered into on 21 May 2004 between Tianjin Beihai as landlord and Tianjin Beifang as tenant in relation to certain office premises;
the Framework Agreement entered into on 6 June 2005 between Sinochem Corporation, Sinochem Macao and Sinochem Fertilizer in relation to the provision of certain services;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Fertilizer in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Suifenhe in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Erlianhaote in relation to the licencing of the nonexclusive and non-transferable use of certain registered trademarks in the PRC;

— VII-24 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Zhisheng in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Dongfang in relation to the licencing of the nonexclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Fuling in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Yantai in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Tianjin Beifang in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Kailin in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Sanhuan in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sinochem Logistics in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Sichuan Chuanhua in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Tianjin Beihai in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Yingkou Shunda in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the trademark license agreement entered into on 6 June 2005 between Sinochem Corporation and Manzhouli Kaiming in relation to the licencing of the non-exclusive and non-transferable use of certain registered trademarks in the PRC;
the fertilizer purchase agreement entered into on 6 June 2005 between US AgriChemicals as seller and Sinochem Macao as purchaser in relation to the sale and purchase of phosphate-based fertilizers;

— VII-25 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

the lease agreement entered into on 6 June 2005 between Sinochem International Properties Hotel Management Company Limited and Sinochem Fertilizer in relation to the leasing of certain office properties;
the fertilizer purchase agreement entered into on 6 June 2005 between Sinochem Shandong as seller and Sinochem Fertilizer as purchaser in relation to the sale and purchase of certain fertilizer products;
the fertilizer supply agreement entered into on 6 June 2005 between Sinochem Fertilizer as seller and Sinochem Shandong as purchaser in relation to the sale and purchase of certain fertilizer products;
the service agreement entered into on 6 June 2005 between Sinochem UK and Sinochem Macao in relation to the provision of certain services;
the service agreement entered into on 6 June 2005 between US Chem Resources and Sinochem Macao in relation to the provision of certain services;
the agreement entered into on 22 September 2004 between Sinochem Fertilizer as transferor and Sinochem Suifenhe as transferee in relation to the transfer of 10% shareholding in Sinochem Erlianhaote;
the agreement entered into on 22 September 2004 between Sinochem Fertilizer as transferor and Sinochem Erlianhaote as transferee in relation to the transfer of 34% shareholding in Sinochem Suifenhe; and
the agreement entered into on 27 December 2004 between Sinochem Corporation as transferor and the Fertilizer Company as transferee in relation to the transfer of 100% shareholding in Sinochem Fertilizer.

13. EXPERTS

The qualifications of the experts who have given opinions in this circular are as follows:

Name Qualification

Cazenove Asia Licensed under the SFO for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities as defined under the SFO

Goldman Sachs Licensed under the SFO for type 1 (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) regulated activities as defined under the SFO

— VII-26 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

Name	Qualification
Somerley	Licensed under the SFO	for		type	1	(dealing			in
	securities), type 4 (advising		on	securities),				type	6
	(advising on corporate finance)			and	type		9	(asset
	management) regulated activities			as defined			under		the
	SFO
PricewaterhouseCoopers	Certified public accountants
Deloitte Touche Tohmatsu	Certified public accountants
Chesterton Petty Limited	Property valuers
Tianyuan Law Firm	PRC legal advisers
Conyers Dill & Pearman	Legal adviser to the Company		as to Bermuda				Law

None of the above experts has any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

None of the above experts had any direct or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Group, since 31 March 2004, being the date to which the latest published audited financial statements of the Group were made up.

14. CONSENTS

Each of the Sponsors, Somerley, PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Chesterton Petty Limited, Tianyuan Law Firm and Conyers Dill & Pearman has given and has not withdrawn its respective written consents to the issue of this circular with the inclusion of its reports and/or letters and/or valuation certificates and/or the reference to its name included herein in the form and context in which it is respectively included.

15. MISCELLANEOUS

(a) The company secretary of the Company is Mr. Navin Aggarwal, solicitor of Hong Kong.
(b) The qualified accountant of the Company is Ms. Tse Yin Hung, Bonnie, an associate member of the Hong Kong Institute of Certified Public Accountants.
(c) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda.
(d) The principal place of business and head office of the Company in Hong Kong is at Unit 4603, 46th Floor, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong.

— VII-27 —

APPENDIX VII

STATUTORY AND GENERAL INFORMATION

(e) The principal share registrar of the Company is The Bank of Bermuda Limited at 6 Front Street, Hamilton HM 11, Bermuda.
(f) The branch share registrar and transfer office of the Company in Hong Kong is Secretaries Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.
(g) Sinochem Corporation, the parent company of Sinochem HK, is a state-owned enterprise, and does not have directors.
(h) The registered office of Sinochem Corporation is at 5/F, Sinochem Tower, A2 Fuxingmenwai Dajie, Beijing 100045, the PRC.

— VII-28 —

DOCUMENTS AVAILABLE FOR INSPECTION

APPENDIX VIII

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company in Hong Kong at Unit 4603, 46th Floor, Office Tower, Convention Plaza, 1 Harbour Road, Hong Kong during 9: 00 a.m. to 5: 00 p.m. on any weekday other than public holidays, up to and including 5 July 2005:

(a) the Memorandum of Association and Bye-laws of the Company and the memorandum and articles of association of Sinochem HK;
(b) the material contracts referred to in the section headed ‘‘Material Contracts’’ in Appendix VII to this circular;
(c) the annual reports of the Company for each of the two years ended 31 March 2004 and the interim report of the Company for the six months ended 30 September 2004;
(d) the accountants’ report on the Fertilizer Group from PricewaterhouseCoopers, the text of which is set out in Appendix I to this circular together with a written statement of adjustments;
(e) the letter in respect of the pro forma financial information of the Enlarged Group from PricewaterhouseCoopers, the text of which is set out in Appendix III to this circular;
(f) the letters in respect of the profit forecast of the Enlarged Group from PricewaterhouseCoopers and the Sponsors respectively, the text of which is set out in Appendix IV to this circular;
(g) the valuation report and certificates from Chesterton Petty Limited, the text of which is set out in Appendix V to this circular and the sections of the full valuation report containing details of property no. 2 in Group I and the properties in Group II of the valuation report (in the Chinese language only) and the sections of the full valuation report containing details of properties in Group I (except for property no. 2), Group III and Group IV of the valuation report (in English and Chinese) of Chesterton Petty Limited referred to in Appendix V to this circular;
(h) written consents of the experts referred to in the section headed ‘‘Consents’’ in Appendix VII to this circular;
(i) the letter of recommendation from the Independent Board Committee to the Independent Shareholders dated 13 June 2005, the text of which is set out in the section headed ‘‘Letter from the Independent Board Committee’’ in this circular;
(j) the letter of advice from Somerley to the Independent Board Committee and the Independent Shareholders dated 13 June 2005, the text of which is set out in the section headed ‘‘Letter from Somerley’’ in this circular;

— VIII-1 —

APPENDIX VIII

DOCUMENTS AVAILABLE FOR INSPECTION

(k) the agreements referred to in the sub-paragraph headed ‘‘Non-exempt Continuing Connected Transactions’’ in the section headed ‘‘Information on the Fertilizer Group — Relationship between the Enlarged Group and the Sinochem Group’’ in this circular;
(l) the circular of the Company dated 9 August 2002 in relation to the adoption of the Share Option Scheme;
(m) the letter of advice from Conyers Dill & Pearman to the Company and a copy of the Companies Act as referred to in Appendix VI to this circular; and
(n) a PRC legal opinion prepared by Tianyuan Law Firm.

— VIII-2 —

NOTICE OF SGM

==> picture [54 x 53] intentionally omitted <==

SINOCHEM HONG KONG HOLDINGS LIMITED

*

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Sinochem Hong Kong Holdings Limited (the ‘‘Company’’) will be held at 8: 30 a.m. on Tuesday, 5 July 2005 at Atrium Room, Level 39, Island Shangri-La Hong Kong, Two Pacific Place, Supreme Court Road, Hong Kong for the purposes of considering and, if thought fit, passing the Resolution numbered 1 below as a special resolution and passing, with or without modifications, the Resolutions numbered 2 to 7 below as ordinary resolutions of the Company:

SPECIAL RESOLUTION

‘‘THAT:
(a) with effect from 9: 30 a.m. (Hong Kong time) on the Business Day (as defined below) immediately following the day on which this Resolution is passed and conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (‘‘Stock Exchange’’) granting the listing of and permission to deal in the ordinary shares of the Company in issue upon the Share Consolidation (as defined below) becoming effective, the nominal value of each issued ordinary share of HK$0.10 each (‘‘Ordinary Share’’) in the capital of the Company be reduced by cancelling paid-up capital to the extent of HK$0.09 per Ordinary Share (‘‘Capital Reduction’’) so that the nominal value of each such Ordinary Share be reduced to HK$0.01 (‘‘Reduced Share’’);
(b) subject to and immediately upon the Capital Reduction taking effect, every 10 Reduced Shares be consolidated (‘‘Share Consolidation’’) into one ordinary share of HK$0.10 (‘‘New Share’’);
(c) all ordinary shares of HK$0.10 each in the capital of the Company following the Share Consolidation becoming effective shall rank pari passu in all respects with each other and have the same rights and privileges and be subject to the same restrictions in respect of ordinary shares contained in the bye-laws of the Company;
(d) subject to and immediately upon the Capital Reduction taking effect, the entire amount standing to the credit of the share premium account of the Company as at 31 March 2004 be cancelled (‘‘Existing Share Premium Cancellation’’);
(e) subject to and conditional upon the Share Consolidation becoming effective and completion of the Acquisition Agreement (as defined in the Resolution numbered 3 set out in the notice convening this meeting) having occurred, an
For identification purposes only

— N-1 —

NOTICE OF SGM

amount of HK$131,625,200, representing part of the share premium arising from the issue of New Shares pursuant to the Acquisition Agreement, be cancelled (‘‘Further Share Premium Cancellation’’);

(f) all credits arising from the Capital Reduction, the Existing Share Premium Cancellation and the Further Share Premium Cancellation be transferred to the contributed surplus account of the Company where it may be utilised as the Directors may direct in accordance with the bye-laws of the Company and all applicable laws;
(g) the directors of the Company be and are hereby authorised generally to do all such acts, deeds and things as they may, in their absolute discretion, deem appropriate to effect and implement any of the foregoing; and
(h) for the purpose of this Resolution, ‘‘Business Day’’ means a day on which the Stock Exchange is open for the business of dealing in securities.’’

ORDINARY RESOLUTIONS

‘‘THAT the authorised share capital of the Company be and is hereby increased from HK$1,000,000,000 to HK$8,316,000,000 by the creation of an additional 73,160,000,000 ordinary shares of HK$0.10 each such that the authorised share capital shall be divided into 80,000,000,000 ordinary shares of HK$0.10 each and 316 convertible redeemable non-voting preference shares of HK$1,000,000 each which shall have attached thereto the respective rights and privileges and be subject to the respective restrictions set out in the bye-laws of the Company.’’
‘‘THAT:
(a) the agreement dated 28 January 2005 (‘‘Acquisition Agreement’’) made between the Company as purchaser and Sinochem Hong Kong (Group) Company Limited as vendor in relation to the acquisition by the Company of the entire issued share capital of China Fertilizer (Holdings) Company Limited, a copy of which has been produced to the meeting marked ‘‘A’’ and signed by the Chairman of the meeting for the purpose of identification, and the execution thereof and implementation of all transactions thereunder be and are hereby approved, confirmed and ratified and, subject to completion of the Acquisition Agreement and commencing in the year 2005, the financial year end of the Company and its subsidiaries be changed from 31 March to 31 December; and the directors of the Company or any of them be and are hereby authorised on behalf of the Company:
- (i) to sign, seal, execute, perfect and deliver all such documents and do all such deeds, acts, matters and things as they may in their absolute discretion consider necessary or desirable for the purpose of or in connection with the implementation of the Acquisition Agreement;
- (ii) subject to the Acquisition Agreement becoming unconditional, to allot and issue such number of new ordinary shares of HK$0.10 each in the capital of the Company (‘‘Consideration Shares’’) as is determined in accordance with the terms of, and in satisfaction of the consideration payable by the

— N-2 —

NOTICE OF SGM

Company under, the Acquisition Agreement, such Consideration Shares to be issued credited as fully paid and ranking pari passu in all respects with all the ordinary shares of the Company then in issue;

  - (iii) to exercise or enforce all rights of the Company under the Acquisition Agreement; and

  - (iv) to take such action and execute such documentation as they may in their absolute discretion consider necessary or desirable to give effect to the terms of, and the transactions contemplated under or ancillary to, the Acquisition Agreement, to waive compliance from and agree to any amendment to any of the provisions of the Acquisition Agreement which in their opinion is not of a material nature and in the interests of the Company, to complete the Acquisition Agreement in accordance with its terms and conditions and to effect or implement any other matters referred to in this Resolution;

(b) the waiver granted or to be granted by the executive director of the Corporate Finance Division of the Hong Kong Securities and Futures Commission (or any delegate of such executive director) in accordance with Note 1 on Dispensations from Rule 26 of the Hong Kong Code on Takeovers and Mergers in respect of the obligation of Sinochem Hong Kong (Group) Company Limited (‘‘Sinochem HK’’) or any parties acting in concert with it to make a mandatory offer to shareholders of the Company for the issued shares of the Company not already owned or agreed to be acquired by Sinochem HK as a result of the issue of the Consideration Shares (as defined in the Resolution numbered 3 set out in the notice convening this meeting) be and is hereby approved; and
(c) (i) each of the Non-exempt Continuing Connected Transactions (as defined and described in the circular to shareholders of the Company dated 13 June 2005 (‘‘Circular’’), a copy of which has been produced to the meeting marked ‘‘B’’ and signed by the Chairman of the meeting for the purpose of identification) and the implementation thereof be and are hereby approved, ratified and confirmed;
- (ii) the proposed maximum aggregate annual value of each of the Nonexempt Continuing Connected Transactions as described in the Circular be and is hereby approved; and
- (iii) the directors of the Company be and are hereby authorised to sign, execute and deliver all such documents and take all such action as they may consider necessary or desirable for the purpose of or in connection with the implementation of the Non-exempt Continuing Connected Transactions and all other matters contemplated thereunder or ancillary thereto.’’
‘‘THAT, conditional upon the passing of the Resolution numbered 3 set out in the notice convening this meeting, the directors of the Company (‘‘Directors’’) be and are hereby authorised to allot and issue up to 3,900,000,000 ordinary shares of the Company pursuant to the Placing (as defined and described in the circular to

— N-3 —

NOTICE OF SGM

shareholders of the Company dated 13 June 2005, a copy of which has been produced to the meeting marked ‘‘B’’ and signed by the Chairman of the meeting for the purpose of identification), or such other number as the Directors determine to be necessary to restore the public float of the Company’s issued ordinary shares upon completion of the Acquisition Agreement (as defined and described in the Resolution numbered 3 set out in the notice convening this meeting) in compliance with Rule 8.08 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, at an issue price of not less than HK$0.10 per ordinary share.’’

5 ‘‘THAT, conditional upon completion of the Acquisition Agreement (as defined in the Resolution numbered 3 set out in the notice convening this meeting):
(a) subject to paragraph (c) of this Resolution, the exercise by the directors of the Company (‘‘Directors’’) during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and otherwise deal with additional ordinary shares of the Company (‘‘Shares’’) or securities convertible into Shares, or options, warrants or similar rights to subscribe for Shares or such convertible securities, and to make or grant offers, agreements and options which would or might require the exercise of such power be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) of this Resolution shall be in addition to any other authorizations given to the Directors and shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options (including bonds, warrants, debentures and other securities convertible into Shares) which would or might require the exercise of such power after the end of the Relevant Period;
(c) the aggregate nominal amount of the ordinary share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) and issued by the Directors pursuant to the approval given in paragraph (a) of this Resolution, otherwise than pursuant to:
- (i) a Rights Issue (as hereinafter defined);
- (ii) the exercise of rights of subscription or conversion under the terms of any warrants issued by the Company or any securities which are convertible into Shares;
- (iii) the exercise of any option granted under any option scheme or similar arrangement adopted for the grant or issue to officers and/or employees of the Company and/or any of its subsidiaries of Shares or rights to acquire Shares; or
- (iv) any scrip dividend or similar arrangement providing for the allotment of Shares in lieu of the whole or part of a dividend on the Shares in accordance with the bye-laws of the Company from time to time;

— N-4 —

NOTICE OF SGM

shall not exceed 20 per cent. of the aggregate of (1) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of this Resolution and, subject to the Share Consolidation (as defined in the Resolution numbered 1 set out in the notice convening this meeting) having taken effect, as adjusted to reflect the effects of the Share Consolidation; and (2) the nominal amount of all Shares to be issued pursuant to and upon completion of the Acquisition Agreement (as such term is defined in the Resolution numbered 3 set out in the notice convening this meeting), and the said approval shall be limited accordingly;

(d) subject to the passing of each of paragraphs (a), (b) and (c) of this Resolution, any prior approvals of the kind referred to in paragraphs (a), (b) and (c) of this Resolution which had been granted to the Directors and which are still in effect be and are hereby revoked; and
(e) for the purpose of this Resolution:

‘‘Relevant Period’’ means the period from the passing of this Resolution until whichever is the earlier of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by law or the bye-laws of the Company to be held; or
(iii) the date on which the authority set out in this Resolution is revoked or varied by ordinary resolution of the shareholders of the Company in general meeting.

‘‘Rights Issue’’ means the allotment, issue or grant of Shares or securities convertible into Shares pursuant to an offer open for a period fixed by the Directors to holders of Shares or of such securities or any class thereof on the register on a fixed record date in proportion to their then holdings of Shares or of such securities or class thereof (subject to such exclusion or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements, or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory outside Hong Kong).’’

6 ‘‘THAT, conditional upon completion of the Acquisition Agreement (as defined in the Resolution numbered 3 set out in the notice convening this meeting):
(a) subject to paragraph (b) of this Resolution, the exercise by the directors of Company (‘‘Directors’’) during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase ordinary shares of the Company (‘‘Shares’’) on The Stock Exchange of Hong Kong Limited or on any other stock exchange on which the Shares may be listed and recognised by the Securities and Futures Commission and The Stock Exchange of Hong Kong Limited for this purpose, and subject to and in accordance with all applicable laws and the requirements of the Rules Governing the Listing of Securities on

— N-5 —

NOTICE OF SGM

The Stock Exchange of Hong Kong Limited or of any other stock exchange as amended from time to time, be and is hereby generally and unconditionally approved;

(b) the aggregate nominal amount of Shares which may be repurchased pursuant to the approval in paragraph (a) of this Resolution shall not exceed 10 per cent. of the aggregate of (1) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of this Resolution and, subject to the Share Consolidation (as defined in the Resolution numbered 1 set out in the notice convening this meeting) having taken effect, as adjusted to reflect the effects of the Share Consolidation; and (2) the nominal amount of all Shares to be issued pursuant to and upon completion of the Acquisition Agreement (as such term is defined in the Resolution numbered 3 set out in the notice convening this meeting), and the said approval shall be limited accordingly;
(c) subject to the passing of each of paragraphs (a) and (b) of this Resolution, any prior approvals of the kind referred to in paragraphs (a) and (b) of this Resolution which had been granted to the Directors and which are still in effect be and are hereby revoked; and
(d) for the purpose of this Resolution, ‘‘Relevant Period’’ means the period from the passing of this Resolution until whichever is the earlier of:
- (i) the conclusion of the next annual general meeting of the Company;
- (ii) the expiration of the period within which the next annual general meeting of the Company is required by law or the bye-laws of the Company to be held; or
- (iii) the date on which the authority given under this Resolution is revoked or varied by ordinary resolution of the shareholders of the Company in general meeting.’’
7 ‘‘THAT, subject to the passing of the Resolutions numbered 5 and 6 as set out in the notice convening this meeting and conditional upon completion of the Acquisition Agreement (as defined in the Resolution numbered 3 set out in the notice convening this meeting), the general mandate granted to the directors of the Company (‘‘Directors’’) to exercise the powers of the Company to allot, issue and otherwise deal with ordinary shares of the Company (‘‘Shares’’) pursuant to the Resolution numbered 5 set out in the notice of this meeting be and is hereby extended by the addition to the aggregate nominal amount of the ordinary share capital of the Company which may be allotted by the Directors pursuant to such general mandate, an amount representing the aggregate nominal amount of the ordinary share capital of the Company repurchased by the Company under the authority granted pursuant to the Resolution numbered 6 set out in the notice of this meeting, provided that such amount shall not exceed 10 per cent. of the aggregate of (1) the nominal amount of the ordinary share capital of the Company in issue as at the date of passing of this Resolution and, subject to the Share Consolidation (as defined in the Resolution numbered 1 set out in the notice convening this meeting) having taken effect, as adjusted to reflect the effects of the Share Consolidation;

— N-6 —

NOTICE OF SGM

and (2) the nominal amount of all Shares to be issued pursuant to and upon completion of the Acquisition Agreement (as such term is defined in Resolution numbered 3 set out in the notice convening this meeting).’’

By Order of the Board of Sinochem Hong Kong Holdings Limited Navin Aggarwal Secretary

Hong Kong, 13 June 2005

Notes:

Any member of the Company entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a member of the Company.
To be valid, a proxy form, together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of that power or authority, must be deposited at the branch share registrar and transfer office of the Company in Hong Kong, Secretaries Limited at Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong not less than 48 hours before the time fixed for the holding of the meeting or any adjournment thereof.
Where there are joint holders of any ordinary share of the Company, any one of such holders may vote at the meeting, either personally or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such holders be present at the meeting personally or by proxy, that one of such holders so present whose name stands first on the register of members of the Company in respect of such share shall alone be entitled to vote in respect thereof.
As at the date of this notice, the executive directors of the Company are Mr. Liu De Shu (Chairman), Mr. Song Yu Qing (Deputy Chairman and Chief Executive Officer), Mr. Chu Yu Lin, David, Mrs. Chu Ho Miu Hing and Ms. Chen Hao; and the independent nonexecutive directors of the Company are Mr. Ko Ming Tung, Edward, Dr. Li Ka Cheung, Eric and Dr. Tang Tin Sek.

— N-7 —

AI assistant

CWT International Limited — Proxy Solicitation & Information Statement 2005

49269_rns_2005-06-13_9e792e59-6b72-44e6-945b-b79d171fec92.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

SINOCHEM HONG KONG HOLDINGS LIMITED

*

ACQUISITION FROM SINOCHEM HONG KONG (GROUP) COMPANY LIMITED OF THE FERTILIZER GROUP

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION REVERSE TAKEOVER INVOLVING AN APPLICATION FOR NEW LISTING AND AN APPLICATION FOR THE WHITEWASH WAIVER CAPITAL REORGANISATION

SOMERLEY LIMITED

CONTENTS

CONTENTS

EXPECTED TIMETABLE

Expected timetable and trading arrangements

EXPECTED TIMETABLE

SUMMARY

The Acquisition

Implications of the Acquisition

SUMMARY

INFORMATION ON THE FERTILIZER GROUP

Overview

Principal strengths

SUMMARY OF FINANCIAL INFORMATION

Audited results of the Fertilizer Group during the Track Record Period

SUMMARY

Pro forma results of the Enlarged Group

Pro forma profit and loss account of the Enlarged Group

Pro forma balance sheet of the Enlarged Group

PROFIT FORECAST OF THE ENLARGED GROUP FOR THE YEAR ENDING 31 DECEMBER 2005

SUMMARY

REGULATORY IMPLICATIONS OF THE ACQUISITION

Listing Rules

Reverse takeover and new listing

Public float requirement

Continuing connected transactions

SUMMARY

Takeovers Code

Capital Reorganisation

Other matters

SUMMARY

Advice and recommendation

SUMMARY

RISK FACTORS

Risks relating to the failure to complete the Acquisition

Risks relating to the Acquisition

Risks relating to the Enlarged Group

Risks relating to the Group

Risks relating to the Fertilizer Group

SUMMARY

SUMMARY

Risks relating to the PRC fertilizer industry

Risks relating to the PRC

Other risks relating to this circular

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

GLOSSARY AND TECHNICAL TERMS

GLOSSARY AND TECHNICAL TERMS

RISK FACTORS

RISKS RELATING TO THE FAILURE TO COMPLETE THE ACQUISITION

RISKS RELATING TO THE ACQUISITION

The shareholding interest in the Company held by the existing Shareholders will be substantially diluted upon Completion.

RISK FACTORS

The Company’s controlling shareholder can exert influence on the Company and could cause the Company to make decisions that may not be in the best interests of the other Shareholders.

RISKS RELATING TO THE ENLARGED GROUP

The principal business of the Enlarged Group will be substantially different from that of the Group at present.

RISK FACTORS

The Enlarged Group may face competition from the Remaining Fertilizer Business.

Failure to enforce the Non-competition Undertaking may adversely affect the business and results of operations of the Enlarged Group.

The Enlarged Group may not be able to obtain additional financing it may require.

RISK FACTORS

RISKS RELATING TO THE GROUP

If the Capital Reorganisation is not approved, the Company’s accumulated losses will remain outstanding and the Company may be unable to pay dividends.

CWT International Limited Proxy Solicitation & Information Statement 2005