ELL Environmental Holdings Limited — Proxy Solicitation & Information Statement 2017

Sep 26, 2017

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this supplemental 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 Sinotrans Limited, you should at once hand this supplemental circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 0598)

SUPPLEMENTAL CIRCULAR MAJOR AND CONNECTED TRANSACTION

Transaction adviser and Chief Coordinator

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Financial Advisers

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

This supplemental circular should be read in conjunction with the Circular issued by the Company to its Shareholders dated 6 September 2017.

A letter from the Board is set out on pages 2 to 5 of this supplemental circular. A letter from the Independent Board Committee is set out on pages 6 to 7 of this supplemental circular. A letter from the Independent Financial Advisor containing its advice to the Independent Board Committee and the Independent Shareholders is set out on 8 to 15 of this supplemental circular.

26 September 2017

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . .	6
LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR . . . . . . . . . . . . . . . . . . . .	8
APPENDIX – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16

• i -

DEFINITIONS

Terms defined in the Circular shall have the meanings when used therein. In this supplemental circular, unless the context otherwise requires, the following expressions have the following meanings:–

“Circular”

the circular of the Company dated 6 September 2017 in relation to, among other things, the Acquisition

“Profit Undertaking”

the undertaking given by China Merchants in favour of the Company dated 25 September 2017 as described in the section headed “Profit Undertaking” in the “Letter from the Board”

“Supplemental Circular Latest 22 September 2017, being the latest practicable date prior to the Practicable Date” printing of this supplemental circular for ascertaining certain information contained herein

For illustration only and unless otherwise specified, all translations from RMB to HK$ in the Circular and this supplemental circular were made at the rate of HK$1 = RMB0.85275. No representation is made that the HK$ or RMB amounts referred to in the Circular and this supplemental circular could have been or could be converted into RMB or HK$, as the case may be, at any particular rate or at all.

• 1 -

LETTER FROM THE BOARD

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 0598)

Chairman: Zhao Huxiang

Executive Directors:

Song Dexing Li Guanpeng Wang Lin Yu Jianmin Wu Xueming

Non-executive Directors: Jerry Hsu

Registered Office: Sinotrans Plaza A A43, Xizhimen Beidajie Beijing, 100082 People’s Republic of China

Headquarters:

Building 10/Sinotrans Tower B No.5 Anding Road Chaoyang District Beijing, 100029 People’s Republic of China

Independent non-executive Directors:

Guo Minjie Lu Zhengfei Han Xiaojing Liu Junhai

Principal Place of Business in Hong Kong:

Units F & G, 20/F., MG Tower, 133 Hoi Bun Road, Kwun Tong, Kowloon, Hong Kong 26 September 2017

To the Shareholders

Dear Sir and Madam,

SUPPLEMENTAL CIRCULAR MAJOR AND CONNECTED TRANSACTION

INTRODUCTION

Reference is made to the Circular in relation to, among other things, the Acquisition.

• 2 -

LETTER FROM THE BOARD

On 22 August 2017, the Company entered into the Acquisition Agreement with China Merchants under which the Company conditionally agreed to acquire the Target Shares from China Merchants at an aggregate consideration of RMB5,450,000,000 (equivalent to approximately HK$6,391,087,658), which is to be satisfied by the issuance and allotment of up to 1,442,683,444 Consideration Shares at the initial Issue Price of HK$4.43 per Domestic Share.

On 25 September 2017, China Merchants has given the Profit Undertaking in favour of the Company as set out in more details below.

The purpose of this supplemental circular is to provide you with, among other things, information of the Profit Undertaking and other information as required under the Listing Rules. This supplemental circular should be read in conjunction with the Circular.

PROFIT UNDERTAKING

On 25 September 2017, in connection with the Acquisition, China Merchants has given the Profit Undertaking in favour of the Company, pursuant to which China Merchants has undertaken to compensate the Company or the Target Company on a dollar for dollar basis if the net profit attributable to owner of the Target Company as shown in the audited consolidated financial statements of the Target Group for each of the following financial years is less than the guaranteed profit specified below:

Financial year ending	Guaranteed profit
31 December 2017	RMB560 million
31 December 2018	RMB580 million

In the event where the Target Company reports a net loss attributable to owner of the Target Company for either of the financial years, China Merchants will compensate such net loss in addition to the entirety of the guaranteed profit for the relevant year.

Payment under the Profit Undertaking is to be made within 3 months following the date of the Company’s publication of its annual results announcement for the relevant financial year.

The Company and China Merchants will jointly engage an auditor to prepare the consolidated financial statements of the Target Group for each of the two financial years ending 31 December 2017 and 2018, adopting accounting standards consistent with those adopted for preparation of the Company’s financial statements.

The Directors understand that China Merchants has offered the Profit Undertaking to demonstrate to the Company (and its shareholders as a whole) that it is prepared to stand behind the Target Group’s ability to continue its overall trend of improving financial performance at least for the two financial years ending 31 December 2018, while it is being integrated into the operations of the Enlarged Group following Completion. The Profit Undertaking being given on 25 September 2017 did not form part of the basis of determination of the Consideration by the Directors when the Acquisition Agreement was signed on 22 August 2017.

• 3 -

LETTER FROM THE BOARD

While the Directors have had no involvement in the determination of the targets comprised in the Profit Undertaking which have been offered unilaterally by China Merchants and, having made enquiries of China Merchants, had not been informed of the basis and/or assumptions for such targets, the Directors note that:-

• (i) the Profit Undertaking provides the Company with assurance of payments that will make up for any shortfall in the net profit attributable to owner of the Target Company for the financial years 2017 and 2018, that had not earlier been available, thereby ensuring positive contribution towards the results of the Group for the two financial years ending 31 December 2018, subject to Completion taking place;

• (ii) the Profit Undertaking for the year ending 31 December 2017 implies a second half year net profit attributable to owner of the Target Company of approximately RMB318 million which compares conservatively against that for the second half year ended 31 December 2016 of approximately RMB384 million;

• (iii) the Profit Undertaking for the year ending 31 December 2018 represents an approximately 3.6% increase over the Profit Undertaking for the year ending 31 December 2017 which is considerably lower than the compound annual growth rate (CAGR) of the Target Group over the three years ended 31 December 2016 and the China targeted gross domestic product (GDP) growth rate of approximately 6.5%, taking into account that there is a strong correlation between growth in business activities and demand for services in the logistics sector.

In view of the above, the Directors (including the Independent Non-Executive Directors) consider that it is reasonable for the Company to accept the benefit of the Profit Undertaking and, taking into account the Profit Undertaking, the terms of the Acquisition (including the Profit Undertaking) are fair and reasonable, on normal commercial terms and are in the interest of the Company and the Shareholders as a whole.

Warning: Shareholders and potential investors of the Company should note that the Profit Undertaking does not constitute any profit forecast of the future performance of the Target Group and does not provide any assurance that the guaranteed profits set out above will be or can be achieved by the Target Group.

DIRECTORS’ RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee as set out on page 16 to 17 of the Circular and pages 6 and 7 to this supplemental circular which contains its recommendation to the Independent Shareholders in respect of the resolution set out in the notice of EGM and the H Shares Class Meeting to approve the Acquisition, a copy of which is published on the website of the Stock Exchange on 22 August 2017 and despatched to the Shareholders on 24 August 2017.

The advice of the Independent Financial Advisor to the Independent Board Committee and the Independent Shareholders as to whether the terms of the Acquisition Agreement are on normal commercial terms and fair and reasonable and whether the transaction contemplated thereunder is in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole is set out on pages 18 to 39 of the Circular and pages 8 to 15 of this supplemental circular.

• 4 -

LETTER FROM THE BOARD

The Directors (including the independent non-executive Directors) consider the terms of the Acquisition (including the issue of the Consideration Shares and the Profit Undertaking) are fair and reasonable and in the interests of the Company and the Shareholders as a whole and recommend the Shareholders to vote in favour of the resolution to be proposed as set out in the notices of the EGM and H Shares Class Meeting.

GENERAL INFORMATION

Your attention is drawn to the additional information as set out in the Appendix to this supplemental circular.

Yours faithfully, By order of the Board of

Sinotrans Limited Li Shichu

Joint Company Secretary

• 5 -

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter from the Independent Board Committee, which has been prepared for the purpose of incorporation into this supplemental circular, setting out its recommendation to the Independent Shareholders in respect of the transactions contemplated under the Acquisition Agreement including the Profit Undertaking.

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(A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 0598)

To the Independent Shareholders

26 September 2017

Dear Sir and Madam,

MAJOR AND CONNECTED TRANSACTION

We have been appointed as members of the Independent Board Committee to advise the Independent Shareholders of Sinotrans Limited (the “ Company ”) in respect of the resolution to approve the transaction contemplated under the Acquisition Agreement, including the issue of the Consideration Shares, details of which are set out in the “Letter from the Board” contained in the circular of the Company dated 6 September 2017 (the “ Circular ”) and the supplemental circular of the Company (the “ Supplemental Circular ”) of which this letter forms part. Unless the context otherwise requires, terms defined in the Circular and the Supplemental Circular shall have the same meanings when used in this letter.

Your attention is drawn to the “Letter from the Board” in the Circular and the Supplemental Circular, and the advice of the Independent Financial Advisor in its capacity as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of whether the transaction contemplated under the Acquisition Agreement (including the issue of the Consideration Shares and the Profit Undertaking) is on normal commercial terms, in the ordinary and usual course of business of the Group, fair and reasonable and in the interests of the Company and the Shareholders as a whole, as set out in the “Letter from the Independent Financial Advisor” in the Circular and the Supplemental Circular, as well as other additional information set out in other parts of the Circular and the Supplemental Circular.

Having taken into account the advice of, and the principal factors and reasons considered by the Independent Financial Advisor in relation thereto as stated in its letters, we consider the terms of the Acquisition Agreement and transactions contemplated thereunder (including the issue of the Consideration Shares and the Profit Undertaking) to be fair and reasonable, on normal commercial terms and in the ordinary and usual course of business of the Group and are in the interests of the Company and the

• 6 -

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Independent Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM and H Shares Class Meeting in respect of the transaction contemplated under the Acquisition Agreement.

Yours faithfully,

The Independent Board Committee Guo Minjie Lu Zhengfei Han Xiaojing Liu Junhai Independent Independent Independent Independent non-executive Director non-executive Director non-executive Director non-executive Director

• 7 -

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

The following is the full text of the letter from the Independent Financial Advisor to the Independent Board Committee and the Independent Shareholders in respect of the Profit Undertaking prepared for the purpose of incorporation in this supplemental circular.

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Octal Capital Limited 801-805, 8th Floor, Nan Fung Tower 88 Connaught Road Central Hong Kong

26 September 2017

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

MAJOR AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our letter to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, details of which are set out in the circular of the Company dated 6 September 2017. Our opinion below is primarily in relation to the Profit Undertaking as set out in more details in the letter from the Board (the “ Letter from the Board ”) contained in the supplemental circular of the Company dated 26 September 2017 (the “ Supplemental Circular ”), of which this letter forms a part. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as ascribed to them under the section headed “Definitions” in the Supplemental Circular.

On 22 August 2017, the Company entered into the Acquisition Agreement with China Merchants under which the Company conditionally agreed to acquire the Target Shares from China Merchants at an aggregate consideration of RMB5,450,000,000 (equivalent to approximately HK$6,391,087,658), which is to be satisfied by the issuance and allotment of up to 1,442,683,444 Consideration Shares at the initial Issue Price of HK$4.43 per Domestic Share.

As stated in the Letter from the Board, on 25 September 2017, in connection with the Acquisition, China Merchants has given the Profit Undertaking in favour of the Company, which was supplemental to the information published in the Circular.

As Sinotrans & CSC is a controlling Shareholder holding approximately 55.76% of the issued Share capital of the Company and Sinotrans & CSC is a wholly-owned subsidiary of China Merchants, China Merchants is a connected person of the Company and the transactions contemplated under the Acquisition Agreement (including the Profit Undertaking) constitute connected transactions of the Company under Chapter 14A of the Listing Rules.

• 8 -

LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

As the results of at least one of the applicable percentage ratios (as defined under the Listing Rules) is more than 25% but less than 100%, the transactions contemplated under the Acquisition Agreement (including the Profit Undertaking) also constitutes a major transaction for the Company under Chapter 14 of the Listing Rules. The Acquisition Agreement is subject to Independent Shareholders’ approval by way of poll on which China Merchants and its associates (including Sinotrans & CSC) will abstain from voting.

An independent board committee, comprising all the independent non-executive Directors, namely Mr. Guo Minjie, Mr. Lu Zhengfei, Mr. Han Xiaojing and Mr. Liu Junhai, has been established to advise the Independent Shareholders as to whether the terms of the Acquisition Agreement are fair and reasonable and the transactions contemplated thereunder are conducted on normal commercial terms and in the ordinary and usual course of business of the Group, and in the interests of the Company and the Shareholders as a whole; and to give a recommendation to the Independent Shareholders in respect of the voting on the resolutions to be proposed at the EGM and the H Shares Class Meeting.

As at the Supplemental Circular Latest Practicable Date, we are not connected with the Directors, chief executive and substantial shareholders of the Company or the Target Company or any of their respective subsidiaries or associates and are therefore considered suitable to give independent advice to the Independent Board Committee and the Independent Shareholders. Save as acting as the Independent Financial Adviser in respect of the Acquisition Agreement, during the last two years, there was no previous engagement between us and the Company or the Target Company or any of their respective subsidiaries or associates. Apart from normal professional fees payable to us by the Company in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Company or the directors, chief executive and substantial shareholders of the Company or the Target Company or any of their respective subsidiaries or associates.

BASIS OF OPINION

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Supplemental Circular and have assumed that all information and representations made or referred to in the Supplemental Circular as provided by the management of the Company were true at the time they were made and continue to be true as at the date of the Supplemental Circular. We have also relied on our discussion with the management of the Company regarding the Profit Undertaking including the information and representations contained in the Supplemental Circular. We have also assumed that all statements of belief, opinion and intention made by the management of the Company respectively in the Supplemental Circular were reasonably made after due enquiry.

We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Supplemental Circular and to provide a reasonable basis for our advice. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in the Supplemental Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the management of the Company. We have not, however, conducted an independent in-depth investigation into the business and affairs of the Group, the Target Company and their respective associates, nor have we carried out any independent verification of the information supplied to us.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

PRINCIPAL FACTORS AND REASONS CONSIDERED

Principal terms of the Profit Undertaking

On 25 September 2017, in connection with the Acquisition, China Merchants has given the Profit Undertaking in favour of the Company, pursuant to which China Merchants has undertaken to compensate the Company or the Target Company on a dollar for dollar basis if the net profit attributable to owner of the Target Company as shown in the audited consolidated financial statements of the Target Group for each of the following financial years is less than the guaranteed profit (the “ Guaranteed Profits ”) specified below:

Financial year ending Guaranteed profit 31 December 2017 RMB560 million 31 December 2018 RMB580 million

According to the Profit Undertaking, (i) in the event that the net profit attributable to owner of the Target Company for the financial year ending 31 December 2017 (“ FY2017 ”) (the “ 2017 Actual Profit ”) is less than RMB560 million (the “ 2017 Guaranteed Profit ”), China Merchants shall pay to the Company or the Target Company in cash, a compensation equal to the difference between the 2017 Guaranteed Profit and the 2017 Actual Profit within three months following the date of the Company’s publication of its annual results announcement for the FY2017; and (ii) in the event that the net profit attributable to owner of the Target Company for the financial year ending 31 December 2018 (“ FY2018 ”) (the “ 2018 Actual Profit ”) is less than the RMB580 million (the “ 2018 Guaranteed Profit ”), China Merchants shall pay to the Company or the Target Company in cash, a compensation equal to the difference between the 2018 Guaranteed Profit and the 2018 Actual Profit within three months following the date of the Company’s publication of its annual results announcement for the FY2018. In the event where the Target Company reports a net loss attributable to owner of the Target Company for either of the financial years, China Merchants will compensate such net loss in addition to the entirety of the Guaranteed Profit for the relevant year.

As set out in the Letter from the Board, the Company and China Merchants will jointly engage an auditor to prepare the consolidated financial statements of the Target Group for each of the two financial years ending 31 December 2017 and 2018, adopting accounting standards consistent with those adopted for preparation of the Company’s financial statements.

As set out in the Letter from the Board, we noted that the Directors have had no involvement in the determination of the targets comprised in the Profit Undertaking which have been offered unilaterally by China Merchants and having made enquiries with China Merchants, had not been informed of the basis and/ or assumptions for such targets. Having noted the following, the Directors consider that it is reasonable for the Company to accept the benefit of the Profit Undertaking and, taking into account the Profit Undertaking, the terms of the Acquisition (including the Profit Undertaking) are fair and reasonable, on normal commercial terms and are in the interest of the Company and the Shareholders as a whole (i) the positive contribution towards the results of the Group for the two financial years ending 31 December 2018 undertaken by China Merchants; (ii) the net profit attributable to owner of the Target Company for the second half of 2017 implied by the 2017 Guaranteed Profit compares conservatively against that for the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

second half of 2016; and (iii) the 2018 Guaranteed Profit represents a growth of approximately 3.6% over the 2017 Guaranteed Profit, which is considerably lower than the CAGR of the Target Group over the three years ended 31 December 2016 and targeted growth rate of the GDP of China.

In order to assess the fairness and reasonableness of the terms of the Profit Undertaking, we have reviewed the recent transactions of acquisition with terms similar to the Profit Undertaking in the website of the Stock Exchange for a period of twelve months prior to the Supplemental Circular Latest Practicable Date (the “ Review Period ”). In view that the Acquisition is also a connected transaction of the Company under Chapter 14A of the Listing Rules, we consider that it is appropriate to identify transactions which are connected transactions in relation to acquisition with profit undertaking given by the vendor of the target companies to the purchasers which are or are subsidiaries of the listed companies. Based on the abovementioned selection criteria, we have identified eight comparable transactions (the “ Comparable Transaction(s) ”) to compare the terms of the profit undertaking under such transactions against that of the Profit Undertaking. Details of the Comparable Transactions are summarised in the following table:

											Timing for payment of	Number of
									Profit undertaking/		compensation for the	financial
					Guaranteed profit of	Guaranteed profit of			profit guarantee		shortfall between the	year(s)
					the target company	the target company			being one of the basis		guaranteed and actual	covered by
Comparable	Announcement	Stock	Name of the listed		in the first financial	in the second		Basis of	of determination of	Payment method	profit of the target	the profit
Transaction	Date	code	company	Consideration	year	financial year		compensation	consideration	of Compensation	company (“Shortfall”)	undertaking
Comparable 1	18-Sep-17	8363	SDM Group Holdings	HK$32 million	HK$2.74 million	–		(Shortfall /	NA 1	NA 1	NA 1	1
			Limited					guaranteed profit)
								x consideration
Comparable 2	26-Jul-17	1020	Cybernaut International	HK$320 million	HK$15 million 2	HK$18 million	2	Shortfall x (total	Yes	Deduct from	Next installment of	2
			Holdings Company					consideration /		installation of	consideration
			Limited					average guaranteed		consideration
								profit)
Comparable 3	24-Apr-17	2268	Youyuan International	Approx. US$151.4	RMB113 million	–		Shortfall x P/E ratio	Yes	Deduct from	Next installment of	1
			Holdings Limited	million	(RMB290 million x			x share interest		installation of	consideration
					attributable share of			attributable to the		consideration
					39.0%)			vendor of 39.0%
Comparable 4	28-Mar-17	3998	Bosideng International	RMB660 million	RMB70 million	–		Shortfall	Yes	Stand-alone cash	Within five business days	1
			Holdings Limited							payment	after issuance of
											audited financial
											statements of the target
											group
Comparable 5	7-Nov-16	2080	Aux International	RMB153 million	RMB15 million	RMB18 million		Shortfall	Yes	NA 1	NA 1	2
			Holding Limited
Comparable 6	2-Nov-16	2138	Union Medical	HK$37 million	HK$6.93 million	HK$7.03 million		Shortfall x share	Yes	Stand-alone cash	Within 30 days after	10
			Healthcare Limited					interest attributable		payment	issuance of audited
								to the vendor of			account at the end of
								75.0%			year 3,6,9 and 10

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

										Timing for payment of	Number of
								Profit undertaking/		compensation for the	financial
					Guaranteed profit of	Guaranteed profit of		profit guarantee		shortfall between the	year(s)
					the target company	the target company		being one of the basis		guaranteed and actual	covered by
Comparable	Announcement	Stock	Name of the listed		in the first financial	in the second	Basis of	of determination of	Payment method	profit of the target	the profit
Transaction	Date	code	company	Consideration	year	financial year	compensation	consideration	of Compensation	company (“Shortfall”)	undertaking
Comparable 7	27-Sep-16	570	China Traditional	RMB510 million	RMB43 million	RMB43 million	Withholding the	Yes	Deduct from	Last installment of	2
			Chinese Medicine				contingent balance		installation of	consideration
			Holdings Co				payment of		consideration
			Limited				consideration
Comparable 8	28-Oct-16	2098	Zall Group Ltd.	HK$2,591 million	RMB110 million	RMB132 million	Withholding balance	Yes	Deduct from	NA 1	7
							of the		installation of
							consideration		consideration
							shares
			The Profit Undertaking	RMB5,450 million	RMB560 million	RMB580 million	Shortfall	No	Stand-alone cash	Within three months after	2
									payment	the Company’s
										publication of its
										annual results
										announcement for the
										relevant financial year

Source: the Stock Exchange (www.hkex.com.hk)

Note:

1. These were not mentioned in the announcements.

2. The guaranteed profit of HK$15 million is the aggregation of HK$7.5 million and HK$7.5 million, being the guaranteed profit for each of the 6 months ended 30 June 2018 and 31 December 2018, respectively.

3. The guaranteed profit of HK$18 million is the aggregation of HK$9 million and HK$9 million, being the guaranteed profit for each of the 6 months ended 30 June 2019 and 31 December 2019, respectively.

From the above table, we noted that the mechanism of the basis of compensation varies among the Comparable Transactions and the Profit Undertaking. We noticed there are three methods of compensating the listed companies:

• For Comparable 1, Comparable 2 and Comparable 3, their compensation has taken into account the shortfall between the guaranteed profit and the actual profit and the amount of the respective consideration;

• For Comparable 7 and Comparable 8, the compensation is to withhold a pre-determined portion of the consideration, being either cash or shares, and does not take into account the shortfall at all;

• The basis of compensation for Comparable 4, Comparable 5 and Comparable 6 is similar to that of the Profit Undertaking which is equal to the entire or a portion of the amount of shortfall without taking into account the consideration.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

We understand that the basis of the determination of the Profit Undertaking, which does not take into account the amount of Consideration, is relatively less favourable when compared to some of the Comparable Transactions (i.e. Comparable 1, Comparable 2 and Comparable 3), however, it is similar or better than the terms in some other Comparable Transactions (i.e. Comparable 4, Comparable 5 and Comparable 6). In view that the basis of compensation for Comparable 7 and Comparable 8 does not take into account the shortfall at all, we consider that they cannot be compared directly to that of the Profit Undertaking. We also noted that the Consideration was arrived at after arm’s length negotiations between the Company and China Merchants before the Profit Undertaking was given and mainly took into account (i) the historical financial performance of the Target Group; (ii) P/B Ratio and P/E Ratio of the comparable logistics companies listed in Hong Kong and in China; (iii) industry outlook; and (iv) the benefits of the Acquisition, and when determining the basis of Consideration, parties to the Acquisition Agreement have not taken into account the Profit Undertaking which was provided by China Merchants subsequent to the entering into of the Acquisition Agreement and nevertheless provides additional benefit (without any material additional cost) to the Group.

Moreover, we noted that the number of financial years covered by profit undertaking of the Comparable Transactions ranged from 1 to 10 financial years, with three Comparable Transactions having guaranteed period of 1 financial year, three Comparable Transactions having guaranteed period of 2 years, one Comparable Transaction having guaranteed period of 7 years and one Comparable Transaction having guaranteed period of 10 years. The two-year period covered by the Profit Undertaking is thus within the range of the Comparable Transactions and equal to the median length of the period covered by profit undertaking of the Comparable Transactions, indicating that the period covered by the Profit Undertaking offered by China Merchants undertaking to compensate the Company or the Target Company is in line with and not less favourable than the guaranteed period covered by those of the majority of the Comparable Transactions ranging from 1 to 2 financial years.

In respect of the payment method of compensation and timing for payment of compensation, we noted that four Comparable Transactions (i.e. Comparable 2, Comparable 3, Comparable 7 and Comparable 8) required the compensation to be paid by deducting the same from the next payment installment of the consideration to be paid by the purchaser, while the compensation payment method for Comparable 4 and Comparable 6, being similar to that of the Profit Undertaking, is stand-alone cash payment which the vendor is required to make to the purchaser within five business days after issuance of audited financial statements of the target group and within 30 days after issuance of audited account at the end of the specified financial years. In view that the payment method for Comparable 2, Comparable 3, Comparable 7 and Comparable 8 is part of the consideration adjustment mechanism and their compensation settlement time is tied to the next payment installment of the consideration, we consider that they cannot be compared directly to those of the Profit Undertaking. On the other hand, we noted that the timing for payment of the compensation of the Profit Undertaking within three months after the Company’s publication of its annual results announcement for the relevant financial year is relatively longer than that of Comparable 4 being within five business days after issuance of audited financial statements of the target group and Comparable 6 being within 30 business days after issuance of audited account at the end of the specified financial years.

Notwithstanding that the basis of determination of compensation under the Profit Undertaking does not take into account the amount of Consideration while some of the Comparable Transactions do and the longer time is required under the Profit Undertaking to settle compensation than that of Comparable 4 and Comparable 6, we considered that (i) the Profit Undertaking not forming part of the basis of determining the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

Consideration can serve as an additional safeguard to the Company without incurring extra substantial costs; (ii) compensation being equal to the amount of shortfall is not an uncommon market practice; and (iii) the Profit Undertaking offers equal or longer guaranteed period than majority of the Comparable Transactions, we are of the view that the terms of the Profit Undertaking are not less favourable than those of the profit undertakings in connection with the Comparable Transactions and in line with common market practice.

Further, based on our review on the historical financial information of the Target Group set out in the Circular, we noted that the Target Group has recorded compound annual growth rate (CAGR) in revenue and net profit attributable to the owner of the Target Company during the three years ended 31 December 2016 of approximately 27.8% and 64.7% respectively. Moreover, based on (i) our discussion with the management of the Target Group; and (ii) our review on the management accounts of the Target Group for the eight months ended 31 August 2016 and 2017, we noted that the Target Group recorded an increase of revenue and net profit attributable to the owner of the Target Company after deducting non-recurring items for the eight months ended 31 August 2017 over the corresponding period in 2016. We considered the growth implied by the Guaranteed Profits being in line with the past financial performance of the Target Group is fair and reasonable.

According to the official website (http://www.cmhk.com) of China Merchants, we note that China Merchants is a leading state-owned conglomerate with three business sectors, namely, transportation, finance and property. China Merchants has been recognized as Level-A State-owned enterprise for thirteen consecutive years from 2004 to 2016. China Merchants actively participates in the “One Belt One Road” national policy, owning 50 ports in 19 countries and districts. In 2016, China Merchants’ container throughput reaches 95.77 million twenty-foot equivalent units (TEU). China Merchants is the largest toll road investor and operator in China, running 8,203 kilometers toll roads, bridges and tunnels in 18 provinces. Since Sinotrans & CSC was administratively allocated (for no consideration) to, and became a wholly-owned subsidiary of China Merchants, China Merchants become one of the world-class players in the logistics industry. China Merchants conducts influential nation-wide network, which is the largest comprehensive logistics service provider in China.

By the end of 2016, the total assets of China Merchants Group were approximately RMB6.81 trillion. China Merchants Group recorded revenue of approximately RMB495.4 billion and total profit of approximately RMB111.2 billion for the year ended 31 December 2016. The total number of staff of China Merchants Group is over 51,110. China Merchants has substantial shareholding on several companies listed in Hong Kong, Shenzhen and Singapore, such as (i) China Merchants Port Holdings Company Limited (stock code: 0144.HK), which is a blue chip company listed on the Stock Exchange in the field of port operations, general and bulk cargo transportation, container and shipping business in the PRC and Hong Kong; (ii) China Merchants Holdings (Pacific) Ltd (stock code: C22.SGX), which is a company listed on the Singapore Stock Exchange in the field of operation of toll roads in the PRC; (iii) Shenzhen Chiwan Wharf Holdings Ltd (stock code: 000022.SZ), which is a company listed on the Shenzhen Stock Exchange in the field of port handling, storage, transportation and other ancillary services for containers and bulk cargo in the PRC; and (iv) China Merchants Bank Co. Limited (stock code: 3968.HK), which is a company listed on the Stock Exchange in the field of personal banking and corporate and investment banking business. Having considered the strong background and financial position of China Merchants, we are of the view that China Merchants has capability to pay the compensation to the Company or the Target Company in the event that the Target Group cannot achieve the Guaranteed Profits.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISOR

In view that (i) China Merchants has provided undertaking in favour of the Company in respect of the Guaranteed Profits to be achieved by the Target Group; (ii) the Group will be able to receive compensation from China Merchants within three months after the publication of the relevant annual results in the event that the Guaranteed Profits cannot be met; (iii) the Company will not incur any substantial cost in respect of the Profit Undertaking; (iv) the terms of the Profit Undertaking are in line with common market practice; and (v) China Merchants has capability to pay the compensation to the Company or the Target Company if the Guaranteed Profits cannot be met, we are of the view that the Profit Undertaking, which serves as a safeguard to ensure the future return of the Target Group and brings additional benefit of the Acquisition to the Company without incurring substantial cost, is fair and reasonable and in the interests of the Company and the Shareholders as a whole.

RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we are of the opinion that (i) the terms of the Profit Undertaking are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Profit Undertaking is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders, and we advise the Independent Shareholders, to vote in favour of the proposed resolution to approve the Acquisition Agreement and the transactions contemplated thereunder at the EGM and the H Shares Class Meeting.

Yours faithfully, For and on behalf of Octal Capital Limited Alan Fung Louis Chan Managing Director Director

Note: Mr. Alan Fung has been a responsible officer of Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities since 2003. Mr. Fung has more than 23 years of experience in corporate finance and investment banking and has participated in and completed various advisory transactions in respect of mergers and acquisitions, connected transactions and transactions subject to the compliance to the Takeovers Code of listed companies in Hong Kong. Mr. Louis Chan has been a responsible officer of Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities since 2008. Mr. Chan has more than 15 years of experience in corporate finance and investment banking and has participated in and completed various advisory transactions in respect of mergers and acquisitions, connected transactions and transactions subject to the compliance to the Takeovers Code of listed companies in Hong Kong.

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This supplemental 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 Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this supplemental 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 supplemental circular misleading.

2. WORKING CAPITAL

After due and careful consideration, the Directors are of the opinion that, after taking into account the financial resources presently available to the Enlarged Group, including the internally generated funds, presently available banking facilities granted to the Enlarged Group and the rights granted by China Merchants Group (excluding the Enlarged Group) to the Target Group to defer the repayment of amounts due to China Merchants Group (excluding the Enlarged Group), the Enlarged Group has sufficient working capital to satisfy its requirements for at least the next 12 months from the date of publication of this supplemental circular.

3. EXPERT

The following is the qualification of the expert which has given its opinion or advice which is contained in this supplemental circular:

Name	Qualification
Octal Capital Limited (Independent	a corporation licensed to carry out type 1 (dealing in
Financial Advisor)	securities) and type 6 (advising on corporate finance)
	regulated activities under the SFO

As at the Supplemental Circular Latest Practicable Date, the Independent Financial Advisor did not have:

• (a) any direct or indirect interest in any assets which have been acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group since 31 December 2016, being the date to which the latest published audited consolidated financial statements of the Group were made up; and

• (b) any shareholding in any member of the Enlarged Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Enlarged Group.

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GENERAL INFORMATION

APPENDIX

4. DOCUMENTS FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on any weekday (except public holidays) at the office of Reed Smith Richards Butler at 20th Floor, Alexandra House, 18 Chater Road, Central, Hong Kong from the date of this supplemental circular, for a period of 14 days:–

• (a) the Profit Undertaking;

• (b) the letter from the Independent Financial Advisor, the text of which is set out on pages 8 to 15 of this supplemental circular;

• (c) the consent letter from the Independent Financial Advisor;

• (d) this supplemental circular.

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