First Tractor Company Limited - Proxy Solicitation & Information Statement 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in First Tractor Company Limited, you should at once hand this circular with the enclosed form of proxy to the purchaser or other transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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

ONGOING CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee

South China Capital Limited

A letter from the Board of First Tractor Company Limited is set out on pages 4 to 16 of this circular.

A letter from the Independent Board Committee of First Tractor Company Limited is set out on page 17 of this circular.

A letter from South China Capital Limited containing its recommendations to the Independent Board Committee of First Tractor Company Limited is set out on pages 18 to 32 of this circular.

A notice convening an extraordinary general meeting of First Tractor Company Limited to be held at 9:00 a.m. on Wednesday, 6 August 2003 at No. 154 Jianshe Road, Luoyang, Henan Province, the People’s Republic of China is set out on pages 36 to 38 of this circular.

A form of proxy for use at the EGM is enclosed. Whether or not you intend to attend, you are requested to complete and return the accompanying form of proxy in accordance with the instructions contained therein and return it to the Company’s registrar, Hong Kong Registrars Limited, situated at Shop 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 24 hours before the time scheduled for holding such meeting (or any adjourned meeting thereof). Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the EGM if you so desire.

19 June 2003

	Pages
Definitions ..................................................................................................................................................	1
Letter from the Board
Introduction .....................................................................................................................................	4
Agreement dated 29 May 2003 ......................................................................................................	5
Relationship between the parties ...................................................................................................	7
Waiver application ..........................................................................................................................	8
EGM ..............................................................................................................................................	15
Opinion of the Independent Board Committee .............................................................................	16
Additional Information ...................................................................................................................	16
Letter from the Independent Board Committee .......................................................................................	17
Letter from South China Capital ...............................................................................................................	18
Appendix I — General Information .......................................................................................................	33
Notice of EGM ...........................................................................................................................................	36

— i —

DEFINITIONS

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

“Agreement”

the agreement dated 29 May 2003 entered into between First Tractor Finance and China Yituo, pursuant to which First Tractor Finance provides the Financial Services to China Yituo Group

“associates” has the same meaning ascribed to it under the Listing Rules

“Board”

the board of Directors

“China Yituo”

China Yituo Group Corporation Limited (�� !"#$%&' ), a PRC company with limited liability and holds about 57.3% equity interests of the Company

“China Yituo Group” China Yituo and its subsidiaries

“Company” First Tractor Company Limited, a joint stock limited company established in the PRC whose H shares are listed on the Stock Exchange

“Directors” the directors of the Company

“EGM” an extraordinary general meeting of the Company to be convened to consider and approve, among others, the Ongoing Connected Transactions

“Financial Services” the financial services provided by First Tractor Finance to China Yituo Group pursuant to the terms of the Agreement
“First Tractor Finance” China First Tractor Group Finance Company Limited (�� !"#$ �� !"#$ ), a subsidiary of the Company since it was acquired on 14 June 2002, which is owned as to about 79.67% by the Company, 10% by Yituo Building, 1.33% by Yituo Dongfang, 1% by YTO International, 7% by Yituo Diesel and 1% by China Yituo

“Group” the Company and its subsidiaries, principally engaged in the manufacture and sale of agriculture tractors and construction machinery

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

— 1 —

DEFINITIONS

“H Shares”	overseas listed foreign shares in the ordinary share capital of the
	Company, with a nominal value of RMB1.00 each, which are listed on the
	Stock Exchange, and subscribed for and traded in Hong Kong dollars
“Independent Board Committee”	an independent committee of the Board comprising the independent non-
	executive Directors, namely Lu Zhong Min, Tao Xiang, Chan Sau Shan,
	Gary and Chen Zhi, appointed to advise the Independent Shareholders in
	respect of the Ongoing Connected Transactions
“Independent Shareholders”	the Shareholders other than China Yituo and its associates
“Latest Practicable Date”	18 June 2003, being the latest practicable date for ascertaining certain
	information in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock Exchange
“Ongoing Connected	the Financial Services (excluding lease financing provided to parties who
Transactions”	are not connected persons (as defined in the Listing Rules) of the
	Company pursuant to which First Tractor Finance will purchase the goods
	from China Yituo Group as chosen by the parties and lease the goods back
	to the parties and excluding the financing First Tractor Finance will
	provide to parties who are not connected persons (as defined in the Listing
	Rules) of the Company for the purchases made from China Yituo Group)
“PBOC”	the People’s Bank of China
“PRC”	the People’s Republic of China
“RMB”	Renminei, the lawful currency of the PRC
“Shareholders”	the shareholders of the Company
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong
	Kong)

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DEFINITIONS

“South China Capital” South China Capital Limited, the independent financial adviser to the Independent Board Committee and a deemed licenced corporation under the SFO “Stock Exchange” The Stock Exchange of Hong Kong Limited “Waiver” the conditional waiver being applied by the Company to the Stock Exchange from strict compliance with Rule 14.26 of the Listing Rules regarding the Financial Services which constitute ongoing connected transactions in respect of each and every occasion they arise during each of the three financial years ending 31 December 2005

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LETTER FROM THE BOARD

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

Board of Directors: DONG Yong An (Chairman) LIU Da Gong LIU Wen Ying SHAO Hai Chen CUI Qi Hong LI Teng Jiao ZHANG Jing CAO Chun Guo LIU Shuang Cheng LU Zhong Min TAO Xiang CHAN Sau Shan, Gary CHEN Zhi

Registered and principal office: No. 154 Jianshe Road Luoyang Henan Province The PRC

* Independent non-executive Director

19 June 2003

To the Shareholders

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

The Group announced that, among others, on 29 May 2003 First Tractor Finance, a subsidiary of the Company, entered into the conditional Agreement with China Yituo to provide the Financial Services. The Agreement is conditional upon, among others, approval of the Independent Shareholders at the EGM and the grant of Waiver by the Stock Exchange.

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LETTER FROM THE BOARD

China Yituo holds about 57.3% equity interests of the Company and thus is considered a connected party of the Company under the Listing Rules and transactions between the Group and China Yituo will constitute connected transactions under the Listing Rules. As such, the Agreement constitute Ongoing Connected Transactions of the Company. And as the cap amounts of the Ongoing Connected Transactions are expected to exceed HK$10,000,000 and 3% of the latest published consolidated net tangible assets of the Company, the Ongoing Connected Transactions will be subject to the Independent Shareholders’ approval under Rule 14.26 of the Listing Rules.

The purpose of this circular is to provide you with information relating to the Ongoing Connected Transactions, to set out the letter of advice from South China Capital to the Independent Board Committee and the recommendation and opinion of the Independent Board Committee in respect of the Ongoing Connected Transactions, and to give notice of the EGM to be convened (at which China Yituo and its associates will abstain from voting) to approve the Agreement and the Ongoing Connected Transactions contemplated thereafter.

AGREEMENT DATED 29 MAY 2003

Parties

First Tractor Finance
China Yituo

Terms of the Agreement

Pursuant to the Agreement, First Tractor Finance will provide the following Financial Services to China Yituo Group from 29 May 2003 to 28 May 2006:

(a) Deposit . First Tractor Finance will provide deposits services for China Yituo Group with saving interest rate determined with reference to the relevant interest rates set by PBOC from time to time;
(b) Loan . First Tractor Finance will provide loans to China Yituo Group with interest rate determined with reference to the relevant interest rates set by PBOC from time to time;
(c) Bills discounting. First Tractor Finance will provide bills discounting services to China Yituo Group, whereby First Tractor Finance pay the face value of bills presented by China Yituo Group net of interests in advance of the payment due date of the bills with interest rate determined with reference to the relevant interest rates set by PBOC from time to time;

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LETTER FROM THE BOARD

(d) Finance lease.

i. First Tractor Finance will provide lease financing to China Yituo Group with interest rate determined with reference to the relevant interest rates set by PBOC from time to time. First Tractor Finance shall also charge an insurance fee based on fee charged by licensed insurance company in the PRC and an one-off handling charge of 1% to 3% of the lease amount;
ii. First Tractor Finance will provide lease financing to parties (“Parties”) who are not connected persons (as defined in the Listing Rules) of the Company pursuant to which First Tractor Finance will purchase the goods from China Yituo Group as chosen by the Parties and lease the goods to the Parties for a lease charge determined with reference to the relevant interest rate set by PBOC from time to time. First Tractor Finance shall also charge an insurance fee based on the fee charged by licensed insurance company in the PRC and an one-off handling charge of about 1% to 3% of the lease amount;
(e) Bills acceptance. First Tractor Finance will provide bills acceptance services to China Yituo Group, whereby First Tractor Finance guarantees the payment of bills issued by China Yituo Group. In return, First Tractor Finance shall charge an one-off service fee of 0.05% of the value of such bills;
(f) Guarantee. First Tractor Finance will provide corporate or credit guarantee for bank loans and other liabilities of China Yituo Group with an one-off service charge of not more than 1% of the guarantee amount;
(g) Designated loan. First Tractor Finance will accept designated deposits placed by China Yituo Group and funded loans made by First Tractor Finance to parties (which are not connected with the Group within the meanings of the Listing Rules) designated by China Yituo Group (who place the designated deposits); and accept designated deposits placed by parties (which are not connected with the Group within the meanings of the Listing Rules) and funded loans made by First Tractor Finance to China Yituo Group designated by the parties (who place the designated deposits). First Tractor Finance will charge an one-off service fee of about 0.1% of the amount of designated deposits. Under this arrangement, First Tractor Finance does not bear any credit risks.

First Tractor Finance will also provide financing to parties who are not connected persons (as defined in the Listing Rules) of the Company for the purchases made from China Yituo with interest rate determined with reference to the relevant interest rates set by PBOC from time to time. Such financing will be reviewed and considered on a case-by-case basis having regard to the credit quality of such customers.

The Agreement is conditional upon, inter alia, approval of the Independent Shareholders at the EGM and the grant of Waiver by the Stock Exchange.

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LETTER FROM THE BOARD

The Board intend that First Tractor Finance would primarily provide internal financial and treasury functions to the Group. The Board believe that the existing resources of First Tractor Finance (including its human resources and administrative capabilities) can support the provision of the Financial Services, in addition to serving the Group. As such, the Financial Services can enhance the utilization of the existing resources of First Tractor Finance and earn additional revenue for the Group.

The Directors are of the view that the Agreement is entered into under normal commercial terms or on terms no less favourable to the Group than terms available to independent third parties and on terms that are fair and reasonable and in the interest of the shareholders of the Company as a whole.

Security

Pursuant to the Agreement, First Tractor Finance may at its discretion require China Yituo Group to provide guarantee/asset pledge from China Yituo Group or other parties for securing the obligations of China Yituo Group under the Agreement.

China Yituo has confirmed in writing to First Tractor Finance that certain assets beneficially owned by China Yituo with net carrying value of about RMB172 million are pledged for the existing borrowings and any future borrowings and obligations of China Yituo that will arise under the Agreement.

RELATIONSHIP BETWEEN THE PARTIES

First Tractor Finance is a subsidiary of the Company, which is owned as to about 79.67% by the Company, 10% by Yituo Building, 1.33% by Yituo Dongfang, 1% by YTO International, 7% by Yituo Diesel and 1% by China Yituo. The Group effectively holds about 91% of equity interests in First Tractor Finance.

First Tractor Finance was established on 27 November 1992 and obtained its financial institution license issued by the PBOC on 4 August 1992. It was acquired by the Group in June 2002 as stated in the announcements of the Company dated 25 June 2002 and 3 July 2002 and its original financial institution licence became invalid. First Tractor Finance subsequently obtained its renewed financial institution license with effect from 25 June 2002. Its registered capital as at the Latest Practicable Date was RMB300 million. It is a licensed financial institution in the PRC subject to the rules and regulation set by the PBOC. Its scope of business as set out in its financial institution license issued by the PBOC comprises the provision of banking related services to China Yituo Group including the Financial Services.

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LETTER FROM THE BOARD

China Yituo is a company established in the PRC with limited liability principally engaged in the manufacture and sale of agriculture machineries, automobiles, electric generator and other related machines, parts and components. It holds 57.3% equity interests of the Company and thus is considered a connected party of the Company under the Listing Rules and transactions between the Group and China Yituo will constitute connected transactions under the Listing Rules.

WAIVER APPLICATION

Given that China Yituo holds 57.3% equity interests of the Company, China Yituo is considered a connected person under the Listing Rules. Accordingly, the Financial Services (excluding lease financing provided to parties who are not connected persons (as defined in the Listing Rules) of the Company pursuant to which First Tractor Finance will purchase the goods from China Yituo Group as chosen by the parties and lease the goods back to the parties and excluding the financing First Tractor Finance will provide to parties who are not connected persons (as defined in the Listing Rules) of the Company for the purchases made from China Yituo Group) will constitute ongoing connected transactions of the Company. As the cap amounts in relation to the Ongoing Connected Transactions as set out in (b) below is expected to exceed HK$10,000,000 and 3% of the latest published consolidated net tangible assets of the Company, the Ongoing Connected Transactions will be subject to the Independent Shareholders’ approval (with China Yituo and its associates abstaining from voting) and the disclosure requirements applicable to connected transactions under rule 14.26 of the Listing Rules.

The Directors intend that the Ongoing Connected Transactions will be of a continuing nature. The Directors are of the view that it would be impractical and unduly burdensome if the Group had to obtain prior shareholders’ approval and make disclosure for each such transaction in the future. The Group has therefore made an application to the Stock Exchange for a conditional waiver from strict compliance with rule 14.26 of the Listing Rules to the Company regarding the Ongoing Connected Transactions in respect of each and every occasion they arise during each of the three financial years ending 31 December 2005, subject to the following conditions:

(a) that the Ongoing Connected Transactions shall be:
(i) conducted either (A) on normal commercial terms (which will be applied by reference to transactions of a similar nature and to be made by similar entities) or (B) if there is not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Group than terms available to independent third parties; and
(ii) fair and reasonable so far as the shareholders of the Company are concerned;

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LETTER FROM THE BOARD

(b) the outstanding balances of the Ongoing Connected Transactions shall not exceed the cap amounts at any time during the relevant periods as set out below:

	For	the year ending 31	December
	2003	2004	2005
	RMB’million	RMB’million	RMB’million
Deposit (with interests)	60	80	100
Loan (with interests)	The lower of 20% of total		asset value of
		First Tractor Finance or
	165	205	245
Bills discounted receivables	The lower of 15% of total		asset value of
		First Tractor Finance or
	120	160	200
Finance lease (with interests)	The lower of 10% of total		asset value of
provided to China Yituo Group		First Tractor Finance or
	35	65	100
Bills acceptance	The lower of 10% of total		asset value of
		First Tractor Finance or
	60	100	140
Guarantee	The lower of 15% of total		asset value of
		First Tractor Finance or
	100	150	200
Designated loan	5	7	9

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LETTER FROM THE BOARD

(c) the independent non-executive Directors shall review the Ongoing Connected Transactions annually and confirm in the Company’s next annual report that these transactions were conducted in the manner as stated in paragraphs (a) and (b) above;
(d) the Company’s auditors shall review the Ongoing Connected Transactions annually and confirm in writing to the Directors (a copy of which is to be provided by the Company to the Listing Division of the Stock Exchange) that:
(i) the Ongoing Connected Transactions have received the approval of the Company’s board of Directors;
(ii) the Ongoing Connected Transactions have been entered into in accordance with the pricing policies of the First Tractor Finance;
(iii) the Ongoing Connected Transactions have been conducted on terms no less favourable than those prescribed by PBOC; and
(iv) the Ongoing Connected Transactions have been entered into within the limit stated in paragraph (b) above;

Where, for whatever reason, the Company’s auditors decline to accept the engagement or are unable to provide the letter to the Directors, the Directors shall contact the Listing Division of the Stock Exchange immediately.

(e) China Yituo shall undertake to the Stock Exchange, for the purpose of the auditors’ review of the Ongoing Connected Transactions referred to in paragraph (d) above, that the auditors of the Company will be granted access to such of its relevant record, and where required by the auditors, use its best efforts to procure China Yituo and its associates to provide the auditors with access to the relevant records; and
(f) details of the Ongoing Connected Transactions in each financial year shall be disclosed as required under Rule 14.25(1)(A) to (D) of the Listing Rules in the annual report of the Company for that financial year together with a statement of the opinion of the independent non-executive Directors referred to in paragraph (c) above.

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LETTER FROM THE BOARD

Basis of cap amounts

The cap amounts, as agreed between First Tractor Finance and China Yituo, are the limits of financial services First Tractor Finance would provide to China Yituo Group as set out in the Agreement. They are determined primarily after the following considerations:

(a) the resources of First Tractor Finance;
(b) credit control policy of First Tractor Finance;
(c) the future growth and development of China Yituo Group; and
(d) the past financial transactions China Yituo Group has undertaken.

�� !"#$% (China Finance Company Association) has indicated in China Finance Companies periodical that financial institutions which provide financial services to group companies are developing rapidly, and in 2001, the industry-wide growth rate of the total assets value of all financial institutions in the PRC which provide financial services to group companies in the industries including manufacturing, oil, electricity, and the industry of manufacturing of agricultural equipment in which China Yituo Group is principally engaged is about 33%. Between 1987 and 1997, the total asset value of such finance companies has increased from about RMB8 billion to RMB172.3 billion, representing an average yearly growth rate of about 35%.

Similar growth rate of First Tractor Finance was not recorded prior to its acquisition by the Company in June 2002. But First Tractor Finance has undergone substantial changes since the acquisition. The registered capital of First Tractor Finance was substantially raised to RMB300 million and the operation is substantially expanded both in terms of the amounts and the kinds of financial services First Tractor Finance is able to provide. The original board and the senior management of First Tractor Finances prior to the acquisition have been replaced. First Tractor Finance is under a new leadership which will focus on the development of the operation of First Tractor Finance.

Acting to provide financial services to China Yituo Group, the business of First Tractor Finance hinges on the operation of China Yituo Group. In 2000 and 2001, the agricultural equipment industry was under structural adjustment implemented by the PRC Government, culminating in contraction in the agricultural industry. The turnover of the China Yituo Group declined by about 9% in 2001 when compared to previous year. In 2002, the China Yituo Group rejuvenated its operation by concentrating on its marketing strategies. The turnover of the China Yituo Group grew by about 33% in 2002 when compared to previous year and the turnover continues to grow even faster at 84% in the first quarter of 2003 when compared to previous year.

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LETTER FROM THE BOARD

For the Board, under current market conditions, do not foresee that the industry of the financial institutions which provide financial services to group companies and China Yituo Group will be subject to adversities, the Board are of the view that the conditions and operating environment of the industry of such financial institutions and China Yituo Group would remain, and the industry of such financial institutions and China Yituo Group will continue to grow. Based on the total asset value of First Tractor Finance of about RMB648 million as at 31 December 2002, the Board project the total asset value of First Tractor Finance to be about RMB862 million, RMB1,146 million and RMB1,524 million, respectively, as at each of the three years ending 31 December 2005.

In particular, the cap amounts of each financial service are set out below:

(a) Deposits. As at 31 December 2002, First Tractor Finance accepted deposits from China Yituo Group amounting to about RMB72.5 million. China Yituo Group agree to continue to place deposits with First Tractor Finance amounting to not more than RMB60 million in the year ending 31 December 2003, being the cap amounts of deposit for the year ending 31 December 2003.

The turnover of China Yituo Group grew by 33% in 2002. The Board expect that China Yituo Group will continue to grow and the working capital of China Yituo Group will increase as the China Yituo Group grow, which in turn will place more deposits with First Tractor Finance as agreed by China Yituo Group. As such, the cap amounts of deposits are RMB80 million and RMB100 million in 2004 and 2005, respectively.

(b) Loans. Since 14 June 2002 when First Tractor Finance was acquired as subsidiary of the Company, First Tractor Finance provided loans to China Yituo Group amounting to about RMB107.5 million as at 31 December 2002. If the amounts of loans provided to China Yituo Group are extrapolated annually, the loans amount to about RMB200 million as at 31 December 2003, representing about 23% of the projected total asset value of First Tractor Finance as at 31 December 2003.

However, it is the internal credit control policy of First Tractor Finance, which is not prescribed by PBOC, that loans provided to China Yituo Group shall not exceed 20% of the total asset value of the First Tractor Finance. It does not represent the maximum capacity which can be provided by First Tractor Finance. The cap amounts of loans for the three years ending 31 December 2005 are RMB165 million, RMB205 million and RMB245 million, respectively, representing about 19%, 18% and 16%, respectively, of projected total asset value of First Tractor Finance of RMB862 million, RMB1,146 million and RMB1,524 million, respectively, as at each of the three years ending 31 December 2005.

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LETTER FROM THE BOARD

(c) Bills discounting. Since 14 June 2002 when First Tractor Finance was acquired as subsidiary of the Company, the bills discounted receivable in relation to China Yituo Group amounted to about RMB86.3 million as at 31 December 2002. If the amounts of bills discounted receivables from China Yituo Group are extrapolated annually, they amount to about RMB160 million as at 31 December 2003, representing about 19% of the projected total asset value of First Tractor Finance as at 31 December 2003.

However, it is the internal credit control policy of First Tractor Finance, which is not prescribed by PBOC, that the bills discounted receivable in relation to China Yituo Group shall not exceed 15% of the total asset value of the First Tractor Finance. It does not represent the maximum capacity which can be provided by First Tractor Finance. The cap amounts of bills discounted receivables for the three years ending 31 December 2005 are RMB120 million, RMB160 million and RMB200 million, respectively, representing about 14%, 14% and 13%, respectively, of projected total asset value of First Tractor Finance of RMB862 million, RMB1,146 million and RMB1,524 million, respectively, as at each of the three years ending 31 December 2005.

(d) Finance lease. Since 14 June 2002 when First Tractor Finance was acquired as subsidiary of the Company, First Tractor Finance have not provided any finance lease services to China Yituo Group save for the Financial Services.

China Yituo Group has submitted to First Tractor Finance development plans of China Yituo Group. In particular, China Yituo Group intends to purchase equipment in 2003 amounting to about RMB35 million by way of finance lease provided by First Tractor Finance, representing about 4.06% of the projected total asset value of First Tractor Finance of RMB862 million as at 31 December 2003.

It is the internal credit control policy of First Tractor Finance, which is not prescribed by PBOC, that the finance lease provided to China Yituo Group shall not exceed 10% of the total asset value of the First Tractor Finance. It does not represent the maximum capacity which can be provided by First Tractor Finance. The cap amounts of finance lease for the three years ending 31 December 2005 are RMB35 million, RMB65 million and RMB100 million, respectively, representing about 4%, 6% and 7%, respectively, of projected total asset value of First Tractor Finance of RMB862 million, RMB1,146 million and RMB1,524 million, respectively, as at each of the three years ending 31 December 2005.

(e) Bills acceptance. Since 14 June 2002 when First Tractor Finance was acquired as subsidiary of the Company, First Tractor Finance have not provided any bills acceptance services to China Yituo Group. Bills acceptance is a new kind of financial transactions China Yituo Group participate in since March 2003. For the month of March 2003, China Yituo Group already conducted bills acceptance transactions with financial institutions other than First Tractor Finance amounting to about RMB20 million. First Tractor Finance have not conducted bills acceptance transactions with China Yituo Group, save for the Financial Services.

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LETTER FROM THE BOARD

It is the internal credit control policy of First Tractor Finance, which is not prescribed by PBOC, that the bills acceptance provided to China Yituo Group shall not exceed 10% of the total asset value of the First Tractor Finance. It does not represent the maximum capacity which can be provided by First Tractor Finance. The cap amounts of bills acceptance for the three years ending 31 December 2005 are RMB60 million, RMB100 million and RMB140 million, respectively, representing about 7%, 9% and 9%, respectively, of projected total asset value of First Tractor Finance of RMB862 million, RMB1,146 million and RMB1,524 million, respectively, as at each of the three years ending 31 December 2005.

(f) Guarantee. As at 31 December 2002, First Tractor Finance provided corporate guarantee in favour of China Yituo Group amounting to about RMB12.5 million, representing about 1.9% of the total asset value of First Tractor Finance as at 31 December 2002. Corporate guarantee provided by other companies in favour of China Yituo Group amounted to RMB1,780 million as at 31 December 2002.

The guarantee service is a new service provided by First Tractor Finance since it was acquired by the Group in June 2002. In line with the internal credit control policy of First Tractor Finance, which is not prescribed by PBOC, First Tractor Finance has agreed to provide corporate guarantee in favour of China Yituo Group not exceeding 15% of the total asset value of the First Tractor Finance. It does not represent the maximum capacity which can be provided by First Tractor Finance. The cap amounts of guarantee for the three years ending 31 December 2005 are RMB100 million, RMB150 million and RMB200 million, respectively, representing about 12%, 13% and 13%, respectively, of projected total asset value of First Tractor Finance of RMB862 million, RMB1,146 million and RMB1,524 million, respectively, as at each of the three years ending 31 December 2005.

(g) Designated loans. As at 31 December 2002, First Tractor Finance have designated loans in relation to China Yituo Group amounting to RMB3.5 million.

The turnover of China Yituo Group grew by 33% in 2002. The Board expected that China Yituo Group will continue to grow and First Tractor Finance agreed to raise the limits of designated loans in relation to China Yituo Group. As such, the cap amounts of designated loans are RMB5 million, RMB7 million and RMB9 million, respectively, in each of the three years ending 31 December 2005.

First Tractor Finance is not required by PBOC to limit its lending exposure to a percentage of its total asset value. For the purpose of safe credit control, First Tractor Finance limits its lending exposure to China Yituo Group to a percentage of its total asset value as set out above.

— 14 —

LETTER FROM THE BOARD

First Tractor Finance has also complied and will continue to comply with the requirements imposed by PBOC. Examples of the requirements are:

Proper internal control system;
Treatment of non-performing loans;
Capital adequacy ratio of not less than 10%; and
External borrowing not to exceed borrowing from group companies.

Based on the registered capital of RMB300 million of First Tractor Finance and that First Tractor Finance shall provide the financial services not exceeding the cap amounts, the capital adequacy ratio of First Tractor Finance will be not less than 55%, 40% and 30% in 2003, 2004 and 2005, respectively.

In the event that the relevant advance (as defined under Practice Note 19 of the Listing Rules) to China Yituo Group exceeds 25% of the consolidated net asset value of the Company, the Company shall make an announcement pursuant to Practice Note 19 of the Listing Rules.

EGM

You will find on pages 36 to 38 of this circular a notice of the EGM to be held on Wednesday, 6 August 2003 at 9:00 a.m. at No. 154 Jianshe Road, Luoyang, Henan Province, the PRC for the purpose of considering and, if thought fit, passing the ordinary resolutions to approve the Ongoing Connected Transactions.

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LETTER FROM THE BOARD

OPINION OF THE INDEPENDENT BOARD COMMITTEE

Your attention is drawn to (i) the letter from the Independent Board Committee set out in this circular which contains the opinion of the Independent Board Committee given to the Shareholders concerning the Ongoing Connected Transactions; and (ii) the letter from South China Capital set out in this circular which contains the opinion of South China Capital given to the Independent Board Committee in relation to the Ongoing Connected Transactions and the principal factors and reasons considered by South China Capital in arriving at its opinion.

The Independence Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolutions which will be proposed at the EGM to approve the Agreement, and the Ongoing Connected Transactions contemplated thereunder.

ADDITIONAL INFORMATION

Your attention is drawn to the general information set out in Appendix I to this circular.

Yours faithfully, For and on behalf of

First Tractor Company Limited Dong Yong An

Chairman

— 16 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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

19 June 2003

To the Independent Shareholders

ONGOING CONNECTED TRANSACTIONS

Dear Sir or Madam,

We refer to the circular (the “Circular”) dated 19 June 2003 of First Tractor Company Limited, of which this letter forms a part. The terms used in the Circular shall have the same meanings in this letter unless the context otherwise requires.

As independent non-executive Directors who are independent of the parties to the Ongoing Connected Transactions, we have been appointed by the Board to advise you as to whether, in our opinion, the terms of the Agreement and the Ongoing Connected Transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders of the Company are concerned and are in the best interests of the Company and its Shareholders as a whole.

We wish to draw your attention to the letter from the Board, as set out in pages 4 to 16 of the Circular, and the letter from South China Capital, as set out on pages 18 to 32 of the Circular, both of which provide details of the Agreement, and the Ongoing Connected Transactions contemplated thereunder. Having considered the opinion given by South China Capital and the principal factors and reasons taken into consideration by them in arriving at their opinion, we are of the opinion that the Ongoing Connected Transactions are in the best interests of the Company and the Independent Shareholders of the Company as a whole and the terms of the Agreement are fair and reasonable as far as the shareholders of the Company are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions which will be proposed at the EGM to approve the Agreement, and the Ongoing Connected Transactions contemplated thereunder.

Yours faithfully,

Independent Board Committee

Mr. Lu Zhong Min Mr. Tao Xiang Independent non-executive Independent non-executive Director Director Mr. Chan Sau Shan, Gary Mr. Chen Zhi Independent non-executive Independent non-executive Director Director

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LETTER FROM SOUTH CHINA CAPITAL

The following is the text of the letter of advice from South China Capital Limited to the Independent Board Committee dated 19 June 2003 for incorporation in this circular.

South China Capital Limited 28th Floor, Bank of China Tower No. 1 Garden Road Central Hong Kong

19 June 2003

To the Independent Board Committee First Tractor Company Limited

Dear Sirs,

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee in respect of the Ongoing Connected Transactions, details of which are set out in the circular (the “Circular”) of the Company dated 19 June 2003 to the Shareholders, of which this letter forms part. Terms used in this letter have the same meanings as defined in the Circular unless the context otherwise requires.

Under the Listing Rules, the Directors submit that the Ongoing Connected Transactions will require the Independent Shareholders’ approval at the EGM. South China Capital Limited (“South China”), an independent financial adviser, has been retained by the Company to advise the Independent Board Committee as to whether or not the Ongoing Connected Transactions are fair and reasonable as far as the Independent Shareholders are concerned.

In formulating our recommendation, we have relied on the accuracy of the information and facts supplied to us by the Company and its Directors and management. We have also assumed that all statements of belief and intention made by the Directors in the Circular were reasonably made after due enquiry. We have assumed that all information, representations and opinion made or referred to in the Circular were true at the time they were made and continued to be true at the date of EGM. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Company and its Directors and management and have been advised by the Directors that no material facts have been omitted from the information provided and referred to in the Circular.

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LETTER FROM SOUTH CHINA CAPITAL

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

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion in respect of Ongoing Connected Transaction, we have taken into consideration the following principal factors and reasons:

Introduction

The Company is principally engaged in the manufacture, distribution and sale of crawler tractors and wheeled agricultural tractors in the PRC. The Group’s business began in 1955 when China Yituo, the controlling shareholder and the holding company of the Company, was established to engage in the production of agricultural tractors. China Yituo currently holds approximately 57.32% of the issued share capital of the Company and is the controlling shareholder of the Company and a connected person of the Company under the Listing Rules.

First Tractor Finance is a subsidiary of the Company whose registered share capital is owned as to approximately 79.67% by the Company, 10% by Yituo Building, 1.33% by Yituo Dongfang, 1% by YTO International, 7% by Yituo Diesel and 1% by China Yituo. First Tractor Finance is a licensed financial institution in the PRC subject to rules and regulation set by PBOC. As stated in its financial institution license issued by PBOC, First Tractor Finance’s scope of business comprises, among others, the provision of banking and financial services to the Group and China Yituo Group.

Ongoing Connected Transactions

On 29 May 2003, the Agreement was entered into between First Tractor Finance, a subsidiary of the Company and China Yituo, the controlling shareholder and holding company of the Company, under which First Tractor Finance agreed to provide the Financial Services to China Yituo Group for the period from 29 May 2003 to 28 May 2006. The Financial Services comprise Ongoing Connected Transactions for the Company under Rule 14.26 of the Listing Rules as set out below. Accordingly, the Agreement is conditional upon, among other things, approval of the Independent Shareholders at the EGM and the grant of Waiver by the Stock Exchange. A summary of each of the Ongoing Connected Transactions is set out as below:

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LETTER FROM SOUTH CHINA CAPITAL

Connected Transactions Descriptions Deposit (with interests) First Tractor Finance will provide deposits services for China Yituo Group with saving interest rate determined with reference to the relevant interest rates set by PBOC from time to time. Loan (with interests) First Tractor Finance will provide loans to China Yituo Group with interest rate determined with reference to the relevant interest rates set by PBOC from time to time. Bills discounting First Tractor Finance will provide bills discounting services to China Yituo Group, whereby First Tractor Finance pay the face value of bills presented by China Yituo Group net of interests in advance of the payment due date of the bills with interest rate determined with reference to the relevant interest rates set by PBOC from time to time. Finance lease First Tractor Finance will provide lease financing to China Yituo Group with (with interests) interest rate determined with reference to the relevant interest rates set by PBOC provided to from time to time. First Tractor Finance shall also charge an insurance fee based China Yituo Group on fee charged by licensed insurance company in the PRC and an one-off handling charge of 1% to 3% of the lease amount. Bills acceptance First Tractor Finance will provide bills acceptance services to China Yituo Group, whereby First Tractor Finance guarantees the payment of bills issued by China Yituo Group. In return, First Tractor Finance shall charge an one-off service fee of 0.05% of the value of such bills. Guarantee First Tractor Finance will provide corporate or credit guarantee for bank loans and other liabilities of China Yituo Group with an one-off service charge of not more than 1% of the guarantee amount.

Designated loan First Tractor Finance will accept designated deposits placed by China Yituo Group and funded loans made by First Tractor Finance to parties (which are not connected with the Group within the meanings of the Listing Rules) designated by China Yituo Group (who place the designated deposits); and accept designated deposits placed by parties (which are not connected with the Group within the meanings of the Listing Rules) and funded loans made by First Tractor Finance to China Yituo Group designated by the parties (who place the designated deposits). First Tractor Finance will charge an one-off service fee of approximately 0.1% of the amount of designated deposits. Under this arrangement, First Tractor Finance does not bear any credit risks.

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LETTER FROM SOUTH CHINA CAPITAL

The Directors are of the view that each of the above Ongoing Connected Transactions has been entered into under normal commercial terms or on terms no less favorable to the Group than terms available to independent third parties and on terms that are fair and reasonable and in the interest of the shareholders of the Company as a whole as the interest rate of each of the respective Ongoing Connected Transactions are determined with reference to the relevant interest rates set by PBOC from time to time and the service fees charged by the First Tractor Finance for the respective Ongoing Connected Transactions are determined with reference to the fees charged by other licensed financial institutions in the PRC on transactions in a similar nature. We have reviewed the relevant interest rates set by PBOC which serve as the industry benchmark for the financial institutions in the PRC. For those financial transactions including financing lease, bills acceptance, guarantee and designated loan, which are charged of a one-off service fee at the time of inception (no annual fees will be charged in the subsequent years), the Directors have confirmed, and we have reviewed the relevant document, that the fees charged by other licensed financial institutions in the PRC for transactions in a similar nature are based on the similar terms and are determined with reference to a percentage to the respective transaction amount at approximately the same range as that charged by First Tractor Finance. As such, we consider that each of the Ongoing Connected Transactions has been entered into under normal commercial terms or on terms no less favorable to the Group than terms available to independent third parties and on terms that are fair and reasonable and in the interest of the shareholders of the Company.

Basis of the determination of annual caps

Annual caps for each of the Financial Services as set out above are determined with reference to the following principal factors:

(a) the resources of First Tractor Finance;
(b) credit control policy of First Tractor Finance;
(c) the future growth and development of China Yituo Group; and
(d) the past financial transactions China Yituo Group has undertaken.

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LETTER FROM SOUTH CHINA CAPITAL

We consider that the above-mentioned principal factors adopted by the Company to set the respective annual caps are fair, reasonable and justifiable for the following reasons:

(a) the resources of First Tractor Finance

According to its business license, First Tractor Finance’s scope of business mainly comprises, among others things, the provision of banking and financial services to the Group and the China Yituo Group. Pursuant to the relevant regulations set by PBOC, financial institutions in the PRC have to comply with certain requirements, which include, among other things, the capital adequacy ratio of not less than 10%. Based on the registered capital of RMB300 million of First Tractor Finance and that First Tractor Finance shall provide the financial services not exceeding the annual caps, First Tractor Finance sets its capital adequacy ratio as not less than 55%, 40% and 30% in 2003, 2004 and 2005 respectively which is higher than that of 10% set by PBOC. Therefore, the level of First Tractor Finance’s resources (including both financial resources and administrative capacities) should be regarded as one of the principal factors in determining the annual caps for each of the Ongoing Connection Transactions.

(b) the credit control policy of First Tractor Finance

Based on the Directors’ presentation, First Tractor Finance has sufficient resources to provide the Financial Services at the amount over the annual caps as set out below. However, in order to further safeguard its financial condition and to better manage its credit risks, in addition to comply with the relevant regulations set by PBOC, First Tractor Finance has implemented certain stricter internal control policy including, among other things, (i) a higher capital adequacy ratio of not less than 30% compared to that of 10% set by PBOC; and (ii) annual caps in relation to its lending exposure as a percentage to its total assets value. We consider such internal control policy are fair, reasonable and justifiable and serve the purpose of protecting the interest of the Shareholders as a whole.

(c) the future growth and development of China Yituo Group

According to the Directors’ presentation and the business development plans of China Yituo Group, China Yituo Group’s business is expected to continue to grow for the three years up to 2005. Based on the Directors’ estimation, China Yituo Group’s turnover will increase to approximately RMB7,000 million in 2005 from approximately RMB2,900 million in 2002 representing an compound annual growth rate of approximately 34%.

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LETTER FROM SOUTH CHINA CAPITAL

As a licensed financial institution to provide financial services to China Yituo Group, the business development of First Tractor Finance relates to the operation of China Yituo Group. For the year ended 31 December 2002, China Yituo Group’s turnover increased by approximately 33% compared to that in 2001. For the three months ended 31 March 2003, China Yituo Group’s turnover increased by approximately 84% compared to that in the same period in 2002. The Directors have advised that the current market condition and operating environment of the industry in which China Yituo Group are principally engaged will continue to improve. Further, the domestic demand for its products (such as engineering machinery and construction machinery) will continue to increase in the future as a result of, among other things, the implementation of several vast government projects including the West to East gas distribution project (�� ! ) and the West to East electricity transmission project (�� ! ).

On the above basis, we consider that the expected growth in China Yituo Group’s business development is fair and reasonable which will provide First Tractor Finance with more opportunities in term of the provision of financial services to China Yituo Group.

(d) the past financial transactions China Yituo Group has undertaken

There were five past financial transactions entered into between China Yituo Group and First Tractor Finance, namely loans (advanced to China Yituo Group, deposit (received from China Yituo Group), guarantee, bills discounting and designated loan. Out of which, the amount of three past financial transactions, namely loans (advanced to China Yituo Group), deposit (received from China Yituo Group) and bills discounting in 2002 are regarded as relevant basis in determining the annual caps for these three transactions for 2003, 2004 and 2005. For details of the analysis, please refer to the table below. We consider the other two past financial transactions entered into between China Yituo Group and First Tractor Finance, namely guarantee and designated loan did not present reasonable basis in determining their respective annual caps for 2003, 2004 and 2005 as these financial services were not fully developed by First Tractor Finance in 2002.

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LETTER FROM SOUTH CHINA CAPITAL

In particular, annual caps for each of the Financial Service were determined taking into account the following factors:

Ongoing	Annual caps	Annual caps	Analysis on and basis of determination of annual caps
Connected	(RMB’ million)
Transactions	2003	2004 2005
Deposit	60	80 100	As at 31 December 2002, First Tractor Finance accepted
(with interests)			deposits from China Yituo Group of approximately RMB72.5
			million.

China Yituo Group agrees to continue to place deposits with First Tractor Finance with the annual caps of RMB60 million, 80 million and RMB100 million for each of the three years ending 31 December 2005 respectively.

Such annual caps are set in light of the expected growth in the turnover of China Yituo Group. In 2002, China Yituo Group’s turnover increased by approximately 33% compared to that in 2001. For the three months ended 31 March 2003, China Yituo Group’s turnover increased by approximately 84% compared to that in the same period in 2002. The management of China Yituo Group and the Directors expect that the turnover of China Yituo Group will continue to grow at a compound annual growth rate of approximately 34% for each of the three years up to 2005 and as a result, China Yituo Group will have more funds available to deposit with First Tractor Finance. The compound annual growth rate of these annual caps for the period from 2003 to 2005 is at approximately 33%, which is in line with that of China Yituo Group’s expected turnover for the same period.

On the above basis, we consider the annual caps set for the deposits for the three years up to 2005 are fair and reasonable.

Loan The lower of 20% of As at 31 December 2002, First Tractor Finance provided loans (with interests) total asset value of of approximately RMB107.5 million to China Yituo Group First Tractor Finance or represented approximately 16.6% of its total asset value of 165 205 245 approximately RMB648 million as at 31 December 2002.

PBOC does not set any annual caps in respect of First Tractor Finance’s lending exposure as a percentage to its total asset value. However, according to First Tractor Finance’s internal credit control policy, loans advanced to China Yituo Group shall not exceed 20% of its total asset value.

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LETTER FROM SOUTH CHINA CAPITAL

For each of the three years up to 2005, annual caps of the loans are RMB165 million, RMB205 million and RMB245 million, representing approximately 19%, 18% and 16% of the expected total asset value of First Tractor Finance of approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively.

The compound annual growth rate of these annual caps for the period from 2003 to 2005 is at approximately 22%, which is less than that of China Yituo Group’s expected growth in turnover of approximately 34% for the same period. We also note that there is a decrease in the annual caps as to the percentage to the total asset value from 19% in 2003 to 16% in 2005. We have enquired the Directors and were advised that the loans advanced to China Yituo Group from First Tractor Finance do not represent the total funding requirement of China Yituo Group in order to support its future business development plan. China Yituo Group will source from other financial institutions to satisfy its total funding requirement.

On the above basis, we consider the annual caps set for the loans for the three years up to 2005 are fair and reasonable.

Bills discounting The lower of 15% of As at 31 December 2002, the bills discounted receivables from total asset value of China Yituo Group amounted to approximately RMB86.3 First Tractor Finance or million, represented approximately 13.3% of the total asset 120 160 200 value of First Tractor Finance for the year ended 31 December 2002

PBOC does not set any annual caps in respect of the bills discounting in relation to China Yituo Group as a percentage to the total asset value of First Tractor Finance. However, according to First Tractor Finance’s internal credit control policy, bills discounted receivables from China Yituo Group shall not exceed 15% of its total asset value.

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LETTER FROM SOUTH CHINA CAPITAL

For each of the three years up to 2005, annual caps of the bills discounted receivables from China Yituo Group are RMB120 million, RMB160 million and RMB200 million, representing approximately 14%, 14% and 13% of the expected total asset value of First Tractor Finance of approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively which is similar to that of approximately 13.3% in 2002.

The compound annual growth rate of this annual caps for the period from 2003 to 2005 is at approximately 31%, which is in line with that of China Yituo Group’s expected growth in turnover of approximately 34% for the same period. Further, These annual caps are set in according with the First Tractor Finance’s internal credit control policy, which should not exceed 15% of its total asset value.

On the above basis, we consider the annual caps set for the bill discounting for the three year up to 2005 are fair and reasonable.

Finance lease The lower of 10% of Since 14 June 2002 when First Tractor Finance became a (with interests) total asset value of subsidiary of the Company, First Tractor Finance has not provided to First Tractor Finance or provided any finance lease services to China Yituo Group. China Yituo 35 65 100

PBOC does not set any annual caps in respect of the amount of the finance lease to China Yituo Group as a percentage to the total asset value of First Tractor Finance. However, according to First Tractor Finance’s internal credit control policy, such annual caps shall not exceed 10% of its total asset value.

For each of the three years up to 2005, such annual caps amounting to RMB120 million, RMB160 million and RMB200 million, representing approximately 4%, 6% and 7% of the projected total asset value of First Tractor Finance of approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively.

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LETTER FROM SOUTH CHINA CAPITAL

The increase in the annual caps as a percentage of the projected total asset value of First Tractor Finance for the three years up to 2005 is due to the expanding business development plans of China Yituo Group. According to the business development plans of China Yituo Group, in 2003, China Yituo Group intends to purchase equipment of approximately RMB35 million by way of financing lease to be provided by First Tractor Finance, representing approximately 4.06% of the expected total asset value of First Tractor Finance of approximately RMB862 million as at 31 December 2003. The Directors submit that during the period from 2003 to 2005, China Yituo Group plans to implement several vast projects including, among other things (i) the expansion of production lines of First Tractor Diesel project (�� !�"#$% ), (ii) the recycle resource power generation project (�� !" �� ) and (iii) the heavy-duty automobiles development project (�� !"#$% ). These new projects will further increase the amount of financing lease provided by First Tractor Finance.

On the above basis, we consider the annual caps set for the finance lease for the three years up to 2005 are fair and reasonable.

Bills acceptance The lower of 10% of Since 14 June 2002 when First Tractor Finance became a total asset value of subsidiary of the Company, First Tractor Finance has not
First Tractor Finance or provided any bills acceptance services to China Yituo Group. 60 100 140

PBOC does not set any annual caps in respect of the bills acceptance provided to China Yituo Group as a percentage to the total asset value of First Tractor Finance. However, according to First Tractor Finance’s internal credit control policy, the amount of bills acceptance provided to China Yituo Group shall not exceed 10% of its total asset value.

For each of the three years up to 2005, annual caps of the bills acceptance provided to China Yituo Group are RMB60 million, RMB100 million and RMB140 million, representing approximately 7%, 9% and 9% of the expected total asset value of First Tractor Finance of approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively.

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LETTER FROM SOUTH CHINA CAPITAL

By way of bill acceptance, First Tractor Finance guarantees payments of bills issued by China Yituo Group in relation to its purchases. In this regard, bill acceptance are in the similar nature as corporate guarantees as First Tractor Finance will either guarantee payments of bills issued by China Yituo Group (in the case of bill acceptance) or guarantees repayment of loans or credit advanced to China Yituo Group (in the case of corporate guarantee). Although First Tractor Finance has not provided any bills acceptance services to China Yituo Group since June 2002 nor has China Yituo Group received bills acceptance from other financial institutions in or before 2002, the amount of corporate guarantee received by China Yituo Group from other financial institutions in the past can be regarded as a relevant basis in determining the annual caps of bills acceptance. In 2002, the total amount of corporate guarantees received by China Yituo Group from other financial institutions amounted to approximately RMB1,000 million. The Directors expect such amount will not be reduced in the three years up to 2005 given the expected growth in the business of China Yituo Group. However, according to First Tractor Finance’s internal credit control policy, the amount of bills acceptance provided to China Yituo Group shall not exceed 10% of its total asset value.

On the above basis, we consider the annual caps set for the bills acceptance for the three years up to 2005 are fair and reasonable.

Guarantee The lower of 15% of As at 31 December 2002, First Tractor Finance provided total asset value of corporate guarantee in favour of China Yituo Group of First Tractor Finance or approximately RMB12.5 million, representing approximately 100 150 200 1.9% of the total asset value of First Tractor Finance as at 31 December 2002. Corporate guarantee provided by other companies in favour of China Yituo Group amounted to approximately RMB1,780 million as at 31 December 2002.

PBOC does not set any annual caps in respect of the amount of the guarantee provided to China Yituo Group as a percentage to the total asset value of First Tractor Finance. However, according to First Tractor Finance’s internal credit control policy, the amount of the guarantee provided to China Yituo Group shall not exceed 15% of its total asset value.

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LETTER FROM SOUTH CHINA CAPITAL

For each of the three years up to 2005, annual caps of the guarantee provided to China Yituo Group are RMB100 million, RMB150 million and RMB200 million, representing approximately 12%, 13% and 13% of the projected total asset value of First Tractor Finance of approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively.

We note that there is a significant increase in the cap amount as a percentage to the total asset value from 1.9% in 2002 to 12% in 2003. In this regard, we have enquired the Directors and was advised that such increase are mainly due to (i) corporate guarantee services was a new service provided by First Tractor Finance to China Yituo Group since June 2002 and was not fully developed; and (ii) In 2002, the total amount of corporate guarantees China Yituo Group received from other financial institutions amounted to approximately RBM1,000 million. The Directors expect such amount will not be reduced in the three years up to 2005 given the expected growth in the business of China Yituo Group. However, according to First Tractor Finance’s internal credit control policy, the amount of the guarantee provided to China Yituo Group shall not exceed 15% of its total asset value.

On the above basis, we consider the basis of the expected financial needs from China Yituo Group and the annual caps set thereof for each of the three years up to 2005 are fair and reasonable.

Designated loan 5 7 9 As at 31 December 2002, First Tractor Finance has designated loans in relation to China Yituo Group of approximately RMB3.5 million.

In 2002, China Yituo Group’s turnover increased by 33% compared to that in 2001. The management of China Yituo Group and the Directors expect that turnover of China Yituo will continue to grow at a compound annual growth rate of approximately 34% for each of the three years up to 2005 and as a result, the amount of designated loans will increase.

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LETTER FROM SOUTH CHINA CAPITAL

We note that there is an increase in the annual cap from RMB3.5 million in 2003 to 5 million in 2003. In this regard, we have enquired the Directors and were advised that such annual caps were determined based on the best estimation of the financial needs of China Yiituo Group as a result of its expanding business development in the next three years. The compound annual growth rate of the cap amount for the period from year 2003 to 2005 is at approximately 34%, which is in line with that of China Yituo Group’s expected growth in turnover of approximately 34% for the same period.

We consider that the basis of the expected financial needs from China Yituo Group is fair and reasonable. Further, given the nature of the designated loan transaction, there is no credit risk to First Tractor Finance in providing such services. Therefore, we consider such annual caps are fair and reasonable.

All the above annual cap, save for the deposit and the designated loan, are set as a percentage of the projected total asset value of First Tractor Finance for each of the three years ending 31 December 2005.

As stated in the letter from the Board, China Finance Company Association (�� !"#$% ) has indicated in China Finance Companies Periodical that financial institutions which provide financial services to group companies are developing rapidly. In 2001, the industry-wide growth rate of the total assets value of all financial institutions in the PRC which provide financial services to group companies in the industries including manufacturing, oil, electricity, and the industry of manufacturing of agricultural equipment in which China Yituo Group is principally engaged is approximately 33%. Between 1987 and 1997, the total asset value of such finance companies has increased from about RMB8 billion to RMB172.3 billion, representing an average yearly growth rate of approximately 35%.

Since June 2002, when First Tractor Finance became a subsidiary of the Company, First Tractor Finance has undergone substantial changes. The original board and the senior management of First Tractor Finance have been replaced by a new management team which focus on the business development of First Tractor Finance. The registered capital of First Tractor Finance was increased significantly from RMB0.66 million to RMB300 million in July 2002. As a result of such changes, First Tractor Finance’s operation has substantially expanded both in terms of the transaction turnover and the type of finance services provided.

As a licensed financial institution to provide financial services to China Yituo Group, the business development of First Tractor Finance relates to the operation of China Yituo Group. In 2002, approximately 40% of First Tractor Finance’s turnover was derived from transactions with China Yituo Group. For the year ended 31 December 2002, China Yituo Group’s turnover increased by approximately 33% compared to that

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LETTER FROM SOUTH CHINA CAPITAL

in 2001. For the three months ended 31 March 2003, China Yituo Group’s turnover increased by approximately 84% compared to that in the same period in 2002. The Directors have advised that the current market condition and operating environment of the industry in which China Yituo Group are principally engaged will continue to grow. Further, the domestic demand for its products (such as engineering machinery and construction machinery) will continue to increase in the future as a result of, among others, the implementation of several vast government projects including. among other things, the West to East gas distribution projects E�� ! F and West to East electricity transmission projects E�� !F.

On the above basis, we consider the projected total asset value of First Tractor Finance of approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively are fair and reasonable.

Given all the above, we are of the view that the annual caps set out above for each of the Ongoing Connected Transactions are fair and reasonable and are in the interest of the Shareholders in a whole.

Benefits of the Ongoing Connected Transactions

As at 31 December 2002, the total asset value of First Tractor Finance amounted to approximately RMB648 million. According to the projection of the Company, First Tractor Finance’s expected total asset value will amount to approximately RMB862 million, RMB1,146 million and RMB1,524 million as at each of the three years ending 31 December 2005 respectively. The Directors consider that the existing and the projected resources (including both financial resources and administrative capacities) of First Tractor Finance can support the provision of the Financial Services, in addition to serving the Group. As stated in the letter from the Board in the Circular, based on the First Tractor Finance’s registered capital of RMB300 and that First Tractor Finance shall provide the Financial Services not exceeding the annual caps, the capital adequacy ratio of First Tractor Finance will be not less than 55%, 40% and 30% in 2003, 2004 and 2005 respective, which are substantially higher than the minimum capital adequacy ratio of 10% imposed by PBOC. The high level of First Tractor Finance’s capital adequacy ratio indicates a low level of credit risk associate with its lending exposure as well as a low level of utilization of its financial resource. We are of the view that entering into the Agreement and the provision of the Financial Services can enhance the utilization of the resources of First Tractor Finance and earn additional revenue for the Group.

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LETTER FROM SOUTH CHINA CAPITAL

RECOMMENDATION

Having considered the abovementioned principal factors and reasons, we consider that, the terms of the Agreement and the Ongoing Connected Transactions contemplated thereunder are fair and reasonable as far as the Independent Shareholders are concerned and are in the interest of the Company. We therefore advise the Independent Board Committee to recommend to the Independent Shareholders to vote in favour of the respective ordinary resolutions which will be proposed at the EGM to approve the Agreement and the Ongoing Connected Transactions.

Yours faithfully, For and on behalf of South China Capital Limited Richard Howard Gorges Managing Director

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GENERAL INFORMATION

APPENDIX I

RESPONSIBILITY STATEMENT

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

DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, none of the Directors, supervisors, chief executive of the Company and their associates had any interests in the shares of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and Stock Exchange pursuant to Divisions 7 and 8 Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange.

As at the Latest Practicable Date, none of the Directors, supervisors or chief executive of the Company or their spouses or children under 18 years of age were granted or had exercised any right to subscribe for any equity or debt securities of the Company or any of its associated corporations (within the meaning of Part XV of the SFO).

None of the Directors or South China Capital has any interest, direct or indirect, in any assets which have 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 since 31 December 2002, the date to which the latest published audited financial statement of the Group were made up.

None of the Directors or South China Capital is materially interested in any contract or arrangement subsisting at the date of this circular which is significant in relation to the business of the Group taken as a whole.

South China Capital does not have any shareholding in any member of the Group, nor does it have any right or option (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, none of the Directors had entered or was proposing to enter into a service contract with the Company or any of its subsidiaries (excluding contracts expiring or determinable within one year without payment of compensation other than statutory compensation).

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GENERAL INFORMATION

APPENDIX I

SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiry by, the Directors, supervisors or chief executive of the Company, set out below are Shareholders who have an interest or short position in the Shares or 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 are, directly or indirectly, interested in 10 per cent. or more of the issued share capital carrying rights to vote at the general meetings of any member of the Group:

		Number of	Percentage of
Name of Shareholder	Class	Shares	total Shares
China Yituo	State-owned	450,000,000	57.32
	legal person
	Shares
The HKSCC Nominees	H Shares	328,783,998	41.88
Limited (Note)

Note: These shares are held on behalf of various individual shareholders of the Company. So far as it is known to the Directors, supervisors or chief executives of the Company as at the Latest Practicable Date, none of these various individual shareholders in the name of the HKSCC Nominees Limited had an interest or short position in the Shares or 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 was, directly or indirectly, interested in 10 per cent. or more of the nominal value of the issued share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group.

Save as disclosed above, there is no person known to the Directors, supervisors or chief executive of the Company who, as at the Latest Practicable Date, had an interest or short position in the Shares or 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 was, directly or indirectly, interested in 10 per cent. or more of the nominal value of the issued share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group.

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GENERAL INFORMATION

APPENDIX I

QUALIFICATION

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

Name

Qualification

South China Capital a deemed licensed corporation under the SFO

CONSENT

South China Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name and letter in the form and context in which they appear.

LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or arbitration or claim of material importance is known to the Directors to be pending or threatened by or against any member of the Group.

MATERIAL CHANGES

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2002, the date to which the latest audited financial statements of the Group were made up.

GENERAL

(a) The secretary of the Company is Mr. Zhang Guo Long.
(b) The H Share transfer office of the Company in Hong Kong is Hong Kong Registrars Limited at Shop 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(c) The English text of this circular shall prevail over the Chinese text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours on any week day (except public holidays) at the offices of Li & Partners, Solicitors, at 22nd Floor, World Wide House, Central, Hong Kong up to and including 9 July 2003:

(a) the Agreement
(b) the letter of opinion from the independent Board Committee dated 19 June 2003, the text of which is set out on page 17 of this circular
(c) the letter of opinion from South China Capital dated 19 June 2003, the text of which is set out on pages 18 to 32 of this circular; and
(d) the written consent referred to in the section headed “Consent” above.

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NOTICE OF EGM

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

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “EGM”) of the shareholders of First Tractor Company Limited (the “Company”) will be held at No. 154 Jianshe Road, Luoyang, Henan Province, the People’s Republic of China on Wednesday, 6 August 2003 at 9:00 a.m. for the following purposes:

To consider as special business, and if thought fit, passing with or without amendments, the following resolutions as ordinary resolutions of the Company:

“ THAT :

(A) the Ongoing Connected Transactions (as defined in the circular of the Company issued on 19 June 2003 (the “Circular”), a copy of which has been produced to the EGM marked “A” and signed by the chairman of the meeting for the purpose of identification) which is subject to the granting of waiver by The Stock Exchange of Hong Kong Limited (“Stock Exchange”) from strict compliance with rule 14.26 of the Rules Governing the Listing of Securities on the Stock Exchange and contemplated under the Agreement (as defined in the Circular), be and are hereby approved, ratified and confirmed;
(B) the execution of the Agreement be and are hereby approved, ratified and confirmed; and

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NOTICE OF EGM

(C) the Directors be and are hereby authorized for and on behalf of the Company, among other matters, to sign, execute, perfect, deliver or to authorize signing, executing, perfecting and delivering all such documents and deeds, and to do or authorize doing all such acts, matters and things as they may in their discretion consider necessary, expedient or desirable to give effect to and implement the Ongoing Connected Transactions pursuant to the Agreement and to waive compliance from or make and agree such variations of a non-material nature to any of the terms of any of the Agreement as they may in their discretion consider to be desirable and in the interest of the Company.”

By Order of the Board Dong Yong An Chairman

Luoyang, the PRC, 19 June 2003

The Company’s registered address:

No. 154, Jianshe Road Luoyang, Henan Province The People’s Republic of China Postal Code: 471004 Telephone: 86-379-4967038 Facsimile: 86-379-4967438

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NOTICE OF EGM

Notes:

The register of members of the Company’s shares will be temporarily closed from 7 July 2003 to 6 August 2003 (both days inclusive) during which no transfer of shares will be registered in order to determine the list of Shareholders for attending the EGM. Shareholders whose names appear on the register of members of the Company on Monday, 7 July 2003 will be entitled to attend and vote at the EGM. In order to be entitled to attend and vote at the EGM, all transfer of H Shares accompanied by the relevant share certificates must be lodged with the H Share registrar of the Company, Hong Kong Registrars Limited, at Shop 1712-1716, 17/F Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, not later than 4:00 p.m. on 4 July 2003.
Each Shareholder having the rights to attend and vote at the EGM is entitled to appoint one or more proxies (whether a Shareholder or not) to attend and vote on his behalf. Should more than one proxy be appointed by one Shareholder, such proxy shall only exercise his voting rights on a poll.
Shareholders can appoint a proxy by an instrument in writing (i.e., by using the Proxy Form enclosed). The Proxy Form shall be signed by the person appointing the proxy or an attorney authorized by such person in writing. If the Proxy Form is signed by an attorney, the power of attorney or other documents of authorization shall be notarially certified. To be valid, the Proxy Form and the notarially certified power of attorney or other documents of authorization must be delivered to the Company’s H Share registrar at the address indicated in paragraph 1 above in not less than 24 hours before the time scheduled for the holding of the EGM.
Shareholders or proxies who intend to attend the EGM are requested to deliver the reply slip for attendance duly completed and signed to the Company in person, by post or by facsimile on or before Wednesday, 16 July 2003.
Shareholders or their proxies shall present proofs of their identities upon attending the EGM. Should a proxy be appointed, the proxy shall also present the Proxy Form.
The EGM is expected to last for less than one day. The Shareholders and proxies attending the EGM shall be responsible for their own traveling and accommodation expenses.
The Company’s registered address is as follows:-

No. 154 Jianshe Road Luoyang, Henan Province the People’s Republic of China Postal Code: 471004 Telephone: 86-379-4967038 Facsimile: 86-379-4967438

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AI assistant

First Tractor Company Limited — Proxy Solicitation & Information Statement 2003

48894_rns_2003-06-19_8b54c725-b1fa-48b4-90bf-0c91835e548e.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

ONGOING CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee

South China Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

AGREEMENT DATED 29 MAY 2003

Parties

Terms of the Agreement

LETTER FROM THE BOARD

(d) Finance lease.

LETTER FROM THE BOARD

Security

RELATIONSHIP BETWEEN THE PARTIES

LETTER FROM THE BOARD

WAIVER APPLICATION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Basis of cap amounts

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

EGM

LETTER FROM THE BOARD

OPINION OF THE INDEPENDENT BOARD COMMITTEE

ADDITIONAL INFORMATION

First Tractor Company Limited Dong Yong An

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

ONGOING CONNECTED TRANSACTIONS

Yours faithfully,

LETTER FROM SOUTH CHINA CAPITAL

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM SOUTH CHINA CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED

Introduction

Ongoing Connected Transactions

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

Basis of the determination of annual caps

LETTER FROM SOUTH CHINA CAPITAL

(a) the resources of First Tractor Finance

(b) the credit control policy of First Tractor Finance

(c) the future growth and development of China Yituo Group

LETTER FROM SOUTH CHINA CAPITAL

(d) the past financial transactions China Yituo Group has undertaken

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

LETTER FROM SOUTH CHINA CAPITAL

Benefits of the Ongoing Connected Transactions

LETTER FROM SOUTH CHINA CAPITAL

RECOMMENDATION

APPENDIX I

RESPONSIBILITY STATEMENT

DISCLOSURE OF INTERESTS

SUBSTANTIAL SHAREHOLDERS

QUALIFICATION

Qualification

CONSENT

LITIGATION

MATERIAL CHANGES

GENERAL

DOCUMENTS AVAILABLE FOR INSPECTION

NOTICE OF EGM

First Tractor Company Limited Proxy Solicitation & Information Statement 2003