Design Capital Limited - Proxy Solicitation & Information Statement 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Swank International Manufacturing Company Limited, you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agents through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability)

(Stock code: 663)

CONTINUING CONNECTED TRANSACTIONS AND GENERAL MANDATES TO ISSUE AND TO REPURCHASE SHARES

Financial adviser to the Company

Independent financial adviser to the Independent Board Committee and the Shareholders

A letter from the board of directors of Swank International Manufacturing Company Limited is set out on pages 5 to 18 of this circular. A letter from the Independent Board Committee (as defined herein) is set out on page 19 of this circular. A letter from Partners Capital International Limited containing its advice to the Independent Board Committee and the Independent Shareholders (as defined herein) is set out on pages 20 to 52 of this circular.

A notice convening an EGM (as defined herein) to be held at 21/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong on 19 June 2006 is set out on pages 77 to 82 of this circular. Whether or not you are able to attend the EGM, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for the holding the relevant meeting. Completion and return of the form of proxy will not prevent the Shareholders from attending and voting in person at the EGM or any adjournment thereof should they so wish.

2 June 2006

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
2. Background of the Continuing Connected Transactions
2.1 Guangxi Leasing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2.2. Guangxi Agency Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
2.3 Guangxi Raw Materials Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
2.4 Guangxi Distribution Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
2.5 Yunnan Leasing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
3. Reasons for the Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
4. EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
5. General mandate to repurchase Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
6. General mandate to issue Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
7. Procedures to demand a poll by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
8. Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Letter from Partners Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Appendix I – Valuation Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	53
Appendix II – Explanatory Statement for the Repurchase Mandate . . . . . . . . . . . . . . . . . . . . . .	68
Appendix III – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	71
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	77

DEFINITIONS

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

“Announcement”

the announcement of the Company dated 11 May 2006 relating to the Continuing Connected Transactions

“associates”

the term bearing the meanings ascribed to it under the Listing Rules

“Board”

the board of Directors

“Company”

Swank International Manufacturing Company Limited, a company listed on the main board of the Stock Exchange

“Connected Person(s)”
connected person(s) of the Company as defined in the Listing Rules, i.e., in relation to the Company, means a director, chief executive or substantial shareholder of the Company or any of its subsidiaries or an associate of any of them
“Continuing Connected Transaction(s)”

the transactions contemplated under the Guangxi Leasing Agreement, the Guangxi Agency Agreement, the Guangxi Raw Materials Purchase Agreement, the Guangxi Distribution Agreement and the Yunnan Leasing Agreement

“China Time”
China Time Investment Holdings Limited, a company incorporated in the British Virgin Islands with limited liability, which owned approximately 60% of the Company’s issued capital as at the Latest Practicable Date
“Directors”

the directors of the Company

“EGM”
extraordinary general meeting of the Company to be held at 21/F, ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong at 4:00 p.m. on 19 June 2006 to approve, inter alia, the Continuing Connected Transactions
“Group”

the Company and its subsidiaries from time to time

“Guangxi Agency Agreement”

the agency agreement entered into between Huahai and Yunphos on 11 May 2006 in relation to the provision of agency services by Yunphos to Huahai for the sale of the Guangxi Agency Products mainly in the Territory on behalf of Huahai

“Guangxi Agency Products”

phosphoric acid manufactured by the Guangxi Premises and stored in tanks for bulk shipment

DEFINITIONS

“Guangxi Distribution Agreement” the distribution agreement entered into between Huahai and Yunphos on 11 May 2006, pursuant to which Yunphos will purchase the Guangxi Distribution Products from Huahai for onward distribution to its customers “Guangxi Distribution Products” phosphoric acid manufactured by the Guangxi Premises and packed in drums for distribution “Guangxi Premises” the production factory and the ancillary structures located at Huagang Road, Yu Zhou Cheng Industrial Zone, Gangkou District, Fangchenggang City, Guangxi Zhuang Zu Autonomous Region, the PRC for the production of the Guangxi Distribution Products and the Guangxi Agency Products “Guangxi Products” the Guangxi Agency Products and Guangxi Distribution Products “Guangxi Leasing Agreement” the leasing agreement entered into between Huahai and Yunphos Fangcheng on 11 May 2006 in relation to the lease of the Guangxi Premises and the Guangxi Machinery and Equipment by Yunphos Fangcheng to Huahai “Guangxi Machinery and Equipment” the machinery and equipment located and/or installed in/on the Guangxi Premises for the production of phosphoric acid “Guangxi Raw Materials Purchase the supply agreement entered into between Huahai and Yunphos Agreement” on 11 May 2006 in relation to the supply of raw materials including yellow phosphorus by Yunphos to Huahai for the production of the Guangxi Products “Huahai” 防城港華海化工有限公司 (Fangcheng Huahai Chemicals Co., Ltd.*), an indirect wholly-owned subsidiary of the Company incorporated in the PRC “Independent Board Committee” independent board committee of the Company, comprising Mr. Choi Tze Kit, Sammy, Mr. Wu Bin and Mr. Tam King Ching, Kenny, who are existing independent non-executive Directors “Independent Shareholders” the shareholders of the Company other than Mr. Wang and its associates “Independent Third Party(ies)” the independent third party or parties who is/are not connected with any of the Directors, chief executive and substantial shareholders of the Company or any of its subsidiaries or an associate of any of them

DEFINITIONS

“Issue Mandate” a general and unconditional mandate to the Directors to exercise the power of the Company to allot and issue Shares up to a maximum of 20% of the aggregate nominal amount of the issued share capital of the Company as at the date of passing of the relevant resolution approving the grant of such mandate
“Latest Practicable Date” 1 June 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular
“Listing Rules” the Rules governing the Listing of Securities on the Stock Exchange
“Mr. Wang” Mr. Wang An Kang (王安康 ), being the sole shareholder of China Time and the ultimate controlling Shareholder
“PRC” the People’s Republic of China “Partners Capital” Partners Capital International Limited, a licensed corporation registered under the SFO to carry out types 1 and 6 regulated activities and the independent financial adviser to the Independent Board Committee and the Independent Shareholders
“Repurchase Mandate” a general and unconditional mandate to the Directors to exercise the power of the Company to repurchase Shares up to a maximum of 10% of the aggregate nominal amount of the issued share capital of the Company as at the date of passing the relevant resolution approving the grant of such mandate

“SFC” the Securities and Futures Commission of Hong Kong “SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended from time to time “Share(s)” the ordinary share(s) of HK$0.01 each in the issued share capital of the Company “Shareholders” the shareholders of the Company “Stock Exchange” The Stock Exchange of Hong Kong Limited “Territory” Indonesia, Thailand, Australia and the United States “Yunnan Premises” the production factory and the ancillary structures located in Jin Suo Xiang Industrial Small District, Xundian County, Kunming City, Yunnan Province, the PRC for the production of the Yunnan Products

DEFINITIONS

“Yunnan Leasing Agreement” the leasing agreement entered into between Huahai and Yunphos Xundian on 11 May 2006 in relation to the lease of the Yunnan Premises and the Yunnan Machinery and Equipment by Yunphos Xundian to Huahai
“Yunnan Products” yellow phosphorus manufactured by the Yunnan Premises “Yunnan Machinery and Equipment” the machinery and equipment located and/or installed in/on the Yunnan Premises for the production of yellow phosphorus
“Yunphos” 雲南南磷集團股份有限公司 (Yunnan Phosphorus Group Co., Ltd.*), a company incorporated in the PRC with limited liability and owned as to approximately 99.56% by Mr. Wang and his associates
“Yunphos Fangcheng” 防城港南磷磷化工有限公司 (Yunphos (Fangcheng) Chemicals Co., Ltd.*), a company incorporated in the PRC with limited liability and owned as to 95% by Mr. Wang
“Yunphos Xundian” 雲南南磷集團尋甸磷電有限公司 (Yunphos Xundian Phosphorus & Electricity Co., Ltd.*), a company incorporated in the PRC with limited liability and owned as to 85% by an associate of Mr. Wang and 15% by Mr. Wang
“HK$” Hong Kong dollars, the lawful currency of Hong Kong “RMB” Renminbi, the lawful currency of the PRC “US$” US dollars, the lawful currency of the United States “kW” kilowatt, equivalent to one thousand watts “sq. m.” square meter “%” per cent.

For the purpose of illustration only, the translation of RMB into Hong Kong dollars is based on the exchange rate of HK$1.00 to RMB1.04 and the translation of US$ into Hong Kong dollars is based on the exchange rate of US$1 to HK$7.8.

For identification purpose only
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LETTER FROM THE BOARD

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability) (Stock code: 663)

Executive Directors:

Mr. Wang An Kang Mr. Zhao Jun Mr. Li Wei Ms. Zhou Jing

Registered office: Suite 1102, 11/F ICBC Tower, Citibank Plaza 3 Garden Road, Central Hong Kong

Independent non-executive Directors:

Mr. Choi Tze Kit, Sammy Mr. Wu Bin Mr. Tam King Ching, Kenny

Principal place of business in Hong Kong:

2/F, Koon Wah Mirror Factory (3rd) Industrial Building 5-9 Ka Hing Road Kwai Chung New Territories Hong Kong

2 June 2006

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

1. INTRODUCTION

The Company announced that, on 11 May 2006, Huahai, an indirect wholly-owned subsidiary of the Company, entered into (i) the Guangxi Leasing Agreement with Yunphos Fangcheng; (ii) the Guangxi Agency Agreement with Yunphos; (iii) the Guangxi Raw Materials Purchase Agreement with Yunphos; (iv) the Guangxi Distribution Agreement with Yunphos; and (v) the Yunnan Leasing Agreement with Yunphos Xundian, each for a term commencing from the respective effective date of the relevant agreement up to 31 December 2008.

The Board has appointed the Independent Board Committee to consider and advise the Independent Shareholders on the terms of the agreements contemplating the Continuing Connected Transactions and the respective annual cap amounts. Partners Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders.

LETTER FROM THE BOARD

Subject to the approval by the Independent Shareholders, the Continuing Connected Transactions may or may not proceed. Shareholders and potential Shareholders are advised to exercise caution when dealing in the Shares.

The purpose of this circular is to provide you with, among others, (i) the details of the Continuing Connected Transactions; (ii) the recommendation from the Independent Board Committee to the Shareholders on the Continuing Connected Transactions; (iii) the recommendation from Partners Capital to the Independent Board Committee and the Independent Shareholders on Continuing Connected Transactions; and (v) the notice of EGM.

2. BACKGROUND OF THE CONTINUING CONNECTED TRANSACTIONS

2.1 Guangxi Leasing Agreement

Parties involved

Leasor: Yunphos Fangcheng, a company incorporated in the PRC with limited liability and owned as to 95% by Mr. Wang, who is also the ultimate controlling Shareholder, and 5% by Mr. Zheng Ge Feng (鄭革鋒 ) who is a director of Yunphos. At present, Yunphos Fangcheng is principally engaged in the manufacture and sale of phosphoric acid.

Lessee: Huahai, an indirect wholly-owned subsidiary of the Company incorporated in the PRC with limited liability. The principal business of Huahai includes the production and sale of organic and inorganic chemical products.

On 11 May 2006, Huahai and Yunphos Fangcheng entered into the Guangxi Leasing Agreement, pursuant to which Yunphos Fangcheng would lease to Huahai the Guangxi Premises, which is located at Huagang Road, Yu Zhou Cheng Industrial Zone, Gangkou District, Fangchenggang City, Guangxi Zhuang Zu Autonomous Region, the PRC with a gross floor area of approximately 6,877.06 sq. m., together with the Guangxi Machinery and Equipment therein for a term commencing from the effective date of the Guangxi Leasing Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent for the execution of the Guangxi Leasing Agreement including, but not limited to, (i) the obtaining of the approval of all the Continuing Connected Transactions by the Independent Shareholders on or before 31 December 2006; and (ii) the settlement of the first installment of the annual rental within six months from the date of obtaining the Independent Shareholders’ approval of the Continuing Connected Transactions. In the event that any of the conditions is not fulfilled or waived by the Shareholders by 31 December 2006, the Guangxi Leasing Agreement shall cease and determine and the parties thereto shall be released from all obligations and liabilities thereunder. The PRC legal adviser to the Company confirmed that the operation of the Guangxi Premises are in compliance with the relevant PRC laws and regulations and the leasing of the Guangxi Premises is legally enforceable and does not breach the relevant PRC laws.

LETTER FROM THE BOARD

The products of the Guangxi Premises can be broadly categorized into technical grade and food grade phosphoric acid. The phosphoric acid produced under the Guangxi Premises will be delivered to customers in two different forms, namely drums and tanker vessels, which will be sold by way of distribution and agency arrangement respectively. The following table depicts the features of the two different forms of delivery:

Delivery media	Tanker vessels	Drums
Selling mode	Agency arrangement	Distribution arrangement
Volume per tanker vessel/drum	about 1,000 – 6,000	0.035 tonnes or
	tonnes	0.300 tonnes
Unit price per tonne_(Note)_	about US$450	about US$560
Shipment mode per order	Pumped from factory	Stored in a number of
	via pipes to storage	drums inside containers
	tanks on the deck of	for shipment
	sea vessels for bulk
	shipment
Customer base	4-6 major customers	A few hundreds customers

Note: The unit price per tonne was based on the actual market price prevailing around the date of the agreements contemplating the Continuing Connected Transactions according to the Directors.

The annual production volume of phosphoric acid in the Guangxi Premises for the year ended 31 December 2005 was approximately 60,000 tonnes, with a utilization rate of approximately 75%. The production capacity of phosphoric acid by the Guangxi Premises has been increased from approximately 50,000 tonnes to approximately 80,000 tonnes since October 2005. The Directors estimate that the annual production capacity of the Guangxi Premises will be approximately 80,000 tonnes of phosphoric acid, of which approximately 40,000 tonnes will be in form of the Guangxi Agency Products and approximately 40,000 tonnes will be in form of the Guangxi Distribution Products, on the assumption that the utilization rate reaches 100%. The Directors advised that the sales volume of phosphoric acid has increased from the quarterly average of approximately 11,000 tonnes for the three quarters ended 30 September 2005 to approximately 22,100 tonnes for the quarter ended 31 December 2005. The Directors advised that the sales volume of phosphoric acid for the first quarter (being the low season) of 2006 amounted to approximately 17,400 tonnes. On the annualized basis amounting to approximately 79,000 tonnes of phosphoric acid after accounting for the actual sales volume for the two quarters ended 31 March 2006 which reflected the scenario after increase in production capacity of the Guangxi Premises, the Directors had reasonable grounds to believe that the annual sales volume of phosphoric acid could reach 80,000 tonnes. The Directors intend to staff the Guangxi Premises with its existing management and technicians by renewing their labour contract. As at the Latest Practicable Date, the Guangxi Premises had a total of 74 staff.

The Guangxi Premises and the Guangxi Machinery and Equipment would be leased for use by Huahai or members of the Group at an annual aggregate rental of RMB2.5 million (equivalent to approximately HK$2.4 million). The Guangxi Leasing Agreement will become effective upon the payment of the first installment of the annual rental by Huahai within six months from the date of obtaining the approval of the Independent Shareholders on all of the Continuing Connected Transactions at the EGM.

LETTER FROM THE BOARD

Pursuant to the Guangxi Leasing Agreement, (i) 50% of the rental for the year ending 31 December 2006 shall be settled within six months from the date of obtaining the Independent Shareholders’ approval of the Continuing Connected Transactions and the balance shall be settled before 31 December 2006; (ii) the rental for each of the two years ending 31 December 2008 shall be settled in three installments in accordance with the following:

(a) 40% of the annual rental of RMB2.5 million, equivalent to RMB1 million or approximately HK$962,000, shall be paid within one week from the beginning of each financial year;
(b) 18% of the annual rental of RMB2.5 million, equivalent to RMB450,000 or approximately HK$433,000, shall be paid before 30 June of each financial year; and
(c) the remaining 42% of the annual rental of RMB2.5 million, equivalent to RMB1.05 million or approximately HK$1.01 million, shall be paid before the end of each financial year.

The Board confirmed that the rental payable by the Company under the Guangxi Leasing Agreement was determined after arm’s length negotiation with reference to the rental consultation opinion on the Guangxi Premises and the Guangxi Machinery and Equipment given by an independent valuation firm, B.I. Appraisals Limited, which has reviewed the terms of the Guangxi Leasing Agreement and confirmed that the annual rental for the Guangxi Premises and Guangxi Machinery and Equipment is not higher than the fair rental of approximately RMB4.5 million as appraised by B.I. Appraisals Limited as at 30 April 2006 for the lease of the Guangxi Premises and the Guangxi Machinery and Equipment.

As mentioned in Appendix I to this circular, the market value and the market rent per annum of the Guangxi Premises as at 30 April 2006 were RMB48,400,000 and RMB4,477,000 respectively, which were appraised based on the following major assumptions:

a) the Guangxi Premises and the Guangxi Machinery and Equipment will continue in its present existing use in the current business and subject to adequate potential profitability of the business;
b) the Guangxi Premises and the Guangxi Machinery and Equipment can be sold on the open market without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement that would serve to affect the value of the Guangxi Premises and the Guangxi Machinery and Equipment;
c) Yunphos Fangcheng is in possession of a proper legal title to the Guangxi Premises and the Guangxi Machinery and Equipment and is entitled to transfer, sell, lease or mortgage the Guangxi Premises and the Guangxi Machinery and Equipment to any third parties;
d) the Guangxi Premises have been constructed, occupied and used in full compliance with, and without contravention of all ordinances, except only where otherwise stated;
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LETTER FROM THE BOARD

e) the Guangxi Machinery and Equipment can perform efficiently according to the purposes for which they were designed and built; and
f) all consents, approvals, required licences, permits, certificates and authorizations have been obtained, except only where otherwise stated, for the use of the Guangxi Premises and the Guangxi Machinery and Equipment upon which the valuations are based.

Details of the rental consultation opinion on the lease of the Guangxi Premises, including but not limited to, the findings and assumptions made by B.I. Appraisals Limited are set out in Appendix I to this circular. Upon the Guangxi Leasing Agreement becoming effective, Huahai will involve in the production of phosphoric acid through the leasing of the Guangxi Premises and the phosphoric acid to be produced therein will be sold to and distributed through Yunphos and/or its associates.

2.2 Guangxi Agency Agreement

Parties involved

Principal : Huahai Agent : Yunphos, a company incorporated in the PRC with limited liability and owned as to approximately 99.56% by Mr. Wang and his associates, approximately 0.16% by Mr. Zhao Jun (趙峻 ) who is the chairman of the Company and an executive Director, approximately 0.16% by Mr. Chen Zhi Kang (陳志康 ) who is a director of Yunphos and approximately 0.11% by an Independent Third Party. At present, Yunphos is principally engaged in the sale of phosphorus-related products.

On 11 May 2006, Huahai and Yunphos entered into the Guangxi Agency Agreement, pursuant to which Yunphos will be engaged by Huahai as an agent to provide agency services for the sale of the Guangxi Agency Products mainly in the Territory for a term commencing from the effective date of the Guangxi Agency Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent for the execution of the Guangxi Agency Agreement including, but not limited to, obtaining the approval of all the Continuing Connected Transactions by the Independent Shareholders on or before 31 December 2006. In the event that any of the conditions is not fulfilled or waived by the Shareholders by 31 December 2006, the Guangxi Agency Agreement shall cease and determine and the parties thereto shall be released from all obligations and liabilities thereunder.

Pursuant to the Guangxi Agency Agreement, the agency fee payable by Huahai to Yunphos will be 3% of the invoiced amount of the Guangxi Agency Products to be sold by Yunphos on behalf of Huahai. The agency fee was determined with reference to an agency arrangement for the sale of phosphorus-related products between an associate of Yunphos and an Independent Third Party, under which the agency fee charged is 3% of the invoiced amount of the products sold by

LETTER FROM THE BOARD

the independent agent on behalf of an associate of Yunphos. Under the Guangxi Agency Agreement, the agency fee to be charged by Yunphos will not be higher than the agency fee charged by Independent Third Parties for similar agency arrangement ranging from 3% to 4%. On such basis, the Directors consider that the agency fee to be charged by Yunphos under the Guangxi Agency Agreement is fair and reasonable. The agency fee for the sale of the Guangxi Agency Products shall be deducted from the invoiced amount of the relevant batch of Guangxi Agency Products and retained for the benefit of Yunphos whilst the remaining balance of the invoiced amount shall be paid to Huahai by means of telegraphic transfer within 5 days from the date of settlement by the relevant customer.

The annual production volume of phosphoric acid in the Guangxi Premises for the year ended 31 December 2005 was approximately 60,000 tonnes, with a utilization rate of approximately 75%. The Directors estimate that the annual cap amounts of the agency fee to be paid by Huahai under the Guangxi Agency Agreement will be US$270,000 (equivalent to approximately HK$2.1 million), US$540,000 (equivalent to approximately HK$4.2 million) and US$540,000 (equivalent to approximately HK$4.2 million) for each of the three years ending 31 December 2008 respectively. Such estimate was calculated mainly based on (i) the production capacity of the Guangxi Premises for the year ended 31 December 2005 relating to the production of the Guangxi Agency Products; (ii) the selling price (per tonne) of phosphoric acid in tanks sold through an independent agent on behalf of an associate of Yunphos to the customers; and (iii) the agency fee of 3% to be charged by Yunphos under the Guangxi Agency Agreement. The Directors confirmed that the actual production volume of phosphoric acid in the Guangxi Premises substantially depends on the availability of yellow phosphorous. The Directors based their estimation of the cap amount for the Guangxi Agency Agreement on a utilization rate of 100% for the Guangxi Premises as they believe it would be possible to have sufficient supply of yellow phosphorous to attain full utilization of the Guangxi Premises.

2.3 Guangxi Raw Materials Purchase Agreement

Parties involved Supplier : Yunphos Purchaser : Huahai

On 11 May 2006, Huahai and Yunphos entered into the Guangxi Raw Material Purchase Agreement, pursuant to which Huahai will purchase yellow phosphorus from Yunphos (and/or its subsidiaries) for the production of phosphoric acid by the Guangxi Premises for a term commencing from the effective date of the Guangxi Raw Materials Purchase Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent for the execution of the Guangxi Raw Materials Purchase Agreement including, but not limited to, obtaining the approval of all the Continuing Connected Transactions by the Independent Shareholders on or before 31 December 2006. In the event that any of the conditions is not fulfilled or waived by the Shareholders by 31 December 2006, the Guangxi Raw Materials Purchase Agreement shall cease and determine and the parties thereto shall be released from all obligations and liabilities thereunder. The quantity and specification of yellow phosphorus to be supplied by Yunphos (and/or its subsidiaries) to

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LETTER FROM THE BOARD

Huahai will be subject to the requirements under each individual order placed by Huahai to Yunphos (and/or its subsidiaries) from time to time. The price payable by Huahai to Yunphos (and/ or its subsidiaries) will be determined after arm’s length negotiation at a price level not higher than the price payable by Huahai for the same products to Independent Third Parties. The invoiced amount payable by Huahai to Yunphos (and/or its subsidiaries) shall be settled within 30 days upon receipt of the relevant raw materials. The Guangxi Raw Materials Purchase Agreement provides that Yunphos (and/or its subsidiaries) will preferentially supply the raw materials to Huahai before such raw materials are supplied to other customers.

The annual production volume of phosphoric acid in the Guangxi Premises for the year ended 31 December 2005 was approximately 60,000 tonnes, with a utilization rate of approximately 75%. The Company estimates that the annual aggregate amount of the raw materials to be purchased by Huahai from Yunphos (and/or its subsidiaries) will not exceed the annual cap amounts of RMB120 million (equivalent to approximately HK$115.4 million), RMB240 million (equivalent to approximately HK$230.8 million) and RMB240 million (equivalent to approximately HK$230.8 million) for each of the three financial years ending 31 December 2008 respectively. Such estimate was determined mainly based on (i) the production capacity of the Guangxi Premises of approximately 80,000 tonnes for the year ended 31 December 2005 relating to the production of phosphoric acid on the assumption that the utilization rate of the Guangxi Premises reaches 100% as the Directors believe that sufficient yellow phosphorus will possibly be supplied to the Guangxi Premises; (ii) the quantity of yellow phosphorus required to produce one tonne of phosphoric acid; and (iii) the recent selling price (per tonne) of yellow phosphorus sold by an associate of Yunphos to an Independent Third Party.

2.4 Guangxi Distribution Agreement

Parties involved Supplier : Huahai Distributor : Yunphos

On 11 May 2006, Huahai and Yunphos entered into the Guangxi Distribution Agreement, pursuant to which Yunphos (and/or its subsidiaries) will purchase the Guangxi Distribution Products from Huahai for onward distribution to its customers for a term commencing from the effective date of the Guangxi Distribution Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent for the execution of the Guangxi Distribution Agreement including, but not limited to, obtaining the approval of all the Continuing Connected Transactions by the Independent Shareholders on or before 31 December 2006. In the event that any of the conditions is not fulfilled or waived by the Shareholders by 31 December 2006, the Guangxi Distribution Agreement shall cease and determine and the parties shall be released from all obligations and liabilities thereunder.

Pursuant to the Guangxi Distribution Agreement, the price of the Guangxi Distribution Products to be sold by Huahai to Yunphos (and/or its subsidiaries) will not be lower than the price available to Independent Third Parties for the same products sold by Huahai. The invoiced amount of the Guangxi Distribution Products to be sold to Yunphos (and/or its subsidiaries) shall be settled

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LETTER FROM THE BOARD

by means of telegraphic transfer within 30 days from the date of bill of lading. The Directors expect that the Guangxi Distribution Products to be produced by the Guangxi Premises, which are estimated to account for not more than 50% of the total quantity of phosphoric acid to be produced by the Guangxi Premises, will be sold by Huahai to Yunphos (and/or its subsidiaries).

The annual production volume of phosphoric acid in the Guangxi Premises for the year ended 31 December 2005 was approximately 60,000 tonnes, with a utilization rate of approximately 75%. The Directors estimate that the annual cap amounts for the sale of the Guangxi Distribution Products to Yunphos (and/or its subsidiaries) under the Guangxi Distribution Agreement will be RMB90 million (equivalent to approximately HK$86.5 million), RMB180 million (equivalent to approximately HK$173.1 million) and RMB180 million (equivalent to approximately HK$173.1 million) for each of the three years ending 31 December 2008 respectively. The above cap amounts were determined mainly based on (i) the production capacity of the Guangxi Premises for the year ended 31 December 2005 relating to the production of the Guangxi Distribution Products on the assumption that the utilization rate of the Guangxi Premises reaches 100%; and (ii) the recent selling price (per tonne) of phosphoric acid packed in drums sold by an associate of Yunphos to an Independent Third Party. The Directors confirmed that the actual production volume of phosphoric acid of the Guangxi Premises substantially depends on the availability of yellow phosphorous. The Directors based their estimation of the cap amount for the Guangxi Distribution Agreement on a utilization rate of 100% for the Guangxi Premises as they believe it would be possible to have sufficient supply of yellow phosphorous to attain full utilization of the Guangxi Premises.

2.5 Yunnan Leasing Agreement

Parties involved Leasor : Yunphos Xundian, a company incorporated in the PRC with limited liability and owned as to 85% by Mr. Wang Qi (王琦 ) who is a director of Yunphos and a relative of Mr. Wang; and as to 15% by Mr. Wang. At present, Yunphos Xundian is mainly engaged in power generation and the production and sale of yellow phosphorus. Lessee : Huahai

On 11 May 2006, Huahai and Yunphos Xundian entered into the Yunnan Leasing Agreement, pursuant to which Yunphos Xundian would lease to Huahai the Yunnan Premises with a gross floor area of approximately 51,793.22 sq. m. located at Jin Suo Xiang Industrial Small District, Xundian County, Kunming City, Yunnan Province, the PRC and the Yunnan Machinery and Equipment for a term commencing from the effective date of the Yunnan Leasing Agreement up to 31 December 2008, subject to (i) the satisfaction of all conditions precedent for the execution of the Yunnan Leasing Agreement including, but not limited to, obtaining the approval of all the Continuing Connected Transactions by the Independent Shareholders on or before 31 December 2006; and (ii) the settlement of the first installment of the annual rental within six months from the date of obtaining the Independent Shareholders’ approval of the Continuing Connected Transactions. In the event that any of the conditions is not fulfilled or waived by the Shareholders by 31 December 2006, the Yunnan Leasing Agreement shall cease and determine and the parties thereto shall be released from all obligations and liabilities thereunder. The PRC legal adviser to the Company confirmed that the operation of the Yunnan Premises are in compliance with the relevant PRC laws and regulations and the leasing of the Yunnan Premises is legally enforceable and does not breach the relevant PRC laws.

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LETTER FROM THE BOARD

The Yunnan Premises comprises mainly two factory premises including one phosphorus production plant and one power production plant. The power production plant will generate and supply electricity to the phosphorus production plant for the manufacture of yellow phosphorus. The power production plant is capable of providing approximately 50,000 kW per hour of electricity per annum whilst the phosphorus production plant is capable of producing approximately 22,000 tonnes of yellow phosphorus per annum. The production volume of yellow phosphorous in the Yunnan Premises for the year ended 31 December 2005 was approximately 22,000 tonnes with a utilization rate of nearly 100%. The Directors intend to staff the Yunnan Premises with its existing management and technicians by renewing their labour contract. As at the Latest Practicable Date, the Yunnan Premises had a total of 730 staff.

The Yunnan Premises and the Yunnan Machinery and Equipment would be leased to Huahai or members of the Group at an annual aggregate rental of RMB20 million (equivalent to approximately HK$19.2 million). The Yunnan Leasing Agreement will become effective upon the payment of the first installment of the annual rental by Huahai within six months from the date of obtaining the approval of the Independent Shareholders on the Continuing Connected Transactions at the EGM.

Pursuant to the Yunnan Leasing Agreement, (i) 50% of the rental for the year ending 31 December 2006 shall be settled within six months from the date of obtaining the Independent Shareholders’ approval of the Continuing Connected Transactions and the balance shall be settled before 31 December 2006; (ii) the rental for each of the two years ending 31 December 2008 shall be settled in three installments in accordance with the following:

(a) 40% of the annual rental of RMB20 million, equivalent to RMB8 million or approximately HK$7.7 million, shall be paid within one week from the beginning of each financial year;
(b) 18% of the annual rental of RMB20 million, equivalent to RMB3.6 million or approximately HK$3.5 million, shall be paid before 30 June of each financial year; and
(c) the remaining 42% of the annual rental of RMB20 million, equivalent to RMB8.4 million or approximately HK$8.1 million, shall be paid before the end of each financial year.

The Board confirmed that the rental payable by the Company under the Yunnan Leasing Agreement was determined after arm’s length negotiation with reference to the rental consultation opinion on the Yunnan Premises and the Yunnan Machinery and Equipment given by an independent valuation firm, B.I. Appraisals Limited, which has reviewed the terms of the Yunnan Leasing Agreement, and confirmed that the annual rental determined for the Yunnan Premises and Yunnan Machinery and Equipment is not higher than the fair rental of approximately RMB51.1 million as appraised by B.I. Appraisals Limited as at 30 April 2006 for the lease of the Yunnan Premises and the Yunnan Machinery and Equipment.

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LETTER FROM THE BOARD

As mentioned in Appendix I to this circular, the market value and the market rent per annum of the Yunnan Premises as at 30 April 2006 were RMB474,000,000 and RMB51,110,000 respectively, which were appraised based on the following major assumptions:

a) the Yunnan Premises and the Yunnan Machinery and Equipment will continue in its present existing use in the current business and subject to adequate potential profitability of the business;
b) the Yunnan Premises and the Yunnan Machinery and Equipment can be sold on the open market without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement that would serve to affect the value of the Yunnan Premises and the Yunnan Machinery and Equipment;
c) Yunphos Xundian is in possession of a proper legal title to Yunnan Premises and the Yunnan Machinery and Equipment and is entitled to transfer, sell, lease or mortgage the Yunnan Premises and the Yunnan Machinery and Equipment to any third parties;
d) the Yunnan Premises have been constructed, occupied and used in full compliance with, and without contravention of all ordinances, except only where otherwise stated;
e) the Yunnan Machinery and Equipment can perform efficiently according to the purposes for which they were designed and built; and
f) all consents, approvals, required licences, permits, certificates and authorizations have been obtained, except only where otherwise stated, for the use of the Yunnan Premises and the Yunnan Machinery and Equipment upon which the valuations are based.

Details of the rental consultation opinion on the lease of the Yunnan Premises, including but not limited to, the findings and assumptions made by B.I. Appraisals Limited are set out in Appendix I to this circular.

Upon the Yunnan Leasing Agreements becoming effective, Huahai or members of the Group will involve in the production of yellow phosphorus through the leasing of the Yunnan Premises and the yellow phosphorus to be produced therein will either be sold to the Guangxi Premises or other customers. The Directors anticipate that the effective date of the Yunnan Leasing Agreement will fall within the second half of the year ending 31 December 2006 and therefore the estimated rental payable to Yunphos Xundian will not exceed HK$10 million for the year ending 31 December 2006. The Directors estimate that the annual cap amounts for the rental for each of the two years ending 31 December 2008 will be RMB20 million (equivalent to approximately HK$19.2 million).

The Directors expect that part of the yellow phosphorus to be produced by the Yunnan Premises will be supplied to the Guangxi Premises as the major raw materials for the production of phosphoric acid and the remaining yellow phosphorus will be supplied to other customers including Connected Persons. However, allocation of sales of the Yunnan Products to the Guangxi

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LETTER FROM THE BOARD

Premises and other customers including Connected Persons cannot be ascertained as at the Latest Practicable Date. In the event that the amount of sales of the Yunnan Products to the Connected Persons exceeds HK$10 million or represents more than 2.5% of each of the applicable percentage ratios under Chapter 14A of the Listing Rules, the Company will make a separate announcement to inform the Shareholders and comply with the necessary requirements under Chapter 14A of the Listing Rules.

The Directors (including the independent non-executive Directors) consider that the Continuing Connected Transactions, including the respective cap amounts, were entered into on normal commercial terms and in the ordinary and usual course of business of the Group; and are fair and reasonable and in the interest of the Company and the Shareholders. The Directors have estimated the annual cap amounts of each of the Continuing Connected Transactions for the coming three financial years ending 31 December 2008 on the basis that the Continuing Connected Transactions will be carried out in accordance with the terms and conditions set out in the respective agreements governing the relevant Continuing Connected Transactions.

3. REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

The Group is principally engaged in the manufacture and sale of optical products and trading of optical equipment and accessories. Subsequent to the completion of an unconditional mandatory cash offer in 2005, Mr. Wang became the controlling Shareholder. Despite the change in the majority shareholding in the Company, the Group continued the operation of its optical business. In the same year, the Company established a trading company which has since then entered into an agency agreement with a company wholly owned by Mr. Wang to provide agency services for the sale of chemical products including red phosphorus, yellow phosphorus, phosphoric acid and related products to Italy, Japan and Korea in return for an agency fee with a view to broadening its income base. For the year ended 31 December 2005, the Group reported a consolidated turnover of approximately HK$147.0 million and net profits of approximately HK$38.7 million. The audited consolidated net assets of the Group were approximately HK$14.7 million as at 31 December 2005.

Mr. Wang has been engaged in the phosphorus industry through his chairmanship at Yunphos, which is principally engaged in the sale of phosphorus-related products such as yellow phosphorus and phosphoric acid, since 1990. Yellow phosphorous has various usages such as producing inorganic chemicals and phosphorous-based fertilizers, while phosphoric acid can be widely applied to the production of numerous products such as ingredients of medicines, food additives and cleansing agents. Under the management of Mr. Wang, Yunphos (including its predecessors) has evolved into a vertically integrated company engaged in the development, manufacturing, import and export of the aforesaid products over the last decade. With Mr. Wang’s continuous efforts in exploring the international market, Yunphos has built up strong and long-term relationships with numerous international customers in Europe, America, Australia, Japan and South East Asia.

As the Company intends to further develop and expand its business in the phosphorus industry, the Continuing Connected Transactions can create a platform for the Company to gain further experience in operating and managing phosphorus business in addition to the trading experience gained from its existing agency business. By engaging in the lease of the Guangxi Premises, the Company could initiate its own

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LETTER FROM THE BOARD

production of phosphoric acid. As a conservative measure, the Company aims to secure reliable and stable supply of yellow phosphorous from Yunphos (and/or its subsidiaries) for the production of phosphoric acid by engaging in the Guangxi Raw Materials Purchase Agreement. On the other hand, given that the Group is a new comer to the phosphorous industry with only limited market reputation and distribution expertise, the Directors consider it more commercially viable to distribute the Guangxi Products through Yunphos, which comparatively has stronger market presence in the phosphorous industry, by engaging in the Guangxi Distribution Agreement and Guangxi Agency Agreement. With the lease of the Yunnan Premises under the Yunnan Leasing Agreement, the Company can also secure a long-term and stable supply of electricity and yellow phosphorus for the ongoing production needs of the Guangxi Premises. The Directors consider that the Continuing Connected Transactions could embody the synergy of vertical integration for the Group’s phosphorus business and maintain the Group’s competitive edge by lowering the overall cost of production via generating electricity and producing yellow phosphorus through the leased premises of the Group for its own manufacturing of phosphoric acid in the long run.

Given that the development of the Group’s phosphorus business is still at nascent stage, the Directors expect that the Continuing Connected Transactions will supplement the business of the Group by leveraging on Mr. Wang’s considerable experience in international trade, in particular, in the phosphorus industry as well as Mr. Wang’s extensive business network. The Directors also expect the Company to gradually establish its presence in the phosphorus industry and eventually build up direct relationships with suppliers and customers for the long-term development of the Group’s phosphoric acid business.

4. EGM

Yunphos is currently held as to approximately 99.56% by Mr. Wang and his associates. Yunphos Fangcheng is currently held as to 95% by Mr. Wang. Yunphos Xundian is currently held as to 85% by an associate of Mr. Wang and as to 15% by Mr. Wang. Accordingly, Yunphos, Yunphos Fangcheng and Yunphos Xundian are Connected Persons. As the Guangxi Leasing Agreement, the Guangxi Agency Agreement, the Guangxi Raw Materials Purchase Agreement, the Guangxi Distribution Agreement and the Yunnan Leasing Agreement are entered into between the Company and parties connected or otherwise associated with one another, the above transactions are aggregated pursuant to Rule 14A.25. As the estimated aggregate annual cap amount under the Continuing Connected Transactions exceed 2.5% of each of the applicable percentage ratios under Chapter 14A of the Listing Rules and HK$10,000,000, such transactions constitute non-exempt continuing connected transactions of the Company under Rule 14A.35 of the Listing Rules and are subject to the requirements under Rules 14A.37 to 14A.40, 14A.45 and 14A.47 and the approval of the Independent Shareholders under Rule 14A.48 of the Listing Rules.

To seek the approval of the Independent Shareholders, the Board resolved to convene the EGM to be held on 19 June 2006 to approve, among other things, the Continuing Connected Transactions for a period commencing from the respective effective dates of the relevant agreements up to 31 December 2008 and their respective annual cap amounts. Votes of the Independent Shareholders will be taken by way of a poll (except for the resolutions to approve the granting of generate mandates to issue and repurchase Shares) in accordance with the Listing Rules, and the poll results of the EGM will be published after the EGM.

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LETTER FROM THE BOARD

China Time, being the controlling Shareholder holding approximately 60% of the share capital of the Company, and its associates will abstain from voting with regards to the ordinary resolutions in connection with the Continuing Connected Transactions to be proposed at the EGM.

Subject to the approval by the Independent Shareholders, the Continuing Connected Transactions may or may not proceed. Shareholders and potential Shareholders are advised to exercise caution when dealing in the Shares.

A form of proxy is enclosed for use at the EGM. If you are unable to attend and vote at the EGM in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar in Hong Kong, Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible, but in any event not less than 48 hours before the time appointed for holding such meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

5. GENERAL MANDATE TO REPURCHASE SHARES

At the EGM, an ordinary resolution will be proposed to grant to the Directors a general and unconditional mandate to exercise all powers of the Company to repurchase issued shares in the share capital of the Company subject to the criteria set out in this circular. In particular, Shareholders should note that the maximum number of shares that may be repurchased pursuant to the Repurchase Mandate will be such number which represents 10% of the aggregate nominal amount of the issued share capital of the Company as at the date of passing of the resolution subject to the Listing Rules. The Repurchase Mandate will end on the earliest of the date of the next annual general meeting, the date by which the next annual general meeting of the Company is required to be held by Hong Kong law or the articles of association of the Company, and the date upon which such authority is revoked or varied by ordinary resolution of the Company in general meeting.

In accordance with the Listing Rules, the Company is required to send to the Shareholders an explanatory statement which is set out in Appendix II of this circular.

6. GENERAL MANDATE TO ISSUE SHARES

At the EGM, an ordinary resolution will be proposed to grant to the Directors a general and unconditional mandate to issue further shares representing up to 20% of the aggregate nominal amount of the issued share capital of the Company as at the date of passing of the resolution.

Subject to the passing of the aforesaid ordinary resolutions of the Repurchase Mandate and general mandate to issue Shares, an ordinary resolution will also be proposed to authorise the Directors to issue Shares in the capital of the Company in an amount not exceeding the aggregate nominal amount of the Shares in the capital of the Company purchased pursuant to the Repurchase Mandate.

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LETTER FROM THE BOARD

7. PROCEDURES TO DEMAND A POLL BY SHAREHOLDERS

Pursuant to article 74 of the articles of association of the Company, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded:

(i) by the Chairman of the meeting; or
(ii) by at least three members present in person or by proxy for the time being entitled to vote at the meeting; or
(iii) by any member or members present in person 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) by a member or members present in person 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 the shares conferring that right.

8. RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 19 of this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders concerning the Continuing Connected Transactions and the respective annual cap amounts; (ii) the letter from Partners Capital set out on pages 20 to 52 of this circular which contains its recommendation to the Independent Board Committee and the Independent Shareholders on the Continuing Connected Transactions and the respective annual cap amounts and the principal factors and reasons considered by Partners Capital in arriving at its recommendation.

Having considered the above principal factors and reasons, the Board is of the opinion that the terms of the Continuing Connected Transactions and the respective annual cap amounts are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Continuing Connected Transactions and the respective annual cap amounts.

Your attention is drawn to the appendices of this circular.

By order of the Board

Swank International Manufacturing Company Limited Zhao Jun

Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of the letter of recommendation, prepared for the purpose of incorporation in this circular, from the Independent Board Committee to the Shareholders regarding the Continuing Connected Transactions:

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability)

(Stock code: 663)

2 June 2006

To the Independent Shareholders

Dear Sirs or Madams,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company dated 2 June 2006 (the “Circular”) of which this letter forms part. Unless the context specifies otherwise, capitalized terms and herein have the same meanings as defined in the Circular.

We have been appointed by the Board as the Independent Board Committee to advise the Shareholders as to whether the terms of the Continuing Connected Transactions are fair and reasonable insofar as the Independent Shareholders are concerned and whether the Continuing Connected Transactions are in the interest of the Company and the Shareholders as a whole. Partners Capital has been appointed as the independent financial adviser to advise you and us in this respect.

RECOMMENDATION

We wish to draw your attention to the letter from the Board and the letter from Partners Capital to the Independent Board Committee and the Independent Shareholders which contains its advice to us in relation to the Continuing Connected Transactions as set out in the Circular.

Having taken into account the principal reasons and factors considered by, and the advice of, Partners Capital as set out in its letter of advice on pages 20 to 52 of the Circular, we are of the opinion that the terms of the Continuing Connected Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve, inter alia, the Continuing Connected Transactions.

Yours faithfully, For and on behalf of

The Independent Board Committee Choi Tze Kit, Sammy Wu Bin Tam King Ching, Kenny

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LETTER FROM PARTNERS CAPITAL

Partners Capital International Limited Room 1305, 13th Floor 9 Queen’s Road Central Hong Kong

2 June 2006

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of (i) the Guangxi Leasing Agreement with Yunphos Fangcheng; (ii) the Guangxi Agency Agreement with Yunphos; (iii) the Guangxi Raw Materials Purchase Agreement with Yunphos; (iv) the Guangxi Distribution Agreement with Yunphos; and (v) the Yunnan Leasing Agreement with Yunphos Xundian (together, the “Agreements”), each for a term commencing from the respective effective date of the relevant agreement up to 31 December 2008. Particulars of which are set out in the letter from the Board (the “Letter from the Board”) of this circular to the Shareholders dated 2 June 2006 (the “Circular”) and in which this letter is reproduced. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as given to them under the definitions section of the Circular.

Yunphos is currently held as to approximately 99.56% by Mr. Wang and his associates. Yunphos Fangcheng is currently held as to 95% by Mr. Wang. Yunphos Xundian is currently held as to 85% by Mr. Wang’s associate and 15% by Mr. Wang. Accordingly, Yunphos, Yunphos Fangcheng and Yunphos Xundian are Connected Persons. As the Agreements are entered into between the Company and parties connected or otherwise associated with one another, the Continuing Connected Transactions contemplated under the Agreements are aggregated pursuant to Rule 14A.25 of the Listing Rules. As the estimated aggregate annual cap amount under the Agreements exceeds 2.5% of each of the applicable percentage ratios under Chapter 14A of the Listing Rules and HK$10,000,000, the Continuing Connected Transactions contemplated under the Agreements constitute non-exempt continuing connected transactions of the Company under Rule 14A.35 of the Listing Rules and are subject to the requirements under Rules 14A.37 to 14A.40, 14A.45 and 14A.47 and the approval of the Independent Shareholders under Rule 14A.48 of the Listing Rules. Each of the Agreements is inter-conditional with the Independent Shareholders’ approval of the rest of the four agreements governing the Continuing Connected Transactions.

The Independent Board Committee comprising all the Independent Directors has been established to advise the Independent Shareholders on terms of the Agreements contemplating the Continuing Connected Transactions and the annual caps. Partners Capital has been appointed as the independent financial adviser to the Independent Board Committee and the Independent Shareholders on the terms of the Agreements.

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LETTER FROM PARTNERS CAPITAL

Partners Capital is not connected with the directors, chief executive and substantial shareholders of the Company or any of its subsidiaries or their respective associates and is independent pursuant to Rule 13.84 of the Listing Rules and is therefore considered suitable to give independent advice to the Independent Board Committee and the Independent Shareholders. Apart from normal professional fees payable to Partners Capital in connection with this appointment, no arrangement exists whereby Partners Capital will receive any fees or benefits from the Company or the directors, chief executive and substantial shareholders of the Company or any of its subsidiaries or their respective associates.

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Circular and have assumed that all information and representations made or referred to in the Circular were true at the time they were made and continue to be true as at the date of the Circular. We have also relied on our discussion with the management of the Company and B.I. Appraisals Limited (being an independent valuation firm appointed by the Company) regarding the Group and the respective terms of the Agreements, including the information and representations contained in the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors and the Company in the Circular were reasonably made after due enquiry. We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. We have not, however, conducted an independent in-depth investigation into the business and affairs of the Group (including the Company and Huahai), Yunphos, Yunphos Fangcheng, Yunphos Xundian and their respective associates nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI LEASING AGREEMENT

In arriving at our opinion regarding the terms of the Guangxi Leasing Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Guangxi Leasing Agreement

As mentioned in the Letter from the Board, the Company intends to further develop and expand its business in the phosphorus industry through entering into the Continuing Connected Transactions which create a platform for the Company to gain further experience in operating and managing phosphorus business in addition to the trading experience gained from its existing agency business. By engaging in the lease of the Guangxi Premises (together with the Guangxi Machinery and Equipment therein), being

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LETTER FROM PARTNERS CAPITAL

one of the Continuing Connected Transactions contemplated for the purpose of attaining vertical integration of the Group’s phosphorus business, the Company could initiate its own production of phosphoric acid in the long run.

As part of our due diligence exercise, we discussed with the Directors and were advised that Guangxi Premises were under operation since 2002 and (together with other members of Yunphos group) is one of the leading manufacturers of phosphorus chemicals in the PRC. According to an article titled “2005年磷酸出口 2000噸以上企業排名 ” on the website of China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters, Yunphos group ranked the second in the PRC in terms of export of phosphoric acid in 2005. The Directors attributed the competitive advantages of the operation under the Guangxi Premises to their geographically location at Fangchenggang City, a port in Guangxi province, where deliveries of finished products to overseas customers by means of shipment are more convenient.

Based on our discussion with the Company, we noted that phosphoric acid can be widely applied for the production of numerous downstream products such as ingredients of medicines, food additives and cleansing agents. The phosphoric acid produced under the Guangxi Premises can be broadly categorized into technical grade and food grade. The phosphoric acid produced under the Guangxi Premises is delivered to customers under two different forms, namely drums (approximating to “retail” mode) and tanker vessels (approximately to “wholesale” mode), which is respectively sold by way of distribution and agency arrangement. As advised by the Directors, the two different forms of delivery are driven by the end customers who have specific demand, details of which are summarized in the following table:

	Tanker vessels	Drums
Selling mode	Agency arrangement	Distribution
Tonnes per tanker	about 1,000 – 6,000 tonnes	about 0.035 tonnes, 0.300 tonnes
vessel/drum
Unit price per tonne_(Note)_	about US$450	about US$560
Shipment mode per order	Pumped from storage tank	Stored in a number of drums
	system located on dock of	inside containers for shipment
	Fanchenggang to the tanker
	vessel for bulk shipment
Customer base	4-6 major customers	A few hundreds customers
	(wholesale)	(retail)

Note: The unit price per tonne was based on the actual market prices prevailing around the date of the Agreements according to the Directors

As mentioned in the Letter from the Board, the annual production capacity of the Guangxi Premises is 80,000 tonnes per annum, with approximately 40,000 tonnes for Guangxi Agency Products and approximately 40,000 tonnes for Guangxi Distribution Products. As advised by the Directors, the 50:50 apportion basis between the Guangxi Agency Products and the Guangxi Distribution Products is determined with reference to the actual proportion of sales (via tanker vessels under agency arrangement versus drums under distribution) of Yunphos Fangcheng in the year ended 31 December 2005.

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LETTER FROM PARTNERS CAPITAL

Against all the background as stated above, we consider that there is an acceptable rationale for the Group to enter into the Guangxi Leasing Agreement, which is to tap into the manufacture and sale of phosphoric acid (thereby broadening the revenue source of the Group) immediately without delay as compared to outright investment and construction of a production factory. The Guangxi Leasing Agreement enables the Group to equip with the assets for the manufacture of phosphoric acid through the mode of operating lease, thereby avoiding heavy capital commitment on the part of the Group at this infant stage but at the same time allowing the Group to enter the phosphorus industry on a vertical integrated basis by means of the package of the other Continuing Connected Transactions as a whole.

However, we note that the profitability of the phosphorus business of the Group would depend on two key factors, namely the market price levels of phosphoric acid (as finished product of the Guangxi Premises) and yellow phosphorus (as raw material of the Guangxi Premises but at the same time as finished product of the Yunnan Premises) respectively, which were volatile and are beyond the control of the Group. In any event, the Directors advised to us that the Group may in view of the changing differentials in the market price levels of phosphoric acid and yellow phosphorus swiftly adjust the product mix by way of, say, temporarily reducing the sale of phosphoric acid when its prevailing market price is unfavorable and focusing more on the sale of yellow phosphorus to outside customers (through the production under the Yunnan Premises). On such basis, we envisage that the Group as a lessee of two distinct factory premises in the Guangxi Premises and the Yunnan Premises respectively may enjoy the flexibility of selling different mix of phosphoric acid and yellow phosphorus for the purpose of optimising the overall interests of the Group by means of the package of the other Continuing Connected Transactions.

2. Key terms of the Guangxi Leasing Agreement

(i) Subject matter

Pursuant to the Guangxi Leasing Agreement, Huahai will lease from Yunphos Fangcheng the Guangxi Premises located at Huagang Road, Yu Zhou Cheng Industrial Zone, Gangkou District, Fangchenggang City, Guangxi Zhuang Zu Autonomous Region, the PRC with a gross floor area of approximately 6,877.06 sq. m., together with the Guangxi Machinery and Equipment therein for the Group’s operation in the manufacture and sale of phosphoric acid for a term commencing from the effective date of the Guangxi Leasing Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent including the settlement of the first installment of the annual rental within six months from the date of obtaining the Independent Shareholders’ approval of the Continuing Connected Transactions. We understand that the Guangxi Leasing Agreement is inter-conditional with the Independent Shareholders’ approval of the rest of the four agreements governing the Continuing Connected Transactions.

As mentioned in the Letter from the Board, the production capacity of phosphoric acid in the Guangxi Premises was 80,000 tonnes per annum for the year ended 31 December 2005. Although the actual production volume of the phosphoric acid in the Guangxi Premises for the year ended 31 December 2005 was approximately 60,000 tonnes only (with an utilization rate of approximately 75%), the Directors estimate that the annual production capacity in the Guangxi Premises will be approximately 80,000 tonnes of phosphoric acid on the assumption that the utilization rate reaches 100%, which in turn would be subject to the availability of yellow phosphorus at competitive cost level. The basis of estimation and the assumptions made by the Directors to

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attain 100% utilization rate for Guangxi Premises include (a) the Directors’ belief on the likelihood to have sufficient supply of yellow phosphorus as raw material, given that each of (i) Yunphos (and/or its subsidiaries) under the Guangxi Raw Materials Purchase Agreement and (ii) the Yunnan Premises under the Yunnan Leasing Agreement are capable of independently supplying around 22,000 tonnes of yellow phosphorus per annum; and (b) that the Guangxi Premises are used to operate on the basis of (i) 24 hours per day (representing a total of three shifts of factory labour for eight hours each) and (ii) around 360 days per annum (after accounting for some days normally required for repair and maintenance). On such basis, and given the Directors’ confirmation that the specification of the maximum production capacity of production line/machinery of the Guangxi Premises amounts to a total of 230 tonnes of phosphoric acid per day, we consider that there is a ground for the Directors to estimate the production of 80,000 tonnes of phosphoric acid per annum for Guangxi Premises, based further on the said likelihood to have sufficient supply of yellow phosphorus as raw material.

The Directors intend to staff the Guangxi Premises with its existing management and technicians by renewing their labour contract. Upon our review of the annual report of the Company for the year ended 31 December 2005, we note that two executive directors of the Company, namely Mr. Wang and Mr. Zhao Jun, are also the key management of Yunphos group (or its predecessor) since 1993 and hence have the expertise and experience in the phosphorus industry.

(ii) Rental

The Board confirmed that the rental payable by the Company under the Guangxi Leasing Agreement was determined after arm’s length negotiation with reference to the rental consultation opinion on the Guangxi Premises and the Guangxi Machinery and Equipment given by an independent valuation firm, B.I. Appraisals Limited, which has reviewed the terms of the Guangxi Lease Agreement, and confirmed that the above-mentioned annual rental for the Guangxi Premises and Guangxi Machinery and Equipment is not higher than (but instead representing approximately 44% discount to) the fair rental of approximately RMB4.5 million as appraised by B.I. Appraisals Limited as at 30 April 2006 for the lease of the Guangxi Premises and the Guangxi Machinery and Equipment.

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According to the “Valuation Report” as set out in Appendix I to the Circular, we note that B.I. Appraisals Limited has arrived at the market value of the Guangxi Premises and the Guangxi Machinery and Equipment by way of adopting the Depreciated Replacement Cost Approach (“DRC Approach”). We have interviewed with B.I. Appraisals Limited on this valuation methodology and further understand that both the market comparable approach and the income capitalization approach were excluded for the purpose of valuing the Guangxi Premises and the Guangxi Machinery and Equipment. Details of the valuation methodologies considered by B.I. Appraisals Limited in arriving at the market value of Guangxi Premises and the Guangxi Machinery and Equipment are summarised as follows:

DRC Approach

Market Income comparable capitalization approach approach

Guangxi • Considered the cost to reproduce Premises or replace in new condition the buildings and structures being valued in accordance with current construction costs for similar property in the locality, with allowance for accrued depreciation as evidence by observed condition or obsolescence present, whether arising from physical, functional or economics causes
Excluded due to • Excluded due to absence of readily the market value identifiable to be accessed comparable sale will in turn be transactions used as a factor to value the market rent, where such market rent in fact is a factor to access the market value under the income capitalization approach
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DRC Approach

Guangxi • For the assets of standard Machinery manufacture, used current and manufacturers’ price lists, price Equipment quotations and price catalogs to determine the cost of replacement. Allowances for freight and installation were sometimes required.
For the assets of special design or fabrication, used current market price for labor, current market price for materials, manufactured components, design fees, engineering fees and contractors’ overhead, profit and fee to determine the cost of replacement new. Allowances for freight and installation were sometimes required.

Market Income comparable capitalization approach approach

Excluded due to • Excluded due to absence of absence of identified active identifiable used-equipment income stream market in the can be attributed PRC that provides to a specific piece information on of equipment or a recent group of transactions of equipment comparable items
Adopted the assets index factor to estimate the cost of reproduction new of special design or fabrication machinery and equipment. An index factor is applied to the historical cost of appraised equipment in order to estimate the current cost of the assets being appraised.
The deductions for physical deterioration, functional obsolescence, and economic obsolescence have reflected observed condition; past maintenance and rebuilding history, if any; current use; and planned future utilization.
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In addition, we note the market rent of the Guangxi Premises and the Guangxi Machinery and Equipment is arrived at by way of adopting the investment approach by applying an appropriate yield to the market value arrived at though the valuation approach as stated above. As discussed with B.I. Appraisals Limited, due to the nature of the subject assets which are tangible and are specially designed for the production of phosphoric acid, there are no readily identifiable comparable leasing transactions; and accordingly the market rent of the subject assets cannot be valued by comparison with open market transactions. Hence, the investment approach is considered the appropriate approach for valuing market rent based on the market value of subject assets in the absence of a known market based on comparable leasing.

Upon review, we consider that the valuation methodology adopted by B.I. Appraisals Limited is generally in line with market practice of valuing the market value and market rent of tangible assets such as buildings and equipments.

Based on the opinion of B.I. Appraisals Limited as stated in their Valuation Report, we are of the view that the annual aggregate rental of RMB2.5 million, representing approximately 44% discount to the fair rental of approximately RMB4.5 million as appraised by B.I. Appraisals Limited as at 30 April 2006, is fair and reasonable and is in the interests of the Company and the Independent Shareholders as a whole.

(iii) Payment term

Pursuant to the Guangxi Leasing Agreement, the rental shall be settled in the following manner:

	Effective date to	Each year
	31 December 2006	of 2007 and 2008
1st installment	50% within six months from	40%; RMB1,000,000
	the date of obtaining the	within one week from the
	Independent Shareholders’	beginning of each financial year
	approval
2nd installment	50% before 31 December	18%; RMB450,000 before 30 June
	2006	of each financial year
3rd installment	Not applicable	42%; RMB1,050,000 before the
		end of each financial year

We note from the above payment term that 82% of the annual rental is to be settled within two months in December and January of two consecutive years ending 31 December 2008, whereas 18% of the annual rental is to be settled in the mid of the year. Upon enquiry and discussion with the Directors and B.I. Appraisals Limited, it is not uncommon for rentals to be settled in a manner other than on monthly basis.

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RECOMMENDATION FOR THE GUANGXI LEASING AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Guangxi Leasing Agreement (in particular, to equip the Group with the assets for the manufacture of phosphoric acid through the mode of operating lease, thereby avoiding heavy capital commitment on the part of the Group at this infant stage but at the same time allowing the Group to enter the phosphorus industry on a vertical integrated basis by means of the package of the other Continuing Connected Transactions as a whole);
(ii) the rental of the Guangxi Premises and the Guangxi Machinery and Equipment under the Guangxi Leasing Agreement, which represents approximately 44% discount to the fair rental of approximately RMB4.5 million as appraised by B.I. Appraisals Limited as at 30 April 2006; and
(iii) the payment term under the Guangxi Leasing Agreement, which is not uncommon with the market practice,

we consider that the terms of the Guangxi Leasing Agreement are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution to approve the transactions contemplated under the Guangxi Leasing Agreement.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI AGENCY AGREEMENT

In arriving at our opinion regarding the terms of the Guangxi Agency Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Guangxi Agency Agreement

As set out in the Letter from the Board, the Directors consider it more commercially viable to distribute the Guangxi Agency Products through Yunphos, which comparatively has longer history of market presence in the phosphorus industry, by engaging in the Guangxi Agency Agreement given that the Group is a new comer to the phosphorus industry with only limited market reputation and distribution expertise.

We note that the Group entered into an agency agreement in 2005 with a company wholly owned by Mr. Wang to provide agency services for the sale of chemical products including red phosphorus, yellow phosphorus, phosphoric acid and related products to Italy, Japan and Korea in return for an agency fee with a view to broadening its income base. Upon enquiry, we were confirmed by the Directors that actually no phosphoric acid was ever sold by the Group as agent under that said agency agreement and the Group has no customer base for sales of phosphoric acid. Given such limited track record (which

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further confines the Group to agency experience in Italy, Japan and Korea only), the Directors confirmed to us that the Guangxi Agency Agreement serves to better sell/market the Guangxi Agency Products through Yunphos which has built up long-term relationships over the last decade with numerous international customers in the Territory (covering a wider scope including but not limited to Indonesia, Thailand, Australia and the United States) which are exclusively outside the three geographical market places as contemplated under the said agency agreement in 2005.

Notwithstanding the necessity for the Group to incur a fixed percentage of agency fee, the mode of sales of the Guangxi Agency Products by means of the Guangxi Agency Agreement serves to expose the Group directly to the international customers in the Territories (thereby embarking on building up a solid business relationship therewith) as the Group shall issue sales invoices thereto directly, and this eventually helps to gradually establish the Group’s presence in the phosphorus industry for its long-term development.

Against all the background as stated above, we consider that there is an acceptable rationale for the Group to enter into the Guangxi Agency Agreement, which is to facilitate the sales and distribution of the Guangxi Agency Products as manufactured through the Guangxi Premises to be leased by the Group.

2. Key terms of the Guangxi Agency Agreement

(i) Subject matter

Pursuant to the Guangxi Agency Agreement, Yunphos will be engaged by Huahai as an agent to provide agency services for the sale of the Guangxi Agency Products mainly in the Territory for a term commencing from the effective date of the Guangxi Agency Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent. We understand that the Guangxi Agency Agreement is inter-conditional with the Independent Shareholders’ approval of the rest of the four agreements governing the Continuing Connected Transactions.

(ii) Pricing policy

As set out in the Letter from the Board, the agency fee was determined with reference to an agency arrangement for the sale of phosphorus-related products between an associate of Yunphos (as principal) and an Independent Third Party (as agent), under which the agency fee charged is 3% of the invoiced amount of the products sold by the independent agent on behalf of an associate of Yunphos. Upon enquiry, we were confirmed by the Directors that no agency agreement has so far been signed between the Guangxi Premises or Huahai (as principal) and an Independent Third Party (as agent), because all agency mode of sale of phosphoric acid had been arranged by the Guangxi Premises (as principal) via Yunphos group (as agent) since 2002. Accordingly, for comparison purpose, the Directors resorted to making reference to two agency agreements relating to the sale of phosphorus-related products between an associate of Yunphos (as principal) and an

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Independent Third Party (as agent), which were confirmed by the Directors as the only ones effective for the year ended 31 December 2005 and were hence representative samples of Yunphos group’s sales via agency arrangement. Upon further comparison, we note that the 3% agency fee charged under the Guangxi Agency Agreement is the same as that adopted under the agency agreement in 2005 between the Group (as agent) and a company wholly owned by Mr. Wang (as principal).

(iii) Settlement policy

Pursuant to the Guangxi Agency Agreement, the agency fee for the sale of the Guangxi Agency Products shall be deducted from the invoiced amount of the relevant batch of Guangxi Agency Products and retained for the benefit of Yunphos, whilst the remaining balance of the invoiced amount shall be paid to Huahai by means of telegraphic transfer within 5 days from the date of settlement by the relevant customer.

We have reviewed two agency agreements between an associate of Yunphos (as principal) and an Independent Third Party (as agent), which were confirmed as representative samples of Yunphos group’s sales via agency arrangement (because the two were the only ones effective for the year ended 31 December 2005) according to the Directors. Upon comparison and discussion with the Directors, we note that the settlement policy under the Guangxi Agency Agreement was generally within the range of comparable agency agreements.

3. Annual cap of the agency fee

The Directors estimate that the annual cap amounts of the agency fee to be paid by Huahai under the Guangxi Agency Agreement will be US$270,000 (or approximately HK$2.1 million), US$540,000 (or approximately HK$4.2 million) and US$540,000 (or approximately HK$4.2 million) for each of the three years ending 31 December 2008 respectively.

For the purpose of assessing whether such maximum cap is justifiable, we analyse the basis of arriving at such cap amount in term of two constituting components, namely “quantity” and “price” which together will arrive at the invoiced amount of the Guangxi Agency Products to be sold by Yunphos on behalf of Huahai:

(i) Quantity

The Directors expect that the Guangxi Agency Products to be produced by the Guangxi Premises, representing approximately 40,000 tonnes of phosphoric acid per annum, will be sold by Huahai via Yunphos (and/or its subsidiaries) for each of the three years ending 31 December 2008.

As discussed with the Directors, we understand that the maximum quantity of the Guangxi Agency Products (representing 40,000 tonnes per annum) to be sold from 2006 to 2008 is based on the 50:50 apportion basis between the Guangxi Agency Products and the Guangxi Distribution Products on the maximum production capacity (representing 80,000 tonnes per annum for the year ended 31 December 2005) of phosphoric acid by the Guangxi Premises, where the 50:50 apportion

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basis is determined with reference to the actual proportion of sales (via tanker vessels under agency arrangement versus drums under distribution) of Yunphos Fangcheng in the year ended 31 December 2005. Since Yunphos will act in the capacity of both an agent and a distributor for Huahai pursuant to the Guangxi Agency Agreement and the Guangxi Distribution Agreement respectively, we are concerned as to whether Yunphos may manipulate from time to time the proportion of sales between the Guangxi Agency Products and the Guangxi Distribution Products in an attempt to earn a higher profit by leaning towards the sales mode which is more beneficial to Yunphos. However, we were advised by the Directors that the forms of delivery (via tanker vessels under agency arrangement versus drums under distribution), which in turn representing the sales mode, are driven by the end customers at their own discretion and depending on their specific demand. On such basis, we envisage that the proportion of sales between the Guangxi Agency Products and the Guangxi Distribution Products should more likely be subject to the actual demand from the end customers (rather than Yunphos).

In addition, the Directors confirmed that the actual production volume of phosphoric acid in the Guangxi Premises substantially depends on the availability of yellow phosphorus. The Directors based their estimation of the cap amount for the Guangxi Agency Agreement on a utilization rate of 100% for the Guangxi Premises (where 50% of which will be sold under agency arrangement) as they believe it would be possible to have sufficient supply of yellow phosphorus to attain full utilization of the Guangxi Premises. However, no long-term sales orders for phosphoric acid are so far secured by the Guangxi Premises for each of the three years ending 31 December 2008 according to the Directors. Notwithstanding that, we were confirmed by the Directors that the Guangxi Premises actually managed to produce and sell approximately 60,000 tonnes of phosphoric acid (of which around 30,000 tonnes or 50% were sold under agency arrangement) for the year ended 31 December 2005, already representing 75% of the estimated total of 80,000 tonnes per annum for the three years ending 31 December 2008. As advised by the Directors, as a result of the expectation of increasing market demand for phosphoric acid in the upcoming years given the latest government policies (in terms of export tariff and export tax refund) have become comparatively more favourable to phosphoric acid, the production capacity of phosphoric acid in the Guangxi Premises has been increased from approximately 50,000 tonnes to approximately 80,000 tonnes since October 2005 and the sales volume of phosphoric acid has subsequently increased from the quarterly average of approximately 11,000 tonnes of phosphoric acid for the three quarters ended 30 September 2005 to approximately 22,100 tonnes for the fourth quarter ended 31 December 2005. As a latest indication, the Directors further advised that the sales volume of phosphoric acid for the first quarter of 2006 reached approximately 17,400 tonnes, which (after aggregating with the actual sales volume of approximately 22,100 tonnes for the fourth quarter ended 31 December 2005) amounted to around 79,000 tonnes on an annualized basis (being (17,400+22,100)/6x12), reflecting the scenario after increase in production capacity since October 2005. On the above basis, we consider that the Directors have based on latest market development, latest sales data and latest production capacity to estimate the cap amount for the Guangxi Agency Agreement of 40,000 tonnes of phosphoric acid per annum.

On the above basis, we consider that there is a pre-determined basis in arriving at the quantity of the Guangxi Agency Products to be sold by Huahai via Yunphos from 2006 to 2008 for the purpose of determining the annual cap.

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(ii) Price

As set out in the Letter from the Board and as further advised by the Directors, the price of the Guangxi Agency Products to be sold by Huahai via Yunphos for the purpose of arriving at the cap from 2006 to 2008 is summarised below:

Guangxi

Agency Products Selling price phosphoric acid US$450, as determined mainly with reference to the selling price (per tonne) of phosphoric acid in tanks sold through an independent agent on behalf of an associate of Yunphos to the customers (prevailing around the date of the Guangxi Agency Agreement)

On the above basis, we consider that there is a pre-determined basis (i.e. determined in advance for the period to be covered under the Continuing Connected Transactions with reference to data prevailing around the date of the Guangxi Agency Agreement) in arriving at the price of the Guangxi Agency Products to be sold by Huahai via Yunphos from 2006 to 2008 for the purpose of determining the annual cap.

(iii) Maximum cap

Having regard to

(i) the pre-determined basis of determining the maximum quantity of the Guangxi Agency Products to be sold by Huahai via Yunphos with reference to the production capacity of the Guangxi Premises for the year ended 31 December 2005 relating to the production of the Guangxi Agency Products;
(ii) the pre-determined basis in arriving at the price of the Guangxi Agency Products to be sold by Huahai via Yunphos from 2006 to 2008;
(iii) the pre-determined basis in arriving at the agency fee of 3% to be charged by Yunphos which was determined with reference to two agency agreements for the sale of phosphorus-related products between an associate of Yunphos (as principal) and an Independent Third Party (as agent); and
(iv) the fact that the sales under the Guangxi Agency Agreement are subject to certain conditions as set out in the following paragraph headed “The conditions” which is regarded as a mechanism to protect the interest of the Independent Shareholders,

we consider that the maximum cap for each of the three financial years ending 31 December 2008 respectively is acceptable for the purpose of accommodating the sales of the Guangxi Agency Products under the Guangxi Agency Agreement.

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(iv) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the Guangxi Agency Agreement (including the annual cap) for the three financial years ending 31 December 2008 subject to the following conditions:

The transactions contemplated under the Guangxi Agency Agreement will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from independent third parties; and
(c) entered into in accordance with the terms of the Guangxi Agency Agreement that are fair and reasonable and in the interests of the Shareholders as a whole;
The aggregate amount of the sales under the Guangxi Agency Agreement for each of the three years ending 31 December 2008 shall not exceed US$270,000 (or approximately HK$2.1 million), US$540,000 (or approximately HK$4.2 million) and US$540,000 (or approximately HK$4.2 million); and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the Guangxi Agency Agreement, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions contemplated under the Guangxi Agency Agreement pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the Guangxi Agency Agreement, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the Guangxi Agency Agreement are, by virtue of the requirements under Rule 14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

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RECOMMENDATION FOR THE GUANGXI AGENCY AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Guangxi Agency Agreement;
(ii) the agency fee of 3% to be charged by Yunphos was determined with reference to two agency agreements for the sale of phosphorus-related products between an associate of Yunphos (as principal) and an Independent Third Party (as agent);
(iii) the basis of setting the annual cap as a function of (a) the pre-determined maximum quantity, (b) the pre-determined price level, and (c) the pre-determined agency fee rate of the Guangxi Agency Products to be sold from 2006 to 2008; and
(iv) the conditions attached to carrying out the transactions contemplated under the Guangxi Agency Agreement as a mechanism to protect the interest of the Independent Shareholders,

we consider that the terms of the Guangxi Agency Agreement (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution to approve the transactions contemplated under the Guangxi Agency Agreement.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI RAW MATERIALS PURCHASE AGREEMENT

In arriving at our opinion regarding the terms of the Guangxi Raw Materials Purchase Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Guangxi Raw Materials Purchase Agreement

As the Company intends to further develop and expand its business in the phosphorus industry, the Continuing Connected Transactions can create a platform for the Company to gain further experience in operating and managing phosphorus business in addition to the trading experience gained from its existing agency business. As a conservative measure, the Company aimed to secure reliable and stable supply of yellow phosphorous from Yunphos (and/or its subsidiaries) for the production of phosphoric acid by engaging in the Guangxi Raw Materials Purchase Agreement.

As part of our due diligence exercise, we discussed with the Directors and were advised that Yunphos group was founded in 1991 and is one of the largest suppliers and exporters of yellow phosphorous in the PRC. The Directors attributed the competitive advantages of Yunphos group to (i) the abundant supply of natural resources (e.g. phosphorus ore) in Yunnan Province; (ii) decade of reputable market presence with long and well established relationship with overseas customers; and (iii) its private-owned nature thereby offering more flexible and intensive customer-oriented services than the state-owned competitors.

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As yellow phosphorous is the essential raw material for the downstream production for the production of phosphoric acid, it is considered that the entering into the Guangxi Raw Materials Purchase Agreement may serve to provide cost benefits, secure stable raw material supplies, and optimise the supply chain logistics for the production of phosphoric acid by the Guangxi Premises which shall be leased by Group. Upon further enquiry, we were advised by the Directors that although yellow phosphorous is available to Huahai from third parties other than Yunphos, there are advantages to Huahai for procuring yellow phosphorous from Yunphos in terms of enjoying:

(a) a cost level not more than the market price level available from other independent suppliers; and
(b) a relatively stable source of supply of bulky quantity as may be demanded by Huahai from time to time, given the mechanism of obligating Yunphos to preferentially supply yellow phosphorous to Huahai before such raw materials are supplied to other customers.

Against all the background as stated above, we consider that there is an acceptable rationale for the Group to enter into the Guangxi Raw Materials Purchase Agreement, which is to facilitate the operation of the Guangxi Premises.

2. Key terms of the Guangxi Raw Materials Purchase Agreement

(i) Subject matter

Pursuant to the Guangxi Raw Materials Purchase Agreement, Huahai will purchase yellow phosphorus from Yunphos (and/or its subsidiaries) for the production of phosphoric acid by the Guangxi Premises for a term commencing from the effective date of the Guangxi Raw Materials Purchase Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent. We understand that the Guangxi Raw Materials Purchase Agreement is inter-conditional with the Independent Shareholders’ approval of the rest of the four agreements governing the Continuing Connected Transactions.

The quantity and specification of yellow phosphorus to be supplied by Yunphos (and/or its subsidiaries) to Huahai will be subject to the requirements under each individual order placed by Huahai to Yunphos from time to time. Upon enquiry for a full list of specification of the relevant yellow phosphorus, we were confirmed by the Directors that there is only one type of yellow phosphorus for procurement under the Guangxi Raw Materials Purchase Agreement.

(ii) Preferential supply

We note that the Guangxi Raw Materials Purchase Agreement provides that Yunphos (and/or its subsidiaries) will preferentially supply the raw materials to Huahai before such raw materials are supplied to other customers. We consider such mechanism serves to better secure reliable and stable supply of yellow phosphorous from Yunphos (and/or its subsidiaries) for the production of phosphoric acid by the Guangxi Premises.

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(iii) Pricing policy

As far as the pricing policy of the Guangxi Raw Materials Purchase Agreement is concerned, we note that the price payable by Huahai to Yunphos (and/or its subsidiaries) will not be higher than the price payable by Huahai for the same products to Independent Third Parties.

To this end and in practice, we were confirmed by the Directors that daily price quotations will be sought by Huahai as appropriate from three independent suppliers (which are amongst the top market participants in the PRC phosphorus industry) on the relevant date of procurement; and (ii) upon comparison, the lowest price quotation among the three independent suppliers will be chosen as the price payable by Huahai to Yunphos (and/or its subsidiaries) under the Guangxi Raw Materials Purchase Agreement. We consider this approach to be in line with market practice of sorting out “a price level not higher than the price available payable for the same products to Independent Third Parties” on the basis that the three independent suppliers represent Independent Third Parties.

(iv) Settlement policy

Pursuant to the Guangxi Raw Materials Purchase Agreement, the invoiced amount payable by Huahai to Yunphos (and/or its subsidiaries) shall be settled within 30 days upon receipt of the relevant raw materials.

Upon enquiry, we were confirmed by the Directors that no purchase orders for yellow phosphorus were issued by the Guangxi Premises (as purchaser) to Independent Third Parties (as suppliers) in recent years because yellow phosphorus had been procured by the Guangxi Premises from Yunphos (and/or its subsidiaries). Instead, we have reviewed certain two purchase orders/ agreements issued by the Guangxi Premises to Independent Third Parties from 1 November 2005 to 30 April 2006. We note that the requirement under the Guangxi Raw Materials Purchase Agreement was within the range of settlement methods under the comparable purchase orders/ agreements.

3. Annual cap of the raw materials to be purchased

The Company estimates that the annual aggregate amount of the raw materials to be purchased by Huahai from Yunphos (and/or its subsidiaries) will not exceed the annual cap amounts of RMB120 million (equivalent to approximately HK$115.4 million), RMB240 million (equivalent to approximately HK$230.8 million) and RMB240 million (equivalent to approximately HK$230.8 million) for each of the three financial years ending 31 December 2008 respectively.

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(i) Quantity

As confirmed by the Directors, the maximum quantity of raw materials to be purchased by Huahai from Yunphos for the purpose of arriving at the cap from 2006 to 2008 is summarised below:

Raw materials

Maximum quantity

yellow phosphorus 22,000 tonnes/year

As discussed with the Directors, we understand that the maximum quantity of raw materials to be purchased from 2006 to 2008 was determined mainly based on (i) the production capacity of phosphoric acid by the Guangxi Premises of approximately 80,000 tonnes for the year ended 31 December 2005 on the assumption that the utilization rate of the Guangxi Premises reaches 100% and (ii) the quantity of yellow phosphorus required to produce one tonne of phosphoric acid.

As confirmed by the Directors, as to approximately 0.273 tonne of yellow phosphorus is required to produce one tonne of phosphoric acid. Given the actual production volume of the phosphoric acid in the Guangxi Premises for the year ended 31 December 2005 was approximately 60,000 tonnes (with an utilization rate of approximately 75%), as to approximately 16,400 tonne of yellow phosphorus was required for the year ended 31 December 2005, which also represented around 75% of the maximum quantity of raw materials of around 22,000 tonnes per annum as estimated to be purchased by Huahai from Yunphos from 2006 to 2008.

On the above basis, we consider that there is a pre-determined basis in arriving at the quantity of raw materials to be purchased by Huahai from Yunphos from 2006 to 2008 for the purpose of determining the annual cap.

(ii) Price

As set out in the Letter from the Board and as further advised by the Directors, the price of raw materials to be purchased by Huahai from Yunphos for the purpose of arriving at the cap from 2006 to 2008 is summarised below:

Raw materials Purchase price

yellow phosphorus RMB11,000, being not more than the market price prevailing around the date of the Guangxi Raw Materials Purchase Agreement, which in turn was determined mainly with reference to (i) the median of quarterly price quotations of three independent suppliers or (ii) quarterly price quotation of China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters.

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On the above basis, we consider that there is a pre-determined basis (i.e. determined in advance for the period to be covered under the Continuing Connected Transactions with reference to data prevailing around the date of the Guangxi Raw Materials Purchase Agreement) in arriving at the price of raw materials to be purchased by Huahai from Yunphos from 2006 to 2008 for the purpose of determining the annual cap.

(iii) Maximum cap

Having regard to

(i) the pre-determined basis of determining the maximum quantity of raw materials to be purchased by Huahai from Yunphos with reference to (i) the production capacity of phosphoric acid by the Guangxi Premises and (ii) the quantity of yellow phosphorus required to produce one tonne of phosphoric acid;
(ii) the pre-determined basis in arriving at the price of raw materials to be purchased by Huahai from Yunphos from 2006 to 2008; and
(iii) the fact that the purchases under the Guangxi Raw Materials Purchase Agreement are subject to certain conditions as set out in the following paragraph headed “The conditions” which is regarded as a mechanism to protect the interest of the Independent Shareholders,

we consider that the maximum cap for each of the three financial years ending 31 December 2008 respectively is acceptable for the purpose of accommodating the purchases under Guangxi Raw Materials Purchase Agreement.

(iv) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the Guangxi Raw Materials Purchase Agreement (including the annual cap) for the three financial years ending 31 December 2008 subject to the following conditions:

The transactions contemplated under the Guangxi Raw Materials Purchase Agreement will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from independent third parties; and
(c) entered into in accordance with the terms of the Guangxi Raw Materials Purchase Agreement that are fair and reasonable and in the interests of the Shareholders as a whole;
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The aggregate amount of the purchase under the Guangxi Raw Materials Purchase Agreement for each of the three years ending 31 December 2008 shall not exceed RMB120 million (equivalent to approximately HK$115.4 million), RMB240 million (equivalent to approximately HK$230.8 million) and RMB240 million (equivalent to approximately HK$230.8 million); and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the Guangxi Raw Materials Purchase Agreement, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions contemplated under the Guangxi Raw Materials Purchase Agreement pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the Guangxi Raw Materials Purchase Agreement, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the Guangxi Raw Materials Purchase Agreement are, by virtue of the requirements under Rule 14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

RECOMMENDATION FOR THE GUANGXI RAW MATERIALS PURCHASE AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Guangxi Raw Materials Purchase Agreement;
(ii) the price of raw materials to be procured under the Guangxi Raw Materials Purchase Agreement will not be higher than the price payable by Huahai for the same products to Independent Third Parties;
(iii) the basis of setting the annual cap as a function of the pre-determined maximum quantity and the pre-determined price level of raw materials to be purchased from 2006 to 2008; and
(iv) the conditions attached to carrying out the transactions contemplated under the Guangxi Raw Materials Purchase Agreement as a mechanism to protect the interest of the Independent Shareholders,

we consider that the terms of the Guangxi Raw Materials Purchase Agreement (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution to approve the transactions contemplated under the Guangxi Raw Materials Purchase Agreement.

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PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI DISTRIBUTION AGREEMENT

In arriving at our opinion regarding the terms of the Guangxi Distribution Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Guangxi Distribution Agreement

As set out in the Letter from the Board, the Directors consider it more commercially viable to distribute the Guangxi Distribution Products through Yunphos, which comparatively has longer history of market presence in the phosphorus industry, by engaging in the Guangxi Distribution Agreement given that the Group is a new comer to the phosphorus industry with only limited market reputation and distribution expertise.

Upon enquiry, we were confirmed by the Directors that actually the Group has no customer base for sales of phosphoric acid. By contrast, Yunphos has built up long-term relationships over the last decade with numerous international customers in Europe, America, Australia, Japan and South East Asia. On such basis, the Directors confirmed to us that the Guangxi Distribution Agreement facilitates the distribution of the Guangxi Products through Yunphos which is in essence willing to take all the risks and rewards in the capacity as the ultimate customer of the Group under the Guangxi Distribution Agreement.

Against all the background as stated above, we consider that there is an acceptable rationale for the Group to enter into the Guangxi Distribution Agreement, which is to facilitate the sales and distribution of the Guangxi Distribution Products as manufactured through the Guangxi Premises to be leased by the Group.

2. Key terms of the Guangxi Distribution Agreement

(i) Subject matter

Pursuant to the Guangxi Distribution Agreement, Yunphos (and/or its subsidiaries) will purchase the Guangxi Distribution Products from Huahai for onward distribution to its customers for a term commencing from the effective date of the Guangxi Distribution Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent. We understand that the Guangxi Distribution Agreement is inter-conditional with the Independent Shareholders’ approval of the rest of the four agreements governing the Continuing Connected Transactions.

(ii) Pricing policy

Pursuant to the Guangxi Distribution Agreement, the price of the Guangxi Distribution Products to be sold by Huahai to Yunphos (and/or its subsidiaries) will not be lower than the price available to any Independent Third Parties for the same products offered by Huahai.

To this end and in practice, we were confirmed by the Directors that (i) daily price quotations will be sought by Huahai as appropriate from three independent competitors (which are amongst the top market participants in the PRC phosphorus industry) on the relevant date of concluding the

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sales; and (ii) upon comparison, the highest price quotation among the three independent competitors will be chosen as the price of the Guangxi Distribution Products to be sold by Huahai to Yunphos (and/or its subsidiaries). We consider this approach to be in line with market practice of sorting out “a price level not lower than the price available to any Independent Third Parties for the same products offered by Huahai” on the basis that the three independent competitors represent Independent Third Parties.

(iii) Settlement policy

Pursuant to the Guangxi Distribution Agreement, the invoiced amount of the Guangxi Distribution Products to be sold to Yunphos (and/or its subsidiaries) shall be settled by means of telegraphic transfer within 30 days from the date of bill of lading.

Upon enquiry, we were confirmed by the Directors that for the year ended 31 December 2005, no distribution arrangement had been signed between the Guangxi Premises or Huahai (as principal) and an Independent Third Party (as distributor), because all distribution mode of sale of phosphoric acid had been arranged by the Guangxi Premises (as principal) to Yunphos group (as distributor). Accordingly, for comparison purpose, we have resorted to review the six distribution agreements between an associate of Yunphos (as principal) and an Independent Third Party (as distributor) for the distribution of products similar to the Guangxi Distribution Products dated November 2005 to March 2006. However, as confirmed by the Directors, all distribution agreements for sale of phosphoric acid (including the said comparables) signed between an associate of Yunphos (as principal) and an Independent Third Party (as distributor) were for sale to overseas distributors (rather than for sale to domestic distributor as in the case of the Guangxi Distribution Agreement). Upon comparison and as discussed with the Directors, we note that the settlement method specified under the Guangxi Distribution Agreement is not directly comparable with the comparable distribution agreements.

3. Annual cap of the sale of the Guangxi Distribution Products

The Directors estimate that the annual cap amounts of the sale of the Guangxi Distribution Products to Yunphos (and/or its subsidiaries) under the Guangxi Distribution Agreement will be RMB90 million (equivalent to approximately HK$86.5 million), RMB180 million (equivalent to approximately HK$173.1 million) and RMB180 million (equivalent to approximately HK$173.1 million) for each of the three years ending 31 December 2008 respectively.

(i) Quantity

The Directors expect that the Guangxi Distribution Products to be produced by the Guangxi Premises, representing approximately 40,000 tonnes of phosphoric acid per annum, will be sold by Huahai to Yunphos (and/or its subsidiaries) for each of the three years ending 31 December 2008.

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As discussed with the Directors, we understand that the maximum quantity of the Guangxi Distribution Products (representing 40,000 tonnes per annum) to be sold from 2006 to 2008 is based on the 50:50 apportion basis between the Guangxi Agency Products and the Guangxi Distribution Products on the maximum production capacity (representing 80,000 tonnes per annum for the year ended 31 December 2005) of phosphoric acid by the Guangxi Premises, where the 50:50 apportion basis is determined with reference to the actual proportion of sales (via tanker vessels under agency arrangement versus drums under distribution) of Yunphos Fangcheng in the year ended 31 December 2005. Since Yunphos will act in the capacity of both an agent and a distributor for Huahai pursuant to the Guangxi Agency Agreement and the Guangxi Distribution Agreement, we are concerned as to whether Yunphos may manipulate from time to time the proportion of sales between the Guangxi Agency Products and the Guangxi Distribution Products in an attempt to earn a higher profit by leaning towards the sales mode which is more beneficial to Yunphos. However, we were advised by the Directors that the forms of delivery (via tanker vessels under agency arrangement versus drums under distribution), which in turn representing the sales mode, are driven by the end customers at their own discretion and depending on their specific demand. On such basis, we envisage that the proportion of sales between the Guangxi Agency Products and the Guangxi Distribution Products should more likely be subject to the actual demand from the end customers (rather than Yunphos).

In addition, the Directors confirmed that the actual production volume of phosphoric acid in the Guangxi Premises substantially depends on the availability of yellow phosphorus. The Directors based their estimation of the cap amount for the Guangxi Distribution Agreement on a utilization rate of 100% for the Guangxi Premises (where 50% of which will be sold under distribution) as they believe it would be possible to have sufficient supply of yellow phosphorus to attain full utilization of the Guangxi Premises. However, no long-term sales orders for phosphoric acid are so far secured by the Guangxi Premises for each of the three years ending 31 December 2008 according to the Directors. Notwithstanding that, we were confirmed by the Directors that the Guangxi Premises actually managed to produce and sell approximately 60,000 tonnes of phosphoric acid (of which around 30,000 tonnes or 50% were sold under distribution) for the year ended 31 December 2005, already representing 75% of the estimated total of 80,000 tonnes per annum for the three years ending 31 December 2008. As advised by the Directors, as a result of the expectation of increasing market demand for phosphoric acid in the upcoming years given the latest government policies (in terms of export tariff and export tax refund) have become comparatively more favourable to phosphoric acid, the production capacity of phosphoric acid in the Guangxi Premises has been increased from approximately 50,000 tonnes to approximately 80,000 tonnes since October 2005 and the sales volume of phosphoric acid has subsequently increased from the quarterly average of approximately 11,000 tonnes of phosphoric acid for the three quarters ended 30 September 2005 to approximately 22,100 tonnes for the fourth quarter ended 31 December 2005. As a latest indication, the Directors further advised that the sales volume of phosphoric acid for the first quarter of 2006 reached approximately 17,400 tonnes, which (after aggregating with the actual sales volume of approximately 22,100 tonnes for the fourth quarter ended 31 December 2005) amounted to around 79,000 tonnes on an annualized basis (being (17,400+22,100)/6x12), reflecting the scenario after increase in production capacity since October 2005. On the above basis, we consider that the Directors have based on latest market development, latest sales data and latest production historical capacity to estimate the cap amount for the Guangxi Distribution Agreement of 40,000 tonnes of phosphoric acid per annum.

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LETTER FROM PARTNERS CAPITAL

On the above basis, we consider that there is a pre-determined basis in arriving at the quantity of the Guangxi Distribution Products to be sold by Huahai to Yunphos from 2006 to 2008 for the purpose of determining the annual cap.

(ii) Price

As set out in the Letter from the Board and as further advised by the Directors, the price of the Guangxi Distribution Products for the purpose of arriving at the cap from 2006 to 2008 is summarised below:

Guangxi Distribution Products Selling price

phosphoric acid

US$560, as determined mainly with reference to the recent selling price (per tonne) of phosphoric acid packed in drums sold by an associate of Yunphos to an Independent Third Party (prevailing around the date of the Guangxi Distribution Agreement)

On the above basis, we consider that there is a pre-determined basis (i.e. determined in advance for the period to be covered under the Continuing Connected Transactions with reference to data prevailing around the date of the Guangxi Distribution Agreement) in arriving at the price of the Guangxi Distribution Products to be sold by Huahai to Yunphos from 2006 to 2008 for the purpose of determining the annual cap.

(iii) Maximum cap

Having regard to

(iv) the pre-determined basis of determining the maximum quantity of the Guangxi Distribution Products to be sold by Huahai to Yunphos with reference to the production capacity of the Guangxi Premises for the year ended 31 December 2005 relating to the production of the Guangxi Distribution Products on the assumption that the utilization rate of the Guangxi Premises reaches 100%;
(v) the pre-determined basis in arriving at the price of the Guangxi Distribution Products to be sold by Huahai to Yunphos from 2006 to 2008; and
(vi) the fact that the sales under the Guangxi Distribution Agreement are subject to certain conditions as set out in the following paragraph headed “The conditions” which is regarded as a mechanism to protect the interest of the Independent Shareholders,

we consider that the maximum cap for each of the three financial years ending 31 December 2008 respectively is acceptable for the purpose of accommodating the sales of the Guangxi Distribution Products under the Guangxi Distribution Agreement.

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LETTER FROM PARTNERS CAPITAL

(iv) The conditions

Pursuant to the Listing Rules, the Company will seek the approval by the Independent Shareholders of the Guangxi Distribution Agreement (including the annual cap) for the three financial years ending 31 December 2008 subject to the following conditions:

The transactions contemplated under the Guangxi Distribution Agreement will be:
(a) entered into in the ordinary and usual course of the business of the Group;
(b) conducted on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available from independent third parties; and
(c) entered into in accordance with the terms of the Guangxi Distribution Agreement that are fair and reasonable and in the interests of the Shareholders as a whole;
The aggregate amount of the sales under the Guangxi Distribution Agreement for each of the three years ending 31 December 2008 shall not exceed RMB90 million (equivalent to approximately HK$86.5 million), RMB180 million (equivalent to approximately HK$173.1 million) and RMB180 million (equivalent to approximately HK$173.1 million); and
The Company will comply with all other relevant requirements under the Listing Rules.

Taking into account of the conditions attached to the transactions contemplated under the Guangxi Distribution Agreement, in particular (i) the restriction by way of setting the annual cap; and (ii) the compliance with all other relevant requirements under the Listing Rules (which include the annual review and/or confirmation by the independent non-executive Directors and auditors of the Company on the actual execution of the transactions contemplated under the Guangxi Distribution Agreement pursuant to Rule 14A.37 and 14A.38 of the Listing Rules), we consider that the Company has taken appropriate measures to govern the Company in carrying out the transactions contemplated under the Guangxi Distribution Agreement, thereby safeguarding the interests of the Shareholders thereunder. In particular, we note that the transactions contemplated under the Guangxi Distribution Agreement are, by virtue of the requirements under Rule 14A.37 of the Listing Rules, conditional upon being carried out by the Company in the ordinary and usual course of its business, on normal commercial terms, fair and reasonable and in the interests of the Shareholders as a whole.

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RECOMMENDATION FOR THE GUANGXI DISTRIBUTION AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Guangxi Distribution Agreement;
(ii) the price of the Guangxi Distribution Products to be sold under the Guangxi Distribution Agreement will not be lower than the price available to any Independent Third Parties for the same products offered by Huahai;
(iii) the basis of setting the annual cap as a function of the pre-determined maximum quantity and the pre-determined price level of the Guangxi Distribution Products to be sold from 2006 to 2008; and
(iv) the conditions attached to carrying out the transactions contemplated under the Guangxi Distribution Agreement as a mechanism to protect the interest of the Independent Shareholders,

we consider that the terms of the Guangxi Distribution Agreement (including the annual cap) are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution to approve the transactions contemplated under the Guangxi Distribution Agreement.

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE YUNNAN LEASING AGREEMENT

In arriving at our opinion regarding the terms of the Yunnan Leasing Agreement, we have considered the following principal factors and reasons:

1. Background of and reasons for entering into the Yunnan Leasing Agreement

As mentioned in the Letter from the Board, the Company intends to further develop and expand its business in the phosphorus industry through entering into the Continuing Connected Transactions which create a platform for the Company to gain further experience in operating and managing phosphorus business in addition to the trading experience gained from its existing agency business. By engaging in the lease of the Yunnan Premises (together with the Yunnan Machinery and Equipment therein), being

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one of the Continuing Connected Transactions contemplated for the purpose of attaining vertical integration of the Group’s phosphorus business, the Group could secure a long-term and stable supply of its own yellow phosphorus (together with self-generated electricity).

As part of our due diligence exercise, we have paid a visit to the Yunnan Premises and have interviewed with their management as to the actual work flows of each of their yellow phosphorus production plant and power production plant. During our visit, we were advised that the Yunnan Premises were under operation by Yunphos group since 2004 and is (together with other members of Yunphos group) one of the largest suppliers and exporters of yellow phosphorus in the PRC. According to the website of China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters, Yunphos group ranked the second in the PRC in terms of yellow phosphorus production in 2005. The Directors attributed the competitive advantages of the operation under the Yunnan Premises to (i) the abundant supply of natural resources (e.g. phosphorus ore) in Yunnan Province (together with a self-owned electricity power plant); (ii) reputable market presence with well established relationship with overseas customers; and (iii) their private-owned nature thereby offering more flexible and intensive customer-oriented services than the state-owned competitors.

Based on our discussion with the Company, we noted that yellow phosphorus is the essential raw material for the downstream production of phosphoric acid in the Guangxi Premises. We further noted that each of (i) Yunphos (and/or its subsidiaries) under the Guangxi Raw Materials Purchase Agreement and (ii) the Yunnan Premises under the Yunnan Leasing Agreement are capable of independently supplying around 22,000 tonnes of yellow phosphorus per annum, which is necessary for the production of an estimated total of 80,000 tonnes of phosphoric acid per annum in the Guangxi Premises for the each of the three years ending 31 December 2008. The Directors advised us that the Guangxi Premises intend to source yellow phosphorus at the sole discretion of the Group from (i) Yunphos (and/or its subsidiaries); (ii) the Yunnan Premises and/or (iii) Independent Third Parties, depending on the actual price level and the availability at the time of order. With a view to optimising the Group’s interests as a whole, we understand from the Directors that the Yunnan Premises are prepared to supply their yellow phosphorus preferentially to the Guangxi Premises (if so requested and subject to market price level) as raw material for the onward production of phosphoric acid before any surplus yellow phosphorus as manufactured by the Yunnan Premises would be supplied to other customers (which are intended to be non-overlapping with the customers of Yunphos (and/or its subsidiaries)).

By way of entering into the Yunnan Leasing Agreement, the Directors consider that it is beneficial to the Company in the long run as the Group can gain experience and expertise in the production of yellow phosphorus through the direct operation and management of the Yunnan Premises and thereby eventually reduce its reliance from Yunphos, the connected person, on the supply of yellow phosphorus as raw material for the onward production of phosphoric acid.

Under the production process of yellow phosphorus, electricity is crucial to extraction of yellow phosphorus from the phosphorus ore. In the Yunnan Premises, cost of electricity in general accounts for approximately 60% of the total production cost for each tonne of yellow phosphorus produced. According to the official policy stated in the 《產業結構調整指導目錄》, production factories of yellow phosphorus with annual production capacity below 10,000 KVA has to pay an extra of RMB0.05 per unit of electricity consumed while those with annual production capacity between 10,000 KVA and 20,000 KVA has to pay an extra of RMB0.02 per unit of electricity consumed, starting from April 2006. As the Yunnan Premises

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include their own power production plant, the yellow phosphorus production plant under the Yunnan Premises is comparatively less vulnerable to the prevailing risk of price increase in electricity as imposed by regulatory bodies.

Against all the background as stated above, we consider that there is an acceptable rationale for the Group to tap into the manufacture of yellow phosphorus by entering into the Yunnan Leasing Agreement, which is to facilitate the onward production of phosphoric acid by the Guangxi Premises. The Yunnan Leasing Agreement enables the Group to enter into the phosphorus industry on a vertical integrated basis through the mode of operating lease of assets for production of yellow phosphorus as the upstream raw material for a downstream product, with the simultaneous benefit of diversifying the product range of the Group and yet without incurring heavy capital commitment (as compared to the investment or acquisition of yellow phosphorus production factory) at this infant stage.

However, we note that the profitability of the phosphorus business of the Group would depend on two key factors, namely the market price levels of phosphoric acid (as finished product of the Guangxi Premises) and yellow phosphorus (as raw material of the Guangxi Premises but at the same time as finished product of the Yunnan Premises) respectively, which were volatile and are beyond the control of the Group. In any event, the Directors advised to us that the Group may in view of the changing differentials in the market price levels of phosphoric acid and yellow phosphorus swiftly adjust the product mix by way of, say, temporarily reducing the sale of yellow phosphorus to Independent Third Parties when its prevailing market price is unfavorable and focusing more on the sale of phosphoric acid to customers through the production under the Guangxi Premises. On such basis, we envisage that the Group as a lessee of two distinct factory premises in the Guangxi Premises and the Yunnan Premises respectively may enjoy the flexibility of selling different mix of phosphoric acid and yellow phosphorus for the purpose of optimising the overall interests of the Group by means of the package of the other Continuing Connected Transactions.

2. Key terms of the Yunnan Leasing Agreement

(i) Subject matter

Pursuant to the Yunnan Leasing Agreement, Huahai will lease from Yunphos Xundian the Yunnan Premises located at Jin Suo Xiang Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province, the PRC with a gross floor area of approximately 51,793.22 sq. m., together with the Yunnan Machinery and Equipment therein for the Group’s operation in the manufacture of yellow phosphorus for a term commencing from the effective date of the Yunnan Leasing Agreement up to 31 December 2008, subject to the satisfaction of all conditions precedent including the settlement of the first installment of the annual rental within six months from the date of obtaining the Independent Shareholders’ approval of the Continuing Connected Transactions. We understand that the Yunnan Leasing Agreement is interconditional with the Independent Shareholders’ approval of the rest of the four agreements governing the Continuing Connected Transactions.

As mentioned in the Letter from the Board, the Yunnan Premises comprise mainly two factory premises including one phosphorus production plant and one power production plant. The current production capacity of yellow phosphorus in the Yunnan Premises is 22,000 tonnes per

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annum with an utilization rate of nearly 100%. As advised by the Directors, the Group intends to run the operation in Yunnan Premises in full capacity under the lease period and to staff the Yunnan Premises with its existing management and technicians by renewing their labour contract. Upon our review of the annual report of the Company for the year ended 31 December 2005, we note that two executive directors of the Company, namely Mr. Wang and Mr. Zhao Jun, are also the key management of Yunphos group (or its predecessor) since 1993 and hence have the expertise and experience in the phosphorus industry. The power production plant will generate and supply electricity to the phosphorus production plant for the manufacture of yellow phosphorus. The power production plant is capable of providing approximately 50,000 kW per hour of electricity per annum, which according to the Directors, is able to supply most of the total electricity required for operating the phosphorus production plant at the existing full capacity of 22,000 tonnes per annum.

(ii) Rental

The Yunnan Premises and the Yunnan Machinery and Equipment would be leased for use by Huahai or members of the Group at an annual aggregate rental of RMB20 million (equivalent to approximately HK$19.2 million).

The Board confirmed that the rental payable by the Company under the Yunnan Leasing Agreement was determined after arm’s length negotiation with reference to the rental consultation opinion on the Yunnan Premises and the Yunnan Machinery and Equipment given by an independent valuation firm, B.I. Appraisals Limited, which has reviewed the terms of the Yunnan Lease Agreement, and confirmed that the above-mentioned annual rental for the Yunnan Premises and Yunnan Machinery and Equipment is not higher than (but instead representing approximately 61% discount to) the fair rental of approximately RMB51.5 million as appraised by B.I. Appraisals Limited as at 30 April 2006 for the lease of the Yunnan Premises and the Yunnan Machinery and Equipment.

According to the “Valuation Report” as set out in Appendix I to the Circular, we note that B.I. Appraisals Limited has arrived at the market value of the Yunnan Premises and the Yunnan Machinery and Equipment by way of adopting the Depreciated Replacement Cost Approach (“DRC Approach”). We have interviewed B.I. Appraisals Limited on this valuation methodology and further understand that both the market comparable approach and the income capitalization approach

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were excluded for the purpose of valuing the Yunnan Premises and the Yunnan Machinery and Equipment. Details of the valuation methodologies considered by B.I. Appraisals Limited in valuing the Yunnan Premises and the Yunnan Machinery and Equipment are summarised as follows:

DRC Approach

Market Income comparable capitalization approach approach

Yunnan	•	Considered the cost to reproduce	•	Excluded due to	•	Excluded due to
Premises		or replace in new condition the		absence of readily		the market value
		buildings and structures being		identifiable		to be accessed
		valued in accordance with current		comparable sale		will in turn be
		construction costs for similar		transactions		used as a factor to
		property in the locality, with				value the market
		allowance for accrued depreciation				rent, where such
		as evidence by observed condition				market rent in
		or obsolescence present, whether				fact is a factor to
		arising from physical, functional or				access the market
		economics causes				value under the
						income
						capitalization
						approach
Yunnan	•	For the assets of standard	•	Excluded due to	•	Excluded due to
Machinery		manufacture, used current		absence of		absence of
and		manufacturers’ price lists, price		identified active		identifiable
Equipment		quotations and price catalogs to		used-equipment		income stream
		determine the cost of replacement.		market in the		can be attributed
		Allowances for freight and		PRC that provides		to a specific piece
		installation were sometimes		information on		of equipment or a
		required.		recent		group of
				transactions of		equipment
	•	For the assets of special design or		comparable items
		fabrication, used current market
		price for labor, current market
		price for materials, manufactured
		components, design fees,
		engineering fees and contractors’
		overhead, profit and fee to
		determine the cost of replacement
		new. Allowances for freight and
		installation were sometimes
		required.

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DRC Approach

Market Income comparable capitalization approach approach

Adopted the assets index factor to estimate the cost of reproduction new of special design or fabrication machinery and equipment. An index factor is applied to the historical cost of appraised equipment in order to estimate the current cost of the assets being appraised.
The deductions for physical deterioration, functional obsolescence, and economic obsolescence have reflected observed condition; past maintenance and rebuilding history, if any; current use; and planned future utilization.

In addition, we note the market rent of the Yunnan Premises and the Yunnan Machinery and Equipment are arrived at by way of adopting the investment approach by applying an appropriate yield to the market value arrived at through the valuation approach as stated above. As discussed with B.I. Appraisals Limited, due to the nature of the subject assets which are tangible and are specially designed for the production of yellow phosphorus, there are no readily identifiable comparable leasing transactions; and accordingly the market rent of the subject assets cannot be valued by comparison with open market transactions. Hence, the investment approach is considered the appropriate approach for valuing market rent based on the market value of subject assets in the absence of a known market based on comparable leasing.

Based on the opinion of B.I. Appraisals Limited as stated in their Valuation Report, we are of the view that the annual aggregate rental of RMB20 million, representing approximately 61% discount to the fair rental of approximately RMB51.1 million as appraised by B.I. Appraisals Limited as at 30 April 2006, is fair and reasonable and is in the interests of the Company and the Independent Shareholders as a whole.

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(iii) Payment term

Pursuant to the Yunnan Leasing Agreement, the rental shall be settled in the following manner:

	Effective date to
	31 December 2006	Each year of 2007 and 2008
1st installment	50% within six months from	40%; RMB8,000,000 within one
	the date of obtaining the	week from the beginning of each
	Independent Shareholders’	financial year
	approval
2nd installment	50% before 31 December 2006	18%; RMB3,600,000
		before 30 June of each financial
		year
3rd installment	Not applicable	42%; RMB8,400,000
		before the end of each financial
		year

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RECOMMENDATION FOR THE GUANGXI LEASING AGREEMENT

Having considered the above factors, in particular,

(i) the background of and the reasons for carrying out the transactions contemplated under the Yunnan Leasing Agreement (in particular, to enter into the phosphorus industry on a vertical integrated basis through the mode of operating lease of assets for production of yellow phosphorus as the upstream raw material for a downstream product, with the simultaneous benefit of diversifying the product range of the Group and yet without incurring heavy capital commitment as compared to outright investment or acquisition of yellow phosphorus production factory by the Group);
(ii) the rental of the Yunnan Premises and the Yunnan Machinery and Equipment under the Yunnan Leasing Agreement, which represents approximately 61% discount to the fair rental of approximately RMB51.5 million as appraised by B.I. Appraisals Limited as at 30 April 2006; and
(iii) the payment term under the Yunnan Leasing Agreement, which is not uncommon with the market practice,

we consider that the terms of the Yunnan Leasing Agreement are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution to approve the transactions contemplated under the Yunnan Leasing Agreement.

Yours faithfully, For and on behalf of

Partners Capital International Limited Alan Fung Harry Yu Managing Director Executive Director

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APPENDIX I

==> picture [64 x 46] intentionally omitted <==

==> picture [197 x 70] intentionally omitted <==

2 June 2006

The Directors

Swank International Manufacturing Company Limited Suite 1102, 11th Floor ICBC Tower, Citibank Plaza 3 Garden Road Central Hong Kong

Dear Sirs,

Re: The fixed assets in two industrial complexes located respectively in Fangchenggang City, Guangxi Zhuang Zu Autonomous Region (“Guangxi”), and Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province (“Yunnan”), the People’s Republic of China (the “PRC”)

In accordance with the instructions from Swank International Manufacturing Company Limited (hereinafter referred to as the “Company”) for us to assess the market value and the market rent of the fixed assets (hereinafter referred to as the “Fixed Assets”), which include land and buildings (hereinafter referred to as the “Property) and machines and equipment (hereinafter referred to as the “Machinery”), and which are held by Yunphos Phosphorus Group Co., Ltd. and/or its subsidiaries (hereinafter collectively referred to as the “Yunphos Group”), 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 market value as well as the market rent of the Fixed Assets as at 30th April 2006 (hereinafter referred to as the “Date of Valuation”).

It is our understanding that this valuation document is to be used for disclosure purpose in relation to the connected transaction regarding the proposed leasing of the Fixed Assets by the Company and/or its subsidiaries (hereinafter together referred to as the “Group”).

This letter, forming part of our valuation report, identifies the assets being valued; explains the basis and methodology of our valuations; lists out the assumptions, the title investigation and the limiting conditions made in the course of our valuations; and states our opinion of values.

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VALUATION REPORT

APPENDIX I

BASIS OF VALUATION AND ASSUMPTIONS

The valuations are our opinions of the market value and the market rent of the Fixed Assets held by 防城港南磷磷化工有限公司 (Yunphos (Fangcheng) Chemicals Co., Ltd., hereinafter referred to as “Yunphos Fangcheng”) in Guangxi and 雲南南磷集團尋甸磷電有限公司 (Yunphos Xundian Phosphorus & Electricity Co., Ltd., hereinafter referred to as “Yunphos Xundian”) in Yunnan respectively.

The market value is defined as “the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

The market rent is defined as “the estimated amount for which an asset should lease on the date of valuation between a willing lessor and a willing lessee in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

The market value/the market rent in continued existing use is further defined as the market value/ market rent of an asset based on continuation of its existing use as part of an on-going business, assuming the asset could be sold in the open market for its existing use, and otherwise in keeping with the market value/market rent definition regardless of whether or not the existing use represents the highest and best use of the asset.

The opinion of the market value/the market rent in continued existing use is not necessarily intended to represent the amount that might be realized from piecemeal disposition/leasing of the Fixed Assets or from some other alternate use.

We have valued the Property and the Machinery held respectively by Yunphos Fangcheng and Yunphos Xundian on the basis that each of them is considered individually. Our valuation of the Fixed Assets held by each of Yunphos Fangcheng and Yunphos Xundian is the aggregate value of the Property and the Machinery and we have not applied any bulk discount.

This investigation is concerned solely with the values of the Fixed Assets. Excluded from this investigation are inventories, materials on hand and all other tangible assets of current nature and intangible assets that might exist. Our opinions of value are not related to the earning capacity of the business. It is assumed that prospective earnings are adequate to support the concluded values of the Fixed Assets plus the value of other assets not included in this valuation, and sufficient net working capital. This report does not attempt to arrive at the value of Yunphos Fangcheng or Yunphos Xundian as a total business entity.

In forming our opinions of the market value in continued existing use, we have assumed that the Fixed Assets will continue in its present existing use in the respective businesses of Yunphos Fangcheng and Yunphos Xundian and subject to adequate potential profitability of the business.

Our valuations on the market value of the Fixed Assets has been made on the assumption that the Fixed Assets is sold on the open market without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement that would serve to affect the value of the Fixed Assets. In addition, no account has been taken of any option or right of pre-emption concerning or effecting sales of the Fixed Assets and no forced sale situation in any manner is assumed in our valuations.

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No allowance has been made in our valuations for any charges, mortgages or amounts owing on the fixed assets valued nor for any expenses or taxation which may be incurred in effecting a sale/lease. Unless otherwise stated, it is assumed that the Fixed Assets are free from encumbrances, restrictions and outgoings of an onerous nature that could affect their values.

Other specific assumptions, if any, have been stated in the footnotes of the valuation certificates.

VALUATION METHODOLOGY

The Property

In arriving at the market value of the Property, which is an industrial complex, owing to the nature of the buildings and structures erected thereon, there are no readily identifiable comparable sale transactions; the Property cannot be valued by comparison with open market transactions. Therefore, we have adopted the Depreciated Replacement Cost (“DRC”) Approach in arriving at the value of such property interest.

The DRC Approach is based on an estimate of the open market value for the existing use of the land in the Property, and the costs to reproduce or replace in new conditions the buildings and structures being valued in accordance with current construction costs for similar buildings and structures in the locality, with allowance for accrued depreciation as evidenced by observed condition or obsolescence present, whether arising from physical, functional or economic causes. The DRC Approach generally furnishes the most reliable indication of value for property in the absence of a known market based on comparable sales.

In arriving at the market rent of the property interest in the Property, we have adopted the Investment Approach by applying an appropriate yield to the market value arrived at through the DRC Approach stated in the above paragraphs.

The Machinery

In arriving at our opinion of the market value of the Machinery, we have considered the three generally accepted approaches to value: the Depreciated Replacement Cost Approach, Market Comparable Approach and Income Capitalization Approach. The theory of these approaches is outlined as follows:

1) The Depreciated Replacement Cost Approach

The Depreciated Replacement Cost Approach establishes value based on the cost of reproducing or replacing in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation arising from condition, utility, age, wear and tear, or physical deterioration and obsolescence present (functional or economic) taking into account past and present maintenance policy and rebuilding history.

Reproduction Cost New is defined as the estimated current cost of reproducing a new replica of an asset with the same or closely similar materials.

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Replacement Cost New is defined as the estimated current cost of the new asset having the nearest equivalent utility as the asset being appraised.

Physical Deterioration is the loss in value of an asset from wear and tear of asset in operation and exposure to various elements.

Functional Obsolescence is the loss in value due to factors inherent in the asset itself and changes in design, materials, or process that result in inadequacy, over capacity, excess construction, lack of functional utility or excess operating costs, etc.

Economic Obsolescence is an incurable loss in value caused by unfavorable external conditions.

When market transactions of comparable assets are not available, when data cannot be extrapolated from larger transactions, or when transactions are non-existent, under premise of continued use and assuming adequate earnings, the Depreciated Replacement Cost Approach is the preferred appraisal procedure.

2) The Market Comparable Approach

The Market Comparable Approach involves the collection of market data pertaining to the subject assets being appraised. The primary intent of the Market Comparable Approach is to determine the desirability of the assets through recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being appraised. If the comparable sales are not exactly similar to the asset being appraised, adjustments must be made to bring them as closely in line as possible with the subject asset.

Under the premise of continued use assuming adequate earnings, consideration is given to the cost to acquire similar equipment in the used-equipment market; an allowance then is made to reflect the costs for freight and installation.

3) The Income Capitalization Approach

The Income Capitalization Approach considers value in relation to the present worth of future benefits derived from ownership and is usually measured through the capitalization of a specific level of income. This approach is most applicable to investment and general-use properties where there is an established and identifiable rental market.

In any valuation study, all three approaches to value must be considered, as one or more approaches may be applicable to value the subject machinery and equipment. In some situations, elements of two or three approaches may be combined to reach an opinion of value.

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In assessing the Machinery, since there is no identified active used-equipment market in the PRC that provides information on recent transactions of comparable items, the Market Comparable Approach was not applied. On the other hand, since no identifiable income stream can be attributed to a specific piece of equipment or a group of equipment, the Income Capitalization Approach to value was not applied. Therefore, we conclude that the Depreciated Replacement Cost Approach is deemed to be the most appropriate method of assessing the Machinery under premise of continued use.

For the assets of standard manufacture, we used current manufacturers’ price lists, price quotations and price catalogs to determine the cost of replacement new. Allowances for freight and installation were sometimes required.

For the assets of special design or fabrication, we used current market price for labor, current market price for materials, manufactured components, design fees, engineering fees and contractors’ overhead, profit and fee to determine the cost of replacement new. Allowances for freight and installation were sometimes required.

Also, we adopted the assets index factor to estimate the cost of reproduction new of special design or fabrication machinery and equipment. An index factor is applied to the historical cost of appraised equipment in order to estimate the current cost of the assets being appraised.

The deductions for physical deterioration, functional obsolescence, and economic obsolescence have reflected observed condition; past maintenance and rebuilding history, if any; current use; and planned future utilization.

In arriving at the market rent of the Machinery, we have adopted the Investment Approach by applying an appropriate yield to the market value arrived at through the valuation approaches or approach stated in the above paragraphs.

TITLE INVESTIGATION

Due to the nature of the land registration system in the PRC, we are not able to investigate the title to or any liabilities against the property interest in the Property. However, we have been provided by the Group with extract copies of documents in relation to the title to the property interest. We have examined the original documents and did not note the existence of any amendments that may not appear on the copies handed to us.

We have not been provided with any title documents relating to the Machinery and are not able to verify the ownership of the Machinery. We have assumed no responsibility for the title to the Machinery. Unless otherwise stated, it is assumed that individual items of the Machinery are free from encumbrances, restrictions and outgoings of an onerous nature, which could affect their values. It is further assumed that there are no hidden or unapparent conditions of the Machinery, which would render them more or less valuable.

In the course of our valuations, we have relied on the advice given by the Group and the legal opinion prepared by Yunnan Xingyuan Law Firm, the Group’s legal advisor on PRC law (hereinafter referred to as the “PRC Legal Advisor”), regarding the title to the Fixed Assets.

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APPENDIX I

LIMITING CONDITIONS

Our valuations have been carried out in accordance with The HKIS Valuation Standards on Properties (1st Edition 2005) issued by the Hong Kong Institute of Surveyors and under generally accepted valuation procedures and practices, which are in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

We have carried out inspections of the Fixed Assets in the period from 28th April to 1st May 2006. We have inspected the exterior and, where possible, the interior of the Property. However, no structural survey has been made nor have any tests been carried out on any of the building services provided in the Property. We are, therefore, not able to report that the Property is free from rot, infestation or any other structural defects. Yet, in the course of our inspection, we did not note any serious defects.

We have not conducted detailed on-site measurement to verify the correctness of the site and floor areas of the Property but have assumed that the areas shown on the documents made available to us are correct. Dimensions, measurements and areas included in the valuation certificates attached are based on information contained in the documents provided to us by the Group and are therefore approximations only.

Moreover, we have not carried out any site investigation to determine or otherwise the suitability of the ground conditions, the presence or otherwise of contamination and the provision of or otherwise suitability for services etc. for any future development. Our valuations are prepared on the assumption that these aspects are satisfactory and that no extraordinary expenses or delays will be incurred in the event of any development.

At the time of our inspections, most items of the Machinery were found to have been in full production and good working condition. Hence, we have assumed that the Machinery can perform efficiently according to the purposes for which it was designed and built.

We have accepted the records of the Machinery furnished to us by the Company as properly describing the Machinery, their costs and their acquisition dates. We have relied to a considerable extent on such records, listings, specifications and documents in arriving at our opinion of value.

Any deferred maintenance, physical wear and tear, operating malfunctions, lack of utility, or other observable conditions distinguishing the Machinery from assets of like kind in new condition were noted and made part of our judgment in arriving at the value.

We have not investigated any industrial safety environmental and health-related regulations in association with this particular manufacturing process. It is assumed that all necessary licenses, procedures, and measures were implemented in accordance with the government legislation and guidance.

We have not investigated any financial data pertaining to the present or prospective earning capacity of the operation in which the Machinery is used. It was assumed that prospective earnings would provide a reasonable return on the fair market value of the Machinery, plus the value of any assets not included in this valuation, and adequate net working capital.

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Our valuations reflect facts and conditions existing at the Date of Valuation. Subsequent events have not been considered and we are not required to update our report for such events and conditions.

To the best of our knowledge, all data set forth in this report are true and accurate. The data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis are gathered from reliable sources, yet, no guarantee is made nor liability assumed for their accuracy.

We have relied to a considerable extent on the information and advices made available to us by the Group and the Yunphos Group on such matters as planning approvals, statutory notices, easements, tenure, particulars of occupancy, site and floor areas and all other relevant matters in the identification of the Property. We have not seen original planning consents and have assumed that the Property will be erected, occupied and used in accordance with such consents.

We have had no reason to doubt the truth and accuracy of the information provided to us by the Group. We were also advised by the Group that no material facts have been omitted from the information provided. We consider that we have been provided with sufficient information to reach an informed view, and have no reason to suspect that any material information has been withheld.

REMARKS

Unless otherwise stated, all monetary amounts stated in the valuation certificates are in Renminbi (RMB).

We hereby confirm that we have neither present nor prospective interests in the Group, the Yunphos Group, the Fixed Assets or the values reported herein.

The summary of values and our valuation certificates are attached.

Yours faithfully, For and behalf of B.I. APPRAISALS LIMITED William C. K. Sham

Registered Professional Surveyor (G.P.) China Real Estate Appraiser MHKIS, MCIREA

Executive Director

Note: Mr. William C. K. Sham is a qualified valuer on the approved List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers published by the Hong Kong Institute of Surveyors. Mr. Sham has 25 years’ experience in the valuation of properties in Hong Kong and has over 10 years’ experience in the valuation of properties and other fixed assets in the People’s Republic of China and the Asia Pacific regions.

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APPENDIX I

SUMMARY OF VALUES

Fixed Assets

The fixed assets held by Yunphos (Fangcheng) Chemicals Co., Ltd. and mostly located at Huagang Road, Yu Zhou Cheng Industrial Zone, Gangkou District, Fangchenggang City, Guangxi Zhuang Zu Autonomous Region, the PRC

Market rent Market value in per annum in existing state as at existing state as at 30th April 2006 30th April 2006 RMB48,400,000 RMB4,477,000

The fixed assets held by Yunphos Xundian Phosphorus & Electricity Co., Ltd. and located at Jin Suo Xiang Industrial Small District, Xundian Hui Zu Yi Zu Autonomous County, Kunming City, Yunnan Province, the PRC

RMB474,000,000 RMB51,110,000

Total:

RMB522,400,000 RMB55,587,000

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APPENDIX I

VALUATION CERTIFICATE

Fixed Assets

The fixed assets held by Yunphos (Fangcheng) Chemicals Co., Ltd. and mostly located at Huagang Road, Yu Zhou Cheng Industrial Zone, Gangkou District, Fangchenggang City, Guangxi Zhuang Zu Autonomous Region, the PRC

Description and tenure

The fixed assets comprise land and buildings together with machines and equipment within an industrial complex erected on an irregular-shaped site having a site area of approximately 22,581.31 sq. m. (243,065 sq.ft.) and in a depot at the port area.

The industrial complex comprises fifteen blocks of one to four-storey buildings and various structures for workshop, warehouse, office, dormitory and other ancillary facilities uses. The buildings were completed in the period between 2002 and 2004.

Market value in Market rent in Particulars of existing state as at existing state as at occupancy 30th April 2006 30th April 2006 The fixed RMB48,400,000 RMB4,477,000 assets are per annum

The fixed assets are occupied by Yunphos (Fangcheng) Chemicals Co., Ltd. for the production of phosphoric acid.

The total gross floor area of the buildings is approximately 6,877.06 sq. m. (74,025 sq.ft.).

The land use rights of the property have been granted for a term due to expire on 12th September 2052 for industrial use.

Major items of the machines and equipment include phosphorus furnace, reaction tanks, various components of vacuum-filtrate system, the water recycling system, the steaming and condensation system and the cooling system, pumps, storage tanks, boiler, air-compressors, office equipment, vehicles. The machines and equipment, most of which are PRC made, was acquired within the period from 2002 to 2005.

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Notes:

(1) Pursuant to the Certificate for State-owned Land Use 港區國用 (2002)字第 04000279號 ,(Gang Qu Guo Yong (2002) Zi No. 04000279) issued by 防城港市港口區國土資源局 (Fangchenggang City Gangkou District Stateowed Land Resources Bureau) on 18th September 2003, the land use rights of land in the property having a site area of 22,581.305 sq. m. has been granted to Yunphos (Fangcheng) Chemicals Co., Ltd. for a term due to expire on 12th September 2052 for industrial use.
(2) Pursuant to the Certificate for Building Ownership 防港房權證港口區字第 C200310001號 (Fang Gang Fang Quan Zheng Gangkou District Zi No. C200310001) issued by 防城港市房產管理局 (Fangchenggang City Property Administration Bureau) on 20th February 2003, the ownership of the guardhouse at north gate and the office building in the property having a total gross floor area of 501.93 sq. m. is vested in Yunphos (Fangcheng) Chemicals Co., Ltd.
(3) Pursuant to the Certificate for Building Ownership 防港房權證港口區字第 C200310002號 (Fang Gang Fang Quan Zheng Gangkou District Zi No. C200310002) issued by Fangchenggang City Property Administration Bureau on 20th February 2003, the ownership of the canteen and the dormitory building in the property having a total gross floor area of 614.49 sq. m. is vested in Yunphos (Fangcheng) Chemicals Co., Ltd.
(4) Pursuant to the Certificate for Building Ownership 防港房權證港口區字第 C200310003號 (Fang Gang Fang Quan Zheng Gangkou District Zi No. C200310003) issued by 防城港市房產管理局 (Fangchenggang City Property Administration Bureau) on 20th February 2003, the ownership of the main workshop and the processing workshop in the property having a total gross floor area of 1,692.86 sq. m. is vested in Yunphos (Fangcheng) Chemicals Co., Ltd.
(5) Pursuant to the Certificate for Building Ownership 防港房權證港口區字第 C200310004號 (Fang Gang Fang Quan Zheng Gangkou District Zi No. C200310004) issued by 防城港市房產管理局 (Fangchenggang City Property Administration Bureau) on 20th February 2003, the ownership of the boiler house, the recycling water station and the storage tanks platform in the property having a total gross floor area of 558.38 sq. m. is vested in Yunphos (Fangcheng) Chemicals Co., Ltd.
(6) As advised by Yunphos (Fangcheng) Chemicals Co., Ltd., the application for the Certificates for Building Ownership in respect of the remaining six blocks of building in the property, having a total gross floor area of 3,509.40 sq. m. will be made.
(7) The opinion of the PRC Legal Advisor stated, inter alia, that:
(a) Yunphos (Fangcheng) Chemicals Co., Ltd. is in possession of the proper legal title to the land use rights of the land and the building ownership of the buildings in the property.
(b) The machines and equipment were acquired by Yunphos (Fangcheng) Chemicals Co., Ltd.
(c) The fixed assets are free from mortgage or third party encumbrances.
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(8) We have relied on the information provided by the Group and the Yunphos Group and the aforesaid legal opinion and prepared our valuation on the following assumptions:
(a) The Certificates for Building Ownership regarding those buildings stated in Note 6 above will be issued to Yunphos (Fangcheng) Chemicals Co., Ltd.
(b) The property has been constructed, occupied and used in full compliance with, and without contravention of all ordinances, except only where otherwise stated.
(c) All consents, approvals, required licences, permits, certificates and authorizations have been obtained, except only where otherwise stated, for the use of the property upon which our valuations are based.
(9) The status of title and grant of major approvals, consents or licences in accordance with the information provided to us by the Group and the Yunghos Group are as fo1lows:

Certificate for State-owned Land Use Certificates for Building Ownership (part)

Yes Yes

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VALUATION CERTIFICATE

Description Fixed Assets and tenure

Market value in Market rent in Particulars of existing state as at existing state as at occupancy 30th April 2006 30th April 2006

The fixed The fixed assets assets held by comprise land and Yunphos buildings together Xundian with machines and Phosphorus & equipment within a Electricity power plant (the Co., Ltd. and “Power Plant”) located at Jin erected on a site Suo Xiang formed by two Industrial adjoining parcels of Small District, land with a total site Xundian Hui area of Zu Yi Zu approximately Autonomous 137,925.92 sq. m. County, (1,484,635 sq.ft.) and Kunming City, an industrial complex Yunnan (the Industrial Province, the Complex”) erected PRC on an irregularshaped site having a site area of approximately 219,642.22 sq. m. (2,364,229 sq.ft.).

The fixed assets is occupied by Yunphos Xundian Phosphorus & Electricity Co., Ltd. for electricity production and for the production of yellow phosphorus.

RMB474,000,000

RMB51,110,000 per annum

The Power Plant comprises various buildings and structures, completed in about 2004, for workshop, warehouse, office, dormitory and other ancillary facilities uses.

The Industrial Complex comprises various buildings and structures for workshop, warehouse, office, dormitory and other ancillary facilities uses. The buildings were completed in the period between 1976 and 2005.

The total gross floor area of the buildings in the property is approximately 51,793.22 sq. m. (557,502 sq.ft.).

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VALUATION CERTIFICATE

Fixed Assets

Description and tenure

Market value in Market rent in Particulars of existing state as at existing state as at occupancy 30th April 2006 30th April 2006

The land use rights of the Power Plant have been granted for industrial use for terms due to expire on 30th August 2044 and 24th August 2054 respectively.

The land use rights of the Industrial Complex have been granted for a term due to expire on 24th August 2054 for industrial use.

The machines and equipment comprise those used mainly for the electricity generation and for the production of yellow phosphorus in the power plant and the industrial complex respectively.

Major items of the machines and equipment include generators, boilers, electricity transformers, phosphorus furnace, reaction tanks, various components of vacuum-filtrate system, the water recycling system and the cooling system, pumps, storage tanks, boiler, aircompressors, office equipment, vehicles. The machines and equipment, most of which are PRC made, was acquired within the period from 1978 to 2005.

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Notes:

(1) Pursuant to the Certificate for State-owned Land Use 尋國用 (2004)字第 526號 ,(Xun Guo Yong (2004) Zi No. 526) issued by 尋甸回族彝族自治縣國土資源局 (Xundian Hui Zu Yi Zu Autonomous County State-owed Land Resources Bureau) on 24th August 2004, the land use rights of a parcel of land in the property having a site area of 219,642.22 sq. m. has been granted to Yunphos Xundian Phosphorus & Electricity Co., Ltd. for a term due to expire on 24th August 2054 for industrial use.
(2) Pursuant to the Certificate for State-owned Land Use 尋國用 (2004)字第 722號 ,(Xun Guo Yong (2004) Zi No. 722) issued by Xundian Hui Zu Yi Zu Autonomous County State-owed Land Resources Bureau on 12th December 2004, the land use rights of a parcel of land in the property having a site area of 74,126.84 sq. m. has been granted to Yunphos Xundian Phosphorus & Electricity Co., Ltd. for a term due to expire on 24th August 2054 for industrial use.
(3) Pursuant to the Certificate for State-owned Land Use 尋國用 (2005)字第 203號 ,(Xun Guo Yong (2005) Zi No. 203) issued by Xundian Hui Zu Yi Zu Autonomous County State-owed Land Resources Bureau on 28th April 2005, the land use rights of a parcel of land in the property having a site area of 63,799.08 sq. m. has been granted to Yunphos Xundian Phosphorus & Electricity Co., Ltd. for a term due to expire on 30th August 2044 for industrial use.
(4) Pursuant to eight Certificates for Building Ownership 昆房權證尋字第 001793號 (Kun Fang Quan Zheng Xundian Zi No. 001793) to 昆房權證尋字第 001800號 (Kun Fang Quan Zheng Xundian Zi No. 001800) issued by 尋甸回族彝族自治縣規劃建設局 (Xundian Hui Zu Yi Zu Autonomous County Planning Construction Bureau) on 25th October 2004, the ownership of 39 blocks of buildings in the property having a total gross floor area of 22,130.92 sq. m. is vested in Yunphos Xundian Phosphorus & Electricity Co., Ltd.
(5) As advised by Yunphos Xundian Phosphorus & Electricity Co., Ltd., the application for the Certificates for Building Ownership in respect of the buildings in the Power Plant, having a total gross floor area of approximately 15,155.36 sq. m. has been made.
(6) As advised by Yunphos Xundian Phosphorus & Electricity Co., Ltd., the application for the Certificates for Building Ownership in respect of the remaining blocks of building in the Industrial Complex, having a total gross floor area of 14,506.94 sq. m. has been made.
(7) The opinion of the PRC Legal Advisor stated, inter alia, that:
(a) Yunphos Xundian Phosphorus & Electricity Co., Ltd. is in possession of the proper legal title to the land use rights of the land and the building ownership of the buildings in the property.
(b) The machines and equipment were acquired by Yunphos Xundian Phosphorus & Electricity Co., Ltd.
(c) The fixed assets are free from mortgage or third party encumbrances.
(8) We have relied on the information provided by the Group and the Yunphos Group and the aforesaid legal opinion and prepared our valuation on the following assumptions:
(a) The Certificates for Building Ownership regarding those buildings stated in Note 5 and Note 6 above will be issued to Yunphos Xundian Phosphorus & Electricity Co., Ltd.
(b) The Property has been constructed, occupied and used in full compliance with, and without contravention of all ordinances, except only where otherwise stated.
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(c) All consents, approvals, required licences, permits, certificates and authorizations have been obtained, except only where otherwise stated, for the use of the property upon which our valuations are based.
(9) The status of title and grant of major approvals, consents or licences in accordance with the information provided to us by the Group and the Yunghos Group are as fo1lows:

Certificate for State-owned Land Use Yes Certificates for Building Ownership (part) Yes

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APPENDIX II EXPLANATORY STATEMENT FOR THE REPURCHASE MANDATE

This Appendix serves as an explanatory statement required by Rule 10.06(1)(b) of the Listing Rules and also as a memorandum of the terms of a proposed repurchase of shares required by section 49BA(3)(b) of the Companies Ordinance, to provide you with all the information reasonably necessary to enable you to make an informed decision on whether to vote for or against the proposed resolutions.

LISTING RULES

The Listing Rules permit companies whose primary listings are on the Stock Exchange to repurchase their own shares on the Stock Exchange subject to certain restrictions, the most important of which are summarised below:

(a) Shareholders’ approval

All proposed repurchases of shares on the Stock Exchange by a company with its primary listing on the Stock Exchange must be approved in advance by an ordinary resolution, either by way of a general mandate or by specific approval.

(b) Source of funds

Repurchases of shares must be funded entirely from the company’s available cashflow or working capital facilities and will be made out of funds legally available for such purpose in accordance with the company’s memorandum and articles of association and the laws of Hong Kong.

REASONS FOR SHARES REPURCHASE

The Directors believe that it is in the best interests of the Company and the Shareholders to continue to have a general authority from the Shareholders to enable the Directors to repurchase Shares on the market. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net value of the Company and its assets and/or its earnings per Share and will only be made when the Directors believe that such repurchases will benefit the Company and the Shareholders as a whole.

SHARE CAPITAL

As at the Latest Practicable Date, the Company had 3,124,862,734 Shares in issue with an issued share capital of HK$31,248,627.34.

Subject to the passing of the proposed ordinary resolution approving the Repurchase Mandate and no further Shares is issued, allotted or repurchased by the Company prior to the EGM, the exercise of the Repurchase Mandate in full would result in up to 312,486,273 Shares, representing the share capital of HK$3,124,862.73, being repurchased by the Company during the period prior to the next annual general meeting of the Company following the passing of the resolution referred to herein to the date upon which such authority is revoked or varied by an ordinary resolution of the Shareholders at a general meeting of the Company.

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APPENDIX II EXPLANATORY STATEMENT FOR THE REPURCHASE MANDATE

FUNDING OF REPURCHASE

In repurchasing the Shares, the Company may only apply funds entirely from the Company’s available cashflow or working capital facilities and will be made out of funds legally available for such purpose in accordance with its memorandum and articles of association and the laws of Hong Kong.

It is envisaged that the funds required for any repurchase of Shares would be derived from the capital paid up on the Shares being repurchased and from the distributable profits of the Company.

The exercise of the Repurchase Mandate in full will not have a material adverse impact on the working capital or gearing level of the Company as compared with the position disclosed in its most recent published audited accounts as at 31 December 2005. However, the Directors do not propose to exercise the Repurchase Mandate to such extent as would, in the circumstances, have a material adverse impact on the working capital or gearing level of the Company which in the opinion of the Directors are from time to time appropriate for the Company.

DISCLOSURE OF INTERESTS

None of the Directors or, to the best of their knowledge having made all reasonable enquiries, any of their respective associates has any present intention, in the event that the Repurchase Mandate is approved by the Shareholders, to sell any Shares to the Company or its subsidiaries (as defined in the Companies Ordinance).

No connected person has notified the Company that he/she has a present intention to sell any Shares to the Company nor has undertaken not to sell any of the Shares held by him/her to the Company, in the event that the Repurchase Mandate is approved by the Shareholders.

UNDERTAKING OF THE DIRECTORS

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 laws of Hong Kong.

EFFECT OF THE TAKEOVERS CODE

If, as a result of Shares repurchased by the Company, a Shareholder’s proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition of voting rights for the purposes of the Takeovers Code. Accordingly, a Shareholder, or a group of Shareholders acting in concert, 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, China Time, the single largest Shareholder, owned approximately 60% of the issued share capital of the Company. In the event that the Repurchase Mandate is exercised in full and no further Shares are issued during the proposed repurchase period, the shareholding of China Time in the Company would be increased to approximately 67% of the issued share capital of the Company. Accordingly, such increase would not give rise to an obligation to make a mandatory offer under Rule 26 of the Takeovers Code.

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APPENDIX II EXPLANATORY STATEMENT FOR THE REPURCHASE MANDATE

SHARE REPURCHASE BY THE COMPANY

The Company did not repurchase any of its Shares (whether on the Stock Exchange or otherwise) in the six months preceding the Latest Practicable Date.

SHARE PRICES

The highest and lowest closing prices at which the Shares have been traded on the Stock Exchange during each of the previous twelve months preceding the Latest Practicable Date were as follows:

	Price	per Share
	Highest	Lowest
	HK$	HK$
2005
June	0.080	0.065
July	0.076	0.065
August	0.075	0.065
September	0.074	0.065
October	0.070	0.070
November	0.070	0.060
December	0.098	0.058
2006
January	0.118	0.092
February	0.108	0.091
March	0.109	0.083
April	0.113	0.088
May	0.195	0.107

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GENERAL INFORMATION

APPENDIX III

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

2. DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests or short positions of each Director and the Company’s chief executive in the shares, underlying shares or debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which (a) were required to be notified to the company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provision of the SFO); or (b) were required pursuant to Section 352 of the SFO to be entered in the register referred to therein; or (c) were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange are as follows:

Director Mr. Wang

Nature of interest Number of Shares Corporate 1,875,079,680

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and chief executive of the Company was interested, or deemed to be interested in the long and short positions in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (b) were required pursuant to section 352 of the SFO to be entered in the register referred to therein; or (c) were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange.

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as it is known to any Directors, chief executives of the Company, Shareholders (other than Directors or chief executive of the Company) who have interests or short positions in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required,

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GENERAL INFORMATION

APPENDIX III

pursuant to section 336 of Part XV of the SFO, to be entered in the register referred to therein, or who is interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group were as follows:

		Approximate
		percentage of the
		Company’s issued
Name	Number of Shares held	share capital
China Time Investment Holdings Limited	1,874,917,645_(note 1)_	60
Mr. Wang	1,875,079,680_(note 1)_	60
Ms. Mu Yucun	1,875,079,680_(note 2)_	60
Choi Koon Shum, Jonathan (“Mr. Choi”)	188,702,795_(note 3)_	6
Kwan Wing Kum, Janice (“Ms Kwan”)	188,702,795_(note 3)_	6
Lam William Ka Chung (“Mr. Lam”)	188,702,795_(note 3)_	6
Lam Wong Yuk Sin, Mary (“Mrs. Lam”)	188,702,795_(note 3)_	6
Kingsway International Holdings Limited
(“Kingsway International”)	188,702,795_(note 3)_	6
Innovation Assets Limited (“Innovation”)	188,702,795_(note 3)_	6
World Developments Limited
(“World Developments”)	188,702,795_(note 3)_	6
SW Kingsway Capital Holdings Limited
(“SW Kingsway”)	188,702,795_(note 3)_	6
Festival Developments Limited
(“Festival Developments”)	188,702,795_(note 3)_	6
Rich Global Investments Limited
(“Rich Global”)	156,202,795_(note 3)_	5
Mr. Chan Yuen Ming (“Mr. Chan”)	156,202,790_(note 4)_	5
Winspark Venture Limited
(“Winspark Venture”)	156,202,790_(note 4)_	5
Tomorrow International Holdings Limited
(“TIHL”)	156,202,790_(note 4)_	5
Fortune Dynamic Group Corp.
(“Fortune Dynamic”)	156,202,790_(note 4)_	5
Probest Holdings Inc. (“Probest”)	156,202,790_(note 4)_	5

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GENERAL INFORMATION

APPENDIX III

Notes:

Mr. Wang is the sole shareholder of China Time.
Ms. Mu Yucun is Mr. Wang’s spouse and she is deemed to be interested in Mr. Wang’s interest in the Shares.
Mr. Choi and his spouse, Ms. Kwan, were deemed to be interested in 188,702,795 ordinary Shares by virtue of their 46% shareholding in Kingsway International. Mr. Lam and his spouse, Mrs. Lam, were deemed to be interested in 188,702,795 ordinary Shares by virtue of their 40% shareholding in Kingsway International. Kingsway International, in turn, held 100% shareholding in Innovation. Innovation, in turn, held 100% shareholding in World Developments. World Developments, in turn, held 74% shareholding in SW Kingsway. SW Kingsway, in turn, held 100% direct shareholding in Festival Developments. Festival Developments held 100% shareholding in Rich Global, which in turn, held 156,202,795 ordinary Shares.
Winspark Venture was deemed to be interested in 156,202,790 ordinary Shares by virtue of its 61.5% shareholding in TIHL, which in turn, held 100% shareholding in Fortune Dynamic. Fortune Dynamic held 100% shareholding in Probest, which in turn, held 156,202,790 ordinary Shares. The entire issued share capital of Winspark Venture is beneficially owned by Mr. Chan.

Save as disclosed above, as at the Latest Practicable Date, the Directors are not aware of any person who is, directly or indirectly, interested in 5% or more of the issued share capital of the Company, has short positions on the Shares or underlying Shares, or has any rights to subscribe for Shares in respect of such capital.

4. SERVICE CONTRACTS

As at the Latest Practicable Date, no Director has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation.

5. COMPETING INTEREST

Should the Continuing Connected Transactions satisfy all the conditions precedent for their respective execution and become effective, the Group would commence its engagement in, among others, the production and sales of yellow phosphorous and phosphoric acid. Pursuant to Rule 14A.59(11) of the Listing Rules, as at the Latest Practicable Date, interests of the Directors in businesses which are likely to compete, either directly or indirectly, with the phosphorus business which the Group intended to engage through the Continuing Connected Transactions were as follows:

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GENERAL INFORMATION

APPENDIX III

Entity whose business(es) may compete or are likely to compete with the intended business(es) of the Group (the “Entity”)
陸良磷化工有限公司 (Luliang Phosphorus Chemicals Co., Ltd.*)
嵩明天南磷化工有限公司 (Songming Tiannan Phosphorus Chemicals Co., Ltd.*)
羅平磷化工有限公司 (Luoping Phosphorus Chemicals Co., Ltd.*)
雲南尋甸意甸磷化工有限公司 (Yunnan Xundian Italphos YP Co., Ltd.*)
Nature of
Description of interest of the business(es) Name of Director of the Entity Director in the Entity Principally engaged Mr. Wang substantial in the production of shareholder yellow phosphorous
Principally engaged Mr. Wang substantial in the production of shareholder yellow phosphorous
Principally engaged Mr. Wang substantial in the production of shareholder yellow phosphorous
Principally engaged (i) Mr. Wang substantial in the production of shareholder yellow phosphorous (ii) Ms. Zhou Jing director

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or their associates has engaged in any business that competes or may compete with the business of the Group or has any other conflict of interest with the Group.

6. MATERIAL CHANGE

The Directors confirm that, as at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Company since 31 December 2005, being the date to which the latest published audited financial statements of the Company were made up.

7. EXPERTS AND CONSENT

The qualifications of the experts who have given opinion in this circular are as follows:

Name Qualification B.I. Appraisals Limited registered professional surveyors, valuers and property advisers Partners Capital a licensed corporation registered under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) to carry out types 1 and 6 regulated activities

Each of B.I. Appraisals Limited and Partners Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter or references to its name in the form and context in which they respectively appear.

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GENERAL INFORMATION

APPENDIX III

As at the Latest Practicable Date, none of B.I. Appraisals Limited and Partners Capital had 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, and none of B.I. Appraisals Limited and Partners Capital had any direct or indirect interest in any assets which have been or proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2005, being the date to which the latest published audited accounts of the Company were made up.

8. INTERESTS IN ASSETS

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2005, being the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to any member of the Group.

9. DIRECTORS’ INTERESTS IN CONTRACTS

Save for the agency agreement dated 3 June 2005 entered into between Rightlink Trading Ltd. and Anchorage Trading Limited, there was no contract of significance in relation to the Group’s business to which the Company, its subsidiaries, its fellow subsidiaries or its holding company was a party and in which a Director had a material interest, whether directly or indirectly, subsisting as at the Latest Practicable Date.

10. MATERIAL CONTRACTS

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

(a) a loan restructuring agreement dated 20 January 2005 as varied and supplemented by a supplemental loan restructuring agreement dated 13 April 2005 entered into between the Company, Probest Holdings Inc. (“ Probest ”) and Profitown Investment Corporation (“ Profitown ”);
(b) a shareholders’ agreement dated 3 June 2005 entered into between the Company, Probest, Tomorrow International Holdings Limited and Profitown ;
(c) a guarantee dated 3 June 2005 entered into between the Company and Probest;
(d) a promissory note dated 3 June 2005 entered into between Profitown and Probest; and
(e) an agency agreement dated 3 June 2005 entered into between Rightlink Trading Ltd. and Anchorage Trading Limited.
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GENERAL INFORMATION

APPENDIX III

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the offices of the Company at Suite 1102, 11/F ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong, during normal business hours up to and including at least 14 days from the date of this circular:

(a) Guangxi Leasing Agreement;
(b) Guangxi Agency Agreement;
(c) Guangxi Raw Materials Purchase Agreement;
(d) Guangxi Distribution Agreement;
(e) Yunnan Leasing Agreement;
(f) a loan restructuring agreement dated 20 January 2005 as varied and supplemented by a supplemental loan restructuring agreement dated 13 April 2005 entered into between the Company, Probest and Profitown;
(g) a shareholders’ agreement dated 3 June 2005 entered into between the Company, Probest, Tomorrow International Holdings Limited and Profitown;
(h) a guarantee dated 3 June 2005 entered into between the Company and Probest;
(i) a promissory note dated 3 June 2005 entered into between Profitown and Probest;
(j) an agency agreement dated 3 June 2005 entered into between Rightlink Trading Ltd. and Anchorage Trading Limited;
(k) the memorandum and articles of association of the Company;
(l) the annual reports of the Company for the two financial years ended 31 December 2005;
(m) the letter from the Independent Board Committee contained in this circular;
(n) the letter of advice from Partners Capital contained in this circular;
(o) the written consents referred to in the section headed “Experts and consent” of this appendix;
(p) The letter and valuation report prepared by B.I. Appraisals Limited, the text of which is set out in Appendix I to this circular; and
(q) this circular.

12. MISCELLANEOUS

The English version of this circular shall prevail over the Chinese text.

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NOTICE OF EGM

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability)

(Stock code: 663)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Swank International Manufacturing Company Limited (the “Company”) will be held at 21/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong at 4:00 p.m. on Monday, 19 June 2006 or any adjournment thereof for the purpose of considering and, if thought fit, passing, with or without amendment or modification, the following resolutions as ordinary resolutions of the Company to be taken by way of a poll:

ORDINARY RESOLUTIONS

(1) “ THAT
(a) the leasing agreement dated 11 May 2006 entered into between 防城港華海化工有限公司 (Fangcheng Huahai Chemicals Co., Ltd.) (“ Huahai ”) and 防城港南磷磷化工有限公司 (Yunphos (Fangcheng) Chemicals Co., Ltd.) (“ Yunphos Fangcheng ”), a copy of which is tabled at the meeting and marked “A” and initialled by the chairman of the meeting for identification purpose, pursuant to which Yunphos Fangcheng will lease certain premises, machinery and equipment to Huahai (the “ Guangxi Leasing Agreement ”) be and is hereby approved, ratified and confirmed;
(b) the cap amount in relation to the Guangxi Leasing Agreement for each of the three financial years ending 31 December 2008 of RMB1.25 million (equivalent to approximately HK$1.2 million), RMB2.5 million (equivalent to approximately HK$2.4 million) and RMB2.5 million (equivalent to approximately HK$2.4 million) be and is hereby approved;
(c) any one director of the Company (The “Director”) be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Guangxi Leasing Agreement.”
(2) “ THAT
(a) the agency agreement dated 11 May 2006 entered into between Huahai and 雲南南磷集團股份有限公司 (Yunnan Phosphorus Group Co., Ltd.) (“ Yunphos ”), a copy of which is tabled at the meeting and marked “B” and initialled by the chairman of the meeting for identification purpose, pursuant to which Yunphos will provide agency services to Huahai (the “ Guangxi Agency Agreement ”) be and is hereby approved, ratified and confirmed;
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NOTICE OF EGM

(b) the cap amount in relation to the Guangxi Agency Agreement for each of the three financial years ending 31 December 2008 of US$270,000 (equivalent to approximately HK$2.1 million), US$540,000 (equivalent to approximately HK$4.2 million) and US$540,000 (equivalent to approximately HK$4.2 million) be and is hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Guangxi Agency Agreement.”
(3) “ THAT
(a) the supply agreement dated 11 May 2006 entered into between Huahai and Yunphos, a copy of which is tabled at the meeting and marked “C” and initialled by the chairman of the meeting for identification purpose, pursuant to which Huahai will purchase yellow phosphorus from Yunphos (the “ Guangxi Raw Materials Purchase Agreement ”) be and is hereby approved, ratified and confirmed;
(b) the cap amount in relation to the Guangxi Raw Materials Purchase Agreement for each of the three financial years ending 31 December 2008 of RMB120 million (equivalent to approximately HK$115.4 million), RMB240 million (equivalent to approximately HK$230.8 million) and RMB240 million (equivalent to approximately HK$230.8 million) be and is hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Guangxi Raw Materials Purchase Agreement.”
(4) “ THAT
(a) the distribution agreement dated 11 May 2006 entered into between Huahai and Yunphos, a copy of which is tabled at the meeting and marked “D” and initialled by the chairman of the meeting for identification purpose, pursuant to which Yunphos will purchase phosphoric acid from Huahai for its onward distribution to its customers (the “ Guangxi Distribution Agreement ”) be and is hereby approved, ratified and confirmed;
(b) the cap amount in relation to the Guangxi Distribution Agreement for each of the three financial years ending 31 December 2008 of RMB90 million (equivalent to approximately HK$86.5 million), RMB180 million (equivalent to approximately HK$173.1 million) and RMB180 million (equivalent to approximately HK$173.1 million) be and is hereby approved;
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NOTICE OF EGM

(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Guangxi Distribution Agreement.”
(5) “ THAT
(a) the leasing agreement dated 11 May 2006 entered into between Huahai and 雲南南磷集團尋甸磷電有限公司 (Yunnan Xundian Phosphorus & Electricity Co., Ltd.) (“ Yunphos Xundian ”), a copy of which is tabled at the meeting and marked “E” and initialled by the chairman of the meeting for identification purpose, pursuant to which Yunphos Xundian will lease certain premises, machinery and equipment to Huahai (the “ Yunnan Leasing Agreement ”) be and is hereby approved, ratified and confirmed;
(b) the cap amount in relation to the Yunnan Leasing Agreement for each of the three financial years ending 31 December 2008 of RMB10 million (equivalent to approximately HK$9.6 million), RMB20 million (equivalent to approximately HK$19.2 million) and RMB20 million (equivalent to approximately HK$19.2 million) be and is hereby approved;
(c) any one Director be and is/are hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Yunnan Leasing Agreement.”
(6) “ THAT
(a) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to purchase issued shares of HK$0.01 each in the capital of the Company subject to and in accordance with all applicable laws and requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as amended from time to time be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) shall be in addition to any other authorisation given to the Directors and shall authorise the Directors during the Relevant Period to procure the Company to purchase its shares at a price determined by the Directors;
(c) the aggregate nominal amount of the shares which are authorised to be purchased by the Directors pursuant to the approval in paragraph (a) shall not exceed 10 per cent. of the aggregate nominal amount of the share capital of the Company in issue as at the date of passing this resolution, and the said approval shall be limited accordingly; and
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NOTICE OF EGM

(d) for the purposes of this resolution:

“Relevant Period” means the period from the passing of this resolution until whichever is the earliest 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 Hong Kong law or the articles of association of the Company to be held; or

  - (iii) the date upon which the authority set out in this resolution is revoked or varied by way of ordinary resolution of the Company in general meeting.”

(7) “ THAT
(a) subject to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant offers, agreements, options and rights of exchange or conversion which might require the exercise of such powers be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) shall be in addition to any other authorisation given to the Directors and shall authorise the Directors during the Relevant Period to make or grant offers, agreements, options and rights of exchange or conversion which might require the exercise of such powers after the end of the Relevant Period;
(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the Directors pursuant to the approval granted in paragraph (a), otherwise than pursuant to (i) a Rights Issue (as hereinafter defined), or (ii) the share option scheme of the Company approved by The Stock Exchange of Hong Kong Limited, or (iii) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares of the Company pursuant to the articles of association of the Company, shall not exceed 20 per cent. of the aggregate nominal amount of the issued share capital of the Company as at the date of passing this resolution, and the said approval shall be limited accordingly; and
(d) for the purposes of this resolution:

“Relevant Period” means the period from the passing of this resolution until whichever is the earliest of:–

(i) the conclusion of the next annual general meeting of the Company;
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NOTICE OF EGM

(ii) the expiration of the period within which the next annual general meeting of the Company is required by Hong Kong law or the articles of association of the Company to be held; or
(iii) the date upon which the authority set out in this resolution is revoked or varied by way of ordinary resolution of the Company in general meeting; and

“Rights Issue” means an offer of shares open for a period fixed by the directors of the Company to holders of shares on the register of members of the Company on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions 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 applicable to the Company).”

(8) “ THAT conditional upon the passing of the resolutions nos. 6 and 7 as set out in the notice convening the meeting of which these resolutions form part, the general mandate granted to the Directors pursuant to the resolution no. 7 as set out in the notice convening the meeting of which this resolution forms part be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of share capital of the Company purchased by the Company under the authority granted pursuant to the resolution no. 6 as set out in the notice convening the meeting of which this resolution forms part, provided that such amount shall not exceed 10 per cent. of the aggregate nominal amount of the issued share capital of the Company as at the date of passing this resolution.”

By order of the Board Swank International Manufacturing Company Limited Zhao Jun Chairman

Hong Kong, 2 June 2006

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NOTICE OF EGM

Registered office in Hong Kong: Suite 1102, 11/F., ICBC Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong

Notes:

A member entitled to attend and vote at the above meeting is entitled to appoint one or more than one proxy to attend and to vote instead of him. A proxy need not be a member of the Company.
Where there are joint registered holders of any share, any one of such persons may vote at the above meeting, either personally or by proxy, in respect of such share as if he were solely entitled to it; but if more than one such joint holders are present at the above meeting personally or by proxy, that one of such persons so present whose name stands first on the Register of Members of the Company in respect of such share will alone be entitled to vote in respect of such share.
A form of proxy of the meeting is enclosed. If the appointer is a corporation, the form of proxy must be under its common seal or, under the hand of an officer or attorney duly authorized on its behalf.
To be valid, a form of proxy must be deposited at the Company’s branch share registrar in Hong Kong, Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not later than 48 hours before the time appointed for the holding of the extraordinary general meeting or any adjournment thereof.
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AI assistant

Design Capital Limited — Proxy Solicitation & Information Statement 2006

49990_rns_2006-06-06_f80059ea-3d16-4015-9c15-abb8f3a4d4c3.pdf

Swank International Manufacturing Company Limited

CONTINUING CONNECTED TRANSACTIONS AND GENERAL MANDATES TO ISSUE AND TO REPURCHASE SHARES

Financial adviser to the Company

Independent financial adviser to the Independent Board Committee and the Shareholders

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Swank International Manufacturing Company Limited

CONTINUING CONNECTED TRANSACTIONS

1. INTRODUCTION

2. BACKGROUND OF THE CONTINUING CONNECTED TRANSACTIONS

2.1 Guangxi Leasing Agreement

LETTER FROM THE BOARD

2.2 Guangxi Agency Agreement

LETTER FROM THE BOARD

2.3 Guangxi Raw Materials Purchase Agreement

LETTER FROM THE BOARD

2.4 Guangxi Distribution Agreement

2.5 Yunnan Leasing Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

3. REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

4. EGM

Subject to the approval by the Independent Shareholders, the Continuing Connected Transactions may or may not proceed. Shareholders and potential Shareholders are advised to exercise caution when dealing in the Shares.

5. GENERAL MANDATE TO REPURCHASE SHARES

6. GENERAL MANDATE TO ISSUE SHARES

7. PROCEDURES TO DEMAND A POLL BY SHAREHOLDERS

8. RECOMMENDATION

Swank International Manufacturing Company Limited

CONTINUING CONNECTED TRANSACTIONS

RECOMMENDATION

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM PARTNERS CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI LEASING AGREEMENT

1. Background of and reasons for entering into the Guangxi Leasing Agreement

LETTER FROM PARTNERS CAPITAL

2. Key terms of the Guangxi Leasing Agreement

LETTER FROM PARTNERS CAPITAL

(ii) Rental

LETTER FROM PARTNERS CAPITAL

DRC Approach

Market Income comparable capitalization approach approach

DRC Approach

Market Income comparable capitalization approach approach

LETTER FROM PARTNERS CAPITAL

(iii) Payment term

RECOMMENDATION FOR THE GUANGXI LEASING AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI AGENCY AGREEMENT

1. Background of and reasons for entering into the Guangxi Agency Agreement

2. Key terms of the Guangxi Agency Agreement

(i) Subject matter

(ii) Pricing policy

(iii) Settlement policy

3. Annual cap of the agency fee

(i) Quantity

LETTER FROM PARTNERS CAPITAL

(ii) Price

Guangxi

RECOMMENDATION FOR THE GUANGXI AGENCY AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED FOR THE GUANGXI RAW MATERIALS PURCHASE AGREEMENT

1. Background of and reasons for entering into the Guangxi Raw Materials Purchase Agreement

LETTER FROM PARTNERS CAPITAL

2. Key terms of the Guangxi Raw Materials Purchase Agreement

(i) Subject matter

(ii) Preferential supply

(iii) Pricing policy

(iv) Settlement policy

3. Annual cap of the raw materials to be purchased

(i) Quantity

Raw materials

Maximum quantity

(ii) Price

Raw materials Purchase price

(iii) Maximum cap

Design Capital Limited Proxy Solicitation & Information Statement 2006