Hybrid Kinetic Group Limited — Proxy Solicitation & Information Statement 2003

Sep 15, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Compass Pacific Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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(incorporated in Bermuda with limited liability)
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ONGOING CONNECTED TRANSACTIONS

Independent Financial Adviser to the Independent Board Committee

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Menlo Capital Limited

A letter from the Board is set out on pages 3 to 10 of this circular and a letter from the Independent Board Committee is set out on page 11 of this circular.

A letter from the Independent Financial Adviser containing its advice to the Independent Board Committee is set out on pages 12 to 21 of this circular.

A notice convening a special general meeting of Compass Pacific Holdings Limited to be held at Suites 612-617, 6th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong at 10 a.m. on Thursday, 2 October 2003 is set out on pages 29 and 30 of this circular. A form of proxy for use at the special general meeting is enclosed. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon and deposit the same with the Company at its principal place of business in Hong Kong at Suites 612617, 6th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the meeting or any adjournment thereof.

Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting or any adjournment thereof should you so wish.

15 September 2003

* For identification purpose only

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
–	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
–	Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
–	Financial implication on the Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . .	5
–	Reasons for the Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
–	Waiver for the Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
–	The SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
–	Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
–	Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		11
Letter from the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		12
Appendix – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		22
Notice of	SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29

• i -

DEFINITIONS

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

• “associates”

has the meaning as ascribed to it under the Listing Rules

“Board” the board of Directors

“Company”

Compass Pacific Holdings Limited (formerly known as Whimsy Entertainment Co., Limited), a company incorporated in Bermuda with limited liability and whose shares are listed on the main board of the Stock Exchange

rear differential axle, driving and driven gears, rear brake assembly, bearings, rear braking drums

“Components” bearings, rear braking drums “Director(s)” the director(s) of the Company

• “Group” the Company and its subsidiaries

“HK$” Hong Kong dollars, the lawful currency of Hong Kong

“Hong Kong”

the Hong Kong Special Administrative Region of the PRC

“Independent Board Committee” an independent board committee of the Company comprising Mr Jian Wang and Mr Banjie He

• “Independent Financial Adviser” Menlo Capital Limited, a deemed licensed corporation under or “Menlo” transitional arrangement within the meaning of the SFO for type 6 regulated activities under the SFO and the independent financial adviser to the Independent Board Committee

• “Latest Practicable Date”

13 September 2003, being the latest practicable date prior to the printing of this circular for ascertaining certain information referred to in this circular

“Listing Rules”

the Rules Governing the Listing of Securities on the Stock Exchange

“Ongoing Connected Transactions”

(a) the continuing purchase of Components by Shenyang JV from 7407 Holding and (b) the continuing sale of finished/assembled products by Shenyang JV to 7407 Holding, details of which are set out in the section headed “Ongoing Connected Transactions” of this circular

“PRC”

the People’s Republic of China which excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan

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DEFINITIONS

“PRC JV Partner”	Shenyang Song Liao Jin Hua Automobile Axles Manufactory
	Limited (瀋陽松遼金華車橋有限公司), a company incorporated
	in the PRC and is interested in 49% of Shenyang JV
“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“SGM”	the special general meeting of the Company to be convened for
	the Shareholders to consider and, if thought fit, approve the
	Ongoing Connected Transactions, notice of which is set out on
	pages 29 and 30 of this circular
“Shareholders”	the shareholders of the Company
“Shenyang JV”	Shenyang Liao Hua Automobile Axles Company Limited (瀋陽遼
	華汽車車橋有限公司), a sino-foreign joint venture established
	in the PRC and indirectly owned as to (a) 51% by the Company
	through its wholly owned subsidiary, Bright Skies Limited, and
	(b) 49% by 7407 Holding through the PRC JV Partner
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Waiver”	the waiver proposed to be applied for by the Company from the
	Stock Exchange from strict compliance with Rule 14.26 of the
	Listing Rules in relation to the Ongoing Connected Transactions,
	subject to the approval by the Shareholders in the SGM of the
	authority in relation to the Ongoing Connected Transactions
“1995 Scheme”	the share option scheme of the Company adopted pursuant to a
	resolution in writing of the shareholders of the Company passed
	on 15 March 1995, which was terminated by the 2003 Scheme on
	12 June 2003
“2003 Scheme”	the share option scheme of the Company adopted pursuant to a
	resolution in writing of the shareholders of the Company passed
	on 12 June 2003
“7407 Holding”	中車集團瀋陽七四零七工廠(formerly known as瀋陽輕型汽車
	車橋製造廠), the holding company of the PRC JV Partner
“%”	per cent.

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LETTER FROM THE BOARD

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(incorporated in Bermuda with limited liability)

Executive directors:

Mr Yung Yeung (Chairman) Mr Chunhua Huang (Deputy Chairman and Chief Financial Officer) Mr Jun Li (Chief Executive Officer) Mr Yu Wen Sun Mrs Chizuko Kubo

Independent non-executive directors: Mr Jian Wang Mr Banjie He

Registered office: Cedar House 41 Cedar Avenue Hamilton HM 12 Bermuda

Principal place of business in Hong Kong Suites 612-617, 6th Floor Hutchison House 10 Harcourt Road Central Hong Kong

15 September 2003

To the Shareholders

Dear Sir/Madam,

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

On 22 August 2003, the Directors announced that the Company had since October 2002 been involved in the following Ongoing Connected Transactions:

• (a) the purchase of Components by Shenyang JV for the manufacture and assembling of automobile axles and related automobile components from 7407 Holding; and

• (b) the sale of finished/assembled products by Shenyang JV to 7407 Holding.

As at the Latest Practicable Date, Shenyang JV was a sino-foreign joint venture established in the PRC on 8 February 1999. Shenyang JV was and is owned as to (a) 51% by the Company through its wholly owned subsidiary, Bright Skies Limited, and (b) 49% by the PRC JV Partner. 7407 Holding is the holding company of the PRC JV Partner. By virtue of their respective interests in Shenyang JV, the PRC JV Partner and 7407 Holding are connected parties to the Company. The Ongoing Connected Transactions constitute connected transactions of the Company under the Listing Rules.

* For identification purpose only

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LETTER FROM THE BOARD

The Directors also announced that the Company would in the future continue to engage in the Ongoing Connected Transactions. As the aggregate consideration paid and payable and/or received and receivable by the Group for the two months ended 31 December 2002 and for the current financial year ending 31 December 2003 under the Ongoing Connected Transactions exceeds and/or will exceed the higher of HK$1 million or 0.03% or, as the case may be, the higher of HK$10 million or 3% of the book value of the Group’s net tangible assets as at 31 December 2002, the Ongoing Connected Transactions are subject to disclosure and prior approval of the shareholders of the Company under Rule 14.26 of the Listing Rules.

In view of the continuing nature of the Ongoing Connected Transaction, the Company applied to the Stock Exchange on 4 September 2003 for the Waiver subject to the conditions mentioned in the section headed “The Waiver for the Ongoing Connected Transactions” below.

The purpose of this circular is to provide Shareholders with details of the Ongoing Connected Transactions, to set out the opinion of the Independent Financial Adviser in respect of the Ongoing Connected Transactions and the recommendation of the Independent Board Committee and to give you notice of the SGM.

ONGOING CONNECTED TRANSACTIONS

The following are details of the Ongoing Connected Transactions:

• (a) the purchase of Components by Shenyang JV for the manufacture and assembling of automobile axles and related automobile components from 7407 Holding:

• the aggregate amount of purchase of Components by Shenyang JV from 7407 Holding amounted to about RMB6,426,000 (equivalent to about HK$6,006,000) for the financial year ended 31 December 2002 and amounted to about RMB8,386,000 (equivalent to about HK$7,837,000) during the six months’ period ended 30 June 2003;

• it is projected that the aggregate amount of purchase of Components by Shenyang JV from 7407 Holding will be about RMB18,000,000 (equivalent to about HK$16,822,000) for the financial year of the Company ending 31 December 2003.

(b) the sale of finished/assembled products by Shenyang JV to 7407 Holding:

• the aggregate amount of sale of finished/assembled products by Shenyang JV to 7407 Holding amounted to about RMB3,550,000 (equivalent to about HK$3,318,000) during the financial year ended 31 December 2002 (representing 55% of the total sales), and the remaining RMB2,930,000 (representing 45% of the total sales) were sold to independent third parties; and

• the aggregate amount of sale of finished/assembled products by Shenyang JV to 7407 Holding amounted to about RMB8,491,000 (equivalent to about HK$7,936,000) during the six months’ period ended 30 June 2003 (representing 100% of the total sales);

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LETTER FROM THE BOARD

• it is projected that the aggregate amount of sale of finished/assembled products by Shenyang JV to 7407 Holding will be about RMB19,000,000 (equivalent to about HK$17,757,000) for the financial year of the Company ending 31 December 2003.

The volume of purchase of Components by Shenyang JV was and is largely depends on the orders received from 7407 Holdings. The purchase order for Components is placed only after Shenyang JV has received confirmed orders from 7407 Holding. As the Ongoing Connected Transactions involve simple purchase of Components from and sale of finished/assembled products to 7407 Holding, constitute part of the usual and ordinary businesses of Shenyang JV and 7407 Holding and are of recurring nature, no formal agreement had been entered into between Shenyang JV and 7407 Holding prior to 17 December 2002. On 17 December 2002, an agreement was entered into between Shenyang JV and 7407 Holding. The agreement was for a term of one year from 1 January 2003 to 31 December 2003 and was to record the understanding of the parties of the agreed terms and arrangement for the Ongoing Connected Transaction as disclosed in this circular. The executive Directors are of the view that the existence and subsistence of the business relationship between Shenyang JV and 7407 Holding are essentially founded on mutual trust and a short term agreement is sufficient. The Directors do not anticipate any difficulty on the part of Shenyang JV in renewing the agreement with 7407 Holding on terms to be agreed between them after its expiration.

Shenyang JV is a sino-foreign joint venture established in the PRC and is principally engaged in the business of the manufacturing and assembling of automobile axles and related automobile components and parts.

7407 Holding is a State-owned enterprise specializing in the manufacturing of light automobile Components in the PRC and is the holding company of PRC JV Partner.

The Group is principally engaged in the operation of indoor family entertainment games centres and the manufacture and sale of automobile axles in the PRC.

FINANCIAL IMPLICATION OF THE ONGOING CONNECTED TRANSACTION

The maximum annual production/processing capacity of Shenyang JV is estimated to be 15,000 units of automobile axles. At present, the average cost of Components and the average amount of processing fee per unit are approximately RMB2,500 and RMB45 respectively. As regards the business referred to Shenyang JV by 7407 Holding, the Directors estimate that the production/processing capacity of Shenyang JV would reach 7,300 units for the financial year ending 31 December 2003 with a moderate growth rate of about 10% for each of the financial years ending 31 December 2004 and 2005. For the six months ended 30 June 2003, the production of Shenyang JV was approximately 3,400 units of automobile axles.

The current processing fee is determined by mutual agreement, which has taken into account factors such as the costs and wages that will normally be incurred by Shenyang JV in the operation of its business. The processing fee is subject to adjustment at such rate as may be mutually agreed by Shenyang JV and 7407 Holding and will take into account factors such as market conditions, costs of production and production plan. For the six months ended 30 June 2003, the average processing fees for various types of finished/assembled products of Shenyang JV were adjusted upwards by up to approximately 80% per unit (from RMB25 to RMB45 per unit). However, given the prevailing gloomy economic

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LETTER FROM THE BOARD

climate, the Group does not expect any material adjustment to the processing fee currently fixed nor would Shenyang JV have sufficient bargaining power to negotiate with independent third parties for terms which would be the same or more favourable than that offered by 7407 Holding in the short run. The Group envisages that, in the foreseeable future, Shenyang JV would still require 7407 Holding’s assistance to sustain its business operation and to build up its strength in the automobile market in the PRC. Nevertheless, the management of Shenyang JV will continue to explore (i) alternative sourcing of the requisite components and (ii) potential customers for Shenyang JV to minimise its reliance on 7407 Holding if and when the opportunities arise. The Company believe that the management of Shenyang JV is able to exercise its commercial judgment and will conduct such market research or do such other things that it considers necessary for promoting the business of Shenyang JV (including ensuring that the processing fees for its finished/assembled products will be no less favourable than normal commercial terms to such extent as the circumstances permit) and taking steps to utilise its internal resources to advance its production lines by the end of 2003 with a view to improving the quality of its products and making them more competitive and attractive to potential customers in the market.

On the above basis and assuming a growth rate of 10% (based on 7,300 units of automobile axles) for each of the financial years ending 31 December 2004 and 2005, the Directors expect that each category of the Ongoing Connected Transactions described above will not exceed the following cap (collectively, “ Caps ”) each year:

Nature of transaction	Annual Cap
the purchase by Shenyang JV of Components from 7407 Holding	RMB21,600,000
	(equivalent to about
	HK$20,187,000)
the sale of finished/assembled products by Shenyang JV to 7407 Holding	RMB22,500,000
	(equivalent to about
	HK$21,028,000)

The Directors, including the independent non-executive Directors, are of the opinion that each of the Ongoing Connected Transactions is of a type that has been or will be carried out on a regular basis and in the ordinary and usual course of business of the Group. The Directors, including the independent non-executive Directors, considered that the Ongoing Connected Transactions have been and will be carried out on normal commercial terms, determined on an arm’s length basis or on terms no less favourable than those available from third parties and were and are in the best interest of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

REASONS FOR THE ONGOING CONNECTED TRANSACTIONS

The operation of Shenyang JV has been suspended in or around June 2000 and no sourcing of Components or sale of finished/assembled products by Shenyang JV took place after the suspension. With the assistance of 7407 Holding, Shenyang JV has been able to revive its operation in October 2002. These assistance includes (a) the referral of some of 7407 Holding’s business in the manufacture of automobile axles and related parts to Shenyang JV without involving any monetary consideration, (b) the obtaining of requisite Components from 7407 Holding’s suppliers (through 7407 Holding) for Shenyang JV of which the costs of the Components have been fully covered in the selling price of Shenyang JV’s finished/assembled products sold to 7407 Holding without affecting the marginal profit made by Shenyang JV as mentioned below and (c) the purchase from Shenyang JV of its finished/assembled products at a price based on costs of the finished/assembled products (comprising the cost of Components) plus a reasonable profit margin (by way of processing fee) to Shenyang JV. Given Shenyang JV’s lack of same nature business track records and its small scale of production and based on the knowledge and experience of the management of Shenyang JV (who has considerable experience in the automobile industry and constantly keeps a close watch on the market (for instance, comparing industrial average for similar transactions which varies from time to time according to market conditions and seeking verbal quotations from potential suppliers and purchasers from time to time) and is well aware of the market practice and the general commercial terms for transacting businesses in the automobile industry), the Directors believe, and the management of Shenyang JV has strived to ensure, that the terms on which Shenyang JV obtains Components from 7407 Holding and the terms on which Shenyang JV sells its finished/assembled products to 7407 Holding would not be less than normal commercial terms nor would it be less favourable than that offered by independent third parties from time to time.

All the Components necessary for the production of finished/assembled products by Shenyang JV were purchased from 7407 Holding, which accounted for a substantial part of the total production costs of Shenyang JV for the year ended 31 December 2002 and the six months ended 30 June 2003. The volume of sales of finished/assembled products by Shenyang JV to 7407 Holding represents approximately 55% of the finished/assembled products manufactured by Shenyang JV for the year ended 31 December 2002 and 100% for the six months ended 30 June 2003. The remaining 45% of the finished/assembled products by Shenyang JV were sold to independent third parties not connected with the directors, chief executive or controlling shareholders of the Company or its subsidiaries and their respective associates. Since the development of Shenyang JV is still in its infant stage, it would be strategically sound if the finished/assembled products of Shenyang JV were sold through 7407 Holding which has established its marketplace in the automobile industry in the PRC and a broader customer base. It is the ultimate goal of Shenyang JV to diversify its customer base in the automobile industry in the long run. However, this is not easy for Shenyang JV to achieve at this infant stage. Further, if Shenyang JV was to attempt to sell its products to other parties, it would have to establish its sales and marketing team to promote its business and the result might not be satisfactory for a new comer like Shenyang JV. Also, additional costs and expenses which would have been avoided if it were to leverage on the available resources of 7407 Holding would have to be incurred. The Directors, therefore, consider it expedient for Shenyang JV to sell its products through 7407 Holding at the start-up period.

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LETTER FROM THE BOARD

The Directors consider that, by entering into the Ongoing Connected Transactions, the Group is able to stablise the costs of production of Shenyang JV, enhance administrative and operational efficiency of Shenyang JV and sustain its business operation, and ultimately establish and develop Shenyang JV’s own marketplace in the automobile assembling industry. The Ongoing Connected Transactions also enable the Group to minimize any credit control risk which Shenyang JV may face at this start-up period, broaden its income base and bring about a better return on the shareholders’ investment in the Company. Having regard to 7407 Holding’s indirect interest in Shenyang JV and its initiative to assist Shenyang JV in resuming its business, the Directors consider that the risk of credit concentration arising from Shenyang JV’s reliance on 7407 Holding is remote. This is a calculated risk that Shenyang JV was and is willing to take at the start-up period until it can secure its own customers when it spread the risk across.

WAIVER FOR THE ONGOING CONNECTED TRANSACTIONS

Given the on-going nature of the Ongoing Connected Transactions, the Directors are of the view that it would be impracticable and unduly burdensome for them to make disclosure of, or to obtain shareholders’ approval for, each of the Ongoing Connected Transactions. Accordingly, the Company made an application to the Stock Exchange for a waiver from strict compliance with the relevant requirements of the Listing Rules for the Ongoing Connected Transactions for the period up to 31 December 2005 (“ Relevant Period ”), subject to the following conditions:

• (1) that the Ongoing Connected Transactions have been:

• (a) entered into by Shenyang JV and 7407 Holding in the ordinary and usual course of its or their business;

• (b) conducted on normal commercial terms or (where there is no available comparison) on terms that are fair and reasonable so far as the shareholders of the Company are concerned; and

• (c) entered into either in accordance with the terms of the agreement(s) governing the Ongoing Connected Transactions or, where there are no such agreements, on terms no less favourable than those available to or from independent third parties;

• (2) that the aggregate amount of each of the categories of the Ongoing Connected Transactions will not exceed the relevant Caps in the relevant financial year of the Company;

• (3) that the details of the Ongoing Connected Transactions shall be set forth in the Company’s annual report and accounts as set out in Rules 14.25(1)(A) to (D) of the Listing Rules;

• (4) that the independent non-executive Directors shall review the Ongoing Connected Transactions annually and confirm in the next annual reports and financial statements of the Company that the Ongoing Connected Transactions were conducted in the manner as stated in paragraphs 1 and 2 above;

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LETTER FROM THE BOARD

• (5) that the auditors of the Company shall review the Ongoing Connected Transactions annually and provide the Directors with a written confirmation stating that the Ongoing Connected Transactions have been:

• (a) approved by the Directors;

• (b) entered into at amounts consistent with the pricing policies as stated in the Company’s financial statements;

• (c) in accordance with the terms of the relevant agreements relating to the Ongoing Connected Transactions in question or, if there is no such agreement, that the Ongoing Connected Transactions were on terms no less favourable than those available to or, as the case may be, from independent third parties; and

• (d) the aggregate amount of each of the categories of the Ongoing Connected Transactions will not exceed the relevant Caps in the relevant financial year of the Company.

• (6) For the purposes of the above review by the auditors of the Company, the Company will provide an undertaking to the Stock Exchange that the auditors of the Company from time to time will have access to such records of the Company and Shenyang JV as the auditors consider necessary for the purposes of reviewing the Ongoing Connected Transactions.

If any of the Caps referred to in relation to the Ongoing Connected Transactions are exceeded or if any of the terms referred to above are altered, the Company must comply with the provisions of Chapter 14 of the Listing Rules dealing with “connected transactions” unless it first applies for and obtains a separate waiver from the Stock Exchange.

THE SGM

A SGM will be convened for the Shareholders to consider and, if thought fit, approve the Ongoing Connected Transactions.

Notice of the SGM is set out on pages 29 and 30 of this circular. At the SGM, an ordinary resolution will be proposed to approve the Ongoing Connected Transactions.

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you are able to attend the SGM in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and, in any event not later than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof to the Company at its principal place of business in Hong Kong at Suites 612-617, 6th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish.

• 9 -

LETTER FROM THE BOARD

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on page 11 of this circular which contains its recommendation to the Shareholders as to vote at the SGM concerning the Ongoing Connected Transactions. Your attention is also drawn to the letter of advice received from the Independent Financial Adviser which contains, among other matters, its advice to the Independent Board Committee in relation to the Ongoing Connected Transactions and the principal factors and reasons considered by it in concluding its advice. The letter from the Independent Financial Adviser is set out on pages 12 to 21 of this circular. The Independent Board Committee, having taken into account the advice from the Independent Financial Adviser, considers that the Ongoing Connected Transactions are fair and reasonable so far as the Company and the Shareholders are concerned. Accordingly, the Independent Board Committee recommends that the Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM to approve the Ongoing Connected Transactions.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendix to this circular and the notice of the SGM.

Yours faithfully, For and on behalf of the Board Compass Pacific Holdings Limited Jun Li

Director

• 10 -

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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(incorporated in Bermuda with limited liability)

15 September 2003

To the Shareholders

Dear Sir/Madam,

ONGOING CONNECTED TRANSACTIONS

We refer to the circular to the Shareholders dated 15 September 2003 (the “ Circular ”) of which this letter forms part. Unless the context requires otherwise, terms used in this letter shall have the same meanings as defined in the section headed “Definitions” of the Circular.

We have been appointed by the Board to consider the Ongoing Connected Transactions and to advise the Independent Shareholders in connection with the Ongoing Connected Transactions as to whether it is fair and reasonable so far as the Company and the Independent Shareholders are concerned.

We wish to draw your attention to the letter from the Board set out on pages 3 to pages 10 of the Circular and the letter of advice from the Independent Financial Adviser as set out on pages 12 to 21 of the Circular.

Having considered, among other matters, the principal factors and reasons considered by, and the opinion of the Independent Financial Adviser as set out in its letter of advice, we consider that the Ongoing Connected Transactions are fair and reasonable as far as the Company and the Independent Shareholders are concerned. Accordingly, we recommend the Shareholders to vote in favour of the ordinary resolution in relation to the Ongoing Connected Transactions, set out in the notice convening the SGM set out on pages 29 and 30 of the Circular, to be proposed at the SGM.

Yours faithfully,

Mr Jian Wang Mr Banjie He Independent Board Committee of Compass Pacific Holdings Limited

* For identification purpose only

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of a letter from Menlo Capital Limited for the purpose of incorporation in this circular, in connection with its advice to the Independent Board Committee in relation to the ongoing connected transactions:

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MENLO CAPITAL LIMITED

Room 505, Nan Fung Tower 173 Des Voeux Road, Central Hong Kong

15 September 2003

To the Independent Board Committee of Compass Pacific Holdings Limited

Dear Sirs,

ONGOING CONNECTED TRANSACTIONS

We refer to our engagement as the independent financial adviser to the Independent Board Committee in relation to the Ongoing Connected Transactions, details of which are set out in the “Letter from the Board” (the “Letter”) contained in the circular of the Company dated 15 September 2003 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context of this letter otherwise requires.

The Ongoing Connected Transactions between Shenyang JV and 7407 Holding have commenced since October 2002. Shenyang JV is a 51% indirectly owned subsidiary of the Company. 7407 Holding is the holding company of the PRC JV Partner. By virtue of their respective interests in Shenyang JV, the PRC JV Partner and 7407 Holdings are connected parties to the Company. Accordingly, the Ongoing Connected Transactions constitute connected transactions of the Company under the Listing Rules. As the Ongoing Connected Transactions have and/or are expected to have an annual aggregation consideration of more than the higher of HK$1 million or 0.03% or, as the case may be, the higher of 3% of the consolidated net tangible asset value of the Company as at 31 December 2002 or HK$10,000,000, they are subject to disclosure and/or prior approval of the shareholders of the Company under Rule 14.26 of the Listing Rules.

In formulating our recommendation, we have relied on the statements, information, opinions and representations contained in the Circular and the information, facts and representations provided to us by the Directors of the Company. We have assumed that all information, representations and opinions contained or referred to in the Circular and all information, representations and opinions which have been provided by the Directors of the Company for which they are solely responsible, are true and accurate at the time they were made and will continue to be accurate at the date of the despatch of the Circular.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We consider that we have been provided with sufficient information on which to form a reasonable basis for our opinion. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any fact or circumstance, which would render the information provided and representations and opinions made to us untrue, inaccurate or misleading. Having made all reasonable enquiries, for which the Directors are solely responsible, the Directors have further confirmed that, to the best of their knowledge, they believe there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We have not, however, carried out any independent verification of the information provided by the Directors of the Company, nor have we conducted an independent investigation into the business and affairs of the Company or any of its respective subsidiaries or associates.

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

In arriving at our advice to the Independent Board Committee in respect of the Ongoing Connected Transactions, we have taken the following principal factors and reasons into consideration:

I. Background and Reasons for the Ongoing Connected Transactions

The operation of Shenyang JV has been suspended in or around June 2000 and no sourcing of Components or sale of finished/assembled products by Shenyang JV took place after the suspension. With the assistance of 7407 Holding, Shenyang JV has been able to revive its operation in October 2002. These assistance includes (a) the referral of some of 7407 Holding’s business in the manufacture of automobile axles and related parts to Shenyang JV without involving any monetary consideration, (b) the obtaining of requisite Components from 7407 Holding’s suppliers (through 7407 Holding) for Shenyang JV of which the costs of the Components have been fully covered in the selling price of Shenyang JV’s finished/assembled products sold to 7407 Holding without affecting the marginal profit made by Shenyang JV as mentioned below and (c) the purchase from Shenyang JV of its finished/assembled products at a price based on costs of the finished/assembled products (comprising the cost of Components) plus a reasonable profit margin (by way of processing fee) to Shenyang JV.

As disclosed in the Letter, the Company has involved in the following Ongoing Connected Transactions between Shenyang JV and 7407 Holding since October 2002:

• (a) the purchase of Components by Shenyang JV for the manufacture and assembling of automobile axles and related automobile components from 7407 Holding:

		Aggregate amount of	Aggregate amount of
		purchases	from 7407 Holding
For six months Ended	For the Year Ended	RMB (‘000)	HK$ equivalent (‘000)
	2002	6,426	6,006
30/6/2003		8,386	7,837
	(projected) 2003	18,000	16,822

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The volume of purchase of Components by Shenyang JV was and depends on the orders received from 7407 Holdings or independent third parties. The purchase order(s) for Components is/are placed only after Shenyang JV has received confirmed order(s) from 7407 Holding or independent third parties.

• (b) the sale of finished/assembled products by Shenyang JV to 7407 Holding:

		Aggregate amount	Aggregate amount
		of sales	to 7407 Holding
For six months Ended	For the Year Ended	RMB (‘000)	HK$ equivalent (‘000)
	2002	3,550	3,318
30/6/2003		8,491	7,936
	(projected) 2003	19,000	17,757

The Directors consider that, by entering into the Ongoing Connected Transactions, the Group is able to stabilise the costs of production of Shenyang JV, enhance administrative and operational efficiency of Shenyang JV and sustain its business operation, and ultimately establish and develop Shenyang JV’s own marketplace in the automobile assembling industry. As the purchases are mostly matched with the sales to 7407 Holding as the same counter party, we are of the view that these transactions enable the Group to minimize the credit risk related to account receivables due from independent third parties, which Shenyang JV may face at this start-up period, broaden its income base and bring about a better return on the shareholders’ investment in the Company. Having regard to 7407 Holding’s indirect interest in Shenyang JV and its initiative to assist Shenyang JV in resuming its business, we share the same view of the Directors that the risk of credit concentration arising from Shenyang JV’s reliance on 7407 Holding is remote. This is a calculated risk that Shenyang JV was and is willing to take at the start-up period until it can secure its own customers when it spread the risk across.

We are of the view that it is in the interest of the Company and the Shareholders to implement the strategy of selling the finished/assembled products of Shenyang JV through 7407 Holding to leverage on the available resources of 7407 Holding at the present stage with the ultimate goal of Shenyang JV to diversify its customer base in the automobile industry in the long run.

II. Terms of the Ongoing Connected Transactions

In reviewing the terms of the Ongoing Connected Transactions, we have obtained from the Company copies of sales and purchases invoices of (i) the Ongoing Connected Transactions and (ii) transactions entered into between Shenyang JV and other independent third parties. We have the findings as follows: –

• (a) the purchases from 7407 Holding:

As disclosed in the Letter, all the Components necessary for the production of finished/ assembled products by Shenyang JV are purchased from 7407 Holding at present stage, which

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

accounted for a substantial part approximately 99% of the total production costs of Shenyang JV for the year ended 31 December 2002 and the six months ended 30 June 2003. Accordingly, no independent third parties’ transaction that is identical to that of these Ongoing Connected Transactions is available. In view of this, we have discussed with the management of Company about the cost structure of Shenyang JV. As confirmed by the Company, although there is no comparable transaction identical to these Ongoing Connected Transactions, the pricing structure and delivery lead time of the Components as supplied by 7407 Holdings are the same in principle for all supplier under similar market situation for similar components, which allows similar level of mark-up for Shenyang JV. Shenyang JV has the flexibility in purchasing from independent third parties and will start to locate new supplies in the near future. Therefore, the cost of purchase of the Components from 7407 Holdings will be close to the cost of purchase of the Components from independent third parties, if any. Based on the above confirmation and representation from the Company, we are of the view that there is no preferential treatment for these Ongoing Connected Transactions.

(b) the sales to 7407 Holding:

According to the Letter, the volume of sales to 7407 Holding represents approximately 55% of the finished/assembled products manufactured by Shenyang JV for the year ended 31 December 2002 and 100% for the six months ended 30 June 2003. The remaining 45% of the finished/ assembled products by Shenyang JV for the year ended 31 December 2002 were sold to independent third parties not connected with the directors, chief executive or controlling shareholders of the Company or its subsidiaries and their respective associates. We have review the sales samples of invoices of Shenyang JV, we are of the view that Shenyang JV has sold the finished/assembled products to 7407 Holding to the independent third parties at a similar level of mark-up. In light of the above, we consider that there is no preferential treatment for these connected transactions.

Moreover, we noted from the above samples that 7407 Holding has allowed Shenyang JV to charge a processing fee more than the amount that has stipulated in the agreement dated 17 December 2002 (the “Agreement”) in most cases. On the above basis and on the condition that the terms of the Ongoing Connected Transactions will be carried out on terms no less favourable than those made available by the Group to independent third parties, We consider that the Ongoing Connected Transactions are in the best interest of the Company and its shareholders as a whole. Given the situation that 7407 Holding is the holding company of PRC JV Partner which holds 49% interest in Shenyang JV, we concur with the Directors’ view that the solid relationship between the Group and 7407 Holding will facilitate the business flow between the two groups. This will enhance and strengthen the Group’s operations, which in turn translates into a better competitive edge of the Group.

We also noticed that 7407 Holding has referred some of 7407 Holding’s business in the manufacture of automobile axles and related parts to Shenyang JV without involving any monetary consideration. We concur with the view of the Directors that, given Shenyang JV’s lack of same nature business track records and its small scale of production and based on the knowledge and experience of the management of Shenyang JV which is well aware of the market practice and the general commercial terms for transacting businesses in the automobile industry and has strived to ensure.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the information and facts provided by the company, no formal agreement had been entered into between Shenyang JV and 7407 Holding prior to 17 December 2002. The Agreement was for a term of one year from 1 January 2003 to 31 December 2003 and was to record the understanding of the parties of the agreed terms and arrangement for the Ongoing Connected Transaction as disclosed in the Circular. The executive Directors are of the view that the existence and subsistence of the business relationship between Shenyang JV and 7407 Holding are essentially founded on mutual trust and a short term agreement is sufficient. The Directors do not anticipate any difficulty on the part of Shenyang JV in renewing the Agreement with 7407 Holding on terms to be agreed between them after its expiration. Taking into account that it is not necessary for the Group to enter into any long-term agreement or other obligation for these connected transactions, we consider that the Ongoing Connected Transactions could provide commercial flexibility to the Group.

III. Caps of the Ongoing Connected Transactions

As stated in the Letter, the Company is prepared to agree to adhere to certain procedures in consideration of the Stock Exchange granting the Waiver and agree that the aggregate value for each of the categories of the Ongoing Connected Transactions will not exceed the relevant Cap stated below.

The maximum annual production/processing capacity of Shenyang JV is estimated to be 15,000 units of automobile axles. As regards the business referred to Shenyang JV by 7407 Holding, the Directors estimate that the production/processing capacity of Shenyang JV would reach 7,300 units for the financial year ending 31 December 2003 with a moderate growth rate of about 10% for each of the financial years ending 31 December 2004 and 2005. For the six months ended 30 June 2003, the production of Shenyang JV was approximately 3,400 units of automobile axles.

On the above basis and assuming a growth rate of 10% (based on 7,300 units of automobile axles) for each of the financial years ending 31 December 2004 and 2005, the Directors expect that each category of the Ongoing Connected Transactions described above will not exceed the following cap (collectively, “Caps” ) each year:

Nature of transaction	Annual Cap
the purchase by Shenyang JV of Components from	RMB21,600,000
7407 Holding	(equivalent to about HK$20,187,000)
the sale of finished/assembled products by	RMB22,500,000
Shenyang JV to 7407 Holding Company	(equivalent to about HK$21,028,000)

The Directors expect the purchase of Components from 7407 Holding will be major portion of the total purchases for the next three financial years. Despite the fact that the operations of Shenyang JV will rely heavily on the purchase of Components from 7407 Holding, we believe that such arrangement is reasonable and justifiable owing to the situation that since the development of Shenyang JV is still in its infant stage, (a) Shenyang JV will secure the source of Components for production in a relatively short period of time without incurring additional merchandizing costs; (b) closer relationship and better

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

communication between Shenyang JV and 7407 Holding will ensure timely delivery of Components in reliable quality which in turn will enhance the efficiency of Shenyang JV and its capability to meet tight production schedule.

In light of the above views of the Directors and the closer relationship between Shenyang JV and 7407 Holding, we are of the opinion that the expected increase in amount of purchase of Components from 7407 Holding is in line with the anticipated increase of turnover of Shenyang JV and that the Cap for the purchase of Components from 7407 Holding is reasonable.

According to the information provided by the Company, the turnover of Shenyang JV for the two financial years ended 31 December 2002 were about HK$0.03million and about HK$6.0 million respectively. On the other hand, taking into account of the existing spare production capacity of Shenyang JV and stable flow of incoming orders, the Directors estimate that the total turnover to be generated by Shenyang JV for the three financial years ending 31 December 2005 are HK$17.8 million, slightly below HK$19.5 million and HK$21.0 million respectively, representing an annual growth rate of approximately 10% in 2004 and 2005. Based on the above estimation of the Directors, the Cap for the sale of finished/ assembled products to 7407 Holding is approximately $21.0 million for the three financial years ending 31 December 2005.

In light of the above views of the Directors and the closer relationship between Shenyang JV and 7407 Holding, we are of the opinion that the expected turnover growth rates and the Cap for the sale of the finished/assembly products to 7407 Holding are reasonable.

On the above basis, we consider that for the three financial years ending 31 December 2005, the turnover of and purchase of raw materials by Shenyang JV may largely rely on the business to and from 7407 Holding as reflected in the figure of the percentage of the Cap to the estimated turnover and purchase of Components by Shenyang JV over the three financial years ending 31 December 2005. As Shenyang JV has only recently resumed its production it is reasonable to expect that a longer time and substantial merchandizing and marketing costs will be needed to re-establish its business. As such, the Ongoing Connected Transactions could secure the source of Components for the production on the one hand and generate a steady stream of revenue to Shenyang JV on the other hand in a relatively short period of time without incurring additional merchandizing and marketing costs. In light of this, we concur with the Directors’ view that the Ongoing Connected Transactions could bring a positive impact on the earnings and financial performance of Shenyang JV. On this basis, we consider that the benefit derived by Shenyang JV from the Ongoing Connected Transactions could outweigh the risk of heavy reliance on 7407 Holding and are of the view that the Caps are fair and reasonable.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

IV. Financial implication of the Ongoing Connected Transactions

(a) the purchases from 7407 Holding:

The relationship between the amounts of purchase of Components by Shenyang JV from 7407 Holding to the net asset value of the Group is set out below:

	Annual Cap of	Net asset value of	Percentage to the
	the purchases from	the Group as at	net asset value of
For the Year Ended	7407 Holding	31/12/2002	the Group as at
	HK$ equivalent (‘000)	HK$ (‘000)	31/12/2002
(actual) 2002	6,006	133,625	4.5%
(projected) 2003	16,822	133,625	12.6%
2003-2005	20,187	133,625	15.1%

The purchases from 7407 Holding for the financial year ended 31 December 2002 amounted to 4.5% of the net asset value of the Group as at 31 December 2002. For the three financial years ending 31 December 2005, the Cap will be approximately 15.1% to the net asset value of the Group as at 31 December 2002. We are of the view that the risk of carrying obsolete stocks related to the Ongoing Connected Transactions will be minimal as all purchases are matched by confirmed sales from either 7407 Holding or independent third parties.

(b) the sales to 7407 Holding:

The relationship between the sales to 7407 Holding to the net assets value of the Group is set out below:

	Annual Cap of	Net asset value of	Percentage to the
	the sales to	the Group as at	net assets value of
For the Year Ended	7407 Holding	31/12/2002	the Group as at
	HK$ equivalent (‘000)	HK$ (‘000)	31/12/2002
(actual) 2002	3,318	133,625	2.5%
(projected) 2003	17,757	133,625	13.3%
2003-2005	21,028	133,625	15.7%

The sales to 7407 Holding for the financial year ended 31 December 2002 amounted to 2.5% of the net asset value of the Group as at 31 December 2002. For the three financial years ending 31 December 2005, the Cap will be approximately 15.7% to the net asset value of the Group as at 31 December 2002. We are of the view that the risk of account receivables due from 7407 Holding is minimal as the sales of the Components are coupled with account payables due to 7407 Holding generated from the purchases from 7407 Holding with only the processing fee as the only exposure to 7407 Holding. As confirmed by the Company that 7407 Holding has an excellent credit record with Shenyang JV. All the account receivables due from 7407 Holding were settled

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

promptly since the first transaction with 7407 Holding in 1999. In view of the close relationship between Shenyang JV and 7407 Holding, we are of the view that the risk is measurable and acceptable to the Company.

The relationship between the sales to 7407 Holding to the turnover of the Group is set out below:

			Percentage of
	Annual Cap of	Turnover of the	contribution to the
	the sales to	Group as at	turnover of the
For the Year Ended	7407 Holding	31/12/2002	Group as at
	HK$ equivalent (‘000)	HK$ (‘000)	31/12/2002
(actual) 2002	3,318	15,445	21.5%
(projected) 2003	17,757	15,445	115.0%
2003-2005	21,028	15,445	136.1%

The sales to 7407 Holding for the financial year ended 31 December 2002 has contributed 21.5% to the sales turnover of the Group for the financial year ended 31 December 2002. The projected contribution of the Ongoing Connected Transaction to the Group in 2003, 2004 and 2005 will be much more substantial compared with the sales figures of the Group in 2002.

V. Waiver Application

Given the on-going nature of the Ongoing Connected Transactions, the Directors are of the view that it would be impracticable and unduly burdensome for them to make disclosure of, or to obtain shareholders’ approval for, each of the Ongoing Connected Transactions. Accordingly, the Company has made an application to the Stock Exchange for a waiver from strict compliance with the relevant requirements of the Listing Rules for the Ongoing Connected Transactions for the period up to 31 December 2005 (“Relevant Period”), subject to the following conditions:

1. that the Ongoing Connected Transactions have been:

2. (a) entered into by Shenyang JV and 7407 Holding in the ordinary and usual course of its or their business;

3. (b) conducted on normal commercial terms or (where there is no available comparison) on terms that are fair and reasonable so far as the shareholders of the Company are concerned; and

4. (c) entered into either in accordance with the terms of the agreement(s) governing the Ongoing Connected Transactions or, where there are no such agreements, on terms no less favourable than those available to or from independent third parties;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. that the aggregate amount of each of the categories of the Ongoing Connected Transactions will not exceed the relevant Caps in the relevant financial year of the Company;

2. that the details of the Ongoing Connected Transactions shall be set forth in the Company’s annual report and accounts as set out in Rules 14.25(1)(A) to (D) of the Listing Rules;

3. that the independent non-executive Directors shall review the Ongoing Connected Transactions annually and confirm in the next annual reports and financial statements of the Company that the Ongoing Connected Transactions were conducted in the manner as stated in paragraphs 1 and 2 above;

4. that the auditors of the Company shall review the Ongoing Connected Transactions annually and provide the Directors with a written confirmation stating that the Ongoing Connected Transactions have been:

5. (a) approved by the Directors;

6. (b) entered into at amounts consistent with the pricing policies as stated in the Company’s financial statements; and

7. (c) in accordance with the terms of the relevant agreements relating to the Transactions in question or, if there is no such agreement, that the Ongoing Connected Transactions were on terms no less favourable than those available to or, as the case may be, from independent third parties; and

8. (d) the aggregate amount of each of the categories of the Ongoing Connected Transactions will not exceed the relevant Caps in the relevant financial year of the Company.

9. For the purposes of the above review by the auditors of the Company, the Company will provide an undertaking to the Exchange that the auditors of the Company from time to time will have access to such records of the Company and Shenyang JV as the auditors consider necessary for the purposes of reviewing the Ongoing Connected Transactions.

On the above basis and in view that the Company undertakes to provide the auditors of the Company with full access to their relevant records for the purpose of carrying out the review of the terms of the Ongoing Connected Transactions, we consider that the Company has taken appropriate measures to govern its entering into the Ongoing Connected Transactions and hence to safeguard the interests of the Shareholders as a whole there under.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Based on the information and representations provided and opinions given by the Board and having taken into account the above principal factors and reasons, we are of the view that the terms of the Ongoing Connected Transactions, the Caps and the conditions of the Waiver are fair and reasonable so far as the shareholders of the Company are concerned and that the Ongoing Connected Transactions together with the conditions of the waiver, which offer sufficient safeguards to the shareholders of the Company, are in the interests of the Company and its shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the shareholders of the Company to vote in favour of the resolutions in connection with the Ongoing Connected Transactions and the Waiver at the special general meeting of the Company.

Yours faithfully, For and on behalf of Menlo Capital Limited Michael Leung Idy Cheung Director Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

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

	Company/name		Interest
	of associated		in Shares/	Short position
Name of Director	corporation	Capacity	Debentures	in shares
Yung Yeung	Company	Beneficial owner	630,304,400	–
		(Notes 1 & 3)
Yung Yeung	Company	Beneficial owner	31,570,000	–
		(Note 4)
Jun Li	Company	Beneficial owner	5,400,000	–
		(Note 4)
Chunhua Huang	Company	Beneficial owner	5,400,000	–
		(Note 4)
Chunhua Huang	Company	Trustee	630,304,400	–
		(Notes 2 & 3)
Yuwen Sun	Company	Trustee	603,304,400	–
		(Notes 2 & 3)

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GENERAL INFORMATION

APPENDIX

Notes:

1. These 630,304,400 Shares (representing 49.88% of the issued share capital of the Company as at the date of this circular) are beneficially owned by Sun East LLC, a company which is held as to 35% by Mr Yung Yeung and as to 65% by Mr Chunhua Huang and Mr Yuwen Sun as trustee for certain trusts established for the benefit of the children of Mr Yung Yeung. Mr Yung Yeung is deemed to be interested in the 630,304,400 Shares by virtue of his interest in Sun East LLC..

2. These 630,304,400 Shares (representing 49.88% of the issued share capital of the Company as at the date of this circular) are beneficially owned by Sun East LLC, a company which is held as to 35% by Mr Yung Yeung and as to 65% by Mr Chunhua Huang and Mr Yuwen Sun as trustees for certain trusts established for the benefit for the children of Mr Yung Yeung. Mr Chunhua Huang and Mr Yuwen Sun are deemed to be interested in the 630,304,400 Shares by virtue of his interest in Sun East LLC.

3. On 30 June 2003 and pursuant to a proposed open offer (“ Proposed Open Offer ”) of Shares as announced by the Company in its announcement dated 4 July 2003 (“ Open Offer Announcement ”), Sun East LLC gave an irrevocable undertaking to the Company and the Underwriter (as defined in the Open Offer Announcement) to subscribe for or procure the subscription of 315,152,200 Shares in total under the Proposed Open Offer. By virtue of this undertaking, Sun East LLC is taken to be interested in the 313,152,200 Shares, in addition to the 630,304,400 Shares presently owned by it (as mentioned to in Notes 1 and 2 above) for the purposes of Part XV of the SFO.

4. Such number of Shares represents the underlying Shares of the options granted under the share option scheme of the Company adopted on 15 March 1995, which was terminated pursuant to a resolution in writing of the shareholders of the Company passed on 12 June 2003.

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

(b) Executive Directors’ service contracts

The Company entered into service contracts with Mr Jun Li and Mr Chunhua Huang, directors, respectively for their offices of Chief Executive Officer and Chief Financial Officer, for a period of one year from 1 August 2000 (“ Services Contracts ”). The Service Contracts shall continue thereafter until terminated by either party by giving the other party one month’s written notice.

On 8 January 2002, the terms of the Service Contract were amended to extend their term of employment to 31 December 2004 and will be thereafter automatically extended unless further notice by either party to terminate the Service Contracts. Unless certain conditions materialized, neither Mr Jun Li nor Mr Chunhua Huang could resign nor the Company could dismiss then before 31 December 2004. Should the Company dismiss Mr Jun Li and Mr Chunhua Huang otherwise than in accordance with the terms of the Service Contracts, the Company would pay them an amount equivalent to their salaries of the unserved period.

• 23 -

GENERAL INFORMATION

APPENDIX

The non-executive Director and the independent non-executive Directors are not appointed for a specific term, but they are subject to retirement by rotation and re-election at the annual general meeting in accordance with the bye-laws of the Company.

(c) Save as disclosed in this circular:

• (i) none of the Directors is materially interested in any contract or arrangement entered into by the Company or any of its subsidiaries which contract or arrangement is subsisting at the date of this circular and which is significant in relation to the business of the Group;

• (ii) none of the Directors is interested, directly or indirectly, in any assets which have been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to the Company or any of its subsidiaries since 31 December 2002, the date to which the latest published audited accounts of the Group were made up; and

• (iii) none of the Directors has entered or is proposing to enter into a service contract with the Company or any of its subsidiaries (excluding contracts expiring or determinable within one year without payment of compensation other than statutory compensation).

3. DISCLOSABLE INTEREST UNDER DIVISIONS 2 AND 3 OF PART XV OF THE SFO AND SUBSTANTIAL SHAREHOLDERS

(a) 5% of holdings

As at the Latest Practicable Date, according to the register kept by the Company pursuant to section 336 of the SFO and so far as is known to, or can be ascertained after reasonable enquiry by the Directors, the following persons 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:

Name	Note	Number of Shares	Percentage
Sun East LLC	1	630,304,400	49.88%
Pure Shine Limited (“PSL”)		162,951,000	12.90%
Brilliance China Automotive Holdings
Limited (“BCA”)	2	162,951,000	12.90%
Success Well International
Group Limited		73,438,000	5.81%

Notes:

1. Sun East LLC is a company owned as to 35% by Mr Yung Yeung and as to 65% by Mr Chunhua Huang and Mr Yuwen Sun as trustee for certain trusts established for the benefit of the children of Mr Yung Yeung. According to the Company’s records, the 630,304,400 Shares presently held by Sun East LLC were previously registered in the name of Daiweldo Group Limited (“DGL”), the entire issued share capital of which was held by Daiweldo Foundation Limited (“DFL”). DFL was, in turn, owned as to 80% by Mr Yung Yeung and 5% by each of the four other individuals who are former directors of the Company. On 22 May 2003, DGL transferred the 630,304,400 Shares to Sun East LLC.

2. 24 -

GENERAL INFORMATION

APPENDIX

1. PSL is a wholly-owned subsidiary of BCA. By virtue of BCA’s interest in PSL, BCA is deemed to be interested in the Shares held by PSL.

(b) Substantial shareholders of the subsidiaries of the Company

As at the Latest Practicable Date, so far as is known to or can be ascertained after reasonable enquiry by the Directors, the following persons were, either directly or indirectly, interested in shares representing 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of a subsidiary of the Company:

		Approximate percentage of
Name of person	Name of subsidiary	securities/equity interest held
PRC JV Partner_(Note 1)_	Shenyang JV	49%
7407 Holding_(Note 2)_	Shenyang JV	49%

Notes:

• (1) As disclosed in this circular, Shenyang JV is a sino-foreign joint venture established in the PRC and is owned as to 51% by the Company through its wholly owned subsidiary, Bright Skies Limited, and 49% by the PRC JV Partner.

• (2) As disclosed in this circular, 7407 Holding is a State-owned enterprise and the holding company of the PRC JV Partner. As such, 7407 Holding is indirectly interested in the 49% equity interest in Shenyang JV.

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

(c) Share options of the Company

Since the adoption of the 1995 Scheme on 15 March 1995 until its termination on 12 June 2003, options to subscribe for an aggregate of 126,300,000 Shares have been granted under the 1995 Scheme. Some of these options lapsed before the Latest Practicable Date. As at the Latest

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GENERAL INFORMATION

APPENDIX

Practicable Date, options granted under the 1995 Scheme to subscribe for 56,570,000 Shares remained outstanding. A breakdown of the options which remained outstanding under the 1995 Scheme as at the Latest Practicable Date is shown as follows:

	Shares being
Name or	subject of
category of	the outstanding	Date of grant	Exercise period	Exercise price
participant	options	of share options	of share options	of share options
				HK$
Directors
Mr. Yung Yeung	10,000,000	16 February 2000	16 February 2000
			to 15 February 2010	0.69
	21,570,000	2 November 2000	2 November 2000
			to 1 November 2010	0.382
Mr Jun Li	5,400,000	2 November 2000	2 November 2000
			to 1 November 2010	0.382
Mr Chunhua Huang	5,400,000	2 November 2000	2 November 2000
			to 1 November 2010	0.382
	42,370,000
Other employees
(in aggregate)	4,800,000	16 February 2000	16 February 2000
			to 15 February 2010	0.69
	9,400,000	2 November 2000	2 November 2000
			to 1 November 2010	0.382
	14,200,000

As at the Latest Practicable Date, the Company has not granted any options to subscribe for Shares under the 2003 Scheme.

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GENERAL INFORMATION

APPENDIX

4. SHARE CAPITAL

As at the Latest Practicable Date, the authorised and issued share capital of the Company were as follows:

Authorised: 3,000,000,000 Shares Issued and fully paid or credited as fully paid: 1,263,634,000 Shares in issue as at the Latest Practicable Date	HK$ 300,000,000
	126,363,400

5. LITIGATION

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

6. CONSENT AND EXPERT

• (a) Menlo is a deemed licensed corporation for type 6 regulated activities under the SFO.

• (b) Menlo has given and has not withdrawn its written consents to the issue of this circular with the inclusion herein of its letter and the reference to its name in the form and context in which it appears.

• (c) Menlo does not have any shareholding in any member of the Group nor does it have any right or option (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for any securities in any member of the Group.

• (d) Menlo is not interested, directly or indirectly, in any assets which have been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to the Company or any of its subsidiaries since 31 December 2002, the date to which the latest audited published accounts of the Group were made up.

7. GENERAL

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

• (b) The secretary of the Company is Mr Li Jun, who is an Executive Director. Mr. Li holds a PhD degree in Political Economy from Oxford University in the United Kingdom. He was a senior manager and director of a member of well-known securities companies in Hong Kong and had extensive experience in international financial markets before joining the Company.

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GENERAL INFORMATION

APPENDIX

• (c) The registered office of the Company is located at Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda. The principal place of business of the Company is Suites 612-617, 6th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong.

• (d) The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited, at Shops 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

• (e) The English text of this circular shall prevail over the Chinese text in case of inconsistency.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the principal place of business of the Company at Suites 612-617, 6th Floor, Hutchison House, 10 Hutchison House, 10 Harcourt road, Central, Hong Kong during normal business hours up to and including 2 October 2003 and at the SGM:

• (a) the letter of advice from the Independent Financial Adviser to the Independent Board Committee, the text of which is set out on pages 12 to 21 of this circular;

• (b) the letter from the Independent Board Committee, the text of which is set out on page 11 of this circular; and

• (c) the written consent from the Independent Financial Adviser referred to in paragraph 6 of this appendix.

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NOTICE OF SGM

==> picture [242 x 45] intentionally omitted <==

(incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Compass Pacific Holdings Limited (the “ Company ”) will be held at Suites 612-617, 6th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong on Thursday, 2 October 2003 at 10 a.m. for the purpose of considering and, if thought fit, passing the resolution set out below as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT subject to the granting of a waiver (the “ Waiver ”) by The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) to the Company in respect of the obligations to comply with the approval and disclosure requirements under Chapter 14 of the Rules Governing the Listing of Securities on the Stock Exchange in respect of the Ongoing Connected Transactions, as defined under the section headed “Definitions” and more particularly described under the section headed “Ongoing Connected Transactions” in the letter from the board of directors of the Company included in the circular dated 15 September 2003 issued by the Company, a copy of which has been produced to this meeting marked “A” and initialled by the chairman of this meeting for the purpose of identification, and subject further to compliance with the terms of the Waiver, the Ongoing Connected Transactions be and the same are hereby generally and unconditionally approved in respect of each and every occasion when such Ongoing Connected Transactions arise for the period of two financial years ending 31 December 2005 and a general mandate be and is hereby given to the directors of the Company to enter into or continue (and to authorise its relevant subsidiary or subsidiaries) to enter into or continue) the Ongoing Connected Transactions during such period.”

By Order of the Board of Directors of Compass Pacific Holdings Limited Jun Li Director

Hong Kong, 15 September 2003

• For identification purpose only

• 29 -

NOTICE OF SGM

Head office and

principal place of business in Hong Kong: Suites 612-617, 6th Floor Hutchison House 10 Harcourt Road, Central Hong Kong

Notes:

1. A member of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint a proxy or proxies to attend and, subject to the provisions of the bye-laws of the Company, vote in his stead. A proxy need not be a member of the Company. A form of proxy for use at the meeting is enclosed herewith.

2. To be valid, the form of proxy together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power or authority must be deposited with the Company’s principal office at Suites 612-617, 6th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong not later than 48 hours before the time appointed for holding the meeting or any adjournment thereof.

3. Completion and return of the accompanying form of proxy will not preclude members of the Company from attending and voting in person at the meeting or any adjournment thereof should they so wish.

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