JY GAS LIMITED — Proxy Solicitation & Information Statement 2003

Aug 18, 2003

IMPORTANT

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

If you have sold or transferred all your shares and/or warrants in China City Natural Gas Holdings Limited, you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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.

• (Incorporated in Bermuda with limited liability)

DISCLOSEABLE TRANSACTION

IN RELATION TO DISPOSAL OF SUBSIDIARY

• For identification purpose only

18 August 2003

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
The Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Information of the Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Reasons for the Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Use of Sales Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Appendix – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8

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DEFINITIONS

In this circular, the following expressions shall have the meanings set out below unless the context requires otherwise:

• “Agreement”

• the agreement dated 23 July 2003 entered into between the Company and the Purchaser regarding the sale and purchase of the Sale Shares

• “Company”

• China City Natural Gas Holdings Limited, a company incorporated in Bermuda, the securities of which are listed on the Stock Exchange

• “Completion” completion of the sale and purchase of the Sale Shares in accordance with the terms and conditions of the Agreement

• “Consideration”

• the consideration payable by the Purchaser to the Company under the Agreement in the amount of HK$37 million

• “Directors” directors of the Company

• “Disposal” the disposal of the Subsidiary and its subsidiaries by the Company under the Agreement

• “Group”

the Company and its subsidiaries

• “Hong Kong”

• the Hong Kong Special Administrative Region of the PRC

• “Latest Practicable Date”

• 11 August 2003, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

• “Listing Rules”

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

• “Model Code”

• the Model Code for Securities Transactions by Directors of Listed Companies

• “PRC”

• the People’s Republic of China

• “Purchaser” Golden Villa Ltd., a company incorporated in the British Virgin Islands with limited liability

• “Sale Shares”

• 10,000 shares, being the entire issued share capital of the Subsidiary

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DEFINITIONS

“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“Shares”	shares of HK$0.025 each in the capital of the Company
“Shareholders”	holders of the Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subsidiary”	Golden Power Investments (B.V.I.) Limited, a company
	incorporated in the British Virgin Islands with limited liability
“HK$”	Hong Kong dollars
“%”	per cent.

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LETTER FROM THE BOARD

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(Incorporated in Bermuda with limited liability)

Executive Directors:

Mr Wong King Shiu, Daniel (Chairman) Mr Wong Kui Shing, Danny (Chief Executive Officer) Mr Kan Kwok Shu Mr Lin Che Chu, George

Registered Office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Non-executive Director: Mr Suzuki Masanori

Independent Non-executive Directors: Mr Cheung Man Yau, Timothy Mr Chuk Che Shing

Head Office and Principal Place of Business in Hong Kong:

31/F, Shui On Centre 6-8 Harbour Road Wanchai Hong Kong

18 August 2003

To the Shareholders and, for information only,

the holders of warrants of the Company

Dear Sir or Madam

DISCLOSEABLE TRANSACTION IN RELATION TO DISPOSAL OF SUBSIDIARY

INTRODUCTION

The Directors announced on 25 July 2003 that the Company entered into the Agreement with the Purchaser on 23 July 2003, pursuant to which the Company agreed to sell and the Purchaser agreed to acquire the entire issued share capital of the Subsidiary.

The Purchaser is beneficially owned as to 70.1% by Mr Wong Pui Sum (“Mr Wong”), an independent third party not connected with the directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or any of their respective associates (as defined in the Listing Rules) and as to 29.9% by Mr Chu King Tien (“Mr Chu”), who is an existing executive director of the Subsidiary. Save as Mr Wong’s acquisition of 70.1% in the Purchaser on 21 July 2003, there is no other agreement, arrangement, understanding or undertaking entered or proposed to be entered into between Mr Wong and Mr Chu. The Purchaser, Mr Wong and Mr Chu confirmed to the Company that there is no arrangement, understanding or intention for the change in the Purchaser’s shareholding in the near future.

* For identification purpose only

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LETTER FROM THE BOARD

The investment in the Subsidiary for Mr Wong is for long-term purpose. He has no intention to alter the existing business of the Subsidiary and intends to maintain the existing workforce of the Subsidiary. The Directors confirm that Mr Wong is not a connected person as defined in the Listing Rules and not an ex-director of the Company and its subsidiaries for the last 12 months.

Mr Chu is not a director of the Company and he holds no shares, options or any other rights to acquire voting rights in the Company.

The consideration for the Disposal is HK$37 million which has been satisfied by the Purchaser in cash upon Completion.

The Disposal constitutes a discloseable transaction for the Company under the Listing Rules.

The purpose of this circular is to provide you with the information in relation to the Disposal.

THE AGREEMENT

Date

23 July 2003

Parties

(i) The Vendor : the Company; and (ii) The Purchaser : Golden Villa Ltd., a company incorporated in the British Virgin Islands on 24 January 2003 with limited liability. It has not conducted any business since its incorporation.

The Sale Shares

10,000 shares, representing the entire issued share capital of the Subsidiary.

Consideration

The Consideration in the amount of HK$37 million, representing an approximately 74% discount to the audited net tangible asset value and net book value of the Subsidiary of approximately HK$142.4 million as at 31 July 2002, was arrived at after arm’s length negotiation and with references made to the business prospects of the Subsidiary. The Consideration is payable by the Purchaser as to HK$37 million in cash upon Completion.

The Directors, including the independent non-executive Directors, are of the view that such discount was justified by (i) the business prospects; (ii) the uncertainty brought about by the potential exclusion order for PRC’s battery manufacturers including a subsidiary of the Subsidiary from the United States International Trade Commission; (iii) the losses of the Subsidiary in an aggregate of approximately HK$46.4 million for the past three financial

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LETTER FROM THE BOARD

period/years; and (iv) the release of the Company’s corporate guarantees of approximately HK$44 million to the Subsidiary as stated in more details in the paragraph headed “Reasons for the Disposal” below. As stated in the Group’s interim report for the six months ended 31 January 2003, corporate guarantees given to banks in connection with facilities granted to the Subsidiary by the Group were utilised to the extent of approximately HK$12.7 million. As at the date of Agreement, corporate guarantees given to banks in connection with facilities granted to the Subsidiary by the Group were utilised to the extent of approximately HK$14.4 million. The Directors, including the independent non-executive Directors, consider that the terms of the Agreement are fair and reasonable so far as the Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole.

The Directors, including the independent non-executive Directors, have not engaged any independent professional adviser to advise on the terms of the Disposal as the Directors consider that they have enough knowledge to consider the value of the Subsidiary.

Since mid-May 2003, the Company has attempted to sell the Subsidiary to four prospective purchasers, including the Purchaser, and came to an agreement with the Purchaser on 23 July 2003. Based on the terms and conditions including but not limited to price, price adjustment, payment terms and warranty and indemnity provisions negotiated as a whole, the Directors, including the independent non-executive Directors, consider that the Purchaser has offered the most favourable terms to the Company amongst the other prospective purchasers.

Completion

Completion has taken place immediately upon the signing of the Agreement.

INFORMATION OF THE SUBSIDIARY

The Subsidiary is a company incorporated in the British Virgin Islands. It and its subsidiaries are principally engaged in the manufacture and trading of batteries. The Subsidiary commenced its operation since 1993 and its target markets focus on their international household customers, chain stores and manufacturers.

The audited consolidated net tangible asset value and net book value of the Subsidiary for the year ended 31 July 2002 amounted to approximately HK$142.4 million, as to approximately HK$0.3 million for unlisted investment, as to approximately HK$64.7 million for plant and machinery, as to approximately HK$9.9 million for land and buildings, as to approximately HK$25.2 million for other fixed assets, as to approximately HK$51.8 million for inventories, as to approximately HK$35.0 million for accounts receivables, as to approximately HK$52.0 million for other current assets, as to approximately HK$91.9 million for current liabilities and as to approximately HK$4.6 million for long-term liabilities. In addition, corporate guarantees amounting to HK$44 million have been provided by the Company to the Subsidiary. The audited consolidated loss before and after taxation of the Subsidiary for the 16 months ended 31 July 2001 amounted to approximately HK$5.2 million and HK$7.4 million respectively. The audited consolidated loss before and after taxation of the Subsidiary for the year ended 31 July 2002 amounted to approximately HK$6.1 million and HK$8.6 million respectively. Since the

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LETTER FROM THE BOARD

net tangible assets of the Subsidiary for the year ended 31 July 2002 represent more than 15% of the consolidated net tangible assets of the Group, the Disposal constitutes a discloseable transaction as defined in the Listing Rules.

Upon Completion, it is estimated that the Group has an unaudited extraordinary loss on disposal of approximately HK$107 million which will be reflected on the consolidated profit and loss account of the Group for the year ended 31 July 2003. Nevertheless, the Disposal enabled the Group to dispose of a loss business and to release its corporate guarantees of approximately HK$44 million to the Subsidiary. As stated in the Group’s interim report for the six months ended 31 January 2003, corporate guarantees given to banks in connection with facilities granted to the Subsidiary by the Group were utilised to the extent of approximately HK$12.7 million. As at the date of Agreement, corporate guarantees given to banks in connection with facilities granted to the Subsidiary by the Group were utilised to the extent of approximately HK$14.4 million. In addition, the extraordinary loss resulting from the Disposal will not constitute a default or breach of any loans, loan agreements or other undertakings for the Group.

REASONS FOR THE DISPOSAL

The Company is an investment holding company and its subsidiaries are principally engaged in investments in Internet and information technology activities, natural gas business, manufacture and trading of batteries and silicone rubber products. The Group expects that the global consumption power will deteriorate and this exerts considerable pressure on most of the battery manufacturers.

In addition, the Directors noted that the United States International Trade Commission starts its investigation against a number of PRC based battery manufacturers including a subsidiary of the Subsidiary in respect of their potential patent infringement of alkaline battery in the United States. Unless successfully pleaded, the aforesaid subsidiary of the Subsidiary and those PRC based battery manufacturers may face a general exclusion order which forbids all kind of importation of alkaline batteries to the United States and thus may probably have an unquantifiable adverse effect on the battery business of the Subsidiary in respect of its exports and re-exports to the United States. At this stage, the Directors have not sought any independent legal advice on the outcome of the investigation for the Subsidiary and have no concrete information to justify the outcome of the investigation. The worst outcome the Directors anticipate is an exclusion order for the products of the Subsidiary to the United States. Based on the above reasons, the Directors consider that it is better to dispose of the Subsidiary on the terms and consideration offered by the Purchaser. The Company has not provided any warranty or indemnity or undertaking to the Purchaser in relation to the investigation before and after the Disposal.

Facing the current uncertain climate in the primary battery business, the Directors believe that the Disposal will allow the Group to reduce exposure on the battery business which has been suffering losses in the past three financial period/years. The terms of the Disposal were arrived at after arm’s length negotiations between the Purchaser and the Company with reference to the above business prospects of the Subsidiary. The consideration of the Disposal

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LETTER FROM THE BOARD

is HK$37 million, representing an approximately 74% discount to the audited net tangible asset value and net book value of the Subsidiary of approximately HK$142.4 million with reference to the latest audited financial information. The Directors, including the independent nonexecutive Directors, are of the view that such discount was justified by (i) the business prospects; (ii) the uncertainty brought about by the potential exclusion order for the PRC’s battery manufacturers including the aforesaid subsidiary of the Subsidiary from the United States International Trade Commission; (iii) the losses of the Subsidiary in an aggregate of approximately HK$46.4 million for the past three financial period/years; and (iv) the release of the Company’s corporate guarantees of approximately HK$44 million to the Subsidiary. The Directors, including the independent non-executive Directors, consider that the terms of the Agreement are fair and reasonable so far as the Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole.

Since April 2002, with the Group’s objective of achieving better return for its Shareholders, the Group has diversified its existing businesses into the natural gas industry in the PRC through forming a joint venture with the China Petroleum Pipeline Bureau. The Group will continue utilising most of its resources in developing the piped-city natural gas operations in the PRC. It is the PRC’s national energy policy to seek alternative energy sources to coal. Natural gas is, among all alternative energy products, the most price competitive and environmentally friendly choice. Given its present low market penetration (representing only 2.9% of primary energy consumption in the PRC in the year 2000) and the presence of only a few local incumbents, the Company believes that with the support from its strategic partner, China Petroleum Pipeline Bureau, the natural gas market will bring in high quality and sustainable income for the Group. Thus, the Directors consider that it is in the interests of the Group and the Shareholders to dispose of the non-performing battery business so as to focus its resources on the development of natural gas business and other existing business lines and to capture new business opportunities in the future.

USE OF SALES PROCEEDS

The sales proceeds of HK$37 million of the Subsidiary will be used as working capital for the Group. The Group has not identified any potential investments or business opportunities for the sales proceeds.

GENERAL

Pursuant to the Listing Rules, the Disposal constitutes a discloseable transaction for the Company.

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

Yours faithfully For and on behalf of

China City Natural Gas Holdings Limited Wong Kui Shing, Danny 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 Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS BY DIRECTORS

As at the Latest Practicable Date, the following Directors and chief executive of the Company were interested or had short position(s), or were deemed to be interested or deemed to have short position(s) in the Shares, underlying Shares and debentures of the Company or any associated corporation (within the meaning of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (b) to be entered in the register pursuant to section 352 of the SFO; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code:

(A) Interests in Shares

Name	Nature of Interest	Number of Shares	Shareholding
			(%)
Wong King Shiu, Daniel_(Note)_	Family	2,180,122,000	25.100
(“Daniel Wong”)
Wong Kui Shing, Danny	Personal	15,400,000	0.177
Kan Kwok Shu	Personal	7,790,000	0.089

Note: 2,180,122,000 Shares are owned by Noble Islands Int’l Limited (“Noble Islands”), of which 2,067,722,000 Shares and 112,400,000 Shares are registered in the names of Kingston Finance Limited (“Kingston Finance”) and HKSCC Nominees Limited respectively. The 2,067,722,000 Shares held by Noble Islands, representing 23.81% of the Company’s issued share capital, were charged. The entire issued capital of Noble Islands is held by Maxi Gain Corporation which is in turn held by The Daniel K S Wong Family Trust, a discretionary trust (“Trust”) of which Equity Trustee Limited is the trustee and Mr Daniel Wong is the settlor. The discretionary objects of the Trust are the entities beneficially owned by the family members of Mr Daniel Wong and hence Mr Daniel Wong is deemed to be interested in the 2,180,122,000 Shares owned by Noble Islands.

(B) Interests in Options to Subscribe for Shares

				Exercise
		Number of		Price
Name	Date of Grant	Option Shares	Exercise Period	per Share
				HK$
Daniel Wong	03.06.2002	46,600,000	03.06.2002 – 31.05.2004	0.153
Kan Kwok Shu	15.03.2002	19,890,000	15.04.2002 – 14.03.2004	0.055
Cheung Man Yau, Timothy	04.07.2002	4,600,000	04.07.2002 – 03.07.2004	0.118

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GENERAL INFORMATION

APPENDIX

Save as disclosed aforesaid, as at the Latest Practicable Date, none of Directors and chief executive of the Company were interested or had any short position(s), or were deemed to be interested or deemed to have any short position(s) in the Shares, underlying Shares and debentures of the Company or any associated corporation (within the meaning of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (b) to be entered in the register pursuant to section 352 of the SFO; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code.

3. SUBSTANTIAL SHAREHOLDERS

So far as is known to the Directors, as at the Latest Practicable Date, the following persons, other than the Directors or chief executive of the Company, had an interest in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of the Divisions 2 and 3 of Part XV of the SFO:

Name	Note	Number of Shares	Shareholding
			(%)
Equity Trustee Limited	1	2,180,122,000	25.10
Maxi Gain Corporation	1	2,180,122,000	25.10
Noble Islands	1,2	2,180,122,000	25.10
Chu Yuet Wah	2,3	2,078,722,000	23.93
Kingston Finance	1,2	2,067,722,000	23.81
Ma Siu Fong	2	2,067,722,000	23.81
Wu Xu Wen		526,026,000	6.05

Note:

1. Of these 2,180,122,000 Shares, 2,067,722,000 Shares and 112,400,000 Shares are registered in the names of Kingston Finance and HKSCC Nominees Limited respectively while the 2,067,722,000 Shares were charged. The entire issued capital of Noble Islands is held by Maxi Gain Corporation which is in turn held by the Trust of which Equity Trustee Limited is the trustee. Mr Daniel Wong, the Chairman and Director of the Company, is the settlor of the Trust. The discretionary objects of the Trust are the entities beneficially owned by the family members of Mr Daniel Wong and hence Mr Daniel Wong is deemed to be interested in the 2,180,122,000 Shares owned by Noble Islands.

2. Kingston Finance has a security interest in the 2,067,722,000 Shares owned by Noble Islands. Ms Chu Yuet Wah and Ms Ma Siu Fong are controlling shareholders of Kingston Finance. Each of them is deemed to be interested in the 2,067,722,000 Shares interested by Kingston Finance.

3. Other than the deemed interest mentioned in Note 2 above, Ms Chu Yuet Wah is interested in 11,000,000 Shares through her wholly owned company, Drifting Swan Holding Limited.

Save as disclosed aforesaid and in the paragraph headed “Disclosures of Interests by Directors”, the Directors are not aware of any person, other than the Directors or Chief executive of the Company, who had an interest or short position in the Shares or equity derivatives which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was interested, directly or indirectly, in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX

4. DIRECTOR’S SERVICE CONTRACT

As at the Latest Practicable Date, there was a service contract made between the Company and Mr Chuk Che Shing commencing on 15 July 2003 for a term of two years and this contract may be terminated by either party giving not less than one month’s notice to the other. Upon expiry, the contract will be deemed to be renewed or extended unless terminated by either party giving not less than one month’s written notice to the other.

Save as disclosed above, no Director has a service contract with the Company or any of its subsidiaries which is not determinable by the Group or not expiring within one year without payment of compensation, other than statutory compensation.

5. LITIGATION

The Company is named as a defendant in a writ dated 11 August 2003 in respect of a High Court action (the “Action”) for damages initiated by GP Batteries International Limited (“GP Batteries”) and its subsidiary, Geewin Industrial Limited (“Geewin”) (collectively the “Plaintiffs”). GP Batteries is a company incorporated in Singapore, the shares of which are listed on the Mainboard of the Singapore Exchange Securities Trading Limited. Geewin is the potential purchaser of three wholly-owned subsidiaries of the Subsidiary, namely Golden Power Industries Limited, Golden Power Properties Limited and Techway (China) Limited (the “Subject Companies”). Save as aforesaid, the Plaintiffs are independent third parties not connected with any of the directors, chief executive and substantial shareholders of the Company or any of its subsidiaries or their respective associates.

The Action was brought against the Company for an alleged breach of an arrangement relating to a potential sale and purchase of the Subject Companies including an exclusivity arrangement.

The amount claimed under the Action is damages in the sum of not less than HK$40 million or, as an alternative, a sum of HK$3 million, plus interest.

The Company has sought legal advice and the preliminary view is that the Action and the relevant claim are unfounded. The Company will contest the Action vigorously. In the circumstances and given that it will take time to resolve, the Directors consider that the Action will not have any significant or immediate financial or operational impact on the Group. The Company will make announcement(s) concerning the Action as and when appropriate in accordance with the Listing Rules.

Save as aforesaid, as at the Latest Practicable Date, no member of the Group 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 any member of the Group.

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GENERAL INFORMATION

APPENDIX

6. MISCELLANEOUS

• (a) The registered office of the Company is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

• (b) The head office and principal place of business of the Company is at 31/F, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong.

• (c) The Hong Kong branch share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited located at Room 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

• (d) The secretary of the Company is Miss Yiu Yuen Wah, Christiana, FCS and FCIS.

• (e) The English text of this circular shall prevail over the Chinese text for the purpose of interpretation.

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