Design Capital Limited - Proxy Solicitation & Information Statement 2010

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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 King Stone Energy Group Limited (the ‘‘Company’’), you should at once hand this circular, together with the enclosed form of proxy to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES; (2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES;

AND

(3) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial adviser to the Company

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Independent financial adviser

to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders

Terms used in this cover shall have the same meanings as defined in this circular.

A letter from the Board is set out on pages 4 to 11 of this circular and a letter from the Independent Board Committee is set out on pages 12 to 13 of this circular. A letter of advice from Quam Capital containing its advice to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders is set out on pages 14 to 23 of this circular.

A notice convening the EGM to be held at Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 p.m. on Friday, 31 December 2010 is set out on pages 30 to 32 of this circular. Whether or not you are able to attend the meeting in person, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s share registrar, Tricor 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 holding the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

15 December 2010

		Page
Definitions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from	the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from	the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Letter from	Quam Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Appendix	— General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		30

– i –

DEFINITIONS

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

‘‘Acquisition’’ the acquisition of the entire issued share capital of Triumph Fund A Limited pursuant to the Agreement
‘‘Agreement’’ the conditional sale and purchase agreement dated 15 September 2009 entered into between Mr. Zhao, Magic Field International Limited and the Company in relation to the Acquisition
‘‘Articles of Association’’ the memorandum and articles of association of the Company as amended, supplemented or modified from time to time
‘‘associates’’ has the meaning ascribed to it under the Listing Rules ‘‘Board’’ the board of Directors ‘‘Company’’ King Stone Energy Group Limited, a company incorporated in Hong Kong with limited liability and the issued Shares of which are listed on the main board of the Stock Exchange
‘‘connected person(s)’’ has the meaning ascribed to it under the Listing Rules ‘‘controlling shareholder’’ has the meaning ascribed to it under the Listing Rules ‘‘Conversion Price’’ HK$0.0625 per Conversion Share (subject to anti-dilution adjustments)
‘‘Conversion Share(s)’’ the new Share(s) to be allotted and issued upon exercise of the conversion rights attached to the Convertible Notes
‘‘Convertible Notes’’ the convertible notes issued by the Company to Mr. Zhao in the aggregate principal amount of HK$1,805 million on 21 December 2009 to satisfy the consideration for the Acquisition
‘‘Directors’’ the directors of the Company ‘‘Effective Date’’ the date upon which the conditions precedent to the Supplemental Deed have been fulfilled or such other date as the Company and Mr. Zhao may mutually agree in writing
‘‘EGM’’ the extraordinary general meeting of the Company to be convened and held at Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 p.m. on Friday, 31 December 2010 to consider and, if thought fit, pass the resolutions to approve, among others, the Supplemental Deed and the grant of the Issue Mandate

– 1 –

DEFINITIONS

‘‘Existing General Mandate’’

the general mandate granted by the Shareholders at the annual general meeting of the Company held on 21 June 2010 to issue or deal with up to a maximum of 3,173,948,674 new Shares

‘‘First Independent Shareholders’’ all Shareholders other than Mr. Zhao and his associates
‘‘Group’’ the Company and its subsidiaries
‘‘Hong Kong’’
the Hong Kong Special Administrative Region of the PRC
‘‘HK$’’ Hong Kong Dollar, the lawful currency of Hong Kong
‘‘Independent Board Committee’’
the independent board committee of the Company comprising the independent non-executive Directors, namely, Mr. Jacobsen William Keith, Mr. Cao Kuangyu and Mr. Chiu Sui Keung
‘‘Issue Mandate’’ a general and unconditional mandate to grant to the Directors to exercise all powers of the Company to allot and issue new Shares not exceeding 20% of the issued share capital of the Company as at the date of the EGM
‘‘Latest Practicable Date’’ 13 December 2010, being the latest practicable date for the purpose of ascertaining certain information contained in this circular
‘‘Listing Rules’’
the Rules Governing the Listing of Securities on the Stock Exchange
‘‘Mr. Zhao’’ Mr. Zhao Ming
‘‘PRC’’
the People’s Republic of China and for the purpose of this circular, excluding Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
‘‘Quam Capital’’
Quam Capital Limited, a company incorporated in Hong Kong with limited liability and a corporation licensed to carry out type 6 (advising on corporate finance) regulated activities under the SFO, being the independent financial adviser to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders in relation to the amendments to the terms of the Convertible Notes and the refreshment of the Existing General Mandate
‘‘Register of Members’’

the register of members of the Company

– 2 –

DEFINITIONS

‘‘Second Independent any Shareholders other than controlling shareholder and its Shareholder(s)’’ associates or, where there are no controlling shareholders, any Shareholders other than the Directors (excluding independent non-executive Directors) and the chief executive of the Company and their respective associates

‘‘SFO’’

the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

‘‘Share(s)’’ share(s) of HK$0.01 each in the share capital of the Company
‘‘Shareholder(s)’’ holder(s) of Shares
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited

‘‘Supplemental Deed’’ the supplemental deed dated 3 December 2010 entered into between the Company and Mr. Zhao to amend the terms of the Convertible Notes

‘‘%’’ per cent.

– 3 –

LETTER FROM THE BOARD

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

Executive Directors: Mr. Wang Da Yong Mr. Tian Wenwei Mr. Wang Tongtian

Non-executive Directors:

Mr. Li Yi Mr. Su Bin

Registered office and principal place of business in Hong Kong: Suite 3603, 36th Floor One Exchange Square 8 Connaught Place Central Hong Kong

Independent non-executive Directors:

Mr. Jacobsen William Keith Mr. Cao Kuangyu Mr. Chiu Sui Keung

15 December 2010

To the Shareholders

Dear Sir or Madam,

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES;

(2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES; AND

(3) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

On 3 December 2010 (after trading hours of the Stock Exchange), the Company entered into the Supplemental Deed with Mr. Zhao, pursuant to which the parties agreed that, subject to the fulfillment of the conditions of the Supplemental Deed, the terms of the Convertible Notes in relation to certain anti-dilution adjustments shall be amended with effect from the Effective Date.

In addition, the Directors proposed the Existing General Mandate be refreshed by way of grant of the Issue Mandate at the EGM.

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LETTER FROM THE BOARD

The purpose of this circular is to provide you with information relating to (i) further details of the Supplemental Deed; (ii) the grant of the Issue Mandate; and (iii) the recommendations from the Independent Board Committee and the advice from Quam Capital to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders in relation to the amendments to the terms of the Convertible Notes and the grant of the Issue Mandate.

The Independent Board Committee, comprising Mr. Jacobsen William Keith, Mr. Cao Kuangyu and Mr. Chiu Sui Keung, being the independent non-executive Directors, has been established to advise the First Independent Shareholders in respect of the amendments to the terms of the Convertible Notes and to advise the Second Independent Shareholders in respect of the refreshment of the Existing General Mandate. Quam Capital has been appointed as independent financial adviser to advise the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders in this regard.

THE AMENDMENTS TO THE CONVERTIBLE NOTES

References are made to the announcements of the Company dated 23 September 2009 and 21 December 2009, and the circular of the Company dated 18 November 2009 in relation to, among other things, the issue of Convertible Notes, pursuant to the Agreement entered into between Mr. Zhao (who was then an independent third party to the Company) as vendor, Magic Field International Limited as purchaser and the Company as guarantor in relation to the Acquisition.

The Acquisition was completed on 21 December 2009 and the Convertible Notes were issued to Mr. Zhao in the aggregate principal amount of HK$1,805 million. The Convertible Notes shall bear no interest, have a term of five years and be convertible into the Conversion Shares at the Conversion Price of HK$0.0625 per Conversion Share. The Conversion Price is subject to anti-dilution adjustments. As at the Latest Practicable Date, the outstanding principal amount of the Convertible Notes was HK$665,000,000, which is convertible into 10,640,000,000 Conversion Shares at the Conversion Price of HK$0.0625 per Conversion Share.

Supplemental Deed

After trading hours on 3 December 2010, the Company entered into the Supplemental Deed with Mr. Zhao, pursuant to which the parties agreed that, subject to the fulfillment of the conditions of the Supplemental Deed, the terms of the Convertible Notes in relation to certain anti-dilution adjustments shall be amended with effect from the Effective Date. The principal amendments to be made to the Convertible Notes pursuant to the Supplemental Deed are as follows:

Under the existing terms of the Convertible Notes, if the rights of conversion or exchange or subscription attached to any securities issued by the Company are modified, so that the consideration per Share receivable for such securities shall be less than 90% of the market price at the trading day immediately preceding the date of the proposal to modify such rights

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LETTER FROM THE BOARD

of conversion or exchange or subscription, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such modification by a fraction of which:

The numerator is (i) the number of Shares in issue immediately before the date of such modification plus (ii) the number of Shares that can be purchased by the consideration receivable by the Company upon exercising the conversion or exchange or subscription rights conferred by such securities at the modified conversion or exchange or subscription price at the lower of the current market price and the existing conversion or exchange or subscription price, and;

The denominator is (i) the number of Shares in issue immediately before the date of such modification plus (ii) the number of Shares to be issued upon exercising the conversion or exchange or subscription rights conferred by such securities at the modified conversion or exchange or subscription price.

Pursuant to the amendments set out in the Supplemental Deed, in the event the above circumstances arise, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such modification by the following fraction:

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Where:

A = the current market price of one Share on the last trading day preceding the date on which such modification is announced
B = the difference between the fair market value of the modification on a per Share basis on the date of such announcement and the consideration received by the Company for the modification on a per Share basis of such modification
Under the existing terms of the Convertible Notes, the Company shall have the overriding right to appoint an approved financial adviser to consider (i) whether any adjustment to the Conversion Price is appropriate for an event or events (whether or not explicitly stipulated in the Agreement); and (ii) the effective date for such adjustment. This term shall be deleted under the Supplemental Deed.

Save and except for the amendments as set out above, other terms of the Convertible Notes shall remain unchanged and in full force and effect.

Conditions precedent

The amendments to the Convertible Notes and the transactions contemplated under the Supplemental Deed are conditional upon:

(a) all consents and approvals by the Stock Exchange required to be obtained regarding the transactions contemplated under the Supplemental Deed having been obtained; and

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LETTER FROM THE BOARD

(b) the passing of resolution by the First Independent Shareholders at the EGM to approve the Supplemental Deed and the transactions contemplated thereunder.

If the conditions precedent as set out above cannot be fulfilled at or before 4:00 p.m. on 31 January 2011 (or such other date as the Company and Mr. Zhao may mutually agree in writing), the Supplemental Deed shall be automatically terminated.

Reason for entering into the Supplemental Deed

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

As at the Latest Practicable Date, the Directors were not aware of any circumstance which has arisen or is likely to arise which will or may trigger any adjustments to the Conversion Price subject to the proposed amendments under the Supplemental Deed.

According to the accounting policies of the Company, convertible notes which entitle the holder to convert the notes into equity instruments, other than into a fixed number of equity instruments at a fixed conversion price, are regarded as combined instruments consist of a liability and a derivative component. On initial recognition, the convertible notes with the derivative component as a whole are designated as financial liabilities at fair value through profit or loss. The entire convertible notes are initially recognised at fair value on the date of issue and are subsequently measured at fair value until extinguished on conversion or redemption. Changes in the fair value of the entire convertible notes are recognised in profit or loss in the year in which they arise.

For the year ended 31 December 2009 and the six months ended 30 June 2010, the Company recorded significant fair value changes of the Convertible Notes of approximately HK$1,054 million and approximately HK$622 million, respectively. Due to the facts that such changes in the fair values of the Convertible Notes are purely resulted from the Company’s accounting treatment as required under Hong Kong Accounting Standard 32 and 39 (HKAS 32 and HKAS 39) and do not have any impact on the cash flows and operation of the Company, the Company considers such fair value changes have significant impact on the income statement of the Company and therefore the operating results of the Group are significantly distorted. In such regard, the Company reviewed the existing terms of the Convertible Notes and are of the opinion that Conversion Price adjustment clauses (viii) and (ix) of the deed poll of the Convertible Notes cannot fulfill the requirements of the principle of ‘‘exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments’’ (the ‘‘Fixed-for-fixed Principle’’) under HKAS 32. As such, under the Company’s accounting policies the Convertible Notes were required to state at fair value on the date of issue and in subsequent period, with changes in the fair value recognised in the income statement of the Group.

The original clause (ix) was intended to cover any potential adjustments which would require to be made, other than those as explicitly mentioned in the clauses (i) to (viii). No specific adjustment formula is provided under this clause (ix) as it will depend on the nature and impact of the relevant transaction involved. However, in the event that the Company effectuates any transaction(s) which would require adjustment(s) under such clause, there would be a potential risk that the adjustment formula so determined would result in the ‘‘per share value of the adjustment’’ exceeded the ‘‘per share value of the dilution in the shareholders’ interest in the Company’s equity which was caused by the transaction’’, thereby violated the Fixed-for-fixed Principle and which ultimately resulted in an impact on the profit

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LETTER FROM THE BOARD

and loss account as discussed in the preceding paragraph. In order to avoid any potential profit and loss impact resulted from such adjustment clause with unspecified adjustment formula, the Company has decided to limit all adjustment scenarios to clauses (i) to (viii) only which will have basically covered all adjustment events commonly found in market, and the original clause (ix) is proposed to be deleted.

The proposed amendments would minimize the uncertainty on the number of Conversion Shares when the Company undergoes transaction which would require adjustment(s) pursuant to clauses (viii) and (ix) of the deed poll of the Convertible Notes. The proposed amendments are in line with the spirit of other anti-dilution clauses of the deed poll of the Convertible Notes of which the per share value of the adjustment cannot exceed the per share value of the dilution in the shareholders’ interest in the Company’s equity caused by the transaction. The Company considers that there would be no direct benefit to Mr. Zhao as a result of the proposed amendments to the terms of the Convertible Notes.

Upon the date on which the proposed amendments becoming effective, the outstanding Convertible Notes would fulfill the principle of ‘‘exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments’’ under HKAS 32, thus will be regarded as combined instruments consisting of a liability component and an equity component. The liability component will be measured at amortised cost using the effective interest rate and recorded as liability while the equity component will be measured at fair value and recorded as a component of reserves. Difference in the fair values of the Convertible Notes arising from the proposed amendments, if any, will be recognised in the income statement. In subsequent period, the amortisation of the liability component based on effective interest rate will be recorded in the income statement as finance cost, and on the other hand, change in fair value of the equity component will not be reassessed subsequently. Accordingly, the financial results of the Group will be less affected by changes in fair value of the Convertible Notes. The auditors of the Company are aware of such accounting treatment to be adopted by the Company.

The Directors consider that the proposed amendments are purely to be made for clarifying the possible adjustments as may be made to the Conversion Price thereby minimizing the uncertainty on the number of Conversion Shares which may fall to be issued upon exercise of the conversion rights attached to the Convertible Notes arising from the possible adjustments to the Conversion Price.

Given the future operating results will not be distorted by changes in fair values of the Convertible Notes and there is no direct benefit that will flow to Mr. Zhao as a result of the proposed amendments, the Directors consider the terms of the Supplemental Deed should not have any adverse financial effect on the Company, and is fair and reasonable to the Group and in the interests of the Shareholders as a whole.

The Company is well aware of, and will continue to comply, its obligations under the Listing Rules to retain its auditors or financial advisers to review and certify whether any adjustment(s) is/are to be made to the conversion price of its existing outstanding convertible notes (as the case may be).

– 8 –

LETTER FROM THE BOARD

REFRESHMENT OF THE EXISTING GENERAL MANDATE

At the annual general meeting of the Company held on 21 June 2010, the Shareholders approved, among other things, an ordinary resolution to grant to the Directors the Existing General Mandate to allot and issue up to a maximum of 3,173,948,674 Shares, which is equivalent to 20% of the then aggregate nominal amount of the share capital of the Company as at the date of the said annual general meeting.

As at the Latest Practicable Date, convertible bonds in an aggregate principal amount of HK$195,000,000 due in 2011 convertible into 975,000,000 Shares at a conversion price of HK$0.20 (subject to adjustments) have been issued on 24 September 2010 under the Existing General Mandate. The Existing General Mandate represented approximately 14.67% of the issued share capital of the Company as at the Latest Practicable Date. The Board proposes to grant to the Directors the Issue Mandate to issue and allot new Shares not exceeding 20% of the issued share capital of the Company as at the date of the EGM. As the refreshment of the Existing General Mandate is proposed to the Shareholders before the Company’s next annual general meeting, pursuant to Rule 13.36(4) of the Listing Rules, the refreshment of the Existing General Mandate will be subject to the Second Independent Shareholders’ approval by way of poll at the EGM.

Based on the 21,629,743,370 Shares in issue as at the Latest Practicable Date and assuming there is no further allotment and issue or repurchase of Shares on or before the date of the EGM, subject to the passing of the relevant resolution to approve the grant of the Issue Mandate at the EGM, the Directors will be granted an authority to allot and issue up to a maximum of 4,325,948,674 Shares under the Issue Mandate.

Reasons for refreshment of the Existing General Mandate

As announced by the Company on 4 November 2010, the Company proposed to expand its coal mining business through the acquisition of two coal mines in Shanxi province, the PRC. The potential acquisition is subject to the Shareholders’ approval at the extraordinary general meeting of the Company to be convened. It is contemplated that the cash portion of the consideration for the potential acquisition will be financed by way of bank borrowings and/or issue of securities or convertible bonds.

Taken into consideration the aforesaid potential acquisition, although the Existing General Mandate has yet been fully utilised, the Directors consider that the grant of the Issue Mandate will give the Company more flexibility to tap into the equity market at such time or times in accordance with the funding requirements for the potential acquisition, and general working capital and other business opportunities of the Group as and when appropriate.

Apart from equity financing through the use of the Issue Mandate, the Directors will also consider other alternatives, such as debt financing, bank borrowings, open offer and rights issue. The Directors are of the view that alternatives such as debt financing and bank borrowing will depend on the financial position of the Group, the cost of funding of the Group and the market conditions, and may have to be subject to a relatively lengthy negotiation process. Due to these reasons, the Directors consider that debt financing would be relatively uncertain and time-consuming compared to equity financing, such as placement of new Shares, for the Group to obtain additional funding. The Directors also consider that rights issue/open offer may take a longer time to complete and will incur substantially more costs such

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LETTER FROM THE BOARD

as underwriting commission and there is the likely chance of a highly dilutive pricing of the offer established by an underwriter and there is no certainty that the Company will be able to procure favourable terms under such commercial underwriting.

In view of the aforesaid, the Directors are of the view that the grant of the Issue Mandate is fair and reasonable and in the interests of the Company and the Shareholders as a whole. The Directors will in any event exercise due and careful consideration when choosing the best method of financing for the Group.

LISTING RULES IMPLICATION

As at the Latest Practicable Date, Mr. Zhao, together with his associate, Future Wise Limited held 3,681,535,195 Shares, representing approximately 17.02% of the issued share capital of the Company. As such, Mr. Zhao is a substantial Shareholder and hence a connected person of the Company. As such, the proposed amendments to the Convertible Notes constitute a connected transaction of the Company under Chapter 14A of the Listing Rules and are subject to the requirements of the reporting, announcement and the Company’s independent shareholders’ approval. The issue of the Convertible Notes was previously approved by the then Shareholders at the extraordinary general meeting of the Company dated 7 December 2009, therefore, the proposed amendments are subject to approval by the First Independent Shareholders at the EGM. Given the above, Mr. Zhao and his associates will abstain from casting vote on the resolution approving the Supplemental Deed at the EGM.

Pursuant to the Listing Rules, in respect of the grant of the Issue Mandate, any controlling shareholders and their associates, or where there are no controlling shareholders, directors (excluding independent non-executive directors) and the chief executive and their respective associates shall abstain from voting at the EGM. To the best of the Director’s knowledge, information and belief after having made reasonable enquiries, as at the Latest Practicable Date, the Company had no controlling shareholder. Mr. Wang Da Yong, an executive Director and Chairman of the Company, together with his associates, China Coal and Coke Investment Holding Company Limited and Sino Bridge Investments Limited were interested in 1,800,000,000 Shares. Other than Mr. Wang Da Yong, as at the Latest Practicable Date, no other Directors or chief executive of the Company or their respective associates held any Shares. Accordingly, Mr. Wang Da Yong and his associates shall abstain from casting vote on the resolutions approving the granting of the Issue Mandate at the EGM.

The results of the EGM will be announced by the Company after the EGM.

EGM

A notice convening the EGM to be held at Suite 3603, 36th floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 p.m. on Friday, 31 December 2010 is set out on pages 30 to 32 of this circular for the purpose of considering and, if thought fit, passing the resolutions as set out therein.

A form of proxy for use by the Shareholders at the EGM is enclosed. Whether or not you are able to attend the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the Company’s share registrar, Tricor Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong as soon as possible but in any event not less

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LETTER FROM THE BOARD

than 48 hours before the time appointed for holding the EGM 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 thereof should you so wish.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee as set out on pages 12 to 13 of this circular which contains its recommendations to the First Independent Shareholders on the amendments to the terms of the Convertible Notes and to the Second Independent Shareholders on the proposed grant of the Issue Mandate. Your attention is also drawn to the letter of advice from Quam Capital as set out on pages 14 to 23 of this circular, which contains its advice to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders in relation to the amendments to the term of the Convertible Notes and the proposed grant of the Issue Mandate.

The Directors consider that the resolutions as set out in the notice of the EGM are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend all Shareholders to vote in favour of all the resolutions to be proposed at the EGM.

ADDITIONAL INFORMATION

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

Yours faithfully, For and on behalf of King Stone Energy Group Limited Wang Da Yong Chairman

– 11 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

15 December 2010

To the Shareholders

Dear Sir or Madam,

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES; AND

(2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

We refer to the circular of the Company dated 15 December 2010 (the ‘‘Circular’’) to the Shareholders, of which this letter forms part. Terms used in this letter shall have the same meanings as those defined in the Circular unless the context requires otherwise.

We have been appointed by the Board as members of the Independent Board Committee and to advise (i) the First Independent Shareholders in respect of the amendments to the terms of the Convertible Notes pursuant to the Supplemental Deed entered into between the Company and Mr. Zhao; and (ii) the Second Independent Shareholders in respect of the grant of the Issue Mandate which will enable the Directors to exercise the power of the Company to allot and issue Shares not exceeding 20% of the issued share capital of the Company as at the date of the EGM.

Quam Capital has been appointed to advise the Independent Board Committee, First Independent Shareholders and the Second Independent Shareholders as to whether the amendments to the terms of the Convertible Notes and the grant of the Issue Mandate are fair and reasonable as far as the First Independent Shareholders and the Second Independent Shareholders are concerned and whether they are in the interests of the Company and the Shareholders as a whole. Details of its advice, together with the principal factors and reasons taken into consideration in arriving at such advice, are set out on pages 14 to 23 of the Circular.

– 12 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Your attention is drawn to the letter from the Board set out on pages 4 to 11 of the Circular.

Having considered the terms of the Supplemental Deed, the terms of the Issue Mandate and the advice of Quam Capital, we are of the opinion that the amendments to the terms of the Convertible Notes and the grant of the Issue Mandate are fair and reasonable so far as the First Independent Shareholders and the Second Independent Shareholders are concerned and that the amendments to the terms of the Convertible Notes and the grant of the Issue Mandate are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the First Independent Shareholders and the Second Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the amendments to the terms of the Convertible Notes and the grant of the Issue Mandate, respectively.

Yours faithfully,

the Independent Board Committee

Mr. Jacobsen William Keith Independent non-executive Director

Mr. Cao Kuangyu Independent non-executive Director

Mr. Chiu Sui Keung Independent non-executive Director

– 13 –

LETTER FROM QUAM CAPITAL

The following is the full text of the letter from Quam Capital setting out the advice to the Independent Board Committee and the First Independent Shareholders in respect of amendments to the terms of the Convertible Notes and the advice to the Independent Board Committee and the Second Independent Shareholders in respect of the refreshment of the Existing General Mandate by way of grant of the Issue Mandate, which has been prepared for the purpose of inclusion in this circular.

15 December 2010

To the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders King Stone Energy Group Limited Room 3603, 36th Floor, One Exchange Square 8 Connaught Place Central Hong Kong

Dear Sir or Madam,

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES; AND

(2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders in relation to the amendments to the terms of the Convertible Notes (the ‘‘Amendments’’) and the refreshment of the Existing General Mandate by way of grant of the Issue Mandate (the ‘‘Refreshment’’). Details of the Amendments and the Refreshment are set out in the ‘‘Letter from the Board’’ contained in the circular of the Company (the ‘‘Letter from the Board’’) dated 15 December 2010 (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

On 15 September 2009, the Company and Mr. Zhao entered into the Agreement in relation to the Acquisition and issue of the Convertible Notes. Details of the Agreement are set out in the announcements of the Company dated 23 September 2009 and 21 December 2009 and the circular of the Company dated 18 November 2009.

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LETTER FROM QUAM CAPITAL

HK$0.0625 per Conversion Share. The Conversion Price is subject to anti-dilution adjustments. As at the Latest Practicable Date, the outstanding principal amount of the Convertible Notes is HK$665,000,000, which is convertible into 10,640,000,000 Conversion Shares at the Conversion Price of HK$0.0625 per Conversion Share during the conversion period.

After trading hour on 3 December 2010, the Company entered into the Supplemental Deed with Mr. Zhao, pursuant to which the parties agreed that, subject to the fulfillment of the conditions of the Supplemental Deed, the terms of the Convertible Notes in relation to certain anti-dilution adjustments shall be amended with effect from the Effective Date.

As at the Latest Practicable Date, Mr. Zhao is a substantial Shareholder and hence a connected person of the Company under the Listing Rules. The issue of the Convertible Notes was previously approved by the then Shareholders at the extraordinary general meeting of the Company dated 7 December 2009, therefore, the proposed amendments to the Convertible Notes constitute a connected transaction of the Company under Chapter 14A of the Listing Rules and are subject to the requirements of the reporting, announcement and independent shareholders’ approval. Given the above, Mr. Zhao and his associates will abstain from casting vote on the resolution approving the Supplemental Deed at the EGM and therefore the Supplemental Deed is subject to the approval of the First Independent Shareholders.

In addition, the Company intends to refresh the Existing General Mandate granted to the Directors to exercise all the powers of the Company to allot, issue and otherwise deal with the new Shares not exceeding 20% of the issued share capital of the Company as at 21 June 2010, being the date of passing of the resolution approving the Existing General Mandate at the annual general meeting of the Company. Pursuant to Rule 13.36(4) of the Listing Rules, any controlling shareholders and their associates, or where there are no controlling shareholders, directors (excluding independent nonexecutive directors) and the chief executive and their respective associates shall abstain from voting at the EGM. To the best of the Director’s information and belief after having made reasonable enquiries, as at the Latest Practicable Date, the Company has no controlling shareholder. Mr. Wang Da Yong, an executive Director and Chairman of the Company, together with his associates, China Coal and Coke Investment Holding Company Limited and Sino Bridge Investments Limited are interested in 1,800,000,000 Shares, shall abstain from casting vote on the resolutions approving the Refreshment at the EGM. Therefore, the Refreshment is subject to the approval of the Second Independent Shareholders.

The Independent Board Committee comprising Mr. Jacobsen William Keith, Mr. Cao Kuangyu and Mr. Chiu Sui Keung, being independent non-executive Directors, has been formed to advise the First Independent Shareholders and the Second Independent Shareholders (as the case may be) on (i) whether the amendments to the terms of the Convertible Notes are fair and reasonable and in the interests of the Company and the Shareholder as a whole; (ii) whether the Refreshment is fair and reasonable and in the interests of the Company and the Shareholders as a whole; and (iii) whether the Independent Shareholders should vote in favour of the resolutions to be proposed at the EGM to approve the Amendments and the Refreshment. We, Quam Capital, have been appointed as the independent financial adviser to give an independent opinion to the Independent Board Committee, the First Independent Shareholders and the Second Independent Shareholders in this regard.

In formulating our opinion, we have relied on the information and facts supplied by the Company and its advisers, and the opinions expressed by and the representations of the Directors and management of the Company, which we have assumed to be true, accurate and complete. We have also assumed that

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LETTER FROM QUAM CAPITAL

all the information and representations contained or referred to in the Circular are true and accurate in all respects at the date thereof and may be relied upon. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us. We have also sought and received confirmation from the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular and that all information and representations regarding the Company, the Amendments and the Refreshment provided to us by the Company and/or its Directors and management are true, accurate, complete and not misleading in all aspects at the time they were made and continued to be so until the date of the EGM.

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendations. We have not, however, carried out any independent verification of the information, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of any member of the Group or any of their respective subsidiaries or associates.

A. THE AMENDMENTS

Principal Factors and Reasons Considered

In arriving at our recommendation and giving advice to the Independent Board Committee and the First Independent Shareholders, we have taken into consideration the following principal factors and reasons:

Pursuant to the Supplemental Deed, subject to the fulfillment of the conditions of the Supplemental Deed, the terms of the Convertible Notes in relation to certain anti-dilution adjustments shall be amended, with effect from the Effective Date, as follows:

(a) Under the existing terms of the Convertible Notes, if the rights of conversion, exchange or subscription attached to any securities are modified, so that the consideration per Share receivable for such securities shall be less than 90% of the market price at the trading day immediately preceding the date of the proposal to modify such rights of conversion or exchange or subscription, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such modification by a fraction of which:

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LETTER FROM QUAM CAPITAL

==> picture [33 x 22] intentionally omitted <==

Where:

A = the current market price of one Share on the last trading day preceding the date on which such modification is announced
B = the difference between the fair market value of the modification on a per Share basis on the date of such announcement and the consideration received by the Company for the modification on a per Share basis of such modification
(b) Under the existing terms of the Convertible Notes, the Company shall have the overriding right to appoint an approved financial adviser to consider (i) whether any adjustment to the Conversion Price is appropriate for an event or events (whether or not explicitly stipulated in the Agreement); and (ii) the effective date for such adjustment. This term shall be deleted under the Supplemental Deed.

We have discussed with the management of the Company in respect of the reasons for the Amendments and were advised that such amendments were made for (i) clarifying the possible adjustments as may be made to the Conversion Price thereby minimising the uncertainty on the number of Conversion Shares which may fall to be issued upon exercise of the conversion rights attached to the Convertible Notes arising from the possible adjustments to the Conversion Price; and (ii) avoiding the volatility of the Group’s financial performance due to possible change in the fair value of the Convertible Notes resulted from the existing terms of the Convertible Notes in relation to the accounting treatment of the Convertible Notes pursuant to the Hong Kong Accounting Standards adopted by the Company.

We understand from the Company that pursuant to the Hong Kong Accounting Standards, the conversion feature of the Convertible Notes when issued may be classified as derivative instruments or equity instruments of the Company. The conversion feature of the Convertible Notes will be classified as equity instruments if, and only if, both the following conditions (A) and (B) are met:

(A) The Convertible Notes include no contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Company.

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LETTER FROM QUAM CAPITAL

(B) If the Convertible Notes will or may be settled in the Company’s own equity instruments, they are:
(i) non-derivatives that include no contractual obligation for the Company to deliver a variable number of its own equity instruments; or
(ii) derivatives that will be settled by the Company exchanging a fixed number of cash or another financial assets for a fixed number of the Company’s own equity instruments.

We were advised by the Company that pursuant to the existing terms of the Convertible Notes, the Conversion Price was subject to adjustments in certain events that would not result in settlement by the exchange of a fixed number of cash for a fixed number of Shares, which fails to satisfy condition (B)(ii) above for classifying as an equity instrument. As such, the conversion feature of the Convertible Notes was classified as derivative instruments according to the aforesaid Hong Kong Accounting Standards under the existing terms of the Convertible Notes regardless of the fulfillment of condition (A) above. Being derivative instruments, the conversion feature of the Convertible Notes shall be measured at fair value and any change in the fair value of the conversion feature of the Convertible Notes will be recognised in the income statement of the Group. Factors affecting the value of the conversion feature of the Convertible Notes include but not limited to the market price of the Shares and the volatility thereof.

In light of the above, the Company and Mr. Zhao agreed to amend the existing terms of the Convertible Notes such that the ‘‘per share value of the adjustment’’ will not exceed the ‘‘per share value of the dilution in the shareholders’ interest in the Company’s equity which was caused by the transaction’’. Given the above, it would result in settlement by the exchange of a fixed number of cash for a fixed number of Shares. Further to our discussion with the Company and its auditors, we understand that following the amendments under the Supplemental Deed, the conversion feature of the Convertible Notes will be classified as equity instruments according to the aforesaid Hong Kong Accounting Standards. The value of the conversion feature of the Convertible Notes as at the Effective Date will be credited to the equity of the Company and changes in fair value of such equity component will not be reassessed subsequently. Consequently, the Company can avoid the volatility of the Group’s financial performance due to non-operating event such as possible changes in the fair values of the Convertible Notes and the accounting policy of the Company. We further understand from the Company that the Amendments are not expected to have any material adverse impact on the financial position of the Group and as stated in the Letter from the Board, the auditors of the Company are aware of such accounting treatment to be adopted by the Company.

Further, having discussed with the Company and after taking into consideration that (i) the final adjustment to the Conversion Price under the provision (b) above is subject to the opinion of an approved financial adviser, the removal of which can eliminate the uncertainties in respect of the factors to be considered by the relevant financial adviser in determining the final adjustment to the Conversion Price; (ii) the new adjustment formula set out in provision (a) above, which equalises the ‘‘per share value of the adjustment’’ with the ‘‘per share value of the dilution in the shareholders’ interest in the Company’s equity which was caused by the transaction’’ and in line with the spirit of other anti-dilution clauses, would more appropriately adjust for the dilution effect of the relevant situations; (iii) it is noted that two companies listed on the Stock Exchange have

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LETTER FROM QUAM CAPITAL

also effected similar amendments to the anti-dilution adjustments of the respective convertible bonds in the past two years; and (iv) the Amendments avoid the volatility of the Group’s financial performance due to possible change in the fair value of the Convertible Notes provided under the existing terms of the Convertible Notes and the Company’s accounting policy while not having material adverse impact on the Group’s financial position, we concur with the view of the Directors that the above Amendments are beneficial to the Company in such respect, and are therefore in the interests of the Company and the Shareholders as a whole.

Recommendation

Having taken into account the principal factors and reasons as discussed above, we consider that although the entering into of the Supplemental Deed by the Company is conducted otherwise than its ordinary and usual course of business, the terms of the Supplemental Deed are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Accordingly, we advise the First Independent Shareholders, and the Independent Board Committee to recommend the First Independent Shareholders, to vote in favour of the ordinary resolution to be proposed at the EGM to approve the Supplemental Deed.

B. THE REFRESHMENT

Principal Factors and Reasons Considered

In arriving at our recommendation and giving advice to the Independent Board Committee and the Second Independent Shareholders, we have taken into consideration the following principal factors and reasons:

Background of and reasons for the Refreshment

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

The General Mandate to issue and allot up to 3,173,948,674 Shares was approved by the ordinary resolution proposed at the annual general meeting of the Company held on 21 June 2010. During the period from the grant of the Existing General Mandate and up to the Latest Practicable Date, the Company has issued the convertible bonds in an aggregate principal amount of HK$195,000,000 due in 2011, which are convertible into 975,000,000 new Shares at a conversion price of HK$0.20 per Share under the Existing General Mandate, representing utilisation of approximately 30.7% of the Existing General Mandate.

Based on the 21,629,743,370 Shares in issue as at the Latest Practicable Date and assuming that no further Shares are repurchased or issued by the Company and none of the outstanding share options is exercised on or before the date of the EGM, upon the Second Independent Shareholders’ approval of the Refreshment at the EGM, the Directors will be authorised to allot and issue up to 4,325,948,674 Shares, representing 20% of the total number of Shares in issue as at the date of the EGM.

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LETTER FROM QUAM CAPITAL

As disclosed in the announcement of the Company dated 4 November 2010, the Company intends to expand its coal mining business through the acquisition of two coal mines in Shanxi province, the PRC (the ‘‘Shanxi Acquisition’’) subject to the Shareholder’s approval at the extraordinary general meeting of the Company to be convened. It is contemplated that the cash portion of the consideration for the Shanxi Acquisition, payable at completion, of a minimum of approximately HK$1.0 billion will be financed by way of bank borrowings and/or issue of securities or convertible bonds. Given (i) the capital requirement for completion of the Shanxi Acquisition; (ii) that as at the Latest Practicable Date only 2,198,948,674 new Shares can be issued and approximately HK$466 million can be raised under the Existing General Mandate based on the closing Share price of HK$0.212 as at the Latest Practicable Date; and (iii) that approximately HK$917 million can be raised under the Issue Mandate based on the same Share price, we concur with the Directors’ view that the Refreshment will provide flexibility to the Company to tap into the equity market at such time or times in accordance with the funding requirements for the Shanxi Acquisition as well as the general working capital and expansion of the coal mining business of the Group.

2. Liquidity of the Group

According to the interim report of the Company for the six months ended 30 June 2010 (the ‘‘2010 Interim Report’’), the Group had unaudited cash and cash equivalents of approximately HK$352 million as at 30 June 2010. We noted from the 2010 Interim Report that, as at 30 June 2010, the gearing ratio of the Group (measured as net debt, which represents total debt excluding tax payable, deferred tax liabilities and convertible notes, less cash and cash equivalents to the capital, which represents convertible notes and equity attributable to owners of the Company) was approximately 0.77.

Having considered the liquidity of the Group and the funding requirement of the Shanxi Acquisition as discussed in section (1) above, we consider that it is reasonable for the Group to maintain a strong capital base by restoring its equity fund raising activities at its full capacity for settlement of any possible acquisition and/or investment opportunities (including the Shanxi Acquisition) as and if they materialise.

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LETTER FROM QUAM CAPITAL

3. Fund raising activities of the Company during the past 12 months

Based on the information provided by the Directors, we summarise the capital raising activities of the Company during the past 12 months immediately prior to the Latest Practicable Date in the following table:

				Actual use of net
Date of		Net proceeds	Intended use of net	proceeds as confirmed
announcement	Event	raised	proceeds as announced	by the Directors
20 September	Issue of the	Approximately	Partial cash payments	HK$180 million was
2010	convertible	HK$195	for the Shanxi	paid as earnest
	bonds	million	Acquisition and costs	money for the
			and expenses in	Shanxi Acquisition
			relation to the issue
			of the convertible
			bonds

As illustrated in the table above, the net proceeds raised from the issue of the convertible bonds have been substantially utilised as earnest money for the Shanxi Acquisition. In addition, the Company entered into a placing agreement on 18 June 2010 for placing of 2,673,000,000 Shares on a best effort basis under the Existing General mandate (the ‘‘Placing Agreement’’). The Placing Agreement was lapsed subsequently on 18 August 2010. Save as disclosed above, the Directors confirmed that the Company had not effected any other capital raising exercise or other activities involving the issue of securities during the past 12 months immediately prior to the Latest Practicable Date.

4. Financial flexibility

Given that equity financing is interest and security free by nature, the Directors consider that equity financing serves as a cost effective method of raising capital for the Group. Apart from equity financing, we were advised by the Directors that the Group will also consider other financing methods (such as internal cash resources, debt financing and bank borrowings) to fund the cash portion of the consideration for the Shanxi Acquisition, the general working capital and its future business development. However, given (i) the current liquidity of the Group as discussed in section (2) above; (ii) the cost of debt financing; and (iii) the size of the cash consideration of the Shanxi Acquisition, the Group’s existing internal cash resources may not be adequate and that other financing alternatives may not be appropriate or readily available. As such, the Directors consider that equity financing is a viable additional financing option to finance the consideration of the Shanxi Acquisition and the Group’s future business development. Furthermore, when comparing various equity financing methods such as rights issue or open offer, the Directors consider that rights issue or open offer may take a longer time to complete and will incur substantially more costs such as underwriting commission and there is the likely chance of a highly dilutive pricing demanded by an underwriter and there is no certainty that the Company will be able to procure favourable terms under such commercial underwriting. Therefore, the Directors perceive that placing of new Shares would enable the Company to raise funds in a more commercially expedient time frame. The Directors have confirmed that they will exercise due and careful consideration, including but not limited to the size, cost and timing of funds, when choosing the best method of financing for the Group.

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LETTER FROM QUAM CAPITAL

In view of the above, we concur with the Directors that the Refreshment would improve the Company’s preparedness for any possible fund raising activities that may arise between the date of the EGM and the next annual general meeting of the Company in a timely manner and thereby increases the Company’s financial flexibility. As such we are of the view that the Refreshment is in the interests of the Company and the Shareholders as a whole.

5. Potential dilution effect to the Shareholders

Set out below is a table showing the shareholdings of the Company as at the Latest Practicable Date, and for illustrative purpose, the potential dilution effect on the shareholdings of the Company assuming (i) full utilisation of the Issue Mandate; and (ii) no Shares are issued or repurchased during the period between the Latest Practicable Date and the date of the EGM:

Shareholders Mr. Zhao Ming Future Wise Limited (wholly owned by Mr. Zhao Ming) China Coal and Coke Investment Holding Company Limited (Note) Public shareholders Shares to be issued under the Issue Mandate	Shareholding as at the Latest Practicable Date Shares % 2,531,535,195 11.7 1,150,000,000 5.3 1,800,000,000 8.3 16,148,208,175 74.7 — — 21,629,743,370 100.0	Shareholding upon full utilisation of the Issue Mandate Shares % 2,531,535,195 9.8 1,150,000,000 4.4 1,800,000,000 6.9 16,148,208,175 62.2 4,325,948,674 16.7 25,955,692,044 100.0	Shareholding upon full utilisation of the Issue Mandate Shares % 2,531,535,195 9.8 1,150,000,000 4.4 1,800,000,000 6.9 16,148,208,175 62.2 4,325,948,674 16.7 25,955,692,044 100.0
			100.0

Note: China Coal and Coke Investment Holding Company Limited is wholly owned by Sino Bridge Investments Limited which is a company wholly owned by Mr. Wang Da Yong, an executive Director and Chairman of the Company.

Assuming full utilisation of the Issue Mandate, 4,325,948,674 new Shares will be issued, representing 20% of the issued share capital of the Company as at the Latest Practicable Date and approximately 16.7% of the issued share capital of the Company as enlarged by the Shares issued under the Issue Mandate. Therefore, the aggregate shareholding of the existing public Shareholders will be diluted from approximately 74.7% as at the Latest Practicable Date to approximately 62.2% in the event that the Issue Mandate is fully utilised.

Having considered that (i) the grant of the Issue Mandate will provide an alternative to increase the amount of capital which may be raised under the Existing General Mandate; (ii) the Refreshment will provide financing flexibility to the Company; and (iii) the shareholding of all existing Shareholders will be diluted proportionately to their respective shareholdings upon utilisation of the Issue Mandate, we consider that the potential dilution effect to the shareholdings of the Second Independent Shareholders to be acceptable.

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LETTER FROM QUAM CAPITAL

Recommendation

Having taken into account the principal factors and reasons as discussed above, we consider that the Refreshment is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Accordingly, we advise the Second Independent Shareholders, and the Independent Board Committee to recommend the Second Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the Refreshment.

Yours faithfully, For and on behalf of Quam Capital Limited Gary Mui

Executive Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DIRECTORS’ INTERESTS

(a) Directors’ interests and short positions in the securities of the Company and its associated corporations

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

					Approximate
					percentage
					of the
			Interest in		Company’s
		Interest in	underlying	Total interest	issued share
Name of Director	Capacity	Shares	Shares	in Shares	capital
Mr. Wang Da Yong	Through controlled	1,800,000,000	100,000,000	1,900,000,000	8.78%
(note 1, 2)	corporation/
	Beneficial owner
Mr. Tian Wenwei (note 2)	Beneficial owner	—	75,000,000	75,000,000	0.35%
Mr. Wang Tongtian	Beneficial owner	—	30,000,000	30,000,000	0.14%
(note 2)
Mr. Li Yi (note 2)	Beneficial owner	—	20,000,000	20,000,000	0.09%
Mr. Su Bin (note 2)	Beneficial owner	—	20,000,000	20,000,000	0.09%
Mr. Jacobsen William	Beneficial owner	—	10,000,000	10,000,000	0.04%
Keith (note 2)
Mr. Cao Kuangyu (note 2)	Beneficial owner	—	10,000,000	10,000,000	0.04%
Mr. Chiu Sui Keung	Beneficial owner	—	10,000,000	10,000,000	0.04%
(note 2)

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GENERAL INFORMATION

APPENDIX

Notes:

These Shares are held by China Coal and Coke Investment Holding Company Limited which is wholly owned by Sino Bridge Investments Limited, a company wholly beneficially owned by Mr. Wang Da Yong (‘‘Mr. Wang’’).
Options were granted to Mr. Tian Wenwei and Mr. Li Yi under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 12 May 2011 to 11 May 2013.

20,000,000 options and 10,000,000 options were granted to Mr. Wang Tongtian under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 12 May 2011 to 11 May 2013 and a period of two years commencing from and including 26 August 2011 to 25 August 2013 respectively.

Options were granted to Mr. Su Bin, Mr. Jacobsen William Keith, Mr. Cao Kuangyu and Mr. Chiu Sui Keung under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 26 August 2011 to 25 August 2013.

Options were granted to Mr. Wang Da Yong under the share option scheme of the Company dated 28 May 2002 which are exercisable at the subscription price of HK$0.248 per Share (subject to adjustments) at any time during a period of two years commencing from and including 10 November 2011 to 9 November 2013.

The respective number of underlying Shares which they have interest in represent the number of Shares which would be allotted and issued to them upon the exercise in full of the options granted.

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

(b) Competing interest

As at the Latest Practicable Date, none of the Directors and his associates had any interests which competes or was likely to compete, either directly or indirectly, with the Company’s business.

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GENERAL INFORMATION

APPENDIX

(c) Service contracts

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

(d) Directors’ interest in assets

None of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2009 (being the date to which the latest published audited consolidated financial statements of the Group were made up) and up to the Latest Practicable Date, acquired or disposed of by or leased to or were proposed to be acquired or disposed of by or leased to any member of the Group.

(e) Directors’ interest in contracts

There was no contract of significance in relation to the Group’s business to which the Company or its subsidiaries was a party and in which a Director had a material interest, whether directly or indirectly, subsisting as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, the following persons (other than the Directors or chief executive of the Company) had, or were deemed to have, an interest or short position in the Shares or/and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or, who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group:

Interest in Shares

			Approximate
			percentage of
		Total interests in	the Company’s
		Shares/underlying	issued share
Name	Capacity	Shares	capital
All Aces Investments Limited (note 1)	Beneficial owner	18,948,000,000 (L)	87.60%
Liu Yong (note 1)	Through controlled	18,948,000,000 (L)	87.60%
	corporation
Zhao Ming (note 2)	Beneficial owner/	16,096,535,195 (L)	74.42%
	Through controlled
	corporation
Bank of America Corporation	Through controlled	4,415,004,650 (L)	20.41%
	corporation	952,500,000 (S)	4.40%
Future Wise Limited (note 2)	Beneficial owner	2,125,000,000 (L)	9.82%
Sino Bridge Investments Limited (note 3)	Through controlled	1,800,000,000 (L)	8.32%
	corporation
China Coal and Coke Investment	Beneficial owner	1,800,000,000 (L)	8.32%
Holding Company Limited (note 3)
Central Huijin Investment Limited (note 4)	Through controlled	1,688,000,000 (L)	7.8%
	corporation	1,600,000,000 (S)	7.4%
China Construction Bank Corporation (note 4)	Through controlled	1,688,000,000 (L)	7.8%
	corporation	1,600,000,000 (S)	7.4%
CCB International Group Holdings Limited (note 4)	Through controlled	1,688,000,000 (L)	7.8%
	corporation	1,600,000,000 (S)	7.4%
CCB Financial Holdings Limited (note 4)	Through controlled	1,688,000,000 (L)	7.8%
	corporation	1,600,000,000 (S)	7.4%
CCB International (Holdings) Limited (note 4)	Through controlled	1,688,000,000 (L)	7.8%
	corporation	1,600,000,000 (S)	7.4%
CCB International Assets Management (Cayman)	Through controlled	1,688,000,000 (L)	7.8%
Limited (note 4)	corporation	1,600,000,000 (S)	7.4%
CCB International Asset Management Limited	Beneficial owner	1,688,000,000 (L)	7.8%
(note 4)		1,600,000,000 (S)	7.4%

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GENERAL INFORMATION

APPENDIX

Notes:

All Aces Investments Limited is wholly owned by Mr. Liu Yong.
Zhao Ming holds 2,531,535,195 Shares, 1,150,000,000 Shares held by Future Wise Limited wholly owned by Mr. Zhao, convertible notes of the Company which entitle the holder thereof to convert for 10,640,000,000 Shares at the current conversion price of HK$0.0625 per Share (subject to adjustments) and has long position of 1,775,000,000 Shares, of which 975,000,000 Shares are held by Future Wise Limited.
China Coal and Coke Investment Holding Company Limited is wholly-owned by Sino Bridge Investments Limited, a company wholly beneficially owned by Mr. Wang.
CCB International Asset Management Limited is the beneficial owner of 1,688,000,000 Shares and has a short position of 1,600,000,000 Shares. Central Huijin Investment Limited is deemed to be interested in the long and short positions held by CCB International Asset Management Limited by virtue of its 57.09% interest in China Construction Bank Corporation which owns 100% interest in CCB International Group Holdings Limited. CCB International Group Holdings Limited holds 100% interest in CCB Financial Holdings Limited which in turn owns 100% interest in CCB International (Holdings) Limited. CCB International (Holdings) Limited holds 100% interest in CCB International Assets Management (Cayman) Limited which in turn owns 100% interest in CCB International Asset Management Limited.

Save as disclosed above, as at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company, no person had, or was deemed or taken to have an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or, who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group.

4. LITIGATION

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

5. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2009 (being the date to which the latest published audited consolidated financial statements of the Group were made up).

6. EXPERT AND CONSENT

Name Qualification Quam Capital a corporation licensed to carry on type 6 (advising on corporate finance) regulated activity under the SFO

As at the Latest Practicable Date, Quam Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of the opinion or letter (as the case may be) and references to its name, in the form and context in which they are respectively included.

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GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, Quam Capital did not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Quam Capital did not have any interest, direct or indirect, or any assets which since 31 December 2009, the date to which the latest published audited financial statements of the Company were made up, had been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

7. GENERAL

The secretary of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Lee Tao Wai, who is a member of the Hong Kong Institute of Certified Public Accountants. The share registrar and transfer office of the Company in Hong Kong is Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the offices of the Company at Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong, during normal business hours from the date of this circular up to and including the date of the EGM:

(a) the Agreement;
(b) the Supplemental Deed;
(c) a copy of the ‘‘Letter from the Independent Board Committee’’, the text of which is set out on pages 12 to 13 of this circular;
(d) a copy of the ‘‘Letter from Quam Capital’’, the text of which is set out on pages 14 to 23 of this circular;
(e) the letter of consent from Quam Capital referred to in the paragraph headed ‘‘Expert and consent’’ in this appendix; and
(f) this circular.

9. MISCELLANEOUS

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

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NOTICE OF EGM

KING STONE ENERGY GROUP LIMITED 金山能源集團有限公司

(Incorporated in Hong Kong with limited liability)

(Stock Code: 00663)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of King Stone Energy Group Limited (the ‘‘Company’’) will be held at Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 p.m. on Friday, 31 December 2010 for the purpose of considering and, if thought fit, approving, with or without amendment or modification, the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

‘‘THAT:
(a) the supplemental deed (the ‘‘Supplemental Deed’’) entered into between the Company and Mr. Zhao Ming (‘‘Mr. Zhao’’) dated 3 December 2010 in relation to the amendments of terms of the convertible notes issued by the Company to Mr. Zhao due 2014, a copy of the Supplemental Deed having been produced to the EGM and marked ‘‘A’’ and initialed by the chairman of the EGM for the purpose of identification, and the transactions contemplated thereby be and are hereby approved, confirmed and ratified; and
(b) any one or more directors of the Company be and are hereby authorised to do all such acts and things as they consider necessary or expedient for the purpose of giving effect to the Supplemental Deed and the transactions contemplated thereby.’’
‘‘THAT, to the extent not already exercised, the mandate to allot and issue shares of the Company given to the directors (the ‘‘Directors’’) of the Company at the annual general meeting (the ‘‘AGM’’) of the Company held on 21 June 2010 be and is hereby revoked and replaced by the mandate THAT:
(a) subject to paragraph (c) below, pursuant to the Rules (the ‘‘Listing Rules’’) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’), the exercise by the Directors during the Relevant Period (as defined below) of all the powers of the Company to allot, issue and deal with unissued shares of the Company (the ‘‘Shares’’) and to make or grant offers, agreements and options, including warrants to subscribe for Shares, which might require the exercise of such powers be and the same is hereby generally and unconditionally approved;

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NOTICE OF EGM

(b) the approval in paragraph (a) above shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options 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 options or otherwise), issued or dealt with by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to (i) a Rights Issue (as defined below); or (ii) the exercise of any options granted under the existing share option scheme of the Company; or (iii) any scrip dividend or similar arrangements providing for the allotment and issue of Shares in lieu of the whole or part of a dividend on Shares in accordance with the Articles of the Company in force from time to time; or (iv) any issue of Shares upon the exercise of rights of subscription or conversion under the terms of any warrants of the Company or any securities which are convertible into Shares, shall not exceed the aggregate of:
(i) 20 per cent. of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing of this resolution; and
(ii) (if the Directors are so authorised by a separate ordinary resolution of the shareholders of the Company) the nominal amount of any share capital of the Company repurchased by the Company subsequent to the passing of this resolution (up to a maximum equivalent to 10 per cent. of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing of such resolution),

and the authority pursuant to paragraph (a) of this resolution shall be limited accordingly; and

(d) for the purposes of this resolution:

‘‘Relevant Period’’ means the period from the date of 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 the Articles of the Company, the Companies Law or any other applicable laws of Cayman Islands to be held; or
(iii) the passing of an ordinary resolution by the shareholders of the Company in general meeting revoking or varying the authority given to the Directors by this resolution;

‘‘Rights Issue’’ means an offer of Shares, or offer or issue of warrants, options or other securities giving rights to subscribe for Shares open for a period fixed by the Directors to holders of Shares on the register on a fixed record date in proportion to their then holdings of Shares (subject to such exclusion or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements, or having regard

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NOTICE OF EGM

to any restrictions or obligations under the laws of, or the requirements of, or the expense or delay which may be involved in determining the existence or extent of any restrictions or obligations under the laws of, or the requirements of, any jurisdiction outside Hong Kong or any recognised regulatory body or any stock exchange outside Hong Kong).’’

‘‘THAT conditional upon the passing of resolution no. 2 above, the mandate granted to the Directors at the AGM to extend the general mandate to allot and issue Shares to Shares repurchased by the Company be and is hereby revoked and replaced by the mandate THAT the Directors be and they are hereby authorised to exercise the authority referred to in paragraph (a) of resolution no. 2 above in respect of the share capital of the Company referred to in sub-paragraph (ii) of paragraph (c) of such resolution.’’

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

Hong Kong, 15 December 2010

Registered Office and Principal Place

of Business in Hong Kong:

Suite 3603, 36th Floor One Exchange Square 8 Connaught Place

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 branch share registrar in Hong Kong, Tricor 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.

– 32 –

AI assistant

Design Capital Limited — Proxy Solicitation & Information Statement 2010

49990_rns_2010-12-15_27b6f7f2-f64d-4ff6-819a-dd5f3d06cb53.pdf

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

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES; (2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES;

AND

(3) NOTICE OF EXTRAORDINARY GENERAL MEETING

CONTENTS

DEFINITIONS

DEFINITIONS

‘‘SFO’’

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

Independent non-executive Directors:

To the Shareholders

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES;

(2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES; AND

(3) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

LETTER FROM THE BOARD

THE AMENDMENTS TO THE CONVERTIBLE NOTES

Supplemental Deed

Conditions precedent

Reason for entering into the Supplemental Deed

LETTER FROM THE BOARD

REFRESHMENT OF THE EXISTING GENERAL MANDATE

Reasons for refreshment of the Existing General Mandate

LISTING RULES IMPLICATION

EGM

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMATION

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

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES; AND

(2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Yours faithfully,

(1) CONNECTED TRANSACTION RELATING TO AMENDMENTS TO THE TERMS OF THE CONVERTIBLE NOTES; AND

(2) REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

INTRODUCTION

A. THE AMENDMENTS

Principal Factors and Reasons Considered

Recommendation

B. THE REFRESHMENT

Principal Factors and Reasons Considered

2. Liquidity of the Group

3. Fund raising activities of the Company during the past 12 months

4. Financial flexibility

5. Potential dilution effect to the Shareholders

Recommendation

1. RESPONSIBILITY STATEMENT

2. DIRECTORS’ INTERESTS

(a) Directors’ interests and short positions in the securities of the Company and its associated corporations

(b) Competing interest

(c) Service contracts

(d) Directors’ interest in assets

(e) Directors’ interest in contracts

3. SUBSTANTIAL SHAREHOLDERS

Interest in Shares

4. LITIGATION

5. MATERIAL ADVERSE CHANGE

6. EXPERT AND CONSENT

7. GENERAL

8. DOCUMENTS AVAILABLE FOR INSPECTION

9. MISCELLANEOUS

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

ORDINARY RESOLUTIONS

Registered Office and Principal Place

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