Design Capital Limited — Proxy Solicitation & Information Statement 2010

Jul 22, 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 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.

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)

MAJOR DISPOSAL RELATING TO DISPOSAL OF A SUBSIDIARY

Financial adviser to the Company

==> picture [138 x 32] intentionally omitted <==

A notice convening the extraordinary general meeting of the Company to be held at Suite 3603, 36th Floor, One Exchange Square, 8 Connaught Place, Central, Hong Kong at 12:00 noon on Tuesday, 10 August 2010 is set out on pages EGM-1 to EGM-2 of this circular. If you are not able to attend the meeting in person, 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, 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 less than 48 hours before the time appointed for the holding of the meeting and any adjournment thereof. Completion and return of the form of proxy will not prevent you from attending and voting in person at the meeting or any adjournment thereof should you so wish.

23 July 2010

CONTENTS

		Page
Definitions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
**Letter from **	the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
2.	The Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
3.	Information on the Anchorage Group . . . . . . . . . . . . . . . . . . . . . . . .	5
4.	Reasons for and benefits of the Disposal . . . . . . . . . . . . . . . . . . . . . .	6
5.	Financial impact on the Group as a result of the Disposal . . . . . . . .	6
6.	Use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
7.	Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
8.	Listing Rules implication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
9.	EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
10.	Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
11.	Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Appendix I	– Financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Appendix II – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		13
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		EGM-1

DEFINITIONS

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

• “Agreement”

the conditional sale and purchase agreement dated 17 June 2010 entered into between the Company and the Purchaser in relation to the Disposal

• “Allied Concept” or “Purchaser”

• Allied Concept Investments Limited, an investment holding company incorporated in Hong Kong

• “Anchorage”

• Anchorage Trading Limited, a company incorporated in Hong Kong with limited liability

• “Anchorage Group”

• Anchorage and Huadian

• “Announcement”

• the announcement of the Company dated 17 June 2010 in relation to the Disposal

• “associate(s)”

• has the meaning ascribed to it under the Listing Rules

• “Board”

• the board of Directors

• “Business Day”

• a day (other than Saturday, Sunday and public holiday) on which licensed banks are generally open for business in Hong Kong throughout their normal business hours

• “Company”

• King Stone Energy Group Limited, a company incorporated in Hong Kong with limited liability and the Shares of which are listed on the Main Board of the Stock Exchange

• “Completion”

• completion of the Disposal in accordance with the terms of the Agreement

• “Conditions Precedent”

• conditions that Completion is subject to, as more particularly set out under the paragraph headed “Conditions Precedent” under the section headed “The Disposal” in the Letter from the Board of this circular

• “Connected Persons”

has the meaning ascribed thereto in the Listing Rules

• “Consideration”

• the sum of HK$1 million payable by the Purchaser to the Company in respect of the Disposal

• “Directors”

• the directors of the Company

– 1 –

DEFINITIONS

“Disposal”

• the disposal of the Sale Interest by the Company to the Purchaser pursuant to the Agreement

• “EGM”

• the extraordinary general meeting of the Company to be convened to approve the Disposal

• “Group”

• the Company and its subsidiaries

• “Hong Kong” the Hong Kong Special Administrative Region of the PRC

• “Huadian” 昆明華甸化工有限公司 (Kunming Huadian Chemicals Co., Ltd.*), a company established in the PRC with limited liability and a direct wholly-owned subsidiary of Anchorage

• “Latest Practicable Date” 21 July 2010, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained in this circular

• “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange

• “Long Stop Date” 31 December 2010, or such later date as the Company and the Purchaser may agree in writing

• “PRC”

• the People’s Republic of China

• “Sale Interest”

• being the entire issued share capital of Anchorage

• “Share(s)”

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

• “Shareholder(s)”

• holder(s) of the Shares

• “SFO”

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

• “Stock Exchange” The Stock Exchange of Hong Kong Limited

• “%”

• per cent

• “HK$”

• Hong Kong dollars, the lawful currency of Hong Kong

• “RMB” Renminbi, the lawful currency of the PRC

* for identification purpose only

– 2 –

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

23 July 2010

To the Shareholders

Dear Sir or Madam,

MAJOR DISPOSAL RELATING TO DISPOSAL OF A SUBSIDIARY

1. INTRODUCTION

On 17 June 2010, the Company announced that, after trading hours of the Stock Exchange, the Company entered into the Agreement with the Purchaser, whereby the Company has conditionally agreed to sell and the Purchaser has agreed to purchase the Sale Interest for the Consideration of HK$1 million.

The purpose of this circular is to provide you with, among others, (i) details of the Disposal; (ii) the financial information of the Group; and (iii) notice of the EGM to approve the Agreement and the transactions contemplated thereunder.

– 3 –

LETTER FROM THE BOARD

2. THE DISPOSAL

The Agreement

Date : 17 June 2010 (after trading hours of the Stock Exchange) Parties Vendor : the Company Purchaser : Allied Concept

Allied Concept is an investment holding company. The Directors confirm that, to the best of their knowledge, information and belief, after having made all reasonable enquiry, Allied Concept and its ultimate beneficial owner(s) are independent of and not connected with the Company and its Connected Persons.

Assets to be disposed of

Pursuant to the Agreement, the Company has conditionally agreed to sell and the Purchaser has agreed to purchase the Sale Interest, being the entire issued share capital of Anchorage. Anchorage is a direct wholly-owned subsidiary of the Company. Upon Completion, Anchorage will cease to be a subsidiary of the Company.

Consideration and terms of payment

The Consideration of HK$1 million is payable in cash by the Purchaser to the Company on Completion.

The Consideration was determined after arm’s length negotiation between the Company and the Purchaser and on normal commercial terms.

Taking into account the net liabilities and the loss-making position of the Anchorage Group and its future business prospects, the Directors consider the terms and conditions of the Disposal to be fair and reasonable and the Disposal to be in the interests of the Company and the Shareholders as a whole.

Conditions Precedent

Completion shall be conditional upon fulfillment of the following conditions:-

• (i) Shareholders’ approval on the Agreement and the transactions contemplated thereunder having been obtained; and

– 4 –

LETTER FROM THE BOARD

• (ii) if required, all approvals and consents in relation to the transactions contemplated under the Agreement having been obtained from relevant governmental authorities, regulatory bodies and third parties.

If the Conditions Precedent set out above could not be fulfilled on or before the Long Stop Date, the Agreement shall lapse and cease to have effect and none of the parties to the Agreement shall have any obligations and liabilities thereunder save for any antecedent breaches.

Completion

Completion shall take place on the later of the third Business Day following the date on which all Conditions Precedent have been fulfilled or such other date that the Company and the Purchaser may agree in writing.

Pursuant to the Agreement, upon Completion, each of Anchorage and Huadian shall release the Group from all liabilities (if any) due to Anchorage and/or Huadian.

3. INFORMATION ON THE ANCHORAGE GROUP

Anchorage is a company incorporated in Hong Kong with limited liability, which together with its direct wholly-owned subsidiary namely Huadian, are currently engaged in the trading of phosphorus products. According to the business license of Huadian, the scope of business of Huadian includes both manufacturing and trading of phosphorous products. However, subsequent to the termination of the PVC leasing agreement (details of which are set out in the announcement of the Company dated 17 September 2008), the Anchorage Group has not carried out any manufacturing of phosphorous products.

Set out below is the unaudited financial information of the Anchorage Group:

	For the year	For the year
	ended 31	ended 31
	December	December
	2009	2008
	HK$‘million	HK$‘million
	(Note)
Turnover	13.7	784.7
Net loss before tax	3.3	86.1
Net loss after tax	3.3	86.1

Note: 防城港華海化工有限公司 (Fangcheng Huahai Chemicals Co., Ltd.*, “Fangcheng Huahai”), an indirect wholly-owned subsidiary of the Company, was disposed of by Anchorage in May 2009 and its financial results was deconsolidated from the financial statements of the Anchorage Group since 31 May 2009, details of which were set out in the announcement and the circular of the Company dated 5 March 2009 and 25 March 2009, respectively.

– 5 –

LETTER FROM THE BOARD

According to the unaudited accounts of the Anchorage Group, as at 31 December 2009, the net liabilities of the Anchorage Group amounted to approximately HK$12.3 million.

4. REASONS FOR AND BENEFITS OF THE DISPOSAL

As mentioned in the circular of the Company dated 25 March 2009, it has been the Group’s intention to downsize its phosphorus business by the disposal of Fangcheng Huahai in May 2009.

Furthermore, as mentioned in the circular of the Company dated 18 November 2009, following the downward trend in the second half of 2008, demand for phosphorus products continued to be weak in early 2009. In view of such unfavourable market and economic situation, the Company will continue to be very cautious and to closely monitor the market.

As set out in the paragraph headed “Information on the Anchorage Group” above, the Anchorage Group recorded net losses for the two years ended 31 December 2009. As raw material prices and energy costs continued to increase since the beginning of 2010 as well as the decreasing demand for the phosphorus products, the performance of phosphorus business remains unsatisfactory. The Directors do not foresee the Group’s phosphorus business can turnaround in the near future, therefore the Board is of the view that rationalization and cost saving measures be explored. The entering into of the Agreement is in line with the said strategy of rationalization and consolidating the business of phosphorus trading, and it is estimated that a gain of approximately HK$19.7 million would arise as a result of the Disposal. Upon Completion, the Company’s phosphorus trading business will be carried out through another wholly-owned subsidiary of the Company, Brand Rich International Limited.

The terms of the Agreement have been determined after arm’s length negotiation between the Company and the Purchaser and are normal commercial terms. Taking into account the above reasons, the Directors are of the view that the terms of the Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

5. FINANCIAL IMPACT ON THE GROUP AS A RESULT OF THE DISPOSAL

Upon Completion, Anchorage will cease to be a subsidiary of the Company and its financial results will no longer be consolidated into the Group’s financial statements.

Revenue

According to the annual report of the Company for the year ended 31 December 2009, the revenue of the Group for the year ended 31 December 2009 was approximately HK$88.7 million. Based on the unaudited financial information of the Anchorage Group for the year ended 31 December 2009, the turnover of the Anchorage Group was approximately HK$13.7 million. The turnover of the Group is expected to decrease after the Disposal.

– 6 –

LETTER FROM THE BOARD

Earnings

According to the annual report of the Company for the year ended 31 December 2009, the loss of the Group for the year ended 31 December 2009 was approximately HK$1,078.7 million. The Group expects to recognise a gain from the Disposal of approximately HK$19.7 million, which is calculated on the basis of the Consideration less (i) the unaudited net liabilities of the Anchorage Group as at 31 December 2009 of approximately HK$12.3 million; (ii) the exchange reserve to be released as a result of the Disposal of approximately HK$6.8 million; and (iii) the fees and expenses in connection with the Disposal of approximately HK$400,000. However, the actual gain on the Disposal may differ as the amount will be calculated based on the carrying value of the Anchorage Group on Completion. In addition, in view of the loss-making position of the Anchorage Group and the unfavourable market and economic situation of the phosphorus industry, it is expected that the earnings of the Group after the Disposal would improve.

Assets and liabilities

According to the annual report of the Company for the year ended 31 December 2009, the audited net liabilities of the Group as at 31 December 2009 was approximately HK$497.2 million. Upon Completion, Anchorage will cease to be a subsidiary of the Company and its assets and liabilities will be deconsolidated from the Group’s future financial statements. Accordingly, both total assets and total liabilities of the Group would decrease as a result of the Disposal. Given the Anchorage Group is at net liability position, the financial position of the Group is expected to improve after completion of the Disposal.

6. USE OF PROCEEDS

The Directors expect that approximately HK$400,000 will be applied for payment of fees and expenses in connection with the Disposal. The remaining proceeds from the Disposal of approximately HK$600,000 will be used for general working capital of the Group.

7. INFORMATION ON THE GROUP

Principal activities of the Group

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

Financial and trading prospects of the Group

Phosphorus business

In view of the loss-making position of the phosphorus business, it has been the Group’s intention to rationalize and implement costs saving measures for its phosphorus business. Due to unfavourable factors including, but not limited to, the

– 7 –

LETTER FROM THE BOARD

increase in raw material prices, the increase in energy cost and the decrease in market demand, the revenue and the gross profit generated from the phosphorus trading business for the year ended 31 December 2009 decreased significantly as compared with that for the previous year. Given the unsatisfactory performance and the financial position of the Anchorage Group, the Directors considered that, following completion of the Disposal, the financial position of the Group is expected to improve. The Board will continue to monitor closely the performance of its phosphorus business.

Optical business

The trading of optical products business which was commenced in the second half of 2008 has been generating steady incomes to the Group. However, such business was affected by the global economic slowdown and its performance was not desirable for the year ended 31 December 2009. In view of the insignificant improvement in the optical business, the Group will continue to monitor the operation of the optical business cautiously so as to take any possible business opportunities when appropriate.

Coal mining business

As stated in the annual report of the Company for the year ended 31 December 2009, the Board considered that with the steady development of China’s economy, domestic demand for coal would increase continuously in the next few years and coal prices would be maintained at a high level, thereby providing various opportunities for the Group’s development in the coal industry. The Company would benefit from the national policy to carry out structure adjustments in the coal industry by weeding out the weak players and tightening the coal supplies. Moreover, the market’s increasing demand for stable supplies of high quality coal would also be favourable to the Group’s future development. With the development of the coal mining business, the Group will divert more of its resources from the phosphorus and optical businesses to the coal mining business which is considered to have better profitability potentials in the future.

Following the acquisition of Triumph Fund A Limited which beneficially owns thermal coal mines located in Ordos City, Inner Mongolia, the PRC on 21 December 2009, the Group entered into a memorandum of understanding and a framework agreement on 26 April 2010 and 9 June 2010, respectively (details of which are set out in the announcements of the Company dated 26 April 2010 and 9 June 2010), with All Aces Investments Limited in respect of a proposed acquisition of two coal mines in the PRC. The terms of a formal agreement have not yet been finalized and the said acquisition is still under negotiation.

– 8 –

LETTER FROM THE BOARD

After the Disposal, the principal business of the Group will be the trading of phosphorus products, trading of optical products and mining and selling of coal. The Company has no present arrangement or plan to dispose of its remaining businesses in the near future. However, the Directors will continue to monitor closely the performance of its businesses and will review the business activities, assets and operating environment of the Group and formulate business plans and strategies for the business development of the Group from time to time.

8. LISTING RULES IMPLICATION

Since the applicable percentage ratios as defined under Rule 14.07 of the Listing Rules are more than 25% but less than 75%, the Disposal contemplated under the Agreement constitutes a major transaction for the Company under the Listing Rules and is therefore subject to the approval of the Shareholders.

To the best of the knowledge, information and belief of the Directors, after having made all reasonable enquiry, none of the Shareholders has a material interest in the Agreement or is required to abstain from voting on the resolution to approve the Agreement and the transactions contemplated thereunder.

9. EGM

Set out on pages EGM-1 to EGM-2 of this circular is 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 noon on Tuesday, 10 August 2010 at which an ordinary resolution will be proposed to approve the Disposal. There is a form of proxy for use at the EGM accompanying this circular. 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 to the branch share register of the Company, Tricor 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 the holding of 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.

10. RECOMMENDATION

The Board considers that the terms of the Agreement are fair and reasonable and the Disposal is in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolution as set out in the notice of the EGM.

– 9 –

LETTER FROM THE BOARD

11. ADDITIONAL INFORMATION

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

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

– 10 –

APPENDIX I

FINANCIAL INFORMATION

1. INDEBTEDNESS

At the close of business on 31 May 2010, being the latest practicable date prior to the printing of this circular for the purpose of this statement of indebtedness, the Group had secured bank loans and an other loan of approximately HK$855 million and approximately HK$101.8 million, respectively, which were secured by:

• (i) guarantees given by Mr. Zhao Ming (former shareholder of Triumph Fund A Limited) and Mr. Hao Shenhai (director of Eerduosi Hengtai Coal Company Limited (“Hengtai”, subsidiary of the Company));

• (ii) pledges over the mining rights with a carrying amount of approximately HK$2,378.0 million and certain plants and machineries held by the Group with aggregate carrying value of approximately HK$115.4 million as at that date; and

• (iii) pledges over 95% and 5% equity interests in Hengtai held by Shanxi Puhua Deqin Metallurgy Technology Co., Ltd. and Eerduosi Dongsheng District Puhua Deqin Trading Co., Ltd. (minority shareholder of Hengtai). As at 31 December 2009, the net book value of Hengtai was approximately HK$177.9 million.

In addition, at the close of business on 31 May 2010, the Group had unsecured bank and other loans of approximately HK$433.2 million and approximately HK$150.9 million, respectively and outstanding zero coupon redeemable convertible notes with aggregate principal amount of HK$1,013.8 million. The unsecured bank loans were guaranteed by certain independent third parties and the convertible notes, which have a 5 years maturity term from 21 December 2009, is redeemable in whole or in part at face value by the Company at any time after 3 years of the issuance date.

Contingent liabilities

At the close of business on 31 May 2010, the Group did not have any significant contingent liabilities.

Save as aforesaid or as otherwise disclosed herein and apart from intra-group liabilities, the Group did not have, at the close of business on 31 May 2010, any mortgages, charges, debentures, loan capital, bank overdrafts, loans, liabilities under acceptance (other than under normal trade bills) or other similar indebtedness, hire purchase or finance lease obligations or any guarantees or other material contingent liabilities.

For the purpose of the above statement of indebtedness, amounts denominated in RMB have been translated into Hong Kong dollars at an exchange rate of RMB100 = HK$114.

– 11 –

APPENDIX I

FINANCIAL INFORMATION

2. WORKING CAPITAL STATEMENT

The Directors are of the opinion that, after taking into account the financial resources and banking facilities available to the Group and its internal generated funds, the Group has sufficient working capital to satisfy its requirements for at least 12 months from the date of publication of this circular in the absence of unforeseen circumstances.

– 12 –

APPENDIX II

GENERAL INFORMATION

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 herein or 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	Total	Company’s
		Interest in	underlying	interest in	issued share
Name of Director	Capacity	Shares	Shares	Shares	capital
Mr. Wang Da Yong	Through	1,800,000,000	–	1,800,000,000	11.34%
(note 1)	controlled
	corporation
Mr. Tian Wenwei	Beneficial	–	75,000,000	75,000,000	0.47%
(note 2)	owner
Mr. Wang Tongtian	Beneficial	–	20,000,000	20,000,000	0.13%
(note 2)	owner
Mr. Li Yi_(note 2)_	Beneficial	–	20,000,000	20,000,000	0.13%
	owner

– 13 –

APPENDIX II

GENERAL INFORMATION

Notes:

1. 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”).

2. Options were granted to Mr. Tian Wenwei, Mr. Wang Tongtian 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. 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.

(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.

– 14 –

APPENDIX II

GENERAL INFORMATION

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 the
			Company’s
		Number of	issued share
Name	Capacity	Shares held	capital
Zhao Ming (note 1)	Beneficial	16,820,000,000	105.99%
	owner
Sino Bridge Investments Limited	Through	1,800,000,000	11.34%
(note 2)	controlled
	corporation
China Coal and Coke Investment	Beneficial	1,800,000,000	11.34%
Holding Company Limited	owner
(note 2)
Central Huijin Investment	Through	1,688,000,000	10.64%
Limited (note 3)	controlled
	corporation
China Construction Bank	Through	1,688,000,000	10.64%
Corporation (note 3)	controlled
	corporation
CCB International Group	Through	1,688,000,000	10.64%
Holdings Limited (note 3)	controlled
	corporation
CCB Financial Holdings Limited	Through	1,688,000,000	10.64%
(note 3)	controlled
	corporation
CCB International (Holdings)	Through	1,688,000,000	10.64%
Limited	controlled
(note 3)	corporation
CCB International Assets	Through	1,688,000,000	10.64%
Management (Cayman) Limited	controlled
(note 3)	corporation
CCB International Asset	Beneficial	1,688,000,000	10.64%
Management Limited (note 3)	owner

– 15 –

APPENDIX II

GENERAL INFORMATION

Notes:

1. Zhao Ming holds 600,000,000 Shares and convertible notes of the Company which entitle the holder thereof to convert for 16,220,000,000 Shares at the current conversion price of HK$0.0625 per Share (subject to adjustments).

2. China Coal and Coke Investment Holding Company Limited is wholly-owned by Sino Bridge Investments Limited, a company wholly beneficially owned by Mr. Wang.

3. CCB International Asset Management Limited is the beneficial owner of 1,688,000,000 Shares. Central Huijin Investment Limited is deemed to be interested in the 1,688,000,000 Shares held by CCB International Asset Management Limited by virtue of its 57.09% interest in China Construction Bank Corporation which owns 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. 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) the acquisition agreement executed between 山西普華德勤冶金科技有限公司 (Shanxi Puhua Deqin Metallurgy Technology Co., Ltd., “Shanxi Puhua”) and Baotou Hengtong (Group) Company Limited (“Baotou Hengtong”) dated 21 July 2008 pursuant to which Shanxi Puhua has purchased 25% equity interest in 鄂爾多斯市恒泰煤炭有限公司 (Eerduosi Hengtai Coal Company Limited, “Hengtai”) from Baotou Hengtong at a consideration of RMB45,000,000;

• (b) the acquisition agreement executed between Eerduosi Dongsheng District Puhua Deqin Trading Company Limited (“Puhua Deqin”) and Baotou Hengtong dated 21 July 2008 pursuant to which Puhua Deqin has purchased 5% equity interest in Hengtai from Baotou Hengtong at a consideration of RMB9,000,000;

• (c) the acquisition agreement executed between Shanxi Puhua and Mr. Zhang Hongliang dated 21 July 2008 pursuant to which Shanxi Puhua has purchased 70% equity interest in Hengtai from Mr. Zhang Hongliang at a consideration of RMB126,000,000;

– 16 –

APPENDIX II

GENERAL INFORMATION

• (d) the PVC leasing termination agreement entered into between Fangcheng Huahai and 雲南南磷集團股份有限公司 (Yunnan Phosphorus Group Co., Ltd.*), on 11 September 2008, pursuant to which parties have agreed to terminate the PVC leasing agreement entered into between the parties on 9 July 2007 in relation to the lease of the PVC premises and the machinery and equipment;

• (e) the equity pledge agreement entered into between Shanxi Puhua and Shenzhen Branch of China Minsheng Banking Corp. Ltd. dated 7 November 2008 pursuant to which 95% equity interest of Hengtai held by Shanxi Puhua has been pledged to Shenzhen Branch of China Minsheng Banking Corp. Ltd. for the purpose of guaranteeing the loan agreement entered into between Hengtai and Shenzhen Branch of China Minsheng Banking Corp. Ltd. for the loan term of RMB500,000,000;

• (f) the conditional subscription agreement entered into on 8 January 2009 between the Company and Mr. Gouw Hiap Kian in relation to the subscription for, and allotment of, the aggregate of 84,880,636 new Shares at a consideration of HK$8,000,000;

• (g) the conditional sale and purchase agreement dated 2 March 2009 entered into between Anchorage and the Purchaser in relation to the disposal of the entire registered capital of Fangcheng Huahai at a consideration of RMB26,000,000;

• (h) the conditional sale and purchase agreement dated 15 September 2009 entered into between Mr. Zhao Ming, Magic Field International Limited and the Company in relation to the acquisition of the entire issued share capital of Triumph Fund A Limited at a consideration of HK$1,855,000,000;

• (i) an equity transfer agreement in respect of 89% equity interest in Shanxi Puhua entered into between 山西恒創實業有限公司 (Shanxi Hengchuang Industrial Co., Ltd *, “Shanxi Hengchuang”) (as transferee) and Mr. Xue Zhendong (as transferor) on 23 September 2009; and an equity transfer agreement in respect of 10% equity interest in Shanxi Puhua entered into between Shanxi Hengchuang (as transferee) and Mr. Zhang Wei (as transferor) on 23 September 2009 at a total consideration of RMB148,500,000;

• (j) a letter dated 28 September 2009 given by Baotou Hengtong and Mr. Zhang Hongliang confirming that the total consideration for the transfer of the 95% equity interest in Hengtai to Shanxi Puhua and the 5% equity interest in Hengtai to Puhua Deqin was RMB700,000,000;

• (k) the memorandum of understanding dated 26 April 2010 entered into between the Company and All Aces Investments Limited in relation to the proposed acquisition of controlling interests in Triumph Fund A1 Limited;

– 17 –

APPENDIX II

GENERAL INFORMATION

• (l) the framework agreement dated 9 June 2010 entered into between Jetway Group Limited and All Aces Investments Limited in relation to the proposed acquisition of 60% of the issued share capital of Triumph Fund A1 Limited;

• (m) the Agreement; and

• (n) the placing agreement dated 18 June 2010 entered into between the Company and Kingsway Financial Services Group Limited in relation to the placing of up to a maximum of 2,673,000,000 new Shares at the placing price of HK$0.195 per Share.

5. 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.

6. GENERAL

The secretary and the qualified accountant 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.

7. 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 up to and including the date of the EGM:

• (a) the Agreement;

• (b) the memorandum and articles of association of the Company;

• (c) the annual report of the Company for the two financial years ended 31 December 2009; and

• (d) the material contracts as referred to the paragraph headed “Material Contracts” in this appendix.

8. MISCELLANEOUS

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

– 18 –

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 noon on Tuesday, 10 August 2010 for the purpose of considering and, if thought fit, passing, with or without amendment or modification, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT :

• (a) the sale and purchase agreement dated 17 June 2010 (the “ Agreement ”) (a copy of which, signed by the Chairman of the meeting for the purpose of identification, has been produced to the meeting marked “A”) made between the Company as vendor and Allied Concept Investments Limited as purchaser pursuant to which the Company has agreed to sell 100% of the shareholding in Anchorage Trading Limited and the transactions contemplated thereunder, be and are hereby approved, confirmed and ratified; and

• (b) the board of directors of the Company (“ Board ”) be and is hereby generally and unconditionally authorized to do all such acts and things and execute all such documents as it considers necessary or expedient or desirable in connection with or to give effect to the Agreement and to implement the transactions contemplated thereunder and to agree to such variation, amendments or waivers of matters relating thereto as are, in the opinion of the Board, in the interest of the Company.”

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

Hong Kong, 23 July 2010

– EGM-1 –

NOTICE OF EGM

Registered Office and Principal Place

of Business in Hong Kong:

Suite 3603, 36th Floor

One Exchange Square 8 Connaught Place Central Hong Kong

Notes:

1. 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.

2. 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.

3. 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.

4. 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.

– EGM-2 –