Honghua Group Limited — Proxy Solicitation & Information Statement 2017

Nov 13, 2017

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your securities in Honghua Group Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

Honghua Group Limited 宏 華 集 團 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 196)

CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EXTRAORDINARY GENERAL MEETING

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

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Capitalised terms used in the cover page shall have the same meanings as those defined in this circular.

A letter from the Board is set out on pages 4 to 16 of this circular. A letter from the Independent Board Committee is set out on page 17 of this circular. A letter from VBG Capital, the independent financial adviser to the Independent Board Committee and the Independent Shareholders containing its advice in relation to the Transactions is set out on pages 18 to 33 of this circular.

A notice convening the EGM of the Company to be held at Boardroom 3–4, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong on Wednesday, 29 November 2017 at 9:30 a.m. and a form of proxy for use at the EGM is enclosed herein. If you do not propose to attend the EGM, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting if you so wish, and in such event, the form of proxy shall be deemed to be revoked.

13 November 2017

CONTENTS

		Page
Definitions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from	the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from	the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Letter from	VBG Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Appendix	— General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	34
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		43

– i –

DEFINITIONS

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

• ‘‘ASIFL’’ Aerospace Science & Industry Financial Leasing Co., Ltd. (航天科工金融租賃有限公司), a company incorporated in the PRC, in which CASIC and its subsidiaries hold a 46.5% equity interest;

• ‘‘associate(s)’’ has the meaning ascribed to it under the Listing Rules;

• ‘‘Board’’ the board of Directors;

• ‘‘business day(s)’’ a day on which banks are generally open for business in Hong Kong (other than a Saturday, Sunday or public holiday or a day on which a tropical cyclone warning No. 8 or above or a ‘‘black rainstorm warning signal’’ is hoisted or remains hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m.);

• ‘‘CASIC’’ China Aerospace Science and Industry Corporation* (中國 航天科工集團公司), a company incorporated in the PRC;

• ‘‘Company’’ Honghua Group Limited, a company incorporated in the Cayman Islands with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange of Hong Kong Limited;

• ‘‘connected person(s)’’ has the meaning ascribed to it under the Listing Rules;

• ‘‘Director(s)’’ director(s) of the Company;

• ‘‘EGM’’

• the extraordinary general meeting of the Company to be held at Boardroom 3–4, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong on Wednesday, 29 November 2017 at 9:30 a.m. for the purpose of considering and approving the Transactions;

• ‘‘Framework Agreement’’

• the framework agreement for strategic cooperation dated 30 September 2017 entered into between Honghua Investment, Honghua Shenzhen, Honghua Shanghai and ASIFL and as amended by a supplemental agreement to the Framework Agreement entered into between the same parties on 7 November 2017;

• ‘‘Group’’ the Company and its subsidiaries;

• ‘‘HK$’’

• Hong Kong dollars, the lawful currency of Hong Kong;

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DEFINITIONS

• ‘‘Hong Kong’’

• ‘‘Honghua Investment’’

• ‘‘Honghua Shenzhen’’

• ‘‘Honghua Shanghai’’

• ‘‘Independent Board Committee’’

• ‘‘Independent Financial Adviser’’ or ‘‘VBG Capital’’

• ‘‘Independent Shareholder(s)’’

• ‘‘Independent Third Party(ies)’’

• ‘‘Kehua’’

• ‘‘Latest Practicable Date’’

• ‘‘Leasing Transactions’’

the Hong Kong Special Administrative Region of the People’s Republic of China

• Honghua (China) Investment Co., Ltd (宏華（中國）投資 有限公司), a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company;

• Honghua Financial Leasing (Shenzhen) Co., Ltd (宏華融資 租賃（深圳）有限公司), a limited liability company incorporated in the PRC and in which the Company directly and indirectly holds a 60% equity interest;

• Honghua Financial Leasing (Shanghai) Co., Ltd (宏華融資 租賃（上海）有限公司), a limited liability company incorporated in the PRC and a wholly-owned subsidiary of the Company;

• the independent committee of the Board, comprising all the independent non-executive Directors, established to make recommendations to the Independent Shareholders in respect of the Transactions;

• VBG Capital Limited, a corporation licensed to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities as defined under the SFO, being the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the Transactions;

• Shareholders other than CASIC and its associates;

• third parties independent of and not connected with the directors, chief executive and substantial shareholders of CASIC or any of its subsidiaries, or any of their respective associates;

• Kehua Technology Co., Limited, a limited liability company incorporated in Hong Kong and a wholly owned subsidiary of CASIC;

• 9 November 2017, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained herein;

• the financial leasing transaction for equipment and products between ASFIL and Honghua Shenzhen or Honghua Shanghai pursuant to the Framework Agreement;

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DEFINITIONS

‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange;

• ‘‘Main Board’’ the stock market operated by the Stock Exchange other than the Growth Enterprise Market;

• ‘‘PBOC’’ The People’s Bank of China;

• ‘‘Proposed Annual Caps’’ collectively, the proposed annual caps with respect to the Sales Transactions, and maximum daily balances of the Leasing Principal and the Annual Interests and other Payments with respect to the Leasing Transaction for each of the period from 30 October 2017 to 31 December 2017, the fiscal year ending 31 December 2018 and 31 December 2019, and the period from 1 January 2020 to 29 October 2020;

• ‘‘PRC’’ the People’s Republic of China;

• ‘‘RMB’’ Renminbi, the lawful currency of the PRC;

• ‘‘Sales Transactions’’ the sales of equipment and products to ASFIL by Honghua Investment pursuant to the Framework Agreement;

• ‘‘SFO’’ the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong);

• ‘‘Share(s)’’ the ordinary share(s) of HK$0.1 each in the share capital of the Company;

• ‘‘Shareholder(s)’’ holder(s) of ordinary share(s) of nominal value of HK$0.10 each in the share capital of the Company;

• ‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited; ‘‘Transactions’’ the transactions contemplated under the Framework Agreement, including the Sales Transactions and the Leasing Transactions;

‘‘USD’’ United States dollars, the lawful currency of the United States of America; and ‘‘%’’ per cent.

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LETTER FROM THE BOARD

Honghua Group Limited 宏 華 集 團 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 196)

Executive Directors: Mr. Chen Yajun (Chairman) Mr. Zhang Mi Mr. Ren Jie

Registered office: Clifton House, 75 Fort Street PO Box 1350, Grand Cayman KY1-1108, Cayman Islands

Non- executive Directors: Mr. Han Guangrong Mr. Chen Wenle

Independent non-executive Directors: Mr. Liu Xiaofeng Mr. Qi Daqing Mr. Chen Guoming Ms. Su Mei Mr. Poon Chiu Kwok Mr. Chang Qing

Head Office:

99 East Road, Information Park Jinniu District, Chengdu Sichuan People’s Republic of China Post code: 610036

Principal place of business in Hong Kong: Room 2508, Harcourt House 39 Gloucester Road Wan Chai, Hong Kong

13 November 2017

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Reference is made to the announcements in respect of the continuing connected transactions in relation to the Framework Agreement and the supplemental agreement to the Framework Agreement entered into between Honghua Investment, Honghua Shenzhen, Honghua Shanghai and ASIFL published by the Company on 3 October 2017 and 7 November 2017, respectively.

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LETTER FROM THE BOARD

The purposes of this circular are to provide the Shareholders with, among others, (i) details of the Transactions; (ii) the letter of recommendation from the Independent Board Committee to the Independent Shareholders regarding the Transactions; (iii) the letter of advice from VBG Capital to the Independent Board Committee and the Independent Shareholders regarding the Transactions; and (iv) the notice of EGM at which an ordinary resolution will be proposed to consider and approve the Transactions.

BACKGROUND

Since 2013, the Group has been carrying out innovative finance leasing business, and expanded the business with customers that are small and medium oil companies. In June 2017, the Company cooperated with ASIFL to sign a finance leasing agreement to sell the inventory products worth over RMB30 million domestically (please refer to the announcement published by the Company on 26 June 2017 for further details). In the current low oil price environment, small and medium oil companies sometimes cannot afford high capital expenditure for oil rig and other drilling equipment needed for drilling operations. Leasing arrangements (comprising of finance leases and/or operating leases depending on terms of negotiation between the Group and end customers) can provide small and medium oil companies with cost-effective way to finance their drilling operations, and helps the Company expand into new markets around the world.

On 30 September 2017, Honghua Investment, Honghua Shenzhen, Honghua Shanghai and ASIFL entered into the Framework Agreement, pursuant to which ASIFL agreed to purchase from Honghua Investment and its subsidiaries certain equipment and products during the term of the Framework Agreement. ASIFL plans to lease such equipment and products through financial leasing arrangements to Honghua Shenzhen or Honghua Shanghai, which will in turn enter into sub-leasing arrangements in the form of finance leases or operating leases, with third parties in relation to such equipment and products. On 7 November 2017, the parties to the Framework Agreement entered into a supplemental agreement to the Framework Agreement to make certain adjustments to the terms of the Framework Agreement.

The term of the Framework Agreement is three years, starting from the date of the supplemental agreement to the Framework Agreement on 7 November 2017.

PRINCIPAL TERMS OF THE FRAMEWORK AGREEMENT

Principal terms

The principal terms and particulars of the Transactions are as follows:

Sales Transactions:

ASIFL agreed to purchase from Honghua Investment certain equipment and products for the aggregated consideration of up to RMB300 million through the Sales Transactions. Details of the purchase of the equipment and products will be set forth in separate purchase agreements to be entered into between ASIFL and Honghua Investment on or prior to 31 December 2017.

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LETTER FROM THE BOARD

Until the obligations under the relevant finance lease(s) with ASIFL are fulfilled, the legal title of the relevant equipment and products rests with ASIFL. Upon fulfilment of the obligations under the relevant finance lease(s), Honghua Shenzhen or Honghua Shanghai shall have an option to buy such equipment and products from ASIFL at a nominal price.

Leasing Transactions:

Following the Sales Transaction(s), ASIFL will provide financial leasing services to the Group by leasing such equipment and products to Honghua Shenzhen or Honghua Shanghai through Leasing Transactions. Honghua Shenzhen or Honghua Shanghai will in turn enter into sub-leasing arrangements with third party customers in relation to such equipment and products. The term(s) of the sub-lease arrangement(s) that Honghua Shenzhen or Honghua Shanghai may enter into with individual third party customer(s) will depend on the customer(s)’ nature of operation and particular needs for the equipment and products, which may exceed three years. Consequently, the term of the corresponding Leasing Transaction pursuant to the Framework Agreement between ASIFL and Honghua Shenzhen or Honghua Shanghai may also exceed three years. In such case, the Company will comply with the disclosure requirement and, if required, obtain the Independent Shareholder’s approval under the Listing Rules to extend the term of the Framework Agreement. In each of the sub-lease agreement with an individual third party customer, Honghua Shenzhen or Honghua Shanghai will secure a right to unilaterally terminate the sub-leasing arrangement on or prior to the expiration date of the Framework Agreement, should the requisite Independent Shareholders’ approval, if required, to extend the Framework Agreement cannot be obtained.

As required under Rule 14A.52 of the Listing Rules, the Company must appoint an independent financial adviser to explain why the relevant finance lease(s) under the Framework Agreement requires a longer period and to confirm that it is normal business practice for agreements of this type to be of such duration. For this purpose, the Company has engaged VBG Capital as the independent financial adviser to provide such confirmation, particulars of which are set out below:

VIEW OF INDEPENDENT FINANCIAL ADVISER

In assessing the reasons for the lease term of the Leasing Transaction under the Framework Agreement to be longer than three years, VBG Capital has considered, the following factors:

• (i) by entering into the finance lease(s) with a longer duration, the payment obligation of the costs of the equipment and products of the Group can be spread over a longer period, which would reduce the stress to the planning of working capital by the relevant members of the Group;

• (ii) the lease period of each finance lease service shall be determined with reference to, among other things, the useful life of the relevant leasing equipment and products, which, as confirmed by the Directors, usually ranges from 5 to 20 years, depending on the type of equipment and products and its utilisation rate; and

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LETTER FROM THE BOARD

• (iii) the sub-leasing arrangements between the Group and third parties in relation to such equipment and products.

In considering whether it is normal business practice for agreements of similar nature as the Leasing Transaction between ASIFL and Honghua Shenzhen or Honghua Shanghai to have a term of more than three years, VBG Capital has identified similar finance lease agreements entered into by companies listed on the Stock Exchange in respect of the leasing of equipment and products, which although are not identical to those under the Framework Agreement, are large scale, with specialty uses and involve substantial amount of capital investment. Besides, VBG Capital noted that the agreement of one of the two similar transactions conducted by the Group with independent third parties is of a lease term of five years.

In view of the above, VBG Capital is of the opinion that it is necessary and normal business practice for the lease term of the Leasing Transaction under the Framework Agreement to be longer than three years.

The following diagram illustrates the operation flow of the financial leasing and leasing business of the Group:

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----- Start of picture text -----

Honghua Third party
Investment customers
Provision of
maintenance services
Enter into Payment of leasing fee Enter into
purchase purchase price payment leasing
agreement agreement
leasing fee payment
H onghua Shenzhen or
ASIFL
Honghua Shanghai [(1)]
Enter into financial leasing
agreement
----- End of picture text -----

Note:

• (1) Honghua Shenzhen or Honghua Shanghai may enter leasing arrangement(s) through a subsidiary of the Group with certain third party customer(s) if such customer(s) has/have particular quality and license requirement of the lessor.

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LETTER FROM THE BOARD

The Transactions contemplated under the Framework Agreement are conducted on a nonexclusive basis. Should the need arises, the Company believes it has the ability to obtain financing for its finance leasing business from commercial banks or other financial institutions.

Based on the business model described above, it is the current intention of the Company that Honghua Investment and Honghua Shenzhen or Honghua Shanghai will enter into the Sales Transactions and Leasing Transactions with ASIFL only after Honghua Shenzhen or Honghua Shanghai has secured sub-leasing arrangements with third party customers. The type and specifics of the equipment or products for each Sales Transaction and Leasing Transaction will depend on the nature of operation and needs of the third party customer.

In the event that the Group enters into a finance lease of relevant equipment and products with an end customer, the legal title of the relevant equipment will be transferred to ASFIL upon sales to ASFIL by Honghua Investment pursuant to the sales agreements. The legal title of the equipment belongs to ASFIL during the terms of the Leasing Transaction between ASFIL and Honghua Shenzhen or Honghua Shanghai. The leasing fees paid to ASFIL by Honghua Shenzhen or Honghua Shanghai will be recognized as expense by Honghua Shenzhen or Honghua Shanghai during the term of the Leasing Transaction. At the same time, Honghua Shenzhen or Honghua Shanghai will recognize account receivables from the end customer pursuant to the sub-leasing agreement. Leasing fee received from end customers will be recognized as revenue. Upon the expiration of the Leasing Transactions and sub-leasing arrangement, the end customer shall have the right to purchase the equipment and products and the legal title of which will be transferred from Honghua Shenzhen or Honghua Shanghai (which would need to obtain the title from ASFIL first if the relevant Leasing Transaction is still in force) to the end customer.

In the event that the Group enters into an operating lease of relevant equipment and products with an end customers, the legal title of the equipment and products will be transferred to ASFIL upon sales to ASFIL by Honghua Investment pursuant to the sales agreements. The legal title of the equipment belongs to ASFIL during the terms of the Leasing Transaction between ASFIL and Honghua Shenzhen or Honghua Shanghai. Pursuant to the applicable accounting standard, IAS 17 Leases, Honghua Shenzhen or Honghua Shanghai will record the equipment and products as fixed assets on its balance sheet at the commencement of the arrangement and subsequently recognize amortization expenses of the equipment over the useful life of the equipment and products. The leasing fees paid to ASFIL by Honghua Shenzhen or Honghua Shanghai will be recognized as expense by Honghua Shenzhen or Honghua Shanghai during the term of the Leasing Transaction. At the same time, Honghua Shenzhen or Honghua Shanghai will recognize account receivables from the third party customers pursuant to the sub-leasing agreement. Leasing fee received from the end customer will be recognized as revenue. On fulfilment of the finance lease with ASFIL, Honghua Shenzhen or Honghua Shanghai can acquire the legal title of relevant equipment and products from ASFIL when it shall be entitled to deal with or dispose of the relevant equipment and product at its discretion.

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LETTER FROM THE BOARD

PROPOSED ANNUAL CAPS UNDER THE FRAMEWORK AGREEMENT

The Proposed Annual Caps

During the term of the Sales Transactions, the relevant proposed annual caps are:

		From	For the		For the	From
		30 October	fiscal year		fiscal year	1 January
		2017 to	ending		ending	2020 to
		31 December	31 December	31	December	29 October
		2017	2018		2019	2020
			RMB
Sales	prices	300,000,000	0		0	0

The Sales Transactions proposed annual caps under the Framework Agreement for 2017 have been determined after arm’s length negotiations between the Company and ASIFL and taking into consideration the aggregate value of the equipment and products which are currently under negotiations between the Group and its leasing services customers.

During the term of the Leasing Transactions, the relevant proposed annual caps are:

From	For the		For the	From
30 October	fiscal year		fiscal year	1 January
2017 to	ending		ending	2020 to
31 December	31 December	31	December	29 October
2017	2018		2019	2020
	RMB

Maximum daily balance of the leasing principal Annual Interests and other Payments: Outstanding Interest fee(1) One-off handling fee	300,000,000 38,001,340 8,100,000	300,000,000 38,001,340 0	253,000,000 26,001,340 0	204,000,000 16,001,340 0

Note:

(1) based on the leasing fee and a maximum interest rate of 6% per annum, which was determined by negotiation at arm’s-length with ASIFL. In determining the maximum interest rate, the parties used the prevailing PBOC rate for bank loans as a starting point and took into consideration of other factors such as transactional cost in the leasing arrangements to be entered into. The Company believes the interest rate to be reasonable and in line with the market rates quoted by financial leasing companies of comparable size and customer portfolio.

The maximum daily balances of the leasing principal and the annual interests and other payments under the Framework Agreement for each of the period from 30 October 2017 to 31 December 2017, the fiscal year ending 31 December 2018 and 31 December 2019, and the period from 1 January 2020 to 29 October 2020 have been determined after arm’s length

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LETTER FROM THE BOARD

negotiations between the Company and ASIFL and taking into consideration that the equipment and products that ASIFL agreed to purchase from the Group (in substance, the principal amount of fund to be obtained by the Group from ASIFL as an alternative financing channel other than the direct sales income from the leasing services customers) in each of the periods concerned under the Sales Transactions.

The proposed annual cap for 2017 with respect to the Sales Transactions is based on the estimate of the purchases of the equipment and products by ASIFL from Honghua Investment and its subsidiaries for the year ending 31 December 2017. Depending on the operation needs and the financial arrangements of the Group, the Directors will review, and if required, revise the amount of the Sales Transactions for the fiscal year ending 31 December 2018 and 31 December 2019, and the period from 1 January 2020 to 29 October 2020. The revision of the amount of the Sales Transaction may involve the changes to the maximum daily balances of the leasing principal and the annual interests and other payments with respect to the Leasing Transaction for each of the period from 30 October 2017 to 31 December 2017, the fiscal year ending 31 December 2018 and 31 December 2019, and the period from 1 January 2020 to 29 October 2020. If the review involves any revision and/or adjustment to the proposed caps, the Company will comply with the disclosure requirement and, if required, obtain the Independent Shareholder’s approval under the Listing Rules before it proceeds to implement the revision and/or adjustment.

Given that Proposed Annual Caps have been determined based on the above basis which is no less favourable than such offered to Independent Third Parties, the Directors (including the independent non-executive Directors who have taken into account the advice from VBG Capital) are of the view that the Proposed Annual Caps are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

PRICING POLICY

The pricing and payment terms of services and related technical service and products under the Transactions shall be determined by arm’s length negotiations between the Group and ASIFL and be determined based on normal commercial terms with reference to prevailing market prices that are fair and reasonable for the relevant equipment and in any event shall be no less favorable to the prices offered by the Group to its independent third parties. The Group will comply with its relevant internal pricing policies in the negotiation with ASIFL.

The sales prices will be determined primarily based on the net book value of the relevant equipment and products and according to the arm’s length negotiation between the Group and ASIFL with reference to the leasing terms.

The leasing price for the Leasing Transaction between ASIFL and Honghua Shenzhen or Honghua Shanghai will be determined through arm’s-length negotiation between ASIFL and Honghua Shenzhen or Honghua Shanghai, subject to a maximum interest rate of 6% per annum. Honghua Shenzhen or Honghua Shanghai will make reference to prevailing PBOC rate for bank loans as a starting point, and will take into consideration of other factors such as transactional cost including the one-off handling fee for each leasing arrangements and comparable transactions entered into between Honghua Shenzhen or Honghua Shanghai and independent third parties. In principle, the interest rate of leasing will not be higher than the

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LETTER FROM THE BOARD

prevailing interest rate promulgated by PBOC or 6% per annum. In addition, according to the relevant pricing policy of Honghua Shenzhen, any financial lease arrangement that has the consideration of RMB10 million or more needs to be approved by the board of directors of Honghua Shenzhen.

The price of a Leasing Transaction will also be affected by the price of the sub-leasing transaction Honghua Shenzhen or Honghua Shanghai entered or to be entered into with the end customer. Honghua Shenzhen or Honghua Shanghai will charge the price of the sub-leases based on the costs of leasing and the interest rate of leasing to ensure that the Group can have a reasonable profit margin in conducting the sub-leasing (be it a finance lease or an operating lease) and hence the Lease Transaction. In this regard, Honghua Shenzhen implemented the Tiered Pricing Approval Procedure in June 2017, which establishes a tiered structure for leasing price approval based on expected returns, with prices that generate lower returns needing approval by more senior management member. The price tiers are further divided by the business segments of the customer, such as governmental organizations, enterprises and related parties. Honghua Shanghai will follow the practice and procedure requirements of Honghua Shenzhen.

INTERNAL CONTROL PROCEDURES GOVERNING THE TRANSACTIONS

Internal control for the Transactions

Honghua Shenzhen implemented the Project Review Procedures and the Approval Committee Procedures in May 2017 and the Financial Leasing Contract Review and Approval Procedures in June 2017. Pursuant to these procedures:

• (a) the relevant department of the Group will obtain terms and rate(s) of interests etc. relating to the Leasing Transactions from major financial leasing companies (who are independent of the Company and the connected persons of the Company), and based on the benchmark lending rate(s) for term loans promulgated by PBOC from time to time make comparisons, in order to allow the Group to obtain the most favourable terms relating to such Leasing Transactions;

• (b) the one-off handling fee that may be charged by ASIFL at the time of conclusion of the finance leases under the Framework Agreement shall be on terms no less favourable than those offered to the Company and its subsidiaries by independent third parties and at such rate as fixed by reference to the charge rates of other major financial institutions for finance leases of equipment of the same or similar type or the applicable rate (if any) published by the PBOC from time to time in relation to such services and set forth in the relevant written agreements;

• (c) once the preliminary terms, including the price, are available, the terms will be reviewed first by the internal control department and then by an approval committee formed by staff from relevant functional departments, including the business development department, credit review department, risk control department, and the general manager of Honghua Shenzhen. The agreement needs to be approved by the board of the directors of Honghua Shenzhen before execution.

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LETTER FROM THE BOARD

Honghua Shanghai will follow the practice and procedure requirements of Honghua Shenzhen.

Additional measures to safeguard the interests of the Group in the sub-leasing arrangements

If Honghua Shenzhen or Honghua Shangai enters into a sub-lease regarding particular equipment or products with end customer who subsequently fails to pay the sub-leasing fees to the Group or fulfil the terms of the sub-finance lease, the Group will still be liable to pay the leasing fees to ASIFL under the terms of the corresponding Leasing Transaction under the Framework Agreement. As such, the Group will adopt the following additional measures to safeguard the interests of the Group in the sub-leasing arrangements:

1. before entering into the sub-finance lease, Honghua Shenzhen or Honghua Shanghai will carry out background check to ensure that the creditworthiness and repayment ability of relevant end customer. Currently, the Group intends to carry out the subfinance leasing services with quality customers;

2. depending on the results of the credit checking, the Group may require end customer to provide guarantee or payment of security deposits before it enters into the subleasing arrangement;

3. the terms of the sub-lease will be subject to approval by the approval committee and that Group will enter into the financial leasing arrangement with ASIFL only when the Group secures the sub-leasing arrangement with end customer; and

4. in addition to its right to sue the end customer for breach of the lease upon default by end customer, the Group can (i) terminate the leasing arrangement with end customer immediately; (ii) recoup the relevant equipment or products from end customer; and (iii) enter into sub-leasing arrangement with other customer given that the title of the relevant equipment or products does not rest with any particular end customer.

Internal control for continuing connected transactions

The Group has implemented stringent approval and control measures for connected transactions and continuing connected transactions, including a requirement that any connection transaction with a consideration of more than RMB1 million needs to be approved by the Board. The Sales Transactions and the Leasing Transactions shall be reviewed and approved by the operational control center and the internal control department prior to the entering into of the relevant transaction agreements with ASIFL to ensure that the terms are set in compliance with the Group’s pricing policy.

Following the entering into of the continuing connected transactions, the finance department and the legal and securities department will monitor the transactions to ensure that the transactions are conducted in accordance with the relevant pricing policies and the annual caps are not exceeded. The relevant departments are required to produce a monthly report on continuing connected transactions and submit to the legal and securities compliance

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LETTER FROM THE BOARD

department. Any responsible department is required to report to the legal and securities compliance department within 3 working days upon discovering that the aggregate consideration of continuing connected transactions of the year to date is more than 80% of the relevant annual cap. Any proposed adjustment to approved transaction consideration need to be reported to the legal and securities compliance department, which will coordinate the required approval process.

The auditors and independent non-executive Directors of the Company will also conduct annual review of the continuing connected transactions entered into by the Group on whether the continuing connected transactions have been conducted in compliance of the pricing policies and whether the relevant annual caps have been exceeded.

Based on the above procedures and policies, the Board considers that there are adequate internal controls in place to ensure the Transactions are to be conducted on normal commercial terms and not prejudicial to the interests of the Company and the minority Shareholders.

REASONS FOR ENTERING INTO THE TRANSACTIONS

The Group is principally engaged in the business of developing, manufacturing and selling drilling rigs, rig parts and components and after-sales services.

Honghua Investment is an investment holding company and a wholly-owned subsidiary of the Company.

Honghua Shenzhen is a subsidiary of the Company under the definition of the Listing Rules as the Company indirectly holds 60% of its issued shares (the other 40% of which is held by third parties independent of the Company and its connected persons), although its financial statements are not consolidated in the accounts of the Group. The main business of Honghua Shenzhen is finance leasing, asset leasing, purchase of assets for leasing and related consultancy service.

Honghua Shanghai is a wholly-owned subsidiary of the Company. The main business of Honghua Shanghai is finance leasing, asset leasing, purchase of assets for leasing and related consultancy service.

ASIFL is company incorporated in the PRC and its principal business includes finance leasing, disposal of assets under finance lease and related consultancy service.

The international oil market has experienced certain degree of recovering in recent years, which in turn has a positive impact on the domestic market. In particular, there is an increase in shale gas drilling activities in the PRC. Large-scale drilling and fracturing operations require a significant amount of capital investment and relevant equipment. Consequently, demands for oil drilling equipment through financing leasing arrangement are also increasing in recent years. The Company intends to capitalize on this opportunity and gain market share in the financial leasing industry, which the Company believes is a good way to make capital gains. In particular, the Company believes the benefits in entering into the Framework Agreement with ASIFL include:

• . reducing the initial capital investment needed in the financial leasing transactions and leasing transactions for the Group;

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LETTER FROM THE BOARD

• . strengthening the Group’s the ability to provide financing leasing services and leasing services to existing and potential customers as a value-added service and alternative solution; and

• . creating synergy with the Group’s other business operations in the oil & gas industry.

In addition, the Group expects to generate sales income from the Sales Transactions and leasing income from the sub-leasing arrangements with third parties. The competitive advantages of sub-leasing arrangement of the Group are that the Group can (i) offer more flexibility in leasing terms of the equipment and products to end-users to meet their operational needs and (ii) provide on-going maintenance and upgrade services to the equipment and products with the Group’s technical teams. It is intended that the Group can achieve ‘‘lightasset’’ operation by leveraging on such sub-leasing arrangement, and that Honghua Investment can establish a platform for providing leasing and management services to the leased equipment and products.

Conversely, the arrangement grants ASIFL access to customers in the oil & gas industry. ASIFL typically does not operate in, and is not familiar with, the oil & gas industry. Honghua Shenzhen or, as the case may be, Honghua Shanghai has customer resources and industrial know-how in the industry, and can help ASIFL source quality customers for its financial leasing business. In addition, Honghua Shenzhen or, as the case may be, Honghua Shanghai has the requisite licence to conduct financial leasing and operational leasing in the PRC, while ASIFL only has licence to conduct financial leasing in the PRC. As such, cooperation with ASIFL will enable Honghua Shenzhen or Honghua Shanghai to diversify its service offerings and enlarge its revenue source. The arrangement between ASIFL and Honghua Shenzhen or, as the case may be, Honghua Shanghai is a commercial arrangement beneficial to both parties.

Accordingly, the Directors (including the independent non-executive Directors who have taken into account the advice from VBG Capital) are of the view that the terms of the Framework Agreement (including the Transactions contemplated thereunder and the Proposed Annual Caps) are fair and reasonable and on normal commercial terms, and that the entering into of the Framework Agreement 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.

LISTING RULES IMPLICATIONS

As at the Latest Practicable Date, CASIC indirectly holds 29.99% of the shares in the Company through its wholly-owned subsidiary Kehua, and therefore is a substantial shareholder and connected person of the Company. CASIC and its subsidiaries together hold a 46.5% equity interest in ASIFL, thus ASIFL is an associate of CASIC and in turn a connected person of the Company.

Therefore, the Transactions constitute connected transactions of the Company under Chapters 14 and 14A of the Listing Rules.

In respect of the Framework Agreement, as one or more of the applicable percentage ratios set out in the Listing Rules in respect of the Transactions is higher than 5.0% but less than 25%, the Transactions constitute a discloseable transaction of the Company under Chapter 14 of the Listing Rules. As one or more of the applicable percentage ratios set out in the

– 14 –

LETTER FROM THE BOARD

Listing Rules in respect of the Transactions is higher than 5.0%, the Transactions are subject to the reporting, announcement, annual review and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. CASIC, being a substantial shareholder and connected person of the Company, and its associates will abstain from voting in the EGM.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee comprising all the independent non-executive Directors (namely Mr. Liu Xiaofeng, Mr. Qi Daqing, Mr. Chen Guoming, Ms. Su Mei, Mr. Poon Chiu Kwok and Mr. Chang Qing) has been established to advise the Independent Shareholders in respect of the Transactions. VBG Capital has been appointed by the Company with the approval of the Independent Board Committee to advise the Independent Board Committee and the Independent Shareholders in this regard.

Save as disclosed above, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there is no other Shareholder who has a material interest in the Framework Agreement who is required to abstain from voting at the EGM as at the Latest Practicable Date.

EXTRAORDINARY GENERAL MEETING

A notice convening the EGM of the Company to be held at Boardroom 3–4, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong on Wednesday, 29 November 2017 at 9:30 a.m. and a form of proxy for use at the EGM is enclosed herein.

If you do not propose to attend the EGM, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting if you so wish, and in such event, the form of proxy shall be deemed to be revoked.

CASIC and its associates including Kehua (holding 1,606,000,000 Shares or approximately 29.99% of the shares in the Company as at the Latest Practicable Date) who are involved in, or interested in the Framework Agreement will abstain from voting in the relevant resolution approving the Transactions at the EGM.

VOTING BY POLL

Pursuant to Rule 13.39(4) of the Listing Rules, any vote of shareholders at a general meeting must be taken by poll except where the chairman, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands. Therefore, all the resolutions put to the vote at the EGM will be taken by way of poll. The chairman of the EGM will explain the detailed procedures for conducting a poll at the commencement of the EGM.

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LETTER FROM THE BOARD

After the conclusion of the EGM, the poll results will be published on the respective websites of the Stock Exchange and the Company.

RECOMMENDATION

The Board considers that the Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole and accordingly recommends the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM for approving the Transactions. The entering into the Framework Agreement (including the Transactions contemplated thereunder and the Proposed Caps) were approved by all the Directors, except for Mr. Chen Yajun, Mr. Han Guangrong and Mr. Chen Wenle, who are directors appointed by CASIC and its associates and are deemed to be interested in the Transactions and thus had abstained from voting.

The Independent Board Committee, having taken into account the advice of VBG Capital, considers that the Transactions are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole, and accordingly recommends the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM for approving the Transactions.

GENERAL INFORMATION

Your attention is drawn to the letter of advice from VBG Capital set out in pages 18 to 33 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in connection with the Transactions and the letter from the Independent Board Committee set out in page 17 of this circular which contains its recommendation to the Independent Shareholders in relation to the Transactions.

FURTHER INFORMATION

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

Yours faithfully, By order of the Board Honghua Group Limited Chen Yajun Chairman

– 16 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Honghua Group Limited 宏 華 集 團 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 196)

13 November 2017

To the Independent Shareholders,

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company dated 13 November 2017 (the ‘‘Circular’’) to the Shareholders of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

We have been appointed as the Independent Board Committee to advise the Independent Shareholders on whether the Framework Agreement (including the Transactions contemplated thereunder and the Proposed Annual Caps) are fair and reasonable and on normal commercial terms, and that the entering into of the Framework Agreement 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.

We wish to draw your attention to the letter from the Board set out in pages 4 to 16 of the Circular and the letter from VBG Capital, the Independent Financial Adviser appointed to advise the Independent Board Committee and the Independent Shareholders in relation to the Transactions, set out in pages 18 to 33 of the Circular.

Having considered the factors and reasons considered by and the opinion of VBG Capital stated in its letter of advice contained in the Circular, we are of the view that the Framework Agreement (including the Transactions contemplated thereunder and the Proposed Annual Caps) are in the ordinary and usual course of business of the Group, on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to approve the Transactions.

Yours faithfully, For and on behalf of the

Independent Board Committee Mr. Liu Xiaofeng Mr. Qi Daqing Ms. Su Mei Mr. Poon Chiu Kwok Independent non-executive Directors

Mr. Chen Guoming Mr. Chang Qing

– 17 –

LETTER FROM VBG CAPITAL

Set out below is the text of a letter received from VBG Capital Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Transactions for the purpose of inclusion in the Circular.

==> picture [12 x 11] intentionally omitted <==

18/F., Prosperity Tower 39 Queen’s Road Central Hong Kong

13 November 2017

• To: The independent board committee and the independent shareholders of Honghua Group Limited

Dear Sirs,

DISCLOSEABLE TRANSACTION AND CONTINUING CONNECTED TRANSACTIONS FRAMEWORK AGREEMENT FOR STRATEGIC COOPERATION

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Transactions, details of which are set out in the letter from the Board (the ‘‘Letter from the Board’’) contained in the circular dated 13 November 2017 issued by the Company to the Shareholders (the ‘‘Circular’’), of which this letter of advice forms part. Terms used in this letter of advice shall have the same meanings as ascribed to them under the section headed ‘‘Definitions’’ in the Circular unless the context requires otherwise.

On 30 September 2017, Honghua Investment, Honghua Shenzhen, Honghua Shanghai and ASIFL entered into the Framework Agreement (as supplemented by a supplemental agreement dated 7 November 2017) for strategic cooperation for a term of three years starting from the date of the supplemental agreement. Pursuant to the Framework Agreement, ASIFL agreed to purchase from Honghua Investment and its subsidiaries certain equipment and products for an aggregate consideration of up to RMB300 million during the term of the Framework Agreement. Details of the purchase of the equipment and products will be set forth in separate purchase agreements to be entered into between ASIFL and Honghua Investment on or prior to 31 December 2017.

Following the Sales Transaction(s), ASIFL will provide finance lease services to the Group by leasing such equipment and products to Honghua Shenzhen or Honghua Shanghai, which will in turn enter into sub-leasing arrangements (in the form of finance leases or operating leases) with third parties in relation to such equipment and products. The term of the sub-leasing arrangement that Honghua Shenzhen or Honghua Shanghai may enter into with third party customer will depend on the customer’s nature of operations and its particular needs for the equipment and products, and may exceed three years. Consequently, the term of the corresponding Leasing Transaction between ASIFL and Honghua Shenzhen or Honghua

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LETTER FROM VBG CAPITAL

Shanghai may also exceed three years. In each of the sub-lease agreement with third party customer, Honghua Shenzhen or Honghua Shanghai will secure a right to unilaterally terminate the sub-leasing arrangement on or prior to the expiration date of the Framework Agreement, in the event that the requisite approval, if applicable, to extend the Framework Agreement cannot be obtained from the Shareholders in accordance with the Listing Rules.

According to the Letter from the Board, the Framework Agreement and the Transactions constitute a discloseable transaction and non-exempt continuing connected transactions for the Company under Chapters 14 and 14A of the Listing Rules. The Transactions are therefore subject to the reporting, annual review, announcement and independent shareholders’ approval requirements in accordance with the Listing Rules.

The Independent Board Committee comprising Mr. Liu Xiaofeng, Mr. Qi Daqing, Mr. Chen Guoming, Ms. Su Mei, Mr. Poon Chiu Kwok and Mr. Chang Qing (all being independent non-executive Directors) has been established to advise the Independent Shareholders on (i) whether the terms of the Framework Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the Transactions are in the interests of the Company and the Shareholders as a whole; and (iii) how the Independent Shareholders should vote in respect of the resolution(s) to approve the Framework Agreement at the EGM. We, VBG Capital Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

BASIS OF OUR OPINION

In formulating our opinion with regard to the Transactions, we have relied on the information and facts supplied, opinions expressed and representations made to us by the management of the Group (including but not limited to those contained or referred to in the Circular). We have assumed that the information and facts supplied, opinions expressed and representations made to us by the management of the Group were true, accurate and complete at the time they were made and continue to be true, accurate and complete in all material aspects until the date of the EGM. We have also assumed that all statements of belief, opinions, expectation and intention made by the management of the Group in the Circular were reasonably made after due enquiry and careful consideration. We have no reason to suspect that any material facts or information have been withheld or to doubt the truth, accuracy and completeness of the information and facts contained in the Circular, or the reasonableness of the opinions expressed by the Company, its management and/or advisers, which have been provided to us.

The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, which to the best of their knowledge and belief, that the information contained in the Circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement in the Circular or the Circular misleading. We, as the Independent Financial Adviser, take no responsibility for the contents of any part of the Circular, save and except for this letter of advice.

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LETTER FROM VBG CAPITAL

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, conducted any independent in-depth investigation into the business and affairs or future prospects of the Group, Honghua Investment, Honghua Shenzhen, Honghua Shanghai and ASIFL or their respective subsidiaries or associates, nor have we considered the taxation implication on the Group or the Shareholders as a result of the Transactions. Our opinion is necessarily based on the market, financial, economic and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note that subsequent developments (including material change in market and economic conditions) may affect and/ or change our opinion and we have no obligation to update this opinion to take into account events occurring after the Latest Practicable Date or to update, revise or reaffirm our opinion. Nothing contained in this letter of advice should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

Where information in this letter of advice has been extracted from published or otherwise publicly available sources, we have ensured that such information has been correctly and fairly extracted, reproduced or presented from the relevant sources while we are not obligated to conduct any independent in-depth investigation into the accuracy and completeness of such information.

In addition, Shareholders should note that as the Transactions are relating to future events and estimated based on assumptions which may or may not remain valid for the entire period up to 29 October 2020, and they do not represent forecasts of revenues or costs to be recorded from the Framework Agreement. Consequently, we express no opinion as to how closely the actual revenue, cost to be incurred under the Framework Agreement will correspond with the respective annual caps for the Transactions.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the Transactions, we have taken into consideration the following principal factors and reasons:

1. Background of and reasons for the Transactions

Business and historical financial performance of the Group

The Group is principally engaged in the business of developing, manufacturing and selling drilling rigs, rig parts and components and provision of after-sales services.

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LETTER FROM VBG CAPITAL

Set out below is a summary of the historical financial performance of the Group for the six months ended 30 June 2017 and the five years ended 31 December 2016 as extracted from the Company’s interim report for the six months ended 30 June 2017 (the ‘‘2017 Interim Report’’) and its annual report for the year ended 31 December 2016 (the ‘‘2016 Annual Report’’), respectively:

			For the
			six months
			ended
			30 June		For the year	ended 31	December
			2017	2016	2015	2014	2013	2012
(RMB’000)			(unaudited)	(audited)	(audited)	(audited)	(audited)	(audited)
Revenue			819,223	2,343,614	4,219,253	7,812,537	8,047,108	5,068,447
(Loss)/Profit	after	tax	(397,291)	(627,249)	(265,866)	110,167	575,250	541,775

Due to the fact that the Group is principally engaged in the development, manufacture and sale of drilling rigs, rig parts and components and provision of after-sales services, its historical financial performance was affected by and has closely followed the overall trend of development of the international oil market. The Group’s total revenue reached the peak of approximately RMB8,047 million in 2013 at the time when the international oil prices stayed at historical high of above USD100 per barrel. Following the subsequent downturn of the international oil market, the Group’s revenue shrank continuously for three consecutive financial years to approximately RMB2,344 million in 2016. The Group has also begun to suffer from losses since the year ended 31 December 2015. For the six months ended 30 June 2017, the Group recorded revenue of below RMB900 million, coupled with approximately RMB397 million loss.

As being illustrated under the sub-section headed ‘‘Overview of the international oil market’’ of this letter of advice, the future prospects of the international oil market remain challenging. Facing the complicated and changing international and domestic environment, in May 2017, the Company successfully brought in China Aerospace Science & Industry Corporation (‘‘CASIC’’), a state-owned enterprise and hi-tech conglomerate, to be its largest Shareholder through the placing of new Shares, which built new impetus for the future development of the Group. According to the 2017 Interim Report, as a sizeable state-owned enterprise with focus on the development of national hi-tech industry, CASIC currently owns seven A-share listed companies. It became a Fortune global 500 enterprise in 2016 and has been ranking as an A-level state-owned enterprise for nine consecutive years.

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LETTER FROM VBG CAPITAL

As referred to in the 2017 Interim Report, the Group focused on the following three business areas:

Land drilling equipment and related products business

Facing the pressure of continuous industry downturn, the Group actively explored business opportunities in the existing and new markets, across the industry chain, and sought new strategic cooperation. During the first half of 2017, the Group signed six new land drilling rigs at the total amount of approximately USD55 million. For parts and components, during the same said period under review, the Group sold 28 sets of mud pumps, ten sets of top drives and six sets of direct drive pumps. As for the special equipment for shale gas, the Group sold four sets of flexible water tanks and signed the rental agreement for two 6,000-horsepowered electric fracturing pumps for the first time. At the same time, the Group also actively expanded the product-agent business and laid a solid foundation to further expand the sales of parts and components.

With the support of CASIC, in June 2017, the Group cooperated with ASIFL to sign a domestic finance lease agreement to sell inventory products with the value of over RMB30 million. As advised by the Company, in the current low oil price environment, oil companies especially the small and medium size companies are not willing to bear the high capital expenditure for oil rig and other drilling equipment. Thus, such cooperation mode can provide small and medium oil companies with cost effective finance lease services, and helps the Group to expand into new markets around the world.

Oil and gas engineering services business

With reference to the 2017 Interim Report, as at 30 June 2017, the Group had 14 oil and gas engineering services team engaged in well drilling and directional well service in the PRC and overseas markets. The Group’s integrated solution for shale gas has made significant breakthrough during the first half of 2017. The Group signed a strategic cooperation agreement with SINOPEC East China Oil and Gas Company (中國石化股份 公司華東油氣分公司, ‘‘East China Branch’’) to build a mutual-beneficiary and sustainable strategic partnership in the field of shale gas exploration. Under the strategic cooperation with East China Branch, the Group will, amongst others, provide lease and sales service of electric large-power fracturing pump and other equipment for East China Branch’s shale gas fields in Pengshui and other regions in the PRC. The Group also signed a non-binding memorandum of understanding with Halliburton Energy Services (China) Limited, pursuant to which the parties agreed to be each other’s preferred subcontractor in the integrated projects of well drilling and completion and shale gas projects in the Sichuan Basin area, the PRC.

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LETTER FROM VBG CAPITAL

Offshore engineering equipment and related products business

Since both CASIC and the Group believed that, in the long run, oil and gas will remain the core energy to fuel the world, the Group’s offshore business concentrated on (i) equipment for offshore oil drilling, such as Jack-up drilling rigs, semi-submersible platform, and deep water drilling ships; (ii) equipment and facility construction for offshore liquefied natural gas (LNG) industrial chain, including the offshore liquefied natural gas platform (PLNG) project; and (iii) commercialisation of flat-panel, semimembrane, prismatic-shaped LNG tank. During the first half of 2017, the Pre-Front End Engineering and Design of the Group’s first offshore PLNG was completed and reviewed by the American Bureau of Shipping and an approval-in-principle was granted. Furthermore, the Group entered into a Heads of Agreement (the ‘‘HOA’’) with LNG 21 Partners, LLC (‘‘LNG 21’’), a United States company principally engaged in producing and exporting LNG. Pursuant to the HOA, LNG 21 intends to raise the consideration of one set of PLNG which it has earlier purchased from the Group to approximately USD2.2 billion.

Future development of the Group

Going forward, through its core products, such as complete set of drilling rig, core parts and components, electric driven fracturing pump, the Group intends to steadily extend its equipment product line and continue to invest resources in research and development of new generation of materials and technology, and to develop downhole tools, exploration and transport equipment and other products. As disclosed in the 2017 Interim Report, as at 15 August 2017, the Group had (i) land drilling equipment backlogs in the amount of approximately RMB3,939 million, including 13 sets of land drilling rig backlogs, with an aggregate amount of approximately RMB827 million; (ii) offshore engineering equipment backlogs in the amount of approximately RMB1,155 million; and (iii) oil and gas engineering service contracts in the amount of approximately RMB354 million.

As further represented by the Company, the Group, by taking advantage of CASIC’s status as a state-owned enterprise, will participate and expand the domestic natural gas equipment and service business, especially for shale gas. Simultaneously, relying on CASIC’s overseas market resources, the Group will focus on expanding large high-quality equipment business and oilfield services in countries along the ‘‘One Belt One Road’’ regions. The Group will also utilise the product and technology resources within CASIC’s system to improve its production capacity of the integrated oil and gas exploration and transportation equipment, and to expand the layout of downhole tool business. With regard to the offshore business segment, as referred to in the announcement of the Company dated 19 October 2017, the Company intends to dispose of such business as it was adversely impacted by the uncertainties and price fluctuation of the global oil market in recent years.

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LETTER FROM VBG CAPITAL

Information on Honghua Investment

As extracted from the letter from the Board, Honghua Investment is an investment holding company and a wholly-owned subsidiary of the Company.

Information on Honghua Shenzhen

As extracted from the Letter from the Board, Honghua Shenzhen is a non-wholly owned subsidiary of the Company. The main business of Honghua Shenzhen is finance leasing, asset leasing, purchase of assets for leasing and related consultancy service.

Information on Honghua Shanghai

As extracted from the Letter from the Board, Honghua Shanghai is a wholly-owned subsidiary of the Company. The main business of Honghua Shanghai is finance leasing, asset leasing, purchase of assets for leasing and related consultancy service.

Information on ASIFL

As extracted from the Letter from the Board, ASIFL is a company incorporated in the PRC and its principal business includes finance leasing, disposal of assets under finance lease and related consultancy service.

Overview of the international oil market

The table below illustrates the Brent crude oil prices over the past five years:

==> picture [341 x 126] intentionally omitted <==

----- Start of picture text -----

USD
120
110
100
90
80
70
60
50
40
30
2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul Year
----- End of picture text -----

Source: http://www.macrotrends.net/

– 24 –

LETTER FROM VBG CAPITAL

The table below illustrates the WTI crude oil prices over the past five years:

==> picture [343 x 125] intentionally omitted <==

----- Start of picture text -----

USD
120
110
100
90
80
70
60
50
40
30
2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul Year
----- End of picture text -----

Source: http://www.macrotrends.net/

As depicted by the above tables, the international oil prices stayed above USD100 per barrel and started to decline in the second half of 2014. Around January 2016, the international oil prices dropped to the lowest level of around USD22 per barrel (the Brent crude oil price) or USD29 per barrel (the WTI crude oil price). Subsequently, they rebounded slightly and fluctuated in the range of USD40 to USD60 per barrel. With reference to the 2016 World Oil Outlook published by the Organisation of the Petroleum Exporting Countries, although the oil market has shown signs that it is heading towards a more balanced situation, the oil market is in the process of readjusting with continuing volatility and challenges remaining on several fronts. There is the lower oil price environment and market instability, which creates economic hardship and uncertainty for oil producing countries in their efforts to make appropriate and timely investments. This, in turn, could have a potential knock-on effect for consuming countries. In terms of economic growth, there are numerous uncertainties that could lead to varying outcomes for the global economy. As always, the uncertainties associated with energy and environmental policies at national and international levels cloud the long-term outlook for energy demand and supply. Another major determinant with the potential to significantly alter the oil and energy landscape is technological progress, both on the demand and supply side. In the downstream sector, the response of refiners to the need for capacity rationalisation, changes in the future crude slate quality, regulations concerning product quality specifications and the development of additional routes for oil movements, amongst others, will significantly affect the industry.

Overview of oilfield equipment rental market

We have reviewed the analysis report on the oil and gas equipment leasing market provided by the Company and also conducted independent research on the oilfield equipment rental market. With reference to a summary report published by marketsandmarkets.com (a research agent providing business to business research to 5,000 customers worldwide including 80% of global Fortune 1,000 companies as clients) in May 2017, the global oilfield equipment rental market is expected to be valued at USD16.99 billion in 2017 and is projected to be worth USD20.55 billion by 2022, representing a compound annual growth rate of approximately 3.87%. The oilfield equipment rental market is driven by factors such as technological advancement in oilfield equipment that has enabled the progress of non-

– 25 –

LETTER FROM VBG CAPITAL

conventional oil & gas fields, which were considered economically unviable, with techniques like horizontal drilling and ultra-deep drilling. Increase in global investments in exploration and production by key oil companies is also one of the driving forces for the market.

Reasons for the Transactions

With reference to the Letter from the Board, the international oil market has experienced certain degree of recovering in recent years, which in turn has a positive impact on the domestic market. In particular, there is an increase in shale gas drilling activities in the PRC. Large-scale drilling and fracturing operations require a significant amount of capital investment and relevant equipment. As a result, demands for oil drilling equipment through finance lease arrangement are also increasing in recent years. The Company intends to capitalise on this opportunity and gain market share in the finance lease industry, which the Company believes is a good way to make capital gains. Specifically, the Company believes the benefits of entering into of the Framework Agreement with ASIFL include:

• (i) reducing the initial capital investment needed in the finance lease transactions and lease transactions for the Group;

• (ii) strengthening the Group’s the ability to provide finance lease services and lease services to existing and potential customers as a value-added service and alternative solution; and

• (iii) creating synergy with the Group’s other business operations in the oil & gas industry.

Moreover, the Group expects to generate sales income from the Sales Transactions and leasing income from the sub-leasing arrangements with third parties. The Transactions would generate benefits to both the Group and ASIFL as elaborated under the section headed ‘‘Reasons for entering into the Transactions’’ of the Letter from the Board.

In relation to the above, we understand from the Company that as mentioned under the sub-section headed ‘‘Business and historical financial performance of the Group’’ of this letter of advice, in the current low oil price environment, oil companies especially the small and medium size companies are not willing to bear the high capital expenditure for oil rig and other drilling equipment, and hence would require finance lease services in respect of the equipment and products they demand. Given the future development of the Group, the Group also intends to extend its business relationship with other renowned customers, such as China Petroleum & Chemical Corporation and PetroChina Company Limited, who would prefer to enter into operating lease(s) with it. In order to expand into the new lease services market and as an alternative financing channel other than obtaining direct sales income from the lease services customers, the Group decided to enter into the Sales Transactions with ASIFL such that immediate cash inflow (in the form of sales income from ASIFL) could be generated. Given the Sales Transactions, the Group will lease back the relevant equipment and products from ASIFL in order to sub-lease them to the aforesaid customers. We have enquired into the Company about the pricing policy of such sub-leasing arrangement and we understand that the rental of the sub-leasing arrangement will be determined with reference to the sum of leasing and related fees (in substance, the principal, interest and related charges in relation to granting

– 26 –

LETTER FROM VBG CAPITAL

of fund to the Group by ASIFL) payable to ASIFL with reasonable profits for the Group. For this reason, it is expected that the aggregate income to be received by the Group from the provision of lease services to its third party customers will exceed the total leasing and related fees to be paid to ASIFL under the Leasing Transactions.

Even though the Group may be exposed to credit risk in the event that its third party customers fail to settle the rental of the sub-leasing arrangement while the Group is obligated to pay for the leasing and related fees to ASIFL, we were advised by the Directors that such credit risk can be mitigated by the Group’s right to (i) sue the defaulted customer for breach of the lease; (ii) terminate the sub-leasing arrangement with the defaulted customer; (iii) recoup the relevant equipment and products from the defaulted customer; and (iv) enter into subleasing arrangement with other customer given that the legal title of the relevant equipment and products does not rest with any particular customer.

Taking into account (i) the principal business of the Group being the developing, manufacturing and selling drilling rigs, rig parts and components and after-sales services; (ii) the challenging future prospects of the international oil market as well as the positive outlook of the global oilfield equipment market based on our independent research; (iii) the Framework Agreement would allow the Group to expand into the lease services market on the one hand while generating positive revenue on the other hand; and (iv) the credit risk associated with the Transactions is manageable, we concur with the Directors that the Transactions are conducted in the ordinary and usual course of business of the Group and are in the interests of the Company and the Shareholders as a whole.

2. Principal terms of the Framework Agreement

The principal terms and particulars of the Transactions are as follows:

The Sales Transactions:

ASIFL agreed that during the term of the Framework Agreement, ASIFL will purchase from Honghua Investment and its subsidiaries certain equipment and products for an aggregate consideration of up to RMB300 million through the Sales Transactions. Details of the purchase of equipment and products will be set forth in separate purchase agreements to be entered into between ASIFL and Honghua Investment on or prior to 31 December 2017.

Until the obligations under the relevant finance lease(s) with ASIFL are fulfilled, the legal title to the relevant equipment and products rests with ASIFL. Upon fulfillment of the obligations under the relevant finance lease(s), Honghua Shenzhen or Honghua Shanghai shall have an option to buy such equipment and products from ASIFL at a nominal price.

The Leasing Transactions:

Following the Sales Transaction(s), ASIFL will provide finance lease services to the Group by leasing such equipment and products to Honghua Shenzhen or Honghua Shanghai through the Leasing Transactions. Honghua Shenzhen or Honghua Shanghai will in turn enter into sub-leasing arrangements (in the form of finance leases or operating leases) with third parties in relation to such equipment and products. The term of the sub-leasing arrangement

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LETTER FROM VBG CAPITAL

that Honghua Shenzhen or Honghua Shanghai may enter into with third party customer will depend on the customer’s nature of operations and its particular needs for the equipment and products, and may exceed three years. Consequently, the term of the corresponding Leasing Transaction between ASIFL and Honghua Shenzhen or Honghua Shanghai may also exceed three years. In addition, in each of the sub-lease agreement to be entered into with third party customer, Honghua Shenzhen or Honghua Shanghai will secure a right to unilaterally terminate the sub-leasing arrangement on or prior to the expiration date of the Framework Agreement, in the event that the requisite approval, if applicable, to extend the Framework Agreement cannot be obtained from the Shareholders in accordance with the Listing Rules.

As confirmed by the Company, the Group will enter into the Sales Transactions and the Leasing Transactions with ASIFL after Honghua Shenzhen of Honghua Shanghai has secured sub-leasing arrangements with third party customers. The type and specifics of the equipment or products for each Sales Transaction and Leasing Transaction will depend on the nature of operations and particular needs of the third party customer. Furthermore, the Group will finalise the leasing and related fee of the Sales Transactions and the Leasing Transactions with ASIFL (despite that the relevant transactions are not yet entered into) at the time it enters into the sub-leasing arrangements with third party customers.

Term

The term of the Framework Agreement is three years starting from the date of the supplemental agreement to the Framework Agreement on 7 November 2017. Nonetheless, as aforementioned, the term of the sub-leasing arrangement that Honghua Shenzhen or Honghua Shanghai may enter into with third party customer will depend on the customer’s nature of operations and its particular needs for the equipment and products, and may exceed three years. Consequently, the term of the corresponding Leasing Transaction between ASIFL and Honghua Shenzhen or Honghua Shanghai may also exceed three years.

In assessing the reasons for the lease term of the Leasing Transaction under the Framework Agreement to be longer than three years, we have considered the following factors:

• (i) by entering into the finance lease(s) with a longer duration, the payment obligation of the costs of the equipment and products of the Group can be spread over a longer period, which would reduce the stress to the planning of working capital by the relevant members of the Group;

• (ii) the lease period of each finance lease shall be determined with reference to, among other things, the useful life of the relevant leasing equipment and products, which, as confirmed by the Directors, usually ranges from five to 20 years, depending on the type of equipment and products and its utilisation rate; and

• (iii) the sub-leasing arrangements between the Group and third parties in relation to such equipment and products.

In considering whether it is normal business practice for agreements of similar nature as the Leasing Transaction between ASIFL and Honghua Shenzhen or Honghua Shanghai to have a term of more than three years, we have identified similar finance lease agreements entered

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LETTER FROM VBG CAPITAL

into by companies listed on the Stock Exchange in respect of the leasing of equipment and products which although are not identical to those under the Framework Agreement, are large scale, with specialty use and involve substantial amount of capital investment (the ‘‘Market Comparables’’). Besides, we noted that the agreement of one of the I3P Transactions is of a lease term of five years (for details, please refer to the sub-section headed ‘‘Pricing policy’’ below).

In view of the above, we are of the opinion that it is necessary and normal business practice for the lease term of the Leasing Transaction under the Framework Agreement to be longer than three years.

Pricing policy

The pricing and payment terms of services and related technical service and products under the Transactions shall be determined by arm’s length negotiations between the Group and ASIFL and be determined based on normal commercial terms with reference to prevailing market prices that are fair and reasonable for the relevant equipment and in any event shall be no less favourable to the prices offered by the Group to the independent third parties. The Group will comply with its relevant internal pricing policies in the negotiations with ASIFL.

Shareholders may refer to the section headed ‘‘Pricing policy’’ of the Letter from the Board regarding details of the Group’s pricing policies for the Sales Transactions and the Leasing Transactions.

As mentioned under the sub-section headed ‘‘Business and historical financial performance of the Group’’ of this letter of advice, in June 2017, the Group cooperated with ASIFL to sign a domestic finance lease agreement to sell inventory products with the value of over RMB30 million. Referring to the relevant announcement of the Company dated 26 June 2017, the Group entered into a sale and purchase agreement and a finance lease agreement with ASIFL (altogether, the ‘‘Agreements’’) concurrently on 26 June 2017 in relation to the sale of equipment by the Group to ASIFL and the lease of such equipment by the Group from ASIFL, respectively. As confirmed by the Company, this is the first and only series of transactions between the Group and ASIFL which were conducted before the Framework Agreement and are similar to the Transactions. In addition, the Group (as lessor and lessee) respectively had only conducted two similar transactions with independent third parties (the ‘‘I3P Transactions’’) in the past up to the Latest Practicable Date. We have therefore requested the Company to provide us with the executed copies of the Agreements as well as the executed copies of the agreements of the I3P Transactions. The I3P Transactions, which represent similar finance lease arrangement in the oil and gas market, have a lease term of three years and five years respectively. The products of the I3P Transactions are oilfield equipment and related products such as oil rigs, top drives, electric fracturing pumps. The annual interest rates of the I3P Transactions are with reference to RMB benchmark lending rate published by PBOC from time to time; whereas their handling fees are 3% and 2.7% respectively. After comparison, we noted that the major terms and conditions of the Agreements are comparable to those of the agreements of the I3P Transactions.

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LETTER FROM VBG CAPITAL

Due to the fact that the I3P Transactions may or may not be representative as there are only two of them and the Group acted as lessor and lessee respectively in those two transactions, we have further attempted to compare the major terms of the Market Comparables with those of the Agreements. Based on the information disclosed in the relevant announcements of the Market Comparables, we noted that the major terms and conditions of the Agreements are comparable to those of the Market Comparables. The annual interest rates of the Market Comparables are largely with reference to RMB benchmark lending rate published by PBOC from time to time and their handling fees are generally higher than that of the Agreements. Moreover, for our due diligence purpose, we have requested the Company to provide us with the Group’s internal control documents regarding the aforesaid pricing policies and discussed the same with the Company. As mentioned under the sub-section headed ‘‘Reasons for the Transactions’’ of this letter of advice, we understand that the rental of the sub-leasing arrangement will be determined with reference to the sum of leasing and related fees (in substance, the principal, interest and related charges in relation to granting of fund to the Group by ASIFL) payable to ASIFL with reasonable profits for the Group. In view of all the foregoings, we are of the opinion that the terms of the Framework Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

3. The annual caps

Annual cap for the Sales Transactions

During the term of the Sales Transactions, the relevant annual cap is:

				From			From
			30 October		For the	For the	1 January
				2017 to	year ending	year ending	2020 to
			31	December	31 December	31 December	29 October
				2017	2018	2019	2020
Sales	price	(RMB’000)		300,000	—	—	—

To assess the fairness and reasonableness of the relevant annual cap for the Sales Transactions, we have enquired into the Company for its determination basis. According to the Company, the relevant annual cap for the Sales Transactions was determined primarily with reference to the estimated amount of equipment and products that ASIFL will purchase from the Group. As the Company will enter into the Sales Transactions and the Leasing Transactions with ASIFL after the Company has secured sub-leasing arrangements with third party customers, we have requested from the Company information/ documents with regard to the aggregate value of the equipment and products which are currently under negotiations or expected to be entered into between the Group and its third party customers (the ‘‘Potential Demand’’). Based on the information/ documents provided by the Company, we noted that the aggregate value of the Potential Demand exceeds the relevant annual cap amount.

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LETTER FROM VBG CAPITAL

In light of that (i) the aggregate value of the Potential Demand exceeds the relevant annual cap amount; (ii) the annual cap of RMB300 million represents (a) approximately 6% of the total equipment backlogs of the Group of approximately RMB5.1 billion (i.e. RMB3.9 billion + RMB1.2 billion as illustrated under the sub-section headed ‘‘Future development of the Group’’ of this letter of advice) as at 15 August 2017 and (b) less than 10% of the Group’s average yearly revenue from 2012 to 2016 of approximately RMB5.5 billion; (iii) the Group expects to attract an increasing number of lease services customers with the support of CASIC and as the future prospects of the international oil market remains challenging; and (iv) the Sales Transactions as an alternative financing channel would provide immediate cash inflow to the Group, we are of the view that the relevant annual cap for the Sales Transactions is fair and reasonable so far as the Independent Shareholders are concerned.

Annual caps for the Leasing Transactions

During the term of the Leasing Transactions, the relevant annual caps are:

RMB Maximum daily balance of the leasing principal Outstanding interest fee One-off handling fee Total	From 30 October 2017 to 31 December 2017 300,000,000 38,001,340 8,100,000 346,101,340	For the year ending 31 December 2018 300,000,000 38,001,340 — 338,001,340	For the year ending 31 December 2019 253,000,000 26,001,340 — 279,001,340	From 1 January 2020 to 29 October 2020 204,000,000 16,001,340 —
				220,001,340

To assess the fairness and reasonableness of the relevant annual caps for the Leasing Transactions, we have enquired into the Company for their determination basis. We understand from the Company that owing to the nature of the Leasing Transactions, the Company has adopted the amount of consideration of the equipment and products that ASIFL agreed to purchase from the Group (in substance, the principal amount of fund to be obtained by the Group from ASIFL as an alternative financing channel other than the direct sales income from the leasing services customers) under the Sales Transactions as basis for calculation of the annual caps for the Leasing Transactions for the period from 30 October 2017 to 31 December 2017 and the year ending 31 December 2018. Since repayment of the leasing principal is expected to begin in 2019, the maximum daily balance of the leasing principal is expected to reduce from 2019 onwards.

Then, we noted that an interest rate and handling fee of not more than 6% per annum and 2.7% respectively were assumed in the calculation of the annual caps. We have independently researched over the internet and we noted that the RMB benchmark lending rate published by the People’s Bank of China was 4.75% as at the Latest Practicable Date and in the range of 4.75% to 7.56% over the past ten years from 2008 to 2017. As such, the assumed interest rate of not more than 6% per annum even though is above the market rate as at the Latest

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LETTER FROM VBG CAPITAL

Practicable Date, is within the historical market range. We therefore consider the assumed interest rate of not more than 6% per annum to be reasonable. Furthermore, as we noted from the agreements of the I3P Transactions that a handling fee of approximately 2.7% and 3% was charged respectively, we consider the assumed 2.7% handling fee to be acceptable.

In light of the above basis of determination of the relevant annual caps for the Leasing Transactions, we are of the view that the relevant annual caps for the Leasing Transactions are fair and reasonable so far as the Independent Shareholders are concerned.

4. Relevant Listing Rules’ requirements and the Group’s internal control policies

The Company confirmed that it shall comply with the requirements of Rules 14A.53 and 14A.55 of the Listing Rules pursuant to which (i) the values of the Transactions must be restricted by the respective annual caps for the periods concerned under the Framework Agreement; (ii) the terms of the Framework Agreement (together with the respective annual caps for the Transactions) must be reviewed by the independent non-executive Directors annually; and (iii) details of independent non-executive Directors’ annual review on the terms of the Framework Agreement (together with the respective annual caps for the Transactions) must be included in the Company’s subsequent published annual reports and financial accounts. As also stipulated under Rule 14A.56 of the Listing Rules, auditors of the Company must provide a letter to the Board confirming, among other things, that the Transactions are carried out in accordance with the pricing policies of the Company, and the respective annual caps for the Transactions are not being exceeded. In the event that the total amounts of the Transactions exceed the respective annual caps, or that there is any material amendment to the terms of the Framework Agreement, the Company, as confirmed by the Company, shall comply with the applicable provisions of the Listing Rules governing continuing connected transactions.

As further referred to under the section headed ‘‘Internal control procedures governing the Transactions’’ of the Letter from the Board, the Group has adopted a series of internal control procedures to govern the Transactions. We requested the Company to provide us with copies of those procedures and the supporting samples. While there are no complete set of such supporting samples, we have obtained copies of those procedures and discussed with the Company regarding how those procedures are carried out in practice for our due diligence purpose.

With the aforesaid stipulated requirements for continuing connected transactions of the Listing Rules in place together with the internal control procedures adopted by the Group, the Transactions will be monitored and thus the interest of the Independent Shareholders would be safeguarded.

RECOMMENDATION

Having taken into consideration the factors and reasons as stated above, we are of the opinion that (i) the terms of the Framework Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Transactions are conducted in the ordinary and usual course of business of the Group and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend

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LETTER FROM VBG CAPITAL

the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution(s) to be proposed at the EGM to approve the Framework Agreement, and we recommend the Independent Shareholders to vote in favour of the resolution(s) in this regard.

Yours faithfully, For and on behalf of VBG Capital Limited Doris Sing Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(A) Directors and chief executive of the Company

As at the Latest Practicable Date, the following Directors of the Company had interests or short positions in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which would be required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the requirements of the Model Code for Securities Transactions by Directors of Listed Issuers (the ‘‘Model Code’’):

(a) Ordinary shares of HK$0.1 each of the Company

				% of the issued	% of the issued
	Long/Short		Number of	share capital of
Name	position	Nature of interest	Shares held	the Company
Mr. Zhang Mi	Long	Personal interest, corporate	1,508,998,620(1)(4)		28.17%
		interest and settlor of a
		discretionary trust
Mr. Ren Jie	Long	Personal Interest, corporate	1,508,998,620(2)(4)		28.17%
		interest and settlor of a
		discretionary trust
Miss Su Mei	Long	Personal interest	150,000(3)		0.002%
Note:

• (1) Zhang Mi individually owns 3,050,000 Shares. Yi Langlin, spouse of Zhang Mi owns 2,156,000 Shares. Zhang Mi is a member of the Concert Group. He is the settlor of a discretionary trust, The ZYL Family Trust, whose trustee, through Wealth Afflux Limited, holds the entire issued share capital of Ally Smooth Investments Limited, which in turn is the beneficial owner of 36% of the issued share capital of Ample Chance International Limited, which in turn is the beneficial owner of the entire issued share capital of Ally Giant Limited which holds 1,187,727,837 Shares. The Trustee of The ZYL Family Trust owns 157,800,000 Shares.

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GENERAL INFORMATION

APPENDIX

Ren Jie, another member of the Concert Group and the settlor of a discretionary trust, The RJDJ Victory Trust, individually owns 1,549,000 Shares. The Trustee of The RJDJ Victory Trust owns 32,227,200 Shares. The Trustee of a discretionary trust, The LZWM Family Trust, whose settlor is Liu Zhi, another member of the Concert Group, individually owns 1,250,000 Shares. The Trustee of The LZWM Family Trust owns 28,105,000 Shares. The Trustee of a discretionary trust, The FBX Family Trust, whose settlor is Fan Bing, another member of the Concert Group, individually owns 30,000 Shares. The Trustee of The FBX Family Trust owns 18,581,000 Shares. The Trustee of a discretionary trust, The ZHH Family Trust, whose settlor is Zuo Huixian, another member of the Concert Group, individually owns 210,000 Shares. The Trustee of The ZHH Family Trust owns 18,804,400 Shares. The Trustee of a discretionary trust, The Hong Xu Family Trust, whose settlor is Zhang Xu, another member of the Concert Group, individually owns 12,686 Shares. The Trustee of The Hong Xu Family Trust owns 13,557,400 Shares. The Trustee of a discretionary trust, The LXYY Family Trust, whose settlor is Liu Xuetian (deceased), another member of the Concert Group, owns 6,052,400 Shares. The other members of the Concert Group totally own 37,885,697 Shares.

• (2) Ren Jie individually owns 1,549,000 Shares. Ren Jie is a member of the Concert Group. He is the settlor of a discretionary trust, The RJDJ Victory Trust, whose trustee, through Mowbray Worldwide Limited, holds approximately 41.34% of the issued share capital of Charm Moral International Limited, which in turn is the beneficial owner of approximately 19.09% of the issued share capital of Ample Chance International Limited, which in turn is the beneficial owner of the entire issued share capital of Ally Giant Limited which holds 1,187,727,837 Shares. The Trustee of The RJDJ Victory Trust owns 32,227,200 Shares.

Zhang Mi, another member of the Concert Group and the settlor of a discretionary trust, The ZYL Family Trust, individually owns 3,050,000 Shares. The Trustee of The ZYL Family Trust owns 157,800,000 Shares. Yi Langlin, spouse of Zhang Mi owns 2,156,000 Shares. The Trustee of a discretionary trust, The LZWM Family Trust, whose settlor is Liu Zhi, another member of the Concert Group, individually owns 1,250,000 Shares. The Trustee of The LZWM Family Trust owns 28,105,000 Shares. The Trustee of a discretionary trust, The FBX Family Trust, whose settlor is Fan Bing, another member of the Concert Group, individually owns 30,000 Shares. The Trustee of The FBX Family Trust owns 18,581,000 Shares. The Trustee of a discretionary trust, The ZHH Family Trust, whose settlor is Zuo Huixian, another member of the Concert Group, individually owns 210,000 Shares. The Trustee of The ZHH Family Trust owns 18,804,400 Shares. The Trustee of a discretionary trust, The Hong Xu Family Trust, whose settlor is Zhang Xu, another member of the Concert Group, individually owns 12,686 Shares. The Trustee of The Hong Xu Family Trust owns 13,557,400 Shares. The Trustee of a discretionary trust, The LXYY Family Trust, whose settlor is Liu Xuetian (deceased), another member of the Concert Group, owns 6,052,400 Shares. The other members of the Concert Group totally own 37,885,697 Shares

• (3) Su Mei individually owns 150,000 Shares.

• (4) Concert Group is defined in the prospectus of the Company dated 25 February 2008.

As at the Latest Practicable Date, so far as was known to the Directors, none of the Directors is a director or employee of a company which has an interest or short position in the Shares and underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

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GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, the register of substantial shareholders maintained by the Company pursuant to Section 336	of the SFO showed that the following shareholders had an interest of 5% or more in the issued share capital of the Company and	this interest represents long positions in the ordinary shares of HK$0.1 each of the Company.	Number of shares held	Personal interest	Corporate	interest and	Long/ Settlor of a % of the issued	Short Corporate Discretionary Interest of the share capital of	Name position Share Option Shares Interest interest Trust Concert Group Total the Company	Ally Giant Limited Long — 1,187,727,837 — — 369,958,503 1,557,686,340(1) 29.08%	Ample Chance International Limited Long — — 1,187,727,837 — 369,958,503 1,557,686,340(2) 29.08%	Wealth Afflux Limited Long — 157,800,000 1,187,727,837 — 212,158,503 1,557,686,340(3) 29.08%	Ally Smooth Investments Limited Long — — 1,187,727,837 — 369,958,503 1,557,686,340(3) 29.08%	Equity Trustee Limited Long — — — 1,504,485,237 — 1,504,485,237(3)(5)(6) 28.09%	(9)(10)(14)	(20)(22)	Charm Moral International Limited Long — — 1,187,727,837 — 369,958,503 1,557,686,340(4) 29.08%	Mowbray Worldwide Limited Long — 32,227,200 1,187,727,837 — 337,731,303 1,557,686,340(5) 29.08%	Ecotech Enterprises Corporation Long — 28,105,000 1,187,727,837 — 341,853,503 1,557,686,340(6) 29.08%	Mr. Zheng Yong Long 2,859,760 20,020,950 1,187,727,837 — 347,077,793 1,557,686,340(7) 29.08%	Beauty Clear Holdings Limited Long — — 1,187,727,837 — 369,958,503 1,557,686,340(8) 29.08%	Mr. Zuo Huixian Long 2,656,600 210,000 — 1,206,532,237 348,287,503 1,557,686,340(9) 29.08%	Vast&Fast Corporation Long — 18,804,400 1,187,727,837 — 351,154,103 1,557,686,340(9) 29.08%	Mr. Zhang Xu Long 1,860,720 12,686 — 1,201,285,237 354,527,697 1,557,686,340(10) 29.08%	Cavendish Global Corporation Long — 13,557,400 1,187,727,837 — 356,401,103 1,557,686,340(10) 29.08%	Elegant Scene International Limited Long — — 1,187,727,837 — 369,958,503 1,557,686,340(11) 29.08%	Mr. Wang Jiangyang Long 1,401,000 6,752,600 1,187,727,837 — 361,804,903 1,557,686,340(11) 29.08%	Mr. Chen Jun Long 891,000 2,074,599 1,187,727,837 — 366,992,904 1,557,686,340(12) 29.08%	Believe Power International Limited Long — — 1,187,727,837 — 369,958,503 1,557,686,340(13) 29.08%	Mr. Fan Bing Long 1,744,000 30,000 — 1,206,308,837 349,603,503 1,557,686,340(14) 29.08%	Brondesbury Enterprises Limited Long — 18,581,000 1,187,727,837 — 351,377,503 1,557,686,340(14) 29.08%	Mr. Zhang Yanyong Long 1,494,080 1,720 1,187,727,837 — 368,462,703 1,557,686,340(15) 29.08%	Mr. Ao Pei Long 469,100 962,308 1,187,727,837 — 368,527,095 1,557,686,340(16) 29.08%	Mr. Tian Diyong Long 573,000 400 1,187,727,837 — 369,385,103 1,557,686,340(17) 29.08%	Mr. Shen Dingjian Long 288,040 1,285,720 1,187,727,837 — 368,384,743 1,557,686,340(18) 29.08%

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GENERAL INFORMATION

APPENDIX

		% of the issued	share capital of	the Company	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%	29.08%			29.99%	29.99%		29.99%
				Total	1,557,686,340(19)	1,557,686,340(20)	1,557,686,340(20)	1,557,686,340(21)	1,557,686,340(21)	1,557,686,340(22)	1,557,686,340(22)	1,557,686,340(23)	1,557,686,340(24)	1,557,686,340(25)	1,557,686,340(26)	1,557,686,340(27)	1,557,686,340(28)			1,606,000,000(29)	1,606,000,000(29)		1,606,000,000(29)
			Interest of the	Concert Group	369,958,503	363,906,103	363,906,103	363,906,103	363,906,103	364,548,789	369,958,503	368,306,195	367,095,025	369,391,583	369,694,503	368,553,603	—			—	—		—
Corporate	interest and	Settlor of a	Corporate Discretionary	interest Trust	1,187,727,837 —	— 1,193,780,237	1,187,727,837 —	1,193,780,237 —	1,193,780,237 —	— 1,187,727,837	1,187,727,837 —	1,187,727,837 —	1,187,727,837 —	1,187,727,837 —	1,187,727,837 —	1,187,727,837 —	— —			— —	1,606,000,000 —		1,606,000,000 —
				Shares Interest	—	—	6,052,400	—	—	3,856,714	—	250,808	1,508,478	311,000	264,000	596,400	2,156,000	1,555,530,340	(family interest)	1,606,000,000	—		—
				Share Option	—	—	—	—	—	1,553,000	—	1,401,500	1,355,000	255,920	—	808,500	—			—	—		—
		Long/	Short	position	Long	Long	Long	Long	Long	Long	Long	Long	Long	Long	Long	Long	Long			Long	Long		Long
				Name	Benefit Way International Limited	Mr. Liu Xuetian(deceased)	Dobson Global Inc.	Ms. Qu Yihong	Ms. Liu Ying	Mr. Zhou Bing	Darius Enterprises Limited	Ms. Lv Lan	Mr. Tian Yu	Mr. Li Hanqiang	Mr. Liu Yingguo	Mrs. Liu Lulu	Yi Langlin			Kehua Technology Co.	Shenzhen Aerospace Industry Technology	Research Institute	China Aerospace Science & Industry	Corporation

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GENERAL INFORMATION

APPENDIX

Notes:

• (1) Ally Giant Limited is wholly-owned by Ample Chance International Limited and holds 1,187,727,837 Shares.

• (2) Ample Chance International Limited is owned approximately 36% by Ally Smooth Investments Limited, approximately 19.09% by Charm Moral International Limited, approximately 18.51% by Beauty Clear Holdings Limited, approximately 12.71% by Believe Power International Limited, approximately 10.50% by Benefit Way International Limited and approximately 3.19% by a corporation.

• (3) The entire issued share capital of Ally Smooth Investments Limited is owned by Wealth Afflux Limited, which in turn is held by Equity Trustee Limited as trustee of The ZYL Family Trust. The ZYL Family Trust is a discretionary trust established by Zhang Mi as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The ZYL Family Trust are Zhang Mi and his family members. Zhang Mi is a member of the Concert Group.

• (4) Charm Moral International Limited is owned approximately 41.34% by Mowbray Worldwide Limited, approximately 29.33% by Ecotech Enterprises Corporation and approximately 29.33% by Zheng Yong.

• (5) Approximately 41.34% of the issued share capital of Charm Moral International Limited is owned by Mowbray Worldwide Limited, which in turn is held by Equity Trustee Limited as trustee of The RJDJ Victory Trust. The RJDJ Victory Trust is a discretionary trust established by Ren Jie as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The RJDJ Victory Trust are Ren Jie and his family members. Ren Jie is a member of the Concert Group.

• (6) Approximately 29.33% of the issued share capital of Charm Moral International Limited is held by Ecotech Enterprises Corporation, which in turn is held by Equity Trustee Limited as trustee of The LZWM Family Trust. The LZWM Family Trust is a discretionary trust, established by Liu Zhi as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The LZWM Family Trust are Liu Zhi and his family members. Liu Zhi is a member of the Concert Group.

• (7) Zheng Yong is the beneficial owner of approximately 29.33% of the issued share capital of Charm Moral International Limited, which is in turn the beneficial owner of approximately 19.09% of the issued share capital of Ample Chance International Limited. Zheng Yong is a member of the Concert Group.

• (8) Beauty Clear Holdings Limited is owned approximately 23.63% by Vast & Fast Corporation, approximately 22.77% by Cavendish Global Corporation, approximately 5.76% by Elegant Scene International Limited, approximately 5.10% by Chen Jun, and a total of approximately 42.74% by 3 other shareholders.

• (9) Approximately 23.63% of issued share capital of Beauty Clear Holdings Limited is owned by Vast & Fast Corporation, which in turn is held by Equity Trustee Limited as trustee of The ZHH Family Trust. The ZHH Family Trust is a discretionary trust, established by Zuo Huixian as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The ZHH Family Trust are Zuo Huixian and his family members. Zuo Huixian is a member of the Concert Group.

• (10) Approximately 22.77% of the issued share capital of Beauty Clear Holdings Limited is held by Cavendish Global Corporation, which in turn is held by Equity Trustee Limited as trustee of The Hong Xu Family Trust. The Hong Xu Family Trust is a discretionary trust, established by Zhang Xu as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The Hong Xu Family Trust are Zhang Xu and his family members. Zhang Xu is a member of the Concert Group.

• (11) Approximately 5.76% of the issued share capital of Beauty Clear Holdings Limited is held by Elegant Scene International Limited, which in turn is wholly-owned by Wang Jiangyang. Beauty Clear Holdings Limited is the beneficial owner of approximately 18.51% of the issued share capital of Ample Chance International Limited. Wang Jiangyang is a member of the Concert Group.

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• (12) Chen Jun is the beneficial owner of approximately 5.10% of the issued share capital of Beauty Clear Holdings Limited, which in turn is the beneficial owner of approximately 18.51% of the issued share capital of Ample Chance International Limited. Chen Jun is a member of the Concert Group.

• (13) Believe Power International Limited is owned approximately 32.72% by Brondesbury Enterprises Limited, approximately 29.16% by Zhang Yanyong, approximately 7.30% by Ao Pei, approximately 2.85% by Tian Diyong, approximately 2.24% by Shen Dingjian, and a total of approximately 25.73% by 4 other shareholders.

• (14) Approximately 32.72% of the issued share capital of Believe Power International Limited is held by Brondesbury Enterprises Limited, which in turn is held by Equity Trustee Limited as trustee of The FBX Family Trust. The FBX Family Trust is a discretionary trust, established by Fan Bing as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The FBX Family Trust are Fan Bing and his family members. Fan Bing is a member of the Concert Group.

• (15) Zhang Yanyong is the beneficial owner of approximately 29.16% of the issued share capital of Believe Power International Limited, which in turn is the beneficial owner of approximately 12.71% of the issued share capital of Ample Chance International Limited. Zhang Yanyong is a member of the Concert Group.

• (16) Ao Pei is the beneficial owner of approximately 7.30% of the issued share capital of Believe Power International Limited, which in turn is the beneficial owner of approximately 12.71% of the issued share capital of Ample Chance International Limited. Ao Pei is a member of the Concert Group.

• (17) Tian Diyong is the beneficial owner of approximately 2.85% of the issued share capital of Believe Power International Limited, which in turn is the beneficial owner of approximately 12.71% of the issued share capital of Ample Chance International Limited. Tian Diyong is a member of the Concert Group.

• (18) Shen Dingjian is the beneficial owner of approximately 2.24% of the issued share capital of Believe Power International Limited, which in turn is the beneficial owner of approximately 12.71% of the issued share capital of Ample Chance International Limited. Shen Dingjian is a member of the Concert Group.

• (19) Benefit Way International Limited is owned approximately 35.57% by Dobson Global Inc., approximately 19.36% by Darius Enterprises Limited, approximately 6.49% by Lv Lan, approximately 3.91% by Tian Yu, approximately 3.50% by Li Hangqiang, approximately 1.52% by Liu Yingyuo, approximately 1.22% by Liu Lulu and approximately 28.43% by 6 other shareholders.

• (20) Approximately 35.57% of the issued share capital of Benefit Way International Limited is held by Dobson Global Inc., which in turn is held by Equity Trustee Limited as trustee of The LXYY Family Trust. The LXYY Family Trust is a discretionary trust, established by Liu Xuetian(deceased) as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The LXYY Family Trust are Liu Xuetian (deceased) and his family members. Liu Xuetian (deceased) was a member of the Concert Group and passed away on 23 January 2008.

• (21) Qu Yihong and Liu Ying, family members of Liu Xuetian (deceased), are deemed to be interested in 1,193,780,237 Shares as directors of Dobson Global Inc..

• (22) Approximately 19.36% of the issued share capital of Benefit Way International Limited is held by Darius Enterprises Limited, which in turn is held by Equity Trustee Limited as trustee of The Fang Zhou Family Trust. The Fang Zhou Family Trust is a discretionary trust, established by Zhou Bing as settlor, with Equity Trustee Limited as trustee. The beneficiaries under The Fang Zhou Family Trust are Zhou Bing and his family members. Zhou Bing is a member of the Concert Group.

• (23) Lv Lan is the beneficial owner of approximately 6.49% of the issued share capital of Benefit Way International Limited, which in turn is the beneficial owner of approximately 10.50% of issued share capital of Ample Chance International Limited. Lv Lan is a member of the Concert Group.

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GENERAL INFORMATION

APPENDIX

• (24) Tian Yu is the beneficial owner of approximately 3.91% of the issued share capital of Benefit Way International Limited, which in turn is the beneficial owner of approximately 10.50% of issued share capital of Ample Chance International Limited. Tian Yu is a member of the Concert Group.

• (25) Li Hanqiang is the beneficial owner of approximately 3.50% of the issued share capital of Benefit Way International Limited, which in turn is the beneficial owner of approximately 10.50% of issued share capital of Ample Chance International Limited. Li Hanqiang is a member of the Concert Group.

• (26) Liu Yingyuo is the beneficial owner of approximately 1.52% of the issued share capital of Benefit Way International Limited, which in turn is the beneficial owner of approximately 10.50% of issued share capital of Ample Chance International Limited. Liu Yingguo is a member of the Concert Group.

• (27) Liu Lulu is the beneficial owner of approximately 1.22% of the issued share capital of Benefit Way International Limited, which in turn is the beneficial owner of approximately 10.50% of issued share capital of Ample Chance International Limited. Liu Lulu is a member of the Concert Group.

• (28) Yi Langlin, spouse of Zhang Mi, is deemed to be interested in 1,557,686,340 Shares.

• (29) Kehua Technology Co., Limited is owned 40% by Shenzhen Aerospace Industry Technology Research Institute and 60% by China Aerospace Science and Industry Corporation and holds 1,606,000,000 Shares.

Save as disclosed above, there is no person or entity other than a director or chief executive of the Company whose interests are disclosed under the paragraph headed ‘‘Directors’ interests’’ above, who had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or were directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company.

3. DIRECTORS’ INTERESTS

As at the Latest Practicable Date, none of the Directors had any interests, either directly or indirectly, in any assets which had been acquired or disposed of by or leased to any member of the Group, or which were proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2016, the date to which the latest published audited consolidated accounts of the Group were made up.

As at the Latest Practicable Date, there was no subsisting contracts of significance in relation to the Group’s business to which the Company or any of its subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly.

4. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2016, being the date to which the latest published audited consolidated financial statements of the Group were made up.

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GENERAL INFORMATION

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5. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors nor their respective associates had an interest in any business apart from the Group’s business which competes or is likely to compete, either directly or indirectly, with the Group’s business.

6. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with the Company or any of its subsidiaries which is not expiring nor determinable by the Company or any of its subsidiaries within one year without payment of compensation other than statutory compensation.

7. EXPERTS AND CONSENTS

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

Name Qualification

VBG Capital a corporation licensed to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO

VBG Capital has confirmed that as at the Latest Practicable Date, it did not have any beneficial shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group nor did it have any direct or indirect interests in any assets which had been since 31 December 2016 (being the date to which the latest published audited consolidated financial statements of the Company were made up) acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

VBG Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its opinion prepared for the purpose of incorporation in this circular, and the references to its name and opinion in the form and context in which they respectively appear.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the principal place of business of the Company in Hong Kong from 9:00 a.m. to 6:00 p.m. on any business day from the date of this circular up to and including the closing date of the EGM:

• (i) this circular;

• (ii) the Framework Agreement;

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GENERAL INFORMATION

APPENDIX

• (iii) the letter of recommendation from the Independent Board Committee, the text of which is set out on page 17 of this circular;

• (iv) the letter of advice from VBG Capital to the Independent Board Committee and the Shareholders, the text of which is set out on pages 18 to 33 of this circular; and

• (v) the written consent as referred to under the section headed ‘‘Experts and Consents’’ in this appendix.

9. MISCELLANEOUS

• (i) Ms Lee Mei Yi of Tricor Services Limited has been engaged by the Company as its joint company secretary. Its primary contact person at the Company is Mr. He Bin, another joint company secretary of the Company.

• (ii) The registered office of the Company is situated at Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108, Cayman Islands and the principal place of business of the Company in Hong Kong is situated at Room 2508, Harcourt House, 30 Gloucester Road, Wanchai, Hong Kong.

• (iii) The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

• (iv) In the event of any inconsistency, the English text of this circular shall prevail over the Chinese text.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Honghua Group Limited 宏 華 集 團 有 限 公 司

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 196)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (‘‘EGM’’) of Honghua Group Limited (the ‘‘Company’’) will be held at Boardroom 3–4, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong on Wednesday, 29 November 2017 at 9:30 a.m. for the purpose of considering and, if thought fit, passing the following resolution as ordinary resolution of the Company:

ORDINARY RESOLUTION

‘‘THAT:

• (a) the Framework Agreement (as defined in the circular to the shareholders of the Company dated 13 November 2017 (the ‘‘Circular’’)) and the transactions contemplated thereunder be and are hereby approved;

• (b) the Proposed Annual Caps (as defined in the Circular) for each of the period from 30 October 2017 to 31 December 2017, the fiscal year ending 31 December 2018 and 31 December 2019, and the period from 1 January 2020 to 29 October 2020, be and are hereby approved; and

• (c) any one director be and is hereby authorised on behalf of the Company to sign, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as he may in his discretion consider necessary or desirable for the purposes of or in connection with or to give effect to the aforesaid Framework Agreement and the transactions contemplated thereunder (including the Proposed Annual Caps (as defined in the Circular)).’’

By order of the Board Honghua Group Limited Chen Yajun Chairman

Hong Kong, 13 November 2017

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Registered office: Clifton House, 75 Fort Street PO Box 1350, Grand Cayman KY1-1108, Cayman Islands

Principal place of Head Office: business in Hong Kong: 99 East Road, Information Park Room 2508, Harcourt House Jinniu District, Chengdu Sichuan 39 Gloucester Road People’s Republic of China Wan Chai, Hong Kong Post code: 610036

Notes:

1. A member of the Company who is entitled to attend and vote at the EGM convened by the above notice is entitled to appoint a proxy to attend and vote on his behalf. A proxy need not be a member of the Company but must attend in person to represent the member. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed. Every member present in person or by proxy shall be entitled to one vote for each share held by him.

2. In order to be valid, the form of proxy together with the power of attorney or other authority under which it is signed or a certified copy of such power of attorney or authority, must be deposited at the Company’s Hong Kong branch share registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited, at Shops 1712–1716, 17th Floor Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time for holding the EGM or any adjournment thereof. Delivery of an instrument appointing a proxy should not preclude a member from attending and voting in person at the above meeting or any adjournment thereof and in such event, the instrument appointing a proxy shall be deemed to be revoked.

3. Where there are joint registered holders of any share of the Company, any one of such persons may vote at the EGM, either personally or by proxy, in respect of such share as if he were solely entitled thereto; but if more than one of such joint holders be present at the EGM personally or by proxy, that one of the said persons so present whose name stands first on the register of shareholders of the Company in respect of such share shall alone be entitled to vote in respect thereof.

As at the date hereof, the executive directors of the Company are Mr. Chen Yajun (Chairman), Mr. Zhang Mi and Mr. Ren Jie, the non-executive directors of the Company are Mr. Han Guangrong and Mr. Chen Wenle, and the independent non-executive directors of the Company are Mr. Liu Xiaofeng, Mr. Qi Daqing, Mr. Chen Guoming, Ms. Su Mei, Mr. Poon Chiu Kwok and Mr. Chang Qing.

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