Design Capital Limited — Capital/Financing Update 2010

Sep 20, 2010

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement.

This announcement is for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities.

KING STONE ENERGY GROUP LIMITED 金 山 能 源 集 團 有 限 公 司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

PROPOSED ISSUE UNDER GENERAL MANDATE OF

HK$195,000,000 AGGREGATE PRINCIPAL AMOUNT CONVERTIBLE BONDS DUE 2011

On 20 September 2010, the Company and the Subscriber entered into the Subscription Agreement, whereby the Subscriber has agreed to subscribe for HK$195,000,000 aggregate principal amount of 2 per cent. Convertible Bonds of the Company due in 2011 convertible into Conversion Shares during the Conversion Period at the initial Conversion Price of HK$0.20 each (subject to adjustment) in accordance with the terms set out in the Subscription Agreement.

The Conversion Price of HK$0.20 represents a premium of approximately 9.29% and 10.5% over the closing price of HK$0.183 per Share and the last 10 days average closing price of HK$0.181 per Share respectively as quoted on the Stock Exchange on 17 September 2010, being the Last Trading Day. Should the Convertible Bonds be converted into new Shares in full at the Conversion Price, the Conversion Shares will represent approximately 5.96% of the existing issued share capital of the Company and approximately 5.62% of the share capital of the Company as enlarged by the issue of the Conversion Shares.

The Conversion Shares will be allotted and issued pursuant to the general mandate granted to the Directors at the annual general meeting of the Company held on 21 June 2010. Application will be made by the Company to the Stock Exchange for the approval of the listing of, and permission to deal in, the Conversion Shares.

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The gross proceeds to be raised upon completion of the Subscription are estimated to be approximately HK$195,000,000. The net proceeds (after deducting estimated expenses) to be raised upon completion of the Subscription are estimated to be approximately HK$187,200,000. The net proceeds from the Subscription will be used for partial cash payments for the acquisition of coal mines in the PRC, the details of which are set out in the announcement dated 9 June 2010, and costs and expenses in relation to the issue of the Convertible Bonds.

WARNING

Closing of the Subscription is subject to fulfilment of the Conditions Precedent and therefore the Subscription may or may not proceed. Shareholders and potential investors are advised to exercise caution when dealing in the Shares.

SUBSCRIPTION AGREEMENT DATED 20 SEPTEMBER 2010

Parties

• (1) The Company as the issuer; and

• (2) The Subscriber as the subscriber.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, the Subscriber is an Independent Third Party.

Issue Size

The aggregate principal amount of the Convertible Bonds is HK$195,000,000.

INTRODUCTION

Under the Subscription Agreement, the Subscriber has agreed to subscribe for the Convertible Bonds and the Company has agreed to issue to the Subscriber the Convertible Bonds subject to and on the terms of the Subscription Agreement.

CONDITIONS PRECEDENT

The obligations of the Subscriber to subscribe the Convertible Bonds are subject to the following conditions precedent:

• (1) The execution and delivery on or before the Closing Date of (1) the Deed of Covenant by the Company, (2) the Put Option Deed, (3) the Securities Lending Agreement and (4) the Debenture in each case in a form satisfactory to the Subscriber;

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• (2) A copy of resolutions of the Board of the Company:

• (i) approving the terms of, and the transactions contemplated by, the Contracts (including, without limitation, the terms of and the issue of the Convertible Bonds and the issue of new Shares upon conversion of the Convertible Bonds) and resolving that it executes each of the Contracts;

• (ii) authorising a specified person or persons to execute each of the Contracts (including, without limitation, the certificate of Convertible Bonds) on its behalf; and

• (iii) authorising a specified person or persons, on its behalf, to sign, execute and/or despatch all documents and notices to be signed, executed and/or despatched by it under or in connection with any Contracts to which it is a party;

• (3) The Company having obtained all consents and approvals of all third parties necessary in respect of the issue of the Convertible Bonds and the new Shares to be issued upon conversion of the Convertible Bonds (including the consent and approvals of all applicable regulators and all lenders, as required);

• (4) The Stock Exchange having agreed, subject to any conditions satisfactory to the Subscriber, to list and permit dealing in the new Shares upon conversion of the Convertible Notes (or, in each case, the Subscriber being satisfied that such listing and/or permission to deal will be granted);

• (5) Upon the Closing Date, there shall have been delivered opinions, in form and substance satisfactory to the Subscriber, dated the Closing Date, addressed to the Subscriber of: (i) legal advisers to the Company in relation to the Contracts; (ii) legal advisers to Future Wise as to the laws of the British Virgin Islands; (iii) legal advisers to the Subscriber as to the laws of Hong Kong; and (iv) such other resolutions, consents, authorities, documents, opinions and certificates as the Subscriber may require;

• (6) Up to and at the Closing Date (i), the representations and warranties of the Company set forth in the Subscription Agreement shall be accurate and correct in all material respects at, and as if made on, such Closing Date; (ii) the Company shall have performed all of its obligations under the Subscription Agreement to be performed on or before the Closing Date; (iii) there having been no change nor any development or event involving a prospective change, in the financial or business condition, results of operations, earnings, business affairs, properties or prospects of the Company or the Group since the date of the Subscription Agreement that has a Material Adverse Effect and (iv) there shall have been delivered to the Subscriber a certificate to such effect, dated the Closing Date, and signed by two duly authorised officers of the Company;

• (7) On or before the Closing Date, there shall not have occurred any change nor any development or event involving a prospective change, in the condition (financial or otherwise), or the earnings, business, prospects, properties, results of operations or general affairs of the Company or the Group since the date of the Subscription Agreement, which, in the opinion of the Subscriber, is material and adverse in the context of the issue of the Convertible Bonds;

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• (8) All steps have been taken in relation to the perfection of the Debenture, including, without limitation, (i) the provision of a notice from Mr. Zhao (as chargor) to the Company and (ii) the receipt by MLCP of a written acknowledgement from the Company in respect of the same, in each case pursuant to the Debenture;

• (9) The Company has furnished to the Stock Exchange an announcement, in a form satisfactory to the Subscriber, setting out the material terms of the Convertible Bonds and any other information required to be disclosed in accordance with the Listing Rules; and

• (10) Prior to the Closing Date, the Company shall have furnished to the Subscriber such further information, certificates and documents as the Subscriber may reasonably request.

The Subscriber may at its discretion waive compliance with the whole or any part of the Conditions Precedent other than that set out in para (4) above. In the event that the Conditions Precedent are not fulfilled (or waived by the Subscriber) on or before the Closing Date, the Company and the Subscriber may agree to postpone the Closing Date to another date not later than 14 days after the relevant scheduled Closing Date.

Closing

Closing shall take place on 24 September 2010 subject to the fulfilment (or waiver) of the Conditions Precedent, or such date not later than 14 days after that date as the Company and the Subscriber may agree in writing.

The Put Option

Mr. Zhao, Future Wise, MLCP and the Subscriber have advised the Company that in connection with the issue of the Convertible Bonds one or more of them will enter into private agreements between them that will include amongst other things the Put Option Deed, the Debenture, the Securities Lending Agreement and the Profit Sharing Deed. These arrangements will in effect share between them certain risks and benefits of ownership of the Convertible Bonds. The Subscriber has advised the Company that the Subscriber and Future Wise will make private arrangements under which (a) the Subscriber may require Future Wise to acquire Convertible Bonds or Conversion Shares which the Subscriber may hold from time to time; and (b) the Subscriber and Future Wise will share in the profits (if any) on disposal of Conversion Shares on a basis agreed between them, after the Subscriber receives a preagreed return on the Subscription.

Under the Put Option Deed, Future Wise will grant to MLCP the Put Option under which MLCP can require Future Wise to:

• (a) purchase on one or more occasions such number of the Convertible Bonds as specified by MLCP in the put notice (‘‘Put Bonds’’) during the period beginning on the earlier of (i) the occurrence of an event of default under the terms and conditions of the Convertible Bonds and (ii) the date falling 30 days prior to the Maturity Date, and ending on the date on which the Convertible Bonds

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have been redeemed or converted by the Company, at 110% of the principal amount of the Convertible Bonds which are subject to the relevant put notice together with accrued and unpaid interest; and

• (b) purchase on one or more occasions such number of the Conversion Shares as specified by MLCP in the put notice up to a maximum of 7,500,000 Shares (adjusted for share splits and share consolidations) (‘‘Put Shares’’) during the period beginning on the date falling 30 days prior to the Maturity Date and ending 28 days after the Maturity Date at the price of HK$0.22 per Share (subject to adjustment upon occurrence of any events leading to adjustment of Conversion Price under the terms and conditions of the Convertible Bonds).

The date for settlement of the purchase of the Put Bonds and the Put Shares upon exercise of the relevant Put Option shall be such date (which shall be a Business Day) as is specified by MLCP in the relevant put notice.

In the Put Option Deed, Future Wise will covenant that it shall not and shall procure that no party acting in concert with it will (i) acquire voting rights in the Company so that Future Wise, and the parties acting in concert with it, hold in aggregate 15% or more of the voting rights of the Company save as a result of the exercise of the shares Put Option granted pursuant to the Put Option Deed or (ii) take any action which may result in Future Wise or any party acting in concert with it having an obligation to make a mandatory offer for the total issued share capital of the Company (the ‘‘Future Wise’s Restrictive Covenants’’).

The Debenture will be issued by Mr. Zhao in favour of the Subscriber and MLCP to secure the obligations of Future Wise under the Put Option Deed and pursuant to it Mr. Zhao will grant a first ranking equitable mortgage over HK$195,000,000 principal amount of the Existing Convertible Notes.

In the Debenture, Mr. Zhao will covenant that he shall not and shall procure that no party acting in concert with him will (i) acquire voting rights in the Company so that Mr. Zhao, and the parties acting in concert with him, hold in aggregate 15% or more of the voting rights of the Company save as a result of the exercise of the shares Put Option granted pursuant to the Put Option Deed, or (ii) take any action which may result in Mr. Zhao or any party acting in concert with him having an obligation to make a mandatory offer for the total issued share capital of the Company (‘‘Mr. Zhao’s Restrictive Covenants’’ and together with Future Wise’s Restrictive Covenants, the ‘‘Restrictive Covenants’’).

Under the Securities Lending Agreement the Subscriber and the Future Wise will agree that the Subscriber may, but is not obliged to, borrow up to 500,000,000 Shares (subject to adjustment) from Future Wise.

Mr. Zhao has advised the Company that he is the beneficial owner and controller of the entire issued capital of Future Wise.

The execution and delivery of (1) the Deed of Covenant by the Company, (2) the Put Option Deed, (3) the Securities Lending Agreement and (4) the Debenture in each case in a form satisfactory to the Subscriber on or before the Closing Date are conditions precedent to the issue of the Convertible Bonds

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but, other than (1), are not in the control of the Company. If one or more of them is not executed and delivered on or before the Closing Date and the Subscriber does not grant an appropriate waiver the issue of the Convertible Bonds will not proceed.

CONVERTIBLE BONDS

The principal terms of the Convertible Bonds will be as follows:

Issuer: The Company Principal amount: HK$195,000,000 Maturity date (‘‘Maturity the first anniversary of the issue date of the Convertible Bonds, and if Date’’): that is not a business day, the immediately following business day. Interest: The Convertible Bonds will bear interest at a rate of 2 per cent. per annum payable semi-annually in advance. Conversion Price: HK$0.20 per Conversion Share, subject to usual anti-dilution adjustments for, among others, (i) consolidation, subdivision or reclassification of Shares; (ii) capitalisation of profits or reserves of the Company; (iii) capital distributions by the Company; (iv) rights issues of Shares or grant of warrants or options over Shares at a price which is less than the then market price of the Shares; (v) issues of securities to all Shareholders by way of rights or the grant to all Shareholders by way of rights, options, warrants or other rights to subscribe for or purchase any securities; (vi) issue by the Company wholly for cash Shares at a price which is less than the then market price of the Shares; (vii) issue by the Company (otherwise than as mentioned in paragraphs (iv), (v) or (vi) above) wholly for cash any securities (other than the Convertible Bonds) which by their terms of issue carry rights of conversion into, or exchange or subscription for, Shares at a price which is less than the then market price of the Shares; (viii) modification of the rights of conversion, exchange or subscription attaching to any such securities as are mentioned in paragraph (vii) above so that following such modification the consideration per Share receivable by the Company in respect of such conversion, exchange or subscription is less than the then market price of the Shares; (ix) issue, sale or distribution by the Company of any securities in connection with an offer pursuant to which the Shareholders generally are entitled to participate whereby such securities may be acquired by them; and (x) other event not referred to above whereby the Company or the Bondholders holding more than 50% of the outstanding principal amount of the Convertible Bonds determine that an adjustment should be made to the Conversion Price.

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The initial Conversion Price of HK$0.20 represents:

• (i) a premium of about 9.29% to the closing price of HK$0.183 per Share as quoted on the Stock Exchange on the Last Trading Day;

• (ii) a premium of about 9.89% to the average of the closing price of HK$0.182 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;

• (iii) a premium of about 10.5% to the average of the closing price of HK$0.181 per Share as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day; and

• (iv) a premium of about 14.94% to the average of the closing price of HK$0.174 per Share as quoted on the Stock Exchange for the last thirty consecutive trading days up to and including the Last Trading Day.

The Conversion Price was determined after arm’s length negotiations between the Company and the Subscriber with reference to the prevailing market price of the Shares. The Directors are of the view that the Conversion Price is fair and reasonable and is in the interest of the Company and its Shareholders as a whole.

Conversion Period:

Conversion:

The period commencing from the Closing Date up to the close of business (at the place where the certificate evidencing the Convertible Bonds is deposited for conversion) on the Maturity Date (both days inclusive).

The Bondholder shall have the right to convert at any time during the Conversion Period the whole or part of the principal amount of the Convertible Bonds (in minimum amount of HK$100,000 or integral multiple thereof) into Conversion Shares at the then applicable Conversion Price.

The Conversion Shares shall, when issued, rank pari passu in all respects with all the Shares then in issue on the date when the holder of such Conversion Shares is registered as such in the Company’s register of members including the right to any dividends or distributions.

Financial Covenant:

The Company will give a debt to earnings ratio covenant of a type common in debt securities such as the Convertible Bonds and failure to maintain the ratio may amongst other things enable holders of Convertible Bonds to require prepayment.

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Status: The obligations of the Company arising under the Convertible Bonds constitute direct, unconditional, unsecured and unsubordinated obligations of the Company and rank, and shall rank equally among themselves and pari passu with all other present and future direct, unconditional, unsecured and unsubordinated obligations of the Company except for obligations accorded preference by mandatory provisions of applicable law.

• Redemption: Unless previously redeemed, converted or purchased and cancelled in accordance with the terms and conditions of the Convertible Bonds, the Company will redeem all Convertible Bonds at its principal amount together with accrued and unpaid interest thereon on the Maturity Date. The Company may not redeem the Convertible Bonds at its option prior to the Maturity Date.

• Transferability: There are no restrictions on transfers of the Convertible Bonds. The Convertible Bonds may be transferred in minimum amounts of HK$100,000 or integral multiples thereof.

• Voting rights: A holder of Convertible Bonds will not be entitled to attend or vote at any shareholders’ meetings of the Company by reason of it being a holder of the Convertible Bonds.

• Listing: The Convertible Bonds will not be listed on the Stock Exchange or any other stock exchange.

• Governing Law: Hong Kong.

The Conversion Shares will be allotted and issued pursuant to the General Mandate and will not be subject to further Shareholders’ approval. Application will be made by the Company to the Stock Exchange for the approval of the listing of, and permission to deal in, the Conversion Shares. Upon full conversion of the Convertible Bonds based on the initial Conversion Price of HK$0.20 per Share, a maximum of 975,000,000 Conversion Shares will be issued, representing approximately 5.96% of the existing issued share capital of the Company or approximately 5.62% of the enlarged issued share capital of the Company (but disregarding any Shares that may be issued on exercise of the Existing Convertible Note or otherwise).

EFFECT ON SHAREHOLDING OF THE COMPANY

Set out below is a summary of the shareholding of the Company (i) at the date of this announcement, and (ii) immediately after Closing, assuming full conversion of the Convertible Bonds and full exercise of the outstanding share options of the Company, (iii) immediately after Closing, assuming full conversion of the Convertible Bonds and the Existing Convertible Notes and full exercise of the

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outstanding share options of the Company, each prepared on the basis that there would be no change in the issued share capital of the Company after the date of this announcement other than as stated in each scenario.

3

			3	3
China Coal and Coke Investment Holding Company Limited (note 1) Central Huijin Investment Limited (note 2) Mr. Zhao Holders of outstanding share options Public Shareholders Total	1 At the date of this announcement No. of Shares Approximate % 1,800,000,000 11.0 1,688,000,000 10.3 601,535,195 3.7 0 0.0 12,280,208,175 75.0 16,369,743,370 100	2 Immediately after Closing, assuming full conversion of the Convertible Bonds at the initial Conversion Price of HK$0.20 per Share and full exercise of the outstanding share options of the Company (Note 3) No. of Shares Approximate % 1,800,000,000 10.1 1,688,000,000 9.5 1,576,535,195 8.9 392,320,000 2.2 12,280,208,175 69.3 17,737,063,370 100	Immediately after Closing, assuming full conversion of the Convertible Bonds at the initial Conversion Price of HK$0.20 per Share and the Existing Convertible Notes at the initial conversion price of HK$0.0625 per Share and full exercise of the outstanding share options of the Company (Note 3) No. of Shares Approximate % 1,800,000,000 5.4 1,688,000,000 5.0 17,296,535,195 51.7 392,320,000 1.2 12,280,208,175 36.7 33,457,063,370 100
				100

Notes:

1. China Coal and Coke Investment Holding Company Limited is indirectly and wholly beneficially owned by Mr. Wang Da Yong, the Chairman and executive Director of the Company.

2. CCB International Asset Management Limited is the beneficial owner of 1,688,000,000 Shares. Central Huijin Investment Limited is deemed to be interested in the 1,688,000,000 Shares held by CCB International Asset Management Limited by virtue of its 57.09% interest in China Construction Bank Corporation which owns a 100% of CCB International Group Holdings Limited. CCB International Group Holdings Limited holds 100% of CCB Financial Holdings Limited which in turn owns 100% of CCB International (Holdings) Limited. CCB International (Holdings) Limited holds 100% of CCB International Assets Management (Cayman) Limited which in turn owns 100% of CCB International Asset Management Limited.

3. Column 3 is for illustration only. Pursuant to the terms of the Existing Convertible Notes and to the terms of the Convertible Bonds, the conversion rights shall not be exercised by the holder(s) of the Existing Convertible Notes (or Convertible Bonds, as the case may be) if, immediately following the conversion, (i) the relevant holder(s) of the Existing Convertible Notes (or Convertible Bonds, as the case may be), together with parties acting in concert with it, will hold or control 29.9% or more of the issued share capital of the Company (or such other amount as may from

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time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer), or if the holder(s) of the Existing Convertible Notes would otherwise be obliged to make a mandatory general offer under the Takeovers Code; or (ii) the Company will be unable to meet the public float requirement under the Listing Rules.

1. The above table assumes that the Put Option is exercised in full so that all Shares issuable an exercise of the Convertible Bonds belong to Mr. Zhao and not to the Subscriber. If the Put Option is not exercised at all the number of Shares owned by Mr. Zhao would be reduced by 975,000,000 (based on the initial Conversion Price) and the Subscriber would own the same number of Shares, representing about 2.91% of the Shares in issue immediately after Closing, assuming full conversion of the Convertible Bonds at the initial Conversion Price of HK$0.20 per Share and the Existing Convertible Notes at the initial conversion price of HK$0.0625 per Share and full exercise of the outstanding share options of the Company.

USE OF PROCEEDS AND REASONS FOR THE ISSUE OF THE CONVERTIBLE BONDS

The Group is principally engaged in the trading of phosphorus products, trading of optical products and mining and selling of coal.

After the lapse of the placing agreement entered into between the Company and the placing agent on 18 August 2010, the Directors have considered other financing plans to raise funds. The Directors consider that the issue of Convertible Bonds to the Subscriber represent opportunity to provide additional funding to expand the Company’s coal mining business. Terms of the Subscription Agreement were determined after arm’s length negotiations between the Company and the Subscriber. The Directors consider that the Subscription Agreement to be in the interest of the Company and the Shareholders as a whole.

The gross proceeds to be raised upon completion of the Subscription are estimated to be approximately HK$195,000,000. The net proceeds (after deducting estimated expenses) to be raised upon completion of the Subscription are estimated to be approximately HK$187,200,000. The net proceeds from the Subscription will be used for partial cash payments for the acquisition of coal mines in Shanxi province, PRC, and costs and expenses in relation to the issue of the Convertible Bonds.

FUND RAISING EXERCISES DURING THE PAST 12 MONTHS

The Placing Agreement announced on 21 June 2010 in relation to a placing of 2,673,000,000 Shares on a best effort basis at a price of HK$0.195 per Share lapsed on 18 August 2010, being the long stop date for the fulfilment of the conditions precedent to that Placing Agreement and no Shares were placed pursuant to it.

The Company has not engaged in any other fund raising activities during the 12 months immediately before the date of this announcement.

TAKEOVERS CODE IMPLICATIONS

The conversion rights under the Existing Convertible Notes may not be exercised by the holder(s) of the Existing Convertible Notes if, immediately following the conversion, (i) the relevant holder(s) of the Existing Convertible Notes, together with the parties acting in concert with it, will hold or control

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29.9% or more of the issued share capital of the Company (or such other amount as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer), or if the holder(s) of the Existing Convertible Notes would otherwise be obliged to make a mandatory general offer under the Takeovers Code; or (ii) the Company will be unable to meet the public float requirement under the Listing Rules. As a result of these covenants and the Restrictive Covenants (as described above), Mr. Zhao and parties acting in concert with him will not be required to make a mandatory general offer to Shareholders under Rule 26 of the Takeovers Code by reason only of a conversion of the Convertible Bonds and/or the Existing Convertible Notes.

Assuming full conversion of the Convertible Bonds and based on the initial Conversion Price of the Convertible Bonds, immediately thereafter the Subscriber (or Mr. Zhao if the Put Option has been exercised in full) will, in addition to any other shares they may then hold, hold 975,000,000 new Shares, representing approximately 5.62% of the issued share capital of the Company as enlarged by the full conversion of the Convertible Bonds and approximately 2.95% of the issued share capital of the Company as enlarged by the full conversion of the Convertible Bonds and the Existing Convertible Notes but disregarding the issue of any other Shares.

DEBT OF THE COMPANY

As a result of the terms of the Existing Convertible Notes and the Restrictive Covenants (each of which are described above), and for other reasons it is possible that Existing Convertible Notes and Convertible Bonds may not be converted into Shares. If as a result of these restrictions or otherwise not all the Existing Convertible Notes and Convertible Bonds will be exercised and the debt of the Company will not be reduced on exercise to the extent it might otherwise be reduced. The Company may be forced to sell assets or seek new borrowings to redeem the Existing Convertible Notes and the Convertible Bonds as they fall due for redemption.

LISTING RULES IMPLICATIONS

Depending on the ownership of the resulting Conversion Shares amongst other things, as a result of conversion of Existing Convertible Notes and/ or conversion of the Convertible Bonds the Company may be unable to meet the public float requirement under the Listing Rules and trading in its shares may be suspended as a result until it complies with the public float requirement.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, the Subscriber and MLCP are both Independent Third Parties and neither the Subscriber nor any of their respective associates holds any Shares at the date of this announcement and no Shareholder other than Mr. Zhao has a material interest in the Subscription.

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WARNING

Closing of the Subscription is subject to fulfillment of the Conditions Precedent and therefore the Subscription may or may not proceed. Shareholders and potential investors are advised to exercise caution when dealing in the Shares.

DEFINITIONS

In this announcement the following terms are used with the meanings set opposite them below:

• ‘‘associate(s)’’ the meaning ascribed to it in the Listing Rules ‘‘Board’’ the board of Directors ‘‘Bondholders’’ holders of the Convertible Bonds ‘‘Business Day’’ a day other than Saturday and Sunday on which commercial banks are open for business in Hong Kong

• ‘‘Closing’’ the closing of the Subscription in accordance with the terms of the Subscription Agreement

• ‘‘Closing Date’’ the date on which Closing takes place ‘‘Company’’ King Stone Energy Group Limited, a company incorporated in Hong Kong with limited liability, whose shares are listed on the main board of the Stock Exchange

• ‘‘Conditions Precedent’’ the conditions to which Closing is subject as set out in the paragraph headed ‘‘Conditions Precedent’’ in this announcement

• ‘‘connected person(s)’’ the meaning ascribed to it in the Listing Rules ‘‘Contracts’’ the Subscription Agreement and the Deed of Covenant ‘‘Conversion Price’’ HK$0.20 per Share, subject to adjustment ‘‘Conversion Rights’’ the right of the holder(s) of the Convertible Bonds to convert the whole or part of the principal amounts of the Convertible Bonds into shares in the issued share capital of the Company, as set out in the paragraph headed ‘‘Convertible Bonds’’ in this announcement

• ‘‘Conversion Shares’’ new Shares to be allotted and issued upon exercise of the Conversion Rights

• ‘‘Convertible Bonds’’ the HK$195,000,000 principal amount of 2 per cent. convertible bonds to be issued by the Company to the Subscriber on Closing

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‘‘Debenture’’	a debenture to be dated the Closing Date entered into by Mr. Zhao in
	favour of the Subscriber and MLCP over HK$195,000,000 principal
	amount of the Existing Convertible Notes
‘‘Deed of Covenant’’	a Deed of Covenant constituting the Convertible Bonds expected to be
	dated on or about the Closing Date
‘‘Directors’’	the directors of the Company
‘‘Existing Convertible Notes’’	the zero coupon redeemable convertible notes in the aggregate
	principal amount of HK$1,805 million due 2014 issued to Mr. Zhao as
	consideration for the sale and purchase of the entire issued share
	capital of Triumph Fund A Limited, a company incorporated in the
	Cayman Islands with limited liability
‘‘Future Wise’’	Future Wise Limited, a company incorporated with limited liability in
	the British Virgin Islands and wholly beneficially owned by Mr. Zhao
‘‘General Mandate’’	the general mandate granted to the Directors by the Shareholders at the
	annual general meeting of the Company held on 21 June 2010 to issue
	and allot up to 3,173,948,674 new Shares, representing 20% of the
	then issued share capital of the Company as at the date of such annual
	general meeting
‘‘Group’’	the Company and its Subsidiaries
‘‘HK$’’	Hong Kong dollars, the lawful currency of Hong Kong
‘‘Hong Kong’’	the Hong Kong Special Administrative Region of the People’s Republic
	of China
‘‘Independent Third	third party(ies) independent of and not connected or acting in concert
Party(ies)’’	with the Company or any of its connected persons, nor are connected
	persons of the Company
‘‘Last Trading Day’’	17 September 2010, being the last trading day of the Shares on the
	Stock Exchange immediately prior to the publication of this
	announcement
‘‘Listing Rules’’	the Rules Governing the Listing of Securities on the Stock Exchange

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‘‘Material Adverse Effect’’

a material adverse effect on:

• (a) the business, conditions (financial or otherwise), operations, performance, assets or prospects of: (i) the Company; or (ii) the Group taken as a whole;

• (b) the ability of the Company to perform its obligations under any or all of the Deed of Covenant and the Subscription Agreement, as supplemented and amended from time to time; or

• (c) the legality, validity or enforceability of any or all of the Convertible Bonds, the Deed of Covenant and the Subscription Agreement or any or all of the rights or remedies of any of the Bondholders under any or all of the Deed of Covenant and the Subscription Agreement;

• ‘‘MLCP’’

Merrill Lynch Credit Products LLC

• ‘‘Mr. Zhao’’

Mr. Zhao Ming, holder of the Existing Convertible Notes and holder directly and indirectly of 3.67% of the issued Shares at the date of this announcement

• ‘‘PRC’’

• the People’s Republic of China, excluding Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan

• ‘‘Profit Sharing Deed’’

• a profit sharing deed to be dated the Closing Date between the Subscriber and Future Wise under which they will agree to share certain profit on disposal of Conversion Shares

• ‘‘Put Option’’

• the put option to be granted by Future Wise to MLCP under the Put Option Deed as described in the paragraph headed ‘‘The Put Option’’ in this announcement

• ‘‘Put Option Deed’’

• a put option deed to be dated the Closing Date between Future Wise, the Subscriber and MLCP under which a put option will be granted by Future Wise to MLCP in respect of the Convertible Bonds as described in the paragraph headed ‘‘The Put Option’’ in this announcement

• ‘‘Securities Lending Agreement’’

• a securities lending agreement to be dated the Closing Date between the Subscriber and Future Wise

• ‘‘Share(s)’’ the ordinary share(s) of HK$0.01 each in the issued share capital of the Company

• ‘‘Shareholder(s)’’

• holder(s) of the Shares

– 14 –

• ‘‘Stock Exchange’’

The Stock Exchange of Hong Kong Limited

• ‘‘Subscriber’’

Merrill Lynch International

• ‘‘Subscription’’

the subscription of the Convertible Bonds pursuant to the Subscription Agreement

• ‘‘Subscription Agreement’’ the conditional subscription agreement dated 20 September 2010 entered into between the Subscriber and the Company in relation to the Subscription

• ‘‘Subsidiaries’’

• (a) in relation to any Person including the Company (the ‘‘first Person’’) at any particular time, any other Person (the ‘‘second Person’’):

• (i) whose affairs and policies the first Person controls or has the power to control, whether by ownership of share capital, contract, the power to appoint or remove members of the governing body of the second Person or otherwise; or

• (ii) whose financial statements are, in accordance with applicable law and generally accepted accounting principles, consolidated with those of the first Person; and

• (b) in relation to the Company, each of:

• (i) Shanxi Hengchuang Industrial Company Limited, a company established under the laws of the PRC;

• (ii) Shanxi Puhua Deqin Metallurgy Technology Company Limited, a company established under the laws of the PRC; and

• (iii) Eerduosi Hengtai Coal Company Limited, a company established under the laws of the PRC

– 15 –

‘‘Takeovers Code’’

the Hong Kong Code on Takeovers and Mergers

‘‘%’’

per cent

By Order of the Board King Stone Energy Group Limited Wang Da Yong

Chairman

Hong Kong, 20 September 2010

At the date of this announcement, the Board comprises three executive Directors: Mr. Wang Da Yong, Mr. Tian Wenwei and Mr. Wang Tongtian, two non-executive Directors: Mr. Li Yi and Mr. Su Bin and three independent non-executive Directors: Mr. Jacobsen William Keith, Mr. Cao Kuangyu and Mr. Chiu Sui Keung.

– 16 –