JY GAS LIMITED — Proxy Solicitation & Information Statement 2003

Apr 4, 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 the Company, you should at once hand this circular to the purchaser(s) or transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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.

==> picture [225 x 45] intentionally omitted <==

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


(Incorporated in Bermuda with limited liability)
----- End of picture text -----*

ONGOING CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee of China City Natural Gas Holdings Limited

Baron Capital Limited

A letter from the Independent Board Committee is set out on pages 12 to 13 of this circular.

A letter from Baron Capital containing its advice to the Independent Board Committee on the Ongoing Connected Transactions is set out on pages 14 to 26 of this circular.

A notice convening a Special General Meeting of the Company to be held at 9:00 a.m. on 30 April 2003 at Garden Rooms, 2/F, The Royal Garden, 69 Mody Road, Tsimshatsui East, Kowloon, Hong Kong is set out on page 32 of this circular. Whether or not you are able to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Hong Kong in accordance with the instructions printed thereon as soon as possible but in any event not later than 48 hours before the time appointed for the holding of such meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from subsequently attending and voting in person at the Special General Meeting or any adjourned meeting should you so wish.

4 April 2003

* For identification purpose only

CONTENTS

	Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Relationships between the connected persons, Goldtium HK and
the Company regarding the Ongoing Connected Transactions . . . . . . . . . . . . .	5
Information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
The Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
1. Goldtium HK Sales Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2. Goldtium HK Financing Transactions (Specific Guarantees) . . . . . . . . . .	7
New Waivers from the Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . .	12
LETTER FROM BARON CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
APPENDIX – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
NOTICE OF SPECIAL GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32

– i –

DEFINITIONS

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

• “2002 Circular”

the circular of the Company dated 5 March 2002 in relation to certain ongoing connected transactions

• “Announcement”

the announcement of the Company dated 18 March 2003 in relation to the Ongoing Connected Transactions

• “associates”

has the meaning ascribed to it in the Listing Rules

• “Baron Capital”

• Baron Capital Limited, the independent financial adviser to the Independent Board Committee in relation to the Ongoing Connected Transactions, is a deemed licensed corporation under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) for dealing in securities, advising on securities, advising on corporate finance and asset management

• “Board”

the board of Directors

• “Company”

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

• “connected persons”

has the meaning ascribed to it in the Listing Rules

• “Director(s)”

• director(s) of the Company

• “Finished Products”

• finished products of alkaline batteries and zinc chloride batteries

• “Goldtium HK”

• Goldtium (Hong Kong) Company Limited, a 70% indirectly owned subsidiary of the Company

• “Goldtium HK Sales Transactions”

• the transactions as set out in the paragraph headed “Goldtium HK Sales Transactions” on page 6 of this circular

• “Goldtium HK Financing Transactions (Specific Guarantees)”

the transactions as set out in the paragraph headed “Goldtium HK Financing Transactions (Specific Guarantees)” on page 7 of this circular

– 1 –

DEFINITIONS

• “Goldtium JM” Goldtium (Jiang Men) Battery Company Limited, a 70% indirectly owned subsidiary of the Company

• “Group”

• the Company and its subsidiaries

• “Hong Kong”

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

• “Independent Board Committee”

• an independent committee of the Board comprising Messrs Lau Wah Sum and Cheung Man Yau, Timothy who are independent non-executive Directors

• “Independent Shareholders”

• Shareholders who do not have any interest in the Ongoing Connected Transactions

• “Jiangmen Pioneer”

• Jiangmen Pioneer Import and Export Company Limited (江門市先鋒進出口有限公司 ), a new substantial shareholder of Goldtium JM

• “Latest Practicable Date”

• 31 March 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

• “Mr He”

• Mr He Qing, a new substantial shareholder and director of Goldtium HK and a director of Goldtium JM. He is also a general manager of Jiangmen Pioneer

• “Mr Liu”

• Mr Liu Dong Yu, a substantial shareholder and director of Goldtium HK and a director of Goldtium JM

• “Mr Shi”

• Mr Shi Zhao Ping, a former substantial shareholder and director of Goldtium HK and a former director of Goldtium JM

• “New Waivers”

• the new waivers from full compliance with the relevant requirements under the Listing Rules during the Waiver Period in respect of the Ongoing Connected Transactions as set out on page 8 of this circular, an application for which has been made by the Company to the Stock Exchange

– 2 –

DEFINITIONS

• “Ongoing Connected Transactions”

• the Goldtium HK Sales Transactions and the Goldtium HK Financing Transactions (Specific Guarantees) as set out on pages 6 to 8 of this circular

• “PRC”

• the People’s Republic of China, but for the purpose of this circular only, excluding Hong Kong, Taiwan and the Macau Special Administrative Region

• “SDI Ordinance”

• Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong) previously in force as at the Latest Practicable Date

• “Shares”

• Share(s) of HK$0.025 each in the capital of the Company

• “Shareholders”

• holders of the Share(s)

• “Specific Guarantees”

• guarantees provided by the Group for banking or other loan facilities available only to Goldtium HK (i.e. excluding the guarantees provided by the Group for pool banking or other loan facilities extended partly to Goldtium HK and partly to other member(s) of the Group)

• “Special General Meeting”

• a special general meeting of the Company to be held at 9:00 a.m. on Wednesday, 30 April 2003 at Garden Rooms, 2/F, The Royal Garden, 69 Mody Road, Tsimshatsui East, Kowloon, Hong Kong or any adjournment thereof, the notice of which is set out on page 32 of this circular

• “Stock Exchange”

The Stock Exchange of Hong Kong Limited

• “Waiver Period”

three financial years ending 31 July 2005

• “HK$” and “cent” Hong Kong dollars and cents, respectively

Note: For the purpose of this circular, the translation of US$ to HK$ is based on the exchange rate of US$1: HK$7.8.

– 3 –

LETTER FROM THE BOARD

==> picture [4 x 4] intentionally omitted <==

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


----- End of picture text -----*

(Incorporated in Bermuda with limited liability)

Executive Directors: WONG King Shiu, Daniel (Chairman) WONG Kui Shing, Danny (Chief Executive Officer) KAN Kwok Shu LIN Che Chu, George

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

Non-executive Director: SUZUKI Masanori

Independent Non-executive Directors: LAU Wah Sum CHEUNG Man Yau, Timothy

Head Office and Principal Place of Business in Hong Kong: 31/F, Shui On Centre 6-8 Harbour Road Wanchai Hong Kong

4 April 2003

To the Shareholders and, for information only, to the holders of warrants of the Company

Dear Sirs

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

It was announced on 18 March 2003 that the Group intended to continue to enter into the Ongoing Connected Transactions with various connected persons of the Company as described under the section headed “THE ONGOING CONNECTED TRANSACTIONS” herein below. The Goldtium HK Sales Transactions will be entered into in the ordinary and usual course of business, on normal commercial terms and on arm’s length negotiation. The Ongoing Connected Transactions will be subject to approval by the Independent Shareholders under Rule 14.26 of the Listing Rules. The Company has applied to the Stock Exchange for the New Waivers from strict compliance with the requirements of Chapter 14 of the Listing Rules for the Ongoing Connected Transactions for three financial years ending 31 July 2005.

The Independent Board Committee has been appointed to consider and advise the Independent Shareholders on whether or not the Ongoing Connected Transactions are in the interests of the Company and are fair and reasonable so far as the Independent Shareholders are concerned.

* For identification purpose only

– 4 –

LETTER FROM THE BOARD

Baron Capital has been appointed as the independent financial adviser to advise the Independent Board Committee in relation to the Ongoing Connected Transactions.

The purposes of this circular are (i) to provide the Shareholders with further information on the Ongoing Connected Transactions and the New Waivers; (ii) to set out the advice of the Independent Board Committee to the Independent Shareholders in relation to the Ongoing Connected Transactions; (iii) to set out the advice of Baron Capital to the Independent Board Committee in respect of the Ongoing Connected Transactions; and (iv) to give notice to the Shareholders of the Special General Meeting at which an ordinary resolution will be proposed to approve the Ongoing Connected Transactions.

RELATIONSHIPS BETWEEN THE CONNECTED PERSONS, GOLDTIUM HK AND THE COMPANY REGARDING THE ONGOING CONNECTED TRANSACTIONS

On 27 December 2002, Mr Shi sold his entire 15% shareholding in Goldtium HK, which is an indirectly 70% owned subsidiary of the Company, to Mr He and Mr He has replaced Mr Shi as a director of Goldtium HK since 27 December 2002. In addition, Mr He has been appointed as a director of Goldtium JM, which is also a 70% indirectly owned subsidiary of the Company. Hence Mr Shi has ceased to be, and Mr He has become, a substantial shareholder and director of Goldtium HK and a director of Goldtium JM and therefore a connected person of the Company.

The following diagram illustrates the past relationships between the connected persons, Goldtium HK and the Company in relation to the Ongoing Connected Transactions:

==> picture [269 x 113] intentionally omitted <==

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

Company Mr Liu Mr Shi
70% 15% 15%
Goldtium HK
----- End of picture text -----

Mr Liu (being a substantial shareholder and director of Goldtium HK and a director of Goldtium JM) and Mr Shi (formerly being a substantial shareholder and director of Goldtium HK and a director of Goldtium JM) were connected persons of the Company.

– 5 –

LETTER FROM THE BOARD

The following diagram illustrates the present relationships between the connected persons, Goldtium HK and the Company in relation to the Ongoing Connected Transactions:

==> picture [269 x 113] intentionally omitted <==

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

Company Mr Liu Mr He
70% 15% 15%
Goldtium HK
----- End of picture text -----

Mr Liu and Mr He (being substantial shareholders and directors of Goldtium HK and directors of Goldtium JM) are connected persons of the Company.

Before the transfer of the shareholding in Goldtium HK to Mr He and the appointment of Mr He as director of Goldtium JM and Goldtium HK as stated above, Mr He was an independent third party not connected with any chief executive, director or substantial shareholder of the Company and its subsidiaries or any of their respective associates. Save and except for his 15% shareholding in Goldtium HK, Mr He does not have any other interest in any member of the Group and Mr Shi does not have any other transactions with any member of the Group.

INFORMATION OF THE GROUP

The Group is principally engaged in investment in Internet and information technology activities, manufacture and trading of battery and silicone rubber products, and investment in natural gas business.

Goldtium HK is principally engaged in the manufacture of batteries in the PRC and distribution of batteries in Hong Kong.

THE ONGOING CONNECTED TRANSACTIONS

1. Goldtium HK Sales Transactions

The transactions of sales of Finished Products by Goldtium HK to other companies of the Group have been and will be entered into between members of the Group and Goldtium HK.

Under the arrangement of the above transactions, Goldtium HK will directly source zinc chloride, alkaline and rechargeable batteries in Jiangmen City and other cities in the PRC. After processing, these battery products will be sold to other companies within the Group in Hong Kong for resale to the Group’s customers. There is no master agreement between

– 6 –

LETTER FROM THE BOARD

Goldtium HK and the Group regarding the Goldtium HK Sales Transaction. When the other companies in the Group received orders from the Group’s customers, they will request Goldtium HK to supply the relevant battery products and Goldtium HK will issue invoices stipulating the prices, quantity and dates of delivery of the battery products.

The Directors consider that Goldtium HK is a very quality concerned battery supplier and it is difficult to find other suppliers which can offer the batteries of same quality with similar prices. The high quality battery products of Goldtium HK, in terms of leakage proof and discharge performance, can safeguard the brand name and reputation of the Group’s battery products and they are widely accepted and recognised by the market.

The above transactions are currently subject to a waiver granted by the Stock Exchange with a cap of 25% of the Group’s audited consolidated turnover for each of the relevant financial years.

Based on the turnover of the Group for the financial year ended 31 July 2002 and the projected annual growth rate of the Group’s existing battery products and the individual sales forecast on new range of products, the Company has projected an increase in the variety and the value of the batteries to be sold by Goldtium HK to other companies in the Group in the next three financial years. Moreover, as the overall turnover of the Group may fluctuate in these few years owing to the external business sentiment, the Directors consider that it is in the best interest of the Company to have new caps for the waiver of fixed and ascertainable amounts.

The Directors therefore propose that a new waiver be obtained in respect of the above transactions with the respective caps being set at fixed amounts of HK$130 million, HK$180 million and HK$240 million for the three financial years ending 31 July 2003, 2004 and 2005 which respectively represent approximately 31.7%, 43.9% and 58.5% of the Group’s audited consolidated turnover for the financial year ended 31 July 2002.

2. Goldtium HK Financing Transactions (Specific Guarantees)

The transactions of loans advanced to Goldtium HK by the Group (excluding the Goldtium Transactions (as defined in the 2002 Circular)) and Specific Guarantees have been and will be entered into between the Group and Goldtium HK.

The above transactions are currently subject to a waiver granted by the Stock Exchange with a cap of HK$20 million.

The Group is negotiating a bank loan of approximately HK$26 million to be made available to Goldtium HK, for financing the purchase of a production line for producing AAA alkaline batteries from an independent third party.

– 7 –

LETTER FROM THE BOARD

It is normal banking practice to require the Company, as the listed holding company of Goldtium HK, to provide a guarantee to secure the entire proposed bank loan instead of requiring each of the shareholders of Goldtium HK to provide a several guarantee according to its shareholding in Goldtium HK. Accordingly, only the Company is proposed to provide guarantee for the proposed bank loan.

Counter-indemnity in favour of the Company has been executed by each of Mr Liu and Mr He in respect of his obligations and liabilities which may arise from the Goldtium HK Financing Transactions (Specific Guarantees) and which are proportionate to his 15% beneficial interest in Goldtium HK.

The proposed corporate guarantee to be provided by the Company will be in the amount of HK$26 million which will exceed the existing cap of HK$20 million. In order to provide a buffer to the Group for unforeseeable increase in the said or other guarantee or loan due to any increase in its additional working capital requirement after acquiring the new production line by Goldtium HK, it is proposed that a new waiver be obtained for the above loan and Specific Guarantees transactions with the cap increased to a fixed amount of HK$32 million.

NEW WAIVERS FROM THE STOCK EXCHANGE

The Board intends that the Group will continue to enter into the Ongoing Connected Transactions with various connected persons as described under the section “THE ONGOING CONNECTED TRANSACTIONS” above. Goldtium HK Sales Transactions will be entered into in the ordinary and usual course of business, on normal commercial terms and on arm’s length negotiation. The Ongoing Connected Transactions will be subject to approval by the Independent Shareholders under Rule 14.26 of the Listing Rules. As the Ongoing Connected Transactions are of a continuing nature, the Directors are of the view that it will not be practical nor cost-effective for the Company to make disclosure by way of press announcement or to obtain Independent Shareholders’ approval on each occasion when the Ongoing Connected Transactions arise.

The Company has applied to the Stock Exchange for the New Waivers from strict compliance with the connected transaction requirements of the Listing Rules in respect of the Ongoing Connected Transactions for three financial years ending 31 July 2005 subject to the following conditions:

1. the Goldtium HK Sales Transactions shall be:

2. (i) entered into on normal commercial terms (to the extent that there are comparable transactions) and on an arm’s length basis, and (where applicable) in accordance with the terms of the agreements governing such connected transactions or (where there is no agreement) on terms no less favourable than those available to, or as appropriate, from independent third parties; and

– 8 –

LETTER FROM THE BOARD

(ii) fair and reasonable so far as the Independent Shareholders are concerned;

1. Goldtium HK Financing Transactions (Specific Guarantees) shall be fair and reasonable so far as the Independent Shareholders are concerned;

2. the aggregate values of the Ongoing Connected Transactions shall not exceed the respective caps set forth in the right column below:

3. 3.1 Goldtium HK Sales Transactions

Sales of Finished Products by Goldtium HK to other companies in the Group

Caps

HK$130 million, HK$180 million and HK$240 million for the three financial years ending 31 July 2003, 2004 and 2005 respectively

• 3.2 Goldtium HK Financing Transactions (Specific Guarantees)

(Specific Guarantees) Cap Loans advanced to Goldtium HK by HK$32 million the Group (excluding the Goldtium Transactions (as defined in the 2002 Circular)) and the Specific Guarantees

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

2. the auditors of the Company shall review the Ongoing Connected Transactions annually and confirm in a letter (the “ Letter ”) to the Directors (a copy of which shall be provided to the Listing Division of the Stock Exchange) stating whether:

3. (i) the Ongoing Connected Transactions have received the approval from the Board;

4. (ii) the Goldtium HK Sales Transactions have been entered into in accordance with the terms governing the Goldtium HK Sales Transactions or, if there are no such agreements, on terms no less favourable than those available to or from independent third parties; and

5. (iii) the caps as referred to in paragraph 3 above have not been exceeded.

Where, for whatever reason, the auditors decline to accept the engagement or are unable to provide the Letter, the Directors shall inform the Listing Division of the Stock Exchange immediately;

– 9 –

LETTER FROM THE BOARD

1. details of the Ongoing Connected Transactions in each financial year shall be disclosed as required under Rule 14.25(1)(A) to (D) of the Listing Rules in the annual report of the Company for each financial year together with a statement of the opinion of the independent non-executive Directors and the auditors of the Company referred to in paragraphs 4 and 5 above; and

2. approval of the Independent Shareholders at the Special General Meeting and in each financial year, the approval of the Board for the Ongoing Connected Transactions shall be obtained.

The Independent Board Committee has been appointed to advise the Independent Shareholders in relation to the Ongoing Connected Transactions. Baron Capital has been appointed as the independent financial adviser to advise the Independent Board Committee on its advice to the Independent Shareholders concerning the Ongoing Connected Transactions. The advice of the Independent Board Committee and the advice from Baron Capital to the Independent Board Committee are set out on pages 12 to 13 and pages 14 to 26 of this circular respectively.

The other Directors also consider that the Goldtium HK Sales Transactions will be conducted in the normal course of business of the Company and the terms of the Ongoing Connected Transactions will be fair and reasonable so far as the Independent Shareholders are concerned having regard to the circumstances in which they are entered into.

In the event that the aggregate transaction values of any of the Ongoing Connected Transactions exceed their respective caps in a financial year of the Group during the period when the New Waivers are in force, the Company will comply with the relevant requirements of the Listing Rules.

SPECIAL GENERAL MEETING

Set out on page 32 of this circular is a notice convening the Special General Meeting to be held at 9:00 a.m. on 30 April 2003 at Garden Rooms, 2/F, The Royal Garden, 69 Mody Road, Tsimshatsui East, Kowloon, Hong Kong at which an ordinary resolution will be proposed for the approval by the Independent Shareholders in relation to the Ongoing Connected Transactions.

Whether or not you are able to attend the Special General Meeting in person, you are requested to complete and return the enclosed proxy form in accordance with the instructions printed thereon to the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Hong Kong but in any event not later than 48 hours before the time appointed for the holding of the Special General Meeting or any adjournment thereof. The completion of the enclosed proxy form will not preclude you from attending and voting at the Special General Meeting or any adjournment should you so wish.

– 10 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is drawn to the letters from the Independent Board Committee and from Baron Capital which are respectively set out on pages 12 to 13 and 14 to 26 of this circular. General information of the Company is also set out in the Appendix of this circular for your information.

Yours faithfully

For and on behalf of the Board China City Natural Gas Holdings Limited Wong King Shiu, Daniel Chairman

– 11 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

(Incorporated in Bermuda with limited liability)

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

Head Office and Principal Place of Business in Hong Kong: 31/F, Shui On Centre 6-8 Harbour Road Wanchai Hong Kong

4 April 2003

To the Independent Shareholders

Dear Sirs

ONGOING CONNECTED TRANSACTIONS

We refer to the circular dated 4 April 2003 issued by the Company (the “Circular”) of which this letter forms part. Terms defined in the Circular bear the same meanings herein unless the context otherwise requires.

The Board anticipates that the Ongoing Connected Transactions will be carried out on an ongoing and regular basis. The Ongoing Connected Transactions will be subject to approval by Independent Shareholders under Rule 14.26 of the Listing Rules.

The Company has applied to the Stock Exchange for New Waivers from strict compliance with the requirements of Chapter 14 of the Listing Rules for the Ongoing Connected Transactions for the three financial years ending 31 July 2005 subject to the conditions as set out on pages 8 to 10 of the Circular.

We have been appointed as the members of the Independent Board Committee to consider the Ongoing Connected Transactions and to advise the Independent Shareholders as to the fairness and reasonableness of the Ongoing Connected Transactions. Baron Capital has been appointed to advise the Independent Board Committee in relation to the Ongoing Connected Transactions.

* For identification purpose only

– 12 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We wish to draw your attention to the letter from the Board, as set out on pages 4 to 11 of this circular, and the letter from Baron Capital to the Independent Board Committee which contains its opinion in respect of the Ongoing Connected Transactions as set out on pages 14 to 26 of this circular.

As members of the Independent Board Committee, we have discussed with the management of the Company on the Ongoing Connected Transactions and the reasons for obtaining the New Waivers and the basis upon which their terms have been determined. We have also considered the principal factors and reasons considered by Baron Capital in arriving at its opinion regarding the Ongoing Connected Transactions. Having taken into account of the opinion of Baron Capital, we consider the terms of the Ongoing Connected Transactions to be fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole.

Yours faithfully

For and on behalf of

The Independent Board Committee Lau Wah Sum Cheung Man Yau, Timothy

– 13 –

LETTER FROM BARON CAPITAL

The following is the text of a letter of advice to the Independent Board Committee from Baron Capital Limited dated 4 April 2003 prepared for the purpose of incorporation in this circular:

Baron Capital Limited

4/F, Aon China Building 29 Queen’s Road Central Central, Hong Kong

4 April 2003

To the Independent Board Committee of China City Natural Gas Holdings Limited

Dear Sirs,

ONGOING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee in respect of, inter alia, (i) the Ongoing Connected Transactions which comprise the Goldtium HK Sales Transactions and the Goldtium HK Financing Transactions (Specific Guarantees); and (ii) the Company’s application for the New Waivers in respect of the Goldtium HK Sales Transactions and the Goldtium HK Financing Transactions (Specific Guarantees). Details of Ongoing Connected Transactions and the reasons underlying the Company’s application for the grant of the New Waivers from the Stock Exchange are set out in a circular (the “ Circular ”) issued by the Company to the Shareholders dated 4 April 2003 of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

The Ongoing Connected Transactions, if proceeded with, shall constitute connected transactions for the Company under Chapter 14 of the Listing Rules. Hence, the Ongoing Connected Transactions shall require the approval of the Independent Shareholders at the Special General Meeting. The Independent Board Committee comprising Messrs Lau Wah Sum and Cheung Man Yau, Timothy, being independent non-executive Directors, has been established by the Company to advise the Independent Shareholders regarding the Ongoing Connected Transactions.

In formulating our opinion and recommendation to the Independent Board Committee in relation to the Ongoing Connected Transactions and the New Waivers, we have relied on the

– 14 –

LETTER FROM BARON CAPITAL

accuracy of the information and representations contained in the Circular which have been provided to us by the Directors and which the Directors consider complete and relevant. We have assumed that all statements, information and representations made or referred to in the Circular, for which the Directors are solely responsible, are true, correct and complete in all respects at the time they were made and continued to be so as at the Latest Practicable Date. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and are based on honestlyheld opinions.

We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular. We consider that we have received sufficient information to enable us to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our opinion and recommendation. We have no reason to suspect that any material information has been withheld by the Company or by the Directors.

We have not, however, carried out any independent verification of the information provided to us by the Directors, nor have we conducted an independent in-depth investigation into the affairs of the Company and its subsidiaries (including Goldtium HK), nor have we considered the taxation implication on the Group or the shareholders of the Company as a result of the Ongoing Connected Transactions.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee in relation to (i) the terms of the Ongoing Connected Transactions; and (ii) the Company’s application of the new waivers in respect of the Goldtium HK Sales Transactions and the Goldtium HK Financing Transactions (Specific Guarantees), we have considered the principal factors and reasons set out below:

1. The Goldtium HK Sales Transactions

The Group is principally engaged in (i) investments in Internet and information technology activities; (ii) manufacture and trading of batteries and silicone rubber products; and (iii) investment in natural gas business. Goldtium HK is a subsidiary which is indirectly beneficially owned as to 70% by the Company. As disclosed in the 2002 Circular, Goldtium HK is principally engaged in the manufacture of batteries in the PRC and the distribution of batteries in Hong Kong. Under the Goldtium HK Sales Transactions, Goldtium HK directly sources zinc chloride, alkaline and rechargeable batteries in Jiangmen City and other cities in the PRC. These battery products are then processed by Goldtium HK to become the Finished Products. Goldtium HK sells the Finished Products to other companies within the Group in Hong Kong, which then resell the Finished Products to the Group’s customers.

– 15 –

LETTER FROM BARON CAPITAL

The sales of the Finished Products by Goldtium HK to companies within the Group constitute connected transactions for the Company under Chapter 14 of the Listing Rules, and would normally be subject to the approval of the Independent Shareholders on each occasion when they arise unless a waiver from strict compliance with the connected transactions requirements of the Listing Rules in respect of the Goldtium HK Sales Transactions is otherwise granted by the Stock Exchange to the Company.

We have enquired with and were confirmed by the Directors on the following historical figures in relation to the Goldtium HK Sales Transactions, which cover a period of 44 months ended 30 November 2002 (being the latest practicable date to which statistics regarding the values of Goldtium HK Sales Transactions are prepared and available from the Company):

1.1 Historical statistics

			Value of the
			Goldtium HK
			Sales Transactions
	Value of the		as a percentage
Year/	Goldtium HK	The Group’s	of the Group’s
Period	Sales Transactions	turnover	turnover
	(Approximate HK$’000)	(Approximate HK$’000)	(Approximate %)
Year ended
31 March 2000	54,482	493,149	11.0%
Sixteen months
ended 31 July 2001	111,158	766,117	14.5%
Year ended
31 July 2002	80,597	410,191	19.6%
For the period
of four months
from 1 August 2002
to 30 November 2002	41,387	110,780	37.4%

Based on the foregoing statistics, we noted that the value of the Goldtium HK Sales Transactions, when expressed as a percentage of the Group’s turnover during any financial period/year, demonstrated an increasing trend from approximately 11.0% to approximately 37.4% during the past 44 months ended 30 November 2002. We further noted that the value of the Goldtium HK Sales Transactions during the period of four months ended 30 November 2002 of approximately HK$41.4 million represented approximately 37.4% of the Group’s

– 16 –

LETTER FROM BARON CAPITAL

turnover during the same period, which has exceeded the existing cap of 25% of the Group’s turnover. Therefore, we consider that it would be appropriate for the Company to seek a revision in the cap for the value of the Goldtium HK Sales Transactions.

1.2 Reasons for revising the existing cap

Based on the Group’s turnover for the year ended 31 July 2002 and the projected annual growth rate of the sales of the Group’s existing battery products and the individual sales forecast on new range of products, the Company has projected an increase in the variety and the value of batteries to be sold by Goldtium HK to other companies within the Group in the next three financial years. Furthermore, the Directors consider that the Group’s overall turnover may fluctuate in these few years owing to the external business sentiment. Therefore, the Directors consider that it would be in the best interest of the Company to set new caps at fixed and ascertainable amounts instead of a percentage of the Group’s overall turnover.

A. Expansion of product range and potential markets

We were confirmed by the Directors that Goldtium HK currently supplies zinc chloride batteries, AA alkaline batteries, AAA alkaline batteries, C & D size alkaline batteries and rechargeable batteries to the other members of the Group. For those sales orders which exceed Goldtium HK’s existing processing capacity of AAA alkaline batteries and C & D size alkaline batteries, Goldtium HK needs to source the finished products of these batteries from other suppliers. After processing the aforesaid different types of batteries, Goldtium HK will sell these batteries to other members of the Group which in turn sell these batteries onwards to the customers of the Group.

The Directors have confirmed that in view of the projected growth for the alkaline batteries market, in particular for the developing countries, the Group plans to increase Goldtium HK’s processing capacity for the AAA alkaline batteries and C & D size batteries by the installation of new production lines so that Goldtium HK may be able to supply these battery products by itself and need not rely on sources of these battery products from external suppliers in the future. Furthermore, the Group will arrange for Goldtium HK to supply 9-volt batteries and certain other batteries to other members of the Group in the future. The Directors consider that the installation of new production lines for Goldtium HK will enable the Group to have a direct and better control over the cost of the batteries and that the Group would be able to ensure consistency in the quality and delivery of these battery products. As disclosed in the letter from the Board, the Directors consider that Goldtium HK is a very quality concerned battery supplier and it is difficult to find other suppliers which can offer the batteries of same quality with similar prices. We concur with the Directors’ view in this regard, particularly in terms of the maintenance of high quality battery products by improving leakage proof and discharge performance, that the Group can safeguard the brand name and reputation of its

– 17 –

LETTER FROM BARON CAPITAL

battery products, which enables its battery products to be better received and recognised by the market. In addition, we consider that the Group’s ability to produce high quality battery products itself is essential for it to meet any unexpected sizeable purchase orders from customers.

The Directors have expected that Goldtium HK will commence the operation of the proposed new AAA alkaline battery production line during the financial year ending 31 July 2004, whereas the operation of new production lines for the C & D size batteries, 9-volt batteries and certain other batteries will commence in the last quarter of the financial year ending 31 July 2003. We were confirmed by the Directors that among the various types of batteries to be produced by the new production lines of Goldtium HK, a stronger market growth for AAA alkaline batteries is estimated for the reason that AAA alkaline batteries are more commonly used in small size electronic appliances than other types of batteries, and hence it is expected to command a larger market demand.

We have reviewed the Directors’ projection of the value of the Goldtium HK Sales Transaction of approximately HK$122 million, HK$177 million and HK$238 million for each of the next three financial years ending 31 July 2003, 2004 and 2005 respectively and we noted that the annual growth rate of the Goldtium HK Sales Transactions estimated by the Directors is approximately 52%, 45% and 34% for each of these three years respectively, which is much higher than the historical average annual growth rate of approximately 18% for the Goldtium HK Sales Transactions during the period from 1 April 2000 to 31 July 2002. We noted that the higher projected annual growth rate in the Goldtium HK Sales Transactions for the next three financial years ending 31 July 2005 is mainly attributable to the growth in the Group’s projected sales of AAA alkaline, C & D size and 9-volt batteries through outsourcing prior to the commissioning of the new production lines of Goldtium HK and the step-up of production capacity of Goldtium HK from the last quarter of the financial year ending 31 July 2003 as discussed. Furthermore, we were confirmed by the Directors that Goldtium HK has been engaged in the supply of AA alkaline batteries and zinc chloride batteries since October 1998 and the Group has already established an extensive marketing and distribution network for its battery products. In this regard, we consider that following the installation of new production lines by Goldtium HK and with the Group’s over 30 years of experience in the supply of battery products, it is able to capitalise on the Group’s existing extensive market network and client portfolio. Furthermore, the Group would benefit from (i) the enhancement of customers’ confidence in the battery products supplied by Goldtium HK due to better quality control of products through concentric expansion in the production of wider variety of battery products, and (ii) the expected strong market demand for AAA alkaline batteries, which we consider are relevant factors in supporting the higher projected annual growth rate in the Goldtium HK Sales Transactions for the next three financial years ending 31 July 2005.

– 18 –

LETTER FROM BARON CAPITAL

B. Increased significance of Goldtium HK Sales Transactions in the Group’s turnover

As disclosed in the annual report 2001-2002 of the Company (“Annual Report”), the Group disposed in March 2002 of its entire interests in four subsidiaries (namely, Tapsfield Limited, Watercore Limited, Success Target Limited and Success Target Information Technology Limited) which were engaged in the manufacture and trading of electronic finished products and the trading of electronic parts and components (the “ Discontinued Business ”). The Group’s projected turnover is therefore mainly derived from the sales of batteries and silicone rubber products as well as the Group’s investments in Internet and information technology activities and natural gas business, all of which are the Group’s continuing business operations as at the Latest Practicable Date. As shown in the Annual Report, the turnover derived by the Group from the Discontinued Business accounted for approximately 51%, 56% and 38% of the Group’s total turnover for the financial year ended 31 March 2000, the sixteen months ended 31 July 2001 and the financial year ended 31 July 2002 respectively. Furthermore, we noted that (i) from the Company’s annual report and accounts for the financial year ended 31 July 2002, the Group has not yet started recognising any revenue contributions from its investments in Internet and information technology activities and natural gas business during the financial year then ended and (ii) the Directors do not expect any significant contribution to the Group’s total turnover from such business activities in the immediately foreseeable future.

We therefore consider that (i) given the Group’s loss of revenue contribution from the Discontinued Business, which accounted for approximately 51%, 56% and 38% of the total turnover of the Group for each of the three financial periods ended 31 March 2000, 31 July 2001 and 31 July 2002 respectively; and (ii) given that the Group’s investment in Internet and information technology activities and natural gas business has not contributed to the Group’s turnover for the past financial year and is not expected by the Directors to do so given the inherent uncertainties of these businesses, it is possible for the value of the Goldtium HK Sales Transactions to exceed the 25% threshold of the Group’s audited turnover in any financial year of the Company, if the growth rate in the value of the Goldtium HK Sales Transactions in the next three financial years ending 31 July 2005 is expected to exceed the corresponding growth rate in the Group’s turnover. In such case the transactions contemplated under the Goldtium HK Sales Transactions would have to be subject to the approval of the Independent Shareholders whenever they are entered into by Goldtium HK from time to time. Accordingly, we concur with the Directors’ view that it would not be expedient nor in the interest of the Company to continue to retain the existing cap of 25% of the Group’s audited consolidated turnover for each financial year.

1.3 Basis of determination of the new caps for the Goldtium HK Sales Transactions

The Company proposes that the caps for the new waiver in respect of the Goldtium HK Sales Transactions to be set at fixed amounts of HK$130 million, HK$180 million and HK$240 million for the three financial years ending 31 July 2003, 2004 and 2005 respectively, which

– 19 –

LETTER FROM BARON CAPITAL

replace the existing cap of 25% of the Group’s audited consolidated turnover for each financial year. As referred to in our discussions in sub-paragraph 1.2 headed “Reasons for revising the existing cap” above, the Directors have estimated the aggregate projected value of the Goldtium HK Sales Transactions to be approximately HK$122 million, HK$177 million and HK$238 million for each of the three financial years ending 31 July 2003, 2004 and 2005 respectively.

In estimating these projected values, the Directors have confirmed that they have taken several assumptions and market factors into consideration, including but not limited to:

• (i) Global demand for the primary and secondary batteries is projected to grow over 6% annually through 2006 to US$59 billion (approximately HK$460.2 billion). (Source: Global Information Inc., a firm specialising in market research provision for the telecom and information technology industries.)

Based on the above assumptions, we use the above projected value of the global battery market in the year 2006 and the projected 6% simple annual growth rate of the battery market to work out the estimated global battery demand of approximately US$46.7 billion (approximately HK$364 billion), US$49.5 billion (approximately HK$386 billion), US$52.5 billion (approximately HK$410 billion) and US$55.7 billion (approximately HK$434 billion) for each of the four years ending 2005 respectively. The annual increase in the expected demand may be approximately HK$22 billion, HK$24 billion and HK$24 billion for each of the three years ending 2005 respectively. As such, the annual increase in the aggregate projected value of the Goldtium HK Sales Transactions of approximately HK$41.4 million, HK$55 million and HK$61 million for each of the three financial years ending 2005 may only represent approximately 0.19%, 0.23% and 0.25% of the annual increase in the projected global demand respectively. We consider that the aggregate value of the Goldtium HK Sales Transactions for the next three financial years projected by the Directors are fair and reasonable.

• (ii) Sales network and support of the Group and Goldtium HK would contribute to increased sales growth.

In view of the fact that the Group and Goldtium HK have been engaged in the supply of battery products for over 30 years and approximately 5 years respectively, we consider that the Group would be able to capitalise on its existing extensive market and distribution network.

• (iii) The deployment of the new production lines will enhance product range, quality and delivery, and serve as sales growth impetus.

We concur with the Directors’ view that the Group would be benefited from the enhancement of customers’ confidence in the battery products supplied by Goldtium

– 20 –

LETTER FROM BARON CAPITAL

HK following the installation of new production lines by Goldtium HK as better quality control of products is expected. In addition, various production lines for different battery products are expected to commence operation separately in time during the next two years ending 31 July 2004 and we agree with the projection made by the Directors on the aggregate value of the Goldtium HK Sales Transactions for the next three financial years.

In view of the above assumptions, we consider that it is fair and reasonable for the Company to propose for the caps for the new waiver in respect of the Goldtium HK Sales Transactions to be capped at fixed amounts of HK$130 million, HK$180 million and HK$240 million for each of the three financial years of the Company ending 31 July 2003, 2004 and 2005 respectively.

1.4 Conclusion

Based on our foregoing discussions, we recognise the significance of the Goldtium HK Sales Transactions on the Group (in terms of percentage of the Group’s total turnover) and therefore we concur with the Directors’ view that it would be appropriate for the Company to make an application to the Stock Exchange for the grant of the new waiver in respect of the Goldtium HK Sales Transactions (based on fixed and ascertainable amounts instead of being a percentage on audited Group turnover) from strict compliance with the connected transactions requirements of the Listing Rules. We consider that in view of our evaluation that the Goldtium HK Sales Transactions are essentially continuing transactions falling within the ordinary and usual course of business of Goldtium HK and are of a nature which is consistent with one of the principal business activities of the Group (being the manufacture and trading of batteries), it would not be practical nor cost-effective for the Company to make disclosure by way of press announcement or to obtain approval from the Independent Shareholders on each occasion when the Goldtium HK Sales Transactions arise. The new waiver in respect of the Goldtium HK Sales Transactions, if granted by the Stock Exchange to the Company, are proposed by the Directors to be valid for the next three financial years ending 31 July 2005. We consider that such an arrangement provides a reasonable period during which the Company shall be exempt from any disclosure or Independent Shareholders’ approval requirement in respect of the Goldtium HK Sales Transactions, which would otherwise be impractical or costly for the Group.

2. The Goldtium HK Financing Transactions (Specific Guarantees)

The Group is negotiating with a major bank in Hong Kong, which is independent of and not connected with any of the directors, chief executive or substantial shareholders of the Company and its subsidiaries and any of their respective associates, in relation to a proposed bank loan of approximately HK$26 million (the “ Proposed Loan ”) to be made available to Goldtium HK for the purpose of financing its purchase of a new production line for

– 21 –

LETTER FROM BARON CAPITAL

manufacturing AAA alkaline batteries (as referred to our discussions in the paragraph headed “The Goldtium HK Sales Transactions” above).

Goldtium HK is beneficially held as to 70% by the Company, as to 15% by Mr Liu and 15% by Mr He. It is common in Hong Kong for a lending bank to require a listed company to guarantee the entire amount of borrowings by its subsidiaries, irrespective whether the subsidiaries are wholly or non-wholly owned by the listed company. Accordingly, the Company is required to be the sole guarantor in respect of the entire amount of the Proposed Loan. The value of the guarantee of HK$26 million, which is proposed to be provided by the Company in respect of the Proposed Loan, exceeds the existing cap of HK$20 million for the existing waiver granted by the Stock Exchange to the Company under the Goldtium HK Financing Transactions (Specific Guarantees).

The provision by the Company of a guarantee in respect of the Proposed Loan to be made available to Goldtium HK, being a subsidiary of the Company, constitutes a connected transaction for the Company under Chapter 14 of the Listing Rules and would normally be subject to the approval of the Independent Shareholders unless a waiver from strict compliance with the connected transactions requirements of the Listing Rules in respect of the Goldtium HK Financing Transactions (Specific Guarantees) is otherwise granted by the Stock Exchange to the Company.

We have made the relevant enquiries with the Directors regarding the Goldtium HK Financing Transactions (Specific Guarantees) and have evaluated the information provided to us by the Directors as follows:

2.1 Reason for revising the existing cap

As disclosed in the Annual Report, a loan of approximately HK$2.6 million was granted by the Company in favour of Goldtium HK for the financial year ended 31 July 2002 and is adequately covered by the maximum cap of HK$20 million under the existing waiver granted by the Stock Exchange to the Company. Nevertheless, the Proposed Loan of approximately HK$26 million to Goldtium HK intended to be used for financing the purchase by Goldtium HK of a new production line for the manufacture of AAA alkaline batteries will cause such cap to be exceeded.

Therefore, we consider that it would be appropriate for the Company to revise the existing cap for the Goldtium HK Financing Transactions (Specific Guarantees).

2.2 Reasons for acquiring a new production line for the manufacture of AAA alkaline batteries

As referred to in our discussions in the paragraph headed “The Goldtium HK Sales Transactions” above, we noted that the Directors have estimated a strong market growth for

– 22 –

LETTER FROM BARON CAPITAL

AAA alkaline batteries and that the projected increase in the values of the Goldtium HK Sales Transactions during the next three financial years ending 31 July 2005 is, to a large extent, attributable to the increase in the projected sales by Goldtium HK of AAA alkaline batteries in meeting the projected strong market demand. Furthermore, we were confirmed by the Directors of their estimate that the AAA alkaline batteries to be produced by the Goldtium HK’s new production line may result in an approximately 22% cost savings with better quality and delivery controls when compared with the cost of AAA alkaline batteries sourced by Goldtium HK from other suppliers.

Based on the above, we consider that it would be commercially reasonable for Goldtium HK to acquire a new production line for the AAA alkaline batteries for reason that (i) it enables Goldtium HK to increase its processing capacity for AAA alkaline batteries at lower costs with consistent quality and delivery so that the Group would be able to meet the estimated strong market growth for AAA alkaline batteries; and (ii) it enables Goldtium HK (and hence the Group) to benefit from cost savings by producing AAA alkaline batteries itself instead of sourcing these products from other suppliers.

2.3 Existing financial resources of Goldtium HK

We have enquired with and were made available from the Directors the unaudited management accounts of Goldtium HK as at 30 November 2002, being the latest management accounts of Goldtium HK. We noted that as at 30 November 2002, Goldtium HK has (i) net current liabilities of approximately HK$6.8 million; and (ii) net tangible assets of approximately HK$32.0 million. Based on the foregoing, we consider that Goldtium HK does not have the adequate working capital resources for the purpose of funding its acquisition of the new production line for the AAA alkaline batteries which capital investment is estimated by the Directors at approximately HK$32 million. Therefore, we consider that it would be fair and reasonable for Goldtium HK to obtain the Proposed Loan for the purpose of acquiring the new production line for the manufacturing of AAA alkaline batteries.

2.4 Counter-indemnity arrangements from the minority shareholders of Goldtium HK in favour of the Company in respect of the guarantee under the Proposed Loan

The existing issued share capital of Goldtium HK is beneficially owned as to 70% by the Company, as to 15% by Mr Liu and 15% by Mr He. Being the substantial shareholders of Goldtium HK and directors of Goldtium HK and Goldtium JM, both Mr Liu and Mr He are regarded as connected persons of the Company under the Listing Rules. As we noted that (i) as discussed above, it is a normal banking practice in Hong Kong for a lending bank to require a listed company to provide a guarantee in respect of the entire amount of the loan advanced by such lending bank to its subsidiary, irrespective whether the subsidiary is wholly or non-wholly owned by the listed company; and (ii) the Company has statutory, board, management and operational controls over Goldtium HK, it would be fair and reasonable for the Company to provide a guarantee in respect of the full amount of the Proposed Loan.

– 23 –

LETTER FROM BARON CAPITAL

As disclosed in the letter from the Board, each of Mr Liu and Mr He has executed a counter-indemnity in favour of the Company in connection with their respective obligations and liabilities which may arise from the Goldtium HK Financing Transactions (Specific Guarantees) and which are proportionate to their respective 15% beneficial interest in Goldtium HK. We have reviewed the aforementioned counter-indemnity arrangements from which we noted the following major terms and conditions:

• (i) that each of Mr Liu and Mr He has irrevocably undertaken to indemnify the Company for a maximum amount of HK$4.8 million, which amount shall cover their respective 15% share of all costs, expenses and losses suffered by the Company in connection with the Goldtium HK Financing Transactions (Specific Guarantees); and

(ii) the counter-indemnity arrangements are valid until 31 December 2007.

In relation to the foregoing, we consider that when the counter-indemnity expires in December 2007, the Company may be exposed to additional contingent liabilities of a maximum exposure of HK$9.6 million which amount represents the aggregate obligations and liabilities attributable to Mr Liu and Mr He under the Goldtium HK Financing Transactions (Specific Guarantees). We have estimated that in the event the abovementioned additional contingent liabilities of a maximum exposure of HK$9.6 million were to materialise, then based on the Group’s audited consolidated net tangible assets of approximately HK$637.4 million as at 31 July 2002 (being the latest accounts reporting date to which the published audited consolidated accounts of the Group were prepared), such maximum exposure represents only approximately 1.5% of the Company’s audited consolidated net asset value. Therefore, in such circumstances, it is unlikely that the resultant additional obligations and liabilities to the Company attributable to Mr Liu and Mr He under the Goldtium HK Financing Transactions (Specific Guarantees) would have a significant and adverse impact on the overall net assets position and/or financial position of the Group as well as on the interests of the Shareholders (including the Independent Shareholders) as a whole taking into account particularly that such exposure will be reduced over time as and when Goldtium HK commences to repay the principal and interest amounts of the Proposed Loan by installments.

Notwithstanding the above, we are also confirmed by the Directors that Goldtium HK has been operating profitably in the 16-month financial period ended 31 July 2001 and the financial year ended 31 July 2002. In this regard, we are satisfied that Goldtium HK will be able to meet its financial obligations in respect of the Proposed Loan which is intended to be repaid by monthly installments between 2003 and 2007. We noted that Goldtium HK has fully discharged in 2002 its loan obligations out of its own financial resources in respect of an existing production line which was acquired in 1998 under similar financing arrangement as that being contemplated under the Proposed Loan. We are also confirmed by the Directors that the intended maturity date of the Proposed Loan will be on or before 31 December 2007, being the expiry date of the counter-indemnity executed in favour of the Company by Mr Liu and Mr He respectively.

– 24 –

LETTER FROM BARON CAPITAL

In respect of the standing of Mr Liu and Mr He, we are advised by the Directors that Mr Liu who has been a substantial shareholder and director of Goldtium HK since 1998 has contributed substantially to the successful operation of Goldtium HK while Mr He has become a substantial shareholder and director of Goldtium HK since 27 December 2002. The Directors view that the working relationship between the Company and Mr Liu is good and that Mr Liu and Mr He are good for their normal business undertakings.

In addition, the counter-indemnities in favour of the Company executed by Mr Liu and Mr He are in connection with their respective obligations and liabilities which may arise from the Goldtium HK Financing Transactions (Specific Guarantees) and which are proportionate to their respective 15% beneficial interest in Goldtium HK. The Directors also confirmed to us that the shares owned by Mr Liu and Mr He in Goldtium HK are free of encumbrance.

Furthermore, based on Goldtium HK’s unaudited net assets value of HK$32 million as at 30 November 2002, the proportionate value thereof attributable to Mr He and Mr Liu will be sufficient to accommodate their respective contingent exposures as provided under the relevant counter-indemnities.

In view of the above, we consider that the counter-indemnity in favour of the Company executed by each of Mr Liu and Mr He is fair and reasonable so far as the Independent Shareholders are concerned.

2.5 Conclusion

Based on the foregoing discussions and, in particular, the merits of the new production line of Goldtium HK which is expected to enable it to process all AAA alkaline batteries by itself (instead of having to source part of them from other suppliers, as is currently the case) and hence the positive impact on the Group by (i) being able to increase its overall turnover to be derived from the sales of battery products to its customers; and (ii) the benefit of cost savings arising from the production and supply of AAA alkaline batteries by Goldtium HK to the Group’s customers instead of having to source part of them from the other suppliers, as is currently the case, we consider that it would be appropriate for the Company to make an application to the Stock Exchange for the grant of the new waiver from strict compliance with the connected transactions requirements of the Listing Rules in respect of the Goldtium HK Financing Transactions (Specific Guarantees).

The cap for the new waiver in respect of the Goldtium HK Financing Transactions (Specific Guarantees) is for a fixed amount of HK$32 million, which is approximately 23% higher than the amount of the Proposed Loan of approximately HK$26 million. In this regard, we consider that the cap for the new waiver has been determined on a fair and reasonable basis, for reason that it provides the necessary business flexibility to the Group in the event that there is (i) any unforeseeable increases in the capital investment of the new production line, and hence the amount of the Proposed Loan to be made available to Goldtium HK; and/or (ii) any

– 25 –

LETTER FROM BARON CAPITAL

sundry and related advances to be made by the Group and/or its member companies to Goldtium HK, for purposes such as financing Goldtium HK’s additional working capital requirements after its acquisition of a new production line for AAA alkaline batteries. We consider that, the cap of the new waiver in respect of the Goldtium HK Financing Transactions (Specific Guarantees), being set at an amount in excess of the Proposed Loan, will afford the Company sufficient flexibility so that it will not be required to seek new approval from the Independent Shareholders in the event(s) of any or all of the scenarios as described in (i) and (ii) above.

We therefore concur with the Directors’ view that it would be appropriate for the Company to make an application to the Stock Exchange for the grant of the new waiver in respect of the Goldtium HK Financing Transactions (Specific Guarantees) from strict compliance with the connected transactions requirements of the Listing Rules. The new waiver in respect of the Goldtium HK Financing Transactions (Specific Guarantees), if granted by the Stock Exchange to the Company, is proposed by the Directors to be valid for the next three financial years ending 31 July 2005. Independent Shareholders should note that should the loan obligations under the Proposed Loan have not been fully repaid after the financial year ending 31 July 2005, a new waiver for the Goldtium HK Financing Transactions (Specific Guarantees), which is subject to Independent Shareholders’ approval, may be required. We consider that such an arrangement provides for a reasonable period during which the Company shall be exempt from any disclosure or Independent Shareholders’ approval requirement in respect of the Goldtium HK Financing Transactions (Specific Guarantees), which would otherwise be impractical or costly for the Group.

RECOMMENDATION

Having considered the factors and reasons referred to above, we are of the opinion that (i) the terms and conditions of the Goldtium HK Sales Transactions and the Goldtium HK Financing Transactions (Specific Guarantees) are in the interests of the Company and the Shareholders (including the Independent Shareholders) as a whole and are fair and reasonable insofar as the Independent Shareholders are concerned; and (ii) it would be fair and reasonable for the Independent Shareholders to approve the Goldtium HK Sales Transactions and the Goldtium HK Financing Transactions (Specific Guarantees) as well as the Company’s application for the grant of the New Waivers by the Stock Exchange in relation thereto. Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the resolution to be proposed at the Special General Meeting to consider and, if thought fit, approve the Ongoing Connected Transactions or any matters relating thereto.

Yours faithfully, For and on behalf of Baron Capital Limited Lin Wai Yan, Monica

Director

– 26 –

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY

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 contained herein misleading.

2. DISCLOSURE OF INTERESTS

(i) Directors’ Interest in Securities

As at the Latest Practicable Date, the interests of the Directors and chief executive of the Company in the share capital of the Company and any of its associated corporations (within the meaning of the SDI Ordinance) which require notification to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including interests which any such Director is deemed to have taken under Section 31 of, or part I of the Schedule to, the SDI Ordinance) or which are required to be entered in the register maintained by the Company pursuant to Section 29 of the SDI Ordinance or required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies of the Listing Rules (the “ Model Code ”) were as follows:

Name of Director	Nature of Interest	Number of Shares
Wong King Shiu, Daniel	Family (Note)	2,180,122,000
(“Mr Daniel Wong”)
Wong Kui Shing, Danny	Personal	15,400,000
Kan Kwok Shu	Personal	7,790,000

Note: Out of these 2,180,122,000 Shares owned by Noble Islands Int’l Limited (“ Noble Islands ”), 2,067,722,000 Shares and 112,400,000 Shares are registered in the names of Kingston Finance Limited and HKSCC Nominees Limited respectively. 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. 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.

– 27 –

GENERAL INFORMATION

APPENDIX

(ii) Interest in the Share Options

As at the Latest Practicable Date, the Directors and chief executive of the Company had the following interests in the share options (at a consideration of HK$1 on each grant) which require notification pursuant to Section 28 of the SDI Ordinance or the Model Code or as recorded in the register maintained pursuant to Section 29 of the SDI Ordinance:

				Exercise
				Price
	Date of	Number of		per Share
Name	grant	option shares	Exercise Period	(HK$)
WONG King Shiu, Daniel	03.06.2002	46,600,000	03.06.2002 – 31.05.2004	0.1530
WONG Kui Shing, Danny	20.04.2000	80,000,000	20.10.2000 – 19.04.2003	0.7392
	12.12.2000	6,600,000	12.06.2001 – 11.05.2003	0.2096
KAN Kwok Shu	19.05.2000	8,000,000	19.11.2000 – 11.05.2003	0.5568
	15.08.2001	4,800,000	15.02.2002 – 11.05.2003	0.0893
	15.03.2002	19,890,000	15.04.2002 – 14.03.2004	0.0550
SUZUKI Masanori	20.04.2000	40,000,000	20.10.2000 – 19.04.2003	0.7392
	12.12.2000	9,000,000	12.06.2001 – 11.05.2003	0.2096
LAU Wah Sum	03.06.2002	20,000,000	03.06.2002 – 31.05.2004	0.1530
CHEUNG Man Yau, Timothy	04.07.2002	4,600,000	04.07.2002 – 03.07.2004	0.1180

Save as disclosed herein, as at the Latest Practicable Date:

• (i) none of the Directors or their associates (as defined in the Listing Rules) had any interests in the equity or debt securities of the Company or any of its associated corporations (within the meaning of the SDI Ordinance) which require notification to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including interests which any such Director is taken or deemed to have under Section 31 of, or Part I of the Schedule to, the SDI Ordinance), or which are required to be entered into the register maintained by the Company under Section 29 of the SDI Ordinance, or which require notification to the Company and the Stock Exchange pursuant to the Model Code;

• (ii) none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group since 31 July 2002, being the date to which the latest published audited accounts of the Company was made up, and which was significant in relation to the business of the Group taken as a whole;

– 28 –

GENERAL INFORMATION

APPENDIX

• (iii) Baron Capital did not have any shareholding, direct or indirect, in any member of the Group, or right (whether legally enforceable or not) to subscribe for or to nominate any person to subscribe for securities in any member of the Group; and

• (iv) none of the Directors or Baron Capital had any direct or indirect interest in any assets acquired or disposed of by or leased to, or which were proposed to be acquired, disposed of by or leased to, the Company or any of its subsidiaries since 31 July 2002, the date to which the latest published audited accounts of the Group were made up.

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, according to the register kept by the Company under Section 16(1) of the SDI Ordinance and so far as the Directors were aware, the following persons (not being a Director or the chief executive of the Company) were directly or indirectly interested or taken or deemed to be interested in 10% or more of the nominal value of the issued share capital of the Company carrying rights to vote in all circumstances at general meetings of the Company together with particulars of any options in respect of such capital:

		% of issued share
Name	Number of Shares	capital of the Company
Noble Islands	2,180,122,000 (Note)	25.1
Maxi Gain Corporation	2,180,122,000 (Note)	25.1
Equity Trustee Limited	2,180,122,000_(Note)_	25.1

Note: Out of these 2,180,122,000 Shares owned by Noble Islands, 2,067,722,000 Shares and 112,400,000 Shares are registered in the names of Kingston Finance Limited and HKSCC Nominees Limited respectively. 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. 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.

– 29 –

GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, so far as are known to the directors of the Company, the following persons were, directly or indirectly interested in 10% or more of the equity interests of the subsidiaries of the Company:

	Name of substantial	Shareholding of the
Name of subsidiary	shareholder	substantial shareholder
Goldtium HK	Mr He	15%
	Mr Liu	15%
Goldtium JM	Jiangmen Pioneer	15%
	Jiangmen Industrial Products	15%
	Import and Export Corporation
Golden Power R	Mr Rolando Gonzalez	30%
Gonzalez Limited

4. SERVICE CONTRACTS

As at the Latest Practicable Date, the Company has entered into the following service contracts with Directors:

Name Term CHEUNG Man Yau, Timothy 5 April 2002 to 4 April 2004, both dates inclusive LAU Wah Sum 13 April 2002 to 12 April 2004, both dates inclusive

After the expiry of the initial term of the service contracts as described above, these service contracts will be deemed to be renewed or extended unless terminated by either party giving not less than three months’ prior 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 within one year without payment of compensation, other than statutory compensation.

– 30 –

GENERAL INFORMATION

APPENDIX

5. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading positions of the Group since 31 July 2002, being the date to which the latest published audited accounts of the Group were made up.

6. QUALIFICATION AND CONSENT

Baron Capital is a deemed licensed corporation under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) for dealing in securities, advising on securities, advising on corporate finance and asset management.

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

7. MISCELLANEOUS

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

• (b) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The branch share registrar of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited at Rooms 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the office of Sit, Fung, Kwong & Shum, Suite 4428, COSCO Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Hong Kong, during normal business hours on any day up to and including the date of Special General Meeting:

1. The letter of consent from Baron Capital referred to under the paragraph “Qualification and Consent” to this appendix;

2. The letter of advice from Baron Capital to the Independent Board Committee the text of which is set out on pages 14 to 26 of this circular; and

3. The service contracts of Mr Cheung Man Yau, Timothy and Mr Lau Wah Sum dated 5 April 2002 and 12 April 2002 respectively referred to under the paragraph “Service Contracts” to this appendix.

– 31 –

NOTICE OF SPECIAL GENERAL MEETING

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of China City Natural Gas Holdings Limited (the “ Company ”) will be held at 9:00 a.m. on 30 April 2003 at Garden Rooms, 2/F, The Royal Garden, 69 Mody Road, Tsimshatsui East, Kowloon, Hong Kong for the purpose of considering and, if thought fit, passing the following resolution, with or without amendments, as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT the Ongoing Connected Transactions (as defined in the circular of the Company dated 4 April 2003 to its shareholders, a copy of which was marked “A” and has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification) be and are hereby approved and confirmed and any director of the Company be and is hereby empowered to do all things and to execute all other documents which may in his opinion be necessary or desirable in connection with the Ongoing Connected Transactions or any matters relating thereto.”

By Order of the Board China City Natural Gas Holdings Limited Wong King Shiu, Daniel Director

Hong Kong, 4 April 2003

Notes:

• (a) A member entitled to attend and vote at the special general meeting convened by the above notice is entitled to appoint another person as his/her proxy to attend and vote instead of him/her. A member may appoint a proxy in respect of part of his holding of shares in the Company. A proxy need not be a member of the Company.

• (b) A form of proxy for use at the special general meeting is enclosed herewith.

• (c) To be valid, the form of proxy and the power of attorney, if any, or other authority, if any, under which it is signed or a notarially certified copy of that power of attorney or authority must be deposited at the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 17121716, 17/F, Hopewell Centre, 183 Queen’s Road East, Hong Kong, not less than 48 hours before the time appointed for holding of the special general meeting or adjourned meeting and in default the proxy will be treated as invalid.

• For identification purpose only

– 32 –