Ko Yo Chemical (Group) Limited - Proxy Solicitation & Information Statement 2011

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt about 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 in Ko Yo Chemical (Group) Limited , you should at once hand this circular together with the accompanying form of proxy to the purchaser or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser.

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

The circular is for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of the Company.

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 0827)

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser

Independent financial adviser to the Independent Board Committee and Independent Shareholders

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A letter from the Board is set out on pages 6 to 17 of this circular. A letter from the Independent Board Committee containing its recommendation is set out on page 18 of this circular. A letter from the GF Capital (Hong Kong) Limited containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 19 to 47 of this circular.

A notice convening the extraordinary general meeting of Ko Yo Chemical (Group) Limited (the “Company”) to be held at Suite No. 02, 31st Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong on 9 September 2011, at 3:00 p.m., notice of which is set out on pages 55 to 57 of this circular. A form of proxy for use at the extraordinary general meeting is also enclosed. If you are unable to attend the extraordinary general meeting, please complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the share registrar of the Company in Hong Kong, Union Registrars Limited at 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong, together with any power of attorney or other authority, under which it is signed, or a notarially certified copy of that power or authority, not less than 48 hours before the time for holding the meeting or any adjournment thereof. The completion and return of the form of the proxy will not preclude you from attending and voting in person at the extraordinary general meeting or any adjourned meetings should you so desire.

17 August 2011

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . . .	18
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . . . . . . . .	19
APPENDIX — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
NOTICE OF THE EXTRAORDINARY GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . .	55

— i —

DEFINITIONS

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

“Aggregate Subscription Price”

the aggregate subscription price payable by IFC shall be equal to US$7 million (equivalent to approximately HK$54.6 million)

“Benchmarked Price”

being the higher of:

(a) the closing price of the Shares as quoted in HK$ on the Stock Exchange on the date of the Subscription Agreement; and
(b) the average closing price of the Shares as quoted in HK$ on the Stock Exchange in the 5 trading days immediately prior to the date of the Subscription Agreement
“Board”
the board of Directors

“Business Day” a day when banks in New York and Hong Kong are open for business

“Closing Day”
the day agreed between the parties to complete the Subscription (or the date specified by IFC), with IFC paying for the Subscription Shares and the Company delivering to IFC the Subscription Shares
“Closing Price”

being the lower of:

(a) the closing price per share of the Shares as quoted in HK$ on the Stock Exchange on the trading day preceding the Closing Day; and
(b) the average closing price per share of the Shares as quoted on the Stock Exchange on the 5 trading days immediately prior to the Closing Day
“Company”

Ko Yo Chemical (Group) Limited, a company incorporated in Cayman Islands with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange

“connected person(s)” has the meaning ascribed thereto under the Listing Rules
“Director(s)” the director(s) of the Company
“Effective Subscription Price” the effective subscription price as defined in the paragraph headed “The Subscription Price” of this circular

— 1 —

DEFINITIONS

“EGM” “Financial Plan”

“First Phase Urea Plant”

“Group”

“HK$”
“Hong Kong”
“IFC”
“Independent Board Committee”
“Independent Financial Adviser” or “GF Capital”

an extraordinary general meeting of the Company to be convened to consider and, if thought fit, to approve, among other things, the Subscription, the allotment and issue of the Subscription Shares and the grant of the Specific Mandate

represents the financial plan regarding to the Second Phase Urea Plant including: (i) the projected costs for the completion of the Project and; (ii) the financing plan to fund all such costs, which funding shall include additional equity and long term debt (being debt with a term of at least three years) with the proportion of equity and debt being satisfactory to IFC; and (iii) the financial plan for the overall corporate strategy which shall include a plan to pay down short term debt. It does not contain any profit forecast and price sensitive information of the Company, and it has to be delivered to IFC since the proceeds from the Subscription are specific for the Second Phase Urea Plant, and IFC is also a creditor of the Company and had previously financed the Company in construction of the First Phase Urea Plant

the existing operation of urea plant of the Group, which commenced in October 2010, with an annual production capacity of 450,000 tonnes of urea and 400,000 tonnes of ammonia in Dazhou, Sichuan Province, the PRC

the Company and its subsidiaries

Hong Kong dollars, the lawful currency of Hong Kong

the Hong Kong Special Administrative Region of the PRC

International Finance Corporation, member of World Bank Group and a substantial shareholder of the Company

an independent committee of the Board to be formed by the Company to advise the Independent Shareholders as to whether the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate is fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole

GF Capital (Hong Kong) Limited, a licensed corporation carrying out type 6 (advising on corporate finance) regulated activities under the SFO, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate

— 2 —

DEFINITIONS

“Independent Shareholders”

“Key Subsidiary”

Shareholders (other than IFC) who are not required to abstain from voting on the ordinary resolution to be proposed at the EGM to approve the Subscription under the Listing Rules

at the relevant time or times, either

(a) any subsidiary if, as of the end of the then most recently completed fiscal year of the Company:
(i) the assets of such subsidiary account for more than ten per cent (10%) of the total consolidated assets of the Company; or
(ii) the income of such subsidiary accounts for more than ten percent (10%) of the Company’s total consolidated income from continuing operations before income taxes, extraordinary items and the cumulative effect of changes in accounting principles; or
(b) the following named subsidiaries, whether or not they meet any of the conditions set forth in (a) above: Chengdu Ko Yo Chemical Industry Co., Ltd., Chengdu Ko Yo Compound Fertilizers Co., Ltd., Dazhou Koyo Chemical Industry Co., Ltd., Qingdao Ko Yo Chemical Industry Co., Ltd. and Sichuan Ko Yo Agrochem Co., Ltd.

“Latest Practicable Date”

“Listing Rules”
“Long Stop Date”

12 August 2011, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular

the Rules Governing the Listing of Securities on the Stock Exchange

31 December 2011, stated in the Subscription Agreement or such later date as both parties may agree in writing

— 3 —

DEFINITIONS

“Material Adverse Effect”

a material adverse effect on:

(i) the Company’s or any of its Key Subsidiaries’ assets or properties;
(ii) the Company’s or any of its Key Subsidiaries’ business prospects or financial condition;
(iii) the implementation of the Project, the Financial Plan or the carrying on of the Company’s or any of its Key Subsidiaries’ business or operations; or
(iv) the ability of the Company to comply with its obligations under Subscription Agreement.
“Net Asset Value Per Share”
the net asset value set out in the Company’s most recent audited accounts divided by the total number of Shares as set out in such audited accounts
“PRC” People’s Republic of China
“Project”

the expansion of the Dazhou ammonia/urea facility to develop the Second Phase Urea Plant located in Dazhou city, Sichuan Province, the PRC

“Relevant Percentage”

means 100%, provided that if the Company enters into a binding agreement for the issue of Shares with any other investor between the date of the Subscription Agreement and the Closing Day and the subscription price payable by such investor represents a percentage discount (“Discount Percentage”) to the relevant signing price or the relevant closing price (as applicable), then the “Relevant Percentage” shall be equal to 100% minus the Discount Percentage (or, if there are multiple investors, 100% minus the highest Discount Percentage)

“RMB” Renminbi, the lawful currency of the PRC

“Schedule” a company disclosure schedule, will essentially be a letter providing disclosure against the representations and warranties in the Subscription Agreement, includes but not limited to the information on the details of officers and directors of the Company and its key subsidiaries, status of authorizations, the copy of the Company’s charter documents, information on any litigation and compliance with law, public reporting, environmental and insurance matters, labor employee matters and employee benefits plans

— 4 —

DEFINITIONS

“SFO”	the Securities and Futures Ordinance (Cap. 571 of the Laws of
	Hong Kong)
“Share(s)”	ordinary share(s) of HK$0.02 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of the Share(s)
“Specific Mandate”	a specific mandate to be sought from the Shareholders at the
	EGM to allot and issue the Subscription Shares pursuant to
	the Subscription Agreement
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subscription”	Subscription for the Subscription Shares (subject to
	adjustment in accordance with the pricing mechanism under
	the section headed “The Subscription Price”) by IFC pursuant
	to the terms of the Subscription Agreement
“Subscription Agreement”	the agreement dated 17 June 2011 entered into between the
	Company and IFC after the trading hours in relation to the
	Subscription
“Subscription Price”	the subscription price as defined in the paragraph headed “the
	Subscription Price” of this circular
“Subscription Shares(s)”	new Shares (subject to adjustment in accordance with the
	pricing mechanism under the section headed “The
	Subscription Price”) to be issued and allotted under the
	Subscription Agreement
“Second Phase Urea Plant”	the expansion of the First Phase Urea Plant with an additional
	estimated annual capacity of 300,000 tonnes urea and 40,000
	tonnes melamine to reach 750,000 tonnes of urea, 400,000
	tonnes of ammonia and 40,000 tonnes melamine in Dazhou,
	Sichuan Province, the PRC
“US$”	United States dollars, the lawful currency of the United States
	of America
“World Bank Group”	the International Bank for Reconstruction and Development,
	an international organization established by Articles of
	Agreement among its member countries
“%”	per cent

For the purpose of this circular, the exchange rates of US$1.00 = HK$7.80 and RMB1.00 = HK$1.21 have been used for currency translation, where applicable. Such exchange rates are for illustration purposes and do not constitute a representation that any amounts in, HK$, US$ or RMB have been, could have been or may be converted at such rate.

— 5 —

LETTER FROM THE BOARD

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 0827)

Executive Directors: Mr. Li Weiruo (Chairman) Mr. Yuan Bai Ms. Chi Chuan Ms. Man Au Vivian Mr. Li Shengdi

Registered Office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111, Cayman Islands

Independent Non-executive Directors:

Mr. Hu Xiaoping Mr. Woo Che-wor, Alex Mr. Qian Laizhong

Principal place of business in Hong Kong : Suite No. 02, 31st Floor Sino Plaza 255-257 Gloucester Road Causeway Bay, Hong Kong 17 August 2011

To the Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE AND NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

The Board announced on 17 June 2011 that the Company and IFC have entered into the Subscription Agreement contemplated under the Specific Mandate.

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LETTER FROM THE BOARD

On the terms and subject to the conditions of the Subscription Agreement, the Aggregate Subscription Price shall be US$7 million (equivalent to approximately HK$54.6 million) payable by IFC for an aggregate number of fully paid and non-assessable Subscription Shares equal to US$8 million (equivalent to HK$62.4 million) divided by the Subscription Price (subject to adjustment in accordance with the pricing mechanisum under the section headed “The Subscription Price”).

Based on the pricing mechanism and the conditions of the issue of the Subscription Shares as set out in the Subscription Agreement, the minimum and maximum number of the Subscription Shares shall be approximately 286,896,552 and 355,237,476 Shares respectively, and the minimum and maximum Subscription Price shall be HK$0.1757 (which is calculated by reference to US$8 million (equivalent to HK$62.4 million) divided by the maximum number of the Subscription Shares of 355,237,476 Shares) and HK$0.2175 (which is calculated by reference to US$8 million (equivalent to HK$62.4 million) divided by the minimum number of the Subscription Shares of 286,896,552 Shares) respectively (however, the Effective Subscription Price payable by IFC is lower than the Subscription Price due to the Aggregate Subscription Price being discounted). The Company will seek the grant of the Specific Mandate to allot and issue the Subscription Shares at the EGM to be convened and held by the Company.

As at the Latest Practicable Date, IFC is a substantial shareholder of the Company and is the holder of 799,884,615 Shares, representing approximately 11.12% of the issued share capital of the Company, therefore IFC is a connected person of the Company and, accordingly, the Subscription constitutes a connected transaction of the Company and is subject to the reporting, announcement and the Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules. Completion of the Subscription pursuant to the Specific Mandate is subject to, among other things, approval of the Independent Shareholders by way of poll at the EGM. IFC shall abstain from voting at the EGM in respect of the ordinary resolution approving the Subscription and the allotment and issue of the Subscription Shares contemplated under the Specific Mandate due to their interests in the Subscription.

Completion of the Subscription is subject to the satisfaction of the conditions precedent in the Subscription Agreement. As the Subscription may or may not proceed, Shareholders and potential investors are advised to exercise caution when dealing in the Shares.

The purpose of this circular is to give you (i) details of the Subscription Agreement and the Subscription, (ii) a letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate, (iii) a letter of recommendation from the Independent Board Committee to the Independent Shareholders in relation to the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate, together with (iv) a notice convening the EGM to consider and, if thought fit, to approve the terms of the Subscription Agreement contemplated thereunder.

— 7 —

LETTER FROM THE BOARD

THE SUBSCRIPTION AGREEMENT

Date

17 June 2011

Parties involved

(i) The Company, as the issuer of the Subscription Shares; and
(ii) IFC, as the subscriber of the Subscription Shares.

IFC

IFC is member of the World Bank Group and a substantial shareholder of the Company, holding approximately 11.12% (799,884,615 Shares) of the issued share capital of the Company as at the Latest Practicable Date. It was established in 1956 to foster sustainable economic growth in developing countries by financing private sector investment, mobilising capital in the international financial markets, and providing advisory services to businesses and governments.

Aggregate Subscription Price

The Subscription Price

The subscription price per share (the “Subscription Price”) is determined in accordance with the following pricing mechanism:

The Subscription Price will be equal to the Relevant Percentage (expressed as a decimal) multiplied by the Closing Price (“Initial Subscription Price”), provided that:

(i) if the Initial Subscription Price is greater than 125% of the Benchmarked Price, then the Subscription Price shall be equal to 125% of the Benchmarked Price;
(ii) if the Initial Subscription Price is less than 75% of the Benchmarked Price (the “Floor Price”), then the Subscription Price shall be equal to the Floor Price; and
(iii) if X divided by Y (i.e. X/Y, the “Effective Subscription Price”) is less than the Net Asset Value Per Share, then the number of the Subscription Shares shall be adjusted downwards such that the Net Asset Value Per Share shall be equal to the Effective Subscription Price;

— 8 —

LETTER FROM THE BOARD

whereas:

“ X ” = the Aggregate Subscription Price equivalent to approximately HK$54.6 million (which shall remain constant in the above calculations); and

“ Y ” = the number of the Subscription Shares calculated in the first paragraph of the section headed “The Subscription Shares”.

The Benchmarked Price of HK$0.174 represents:

(1) a premium of approximately 4.2% to the closing price of HK$0.167 per Share as quoted on the Stock Exchange on the date of the Subscription Agreement;
(2) a premium of approximately 1.2% to the average closing price of HK$0.172 per Share in the last 5 trading days up to and including the date of the Subscription Agreement;
(3) a discount of approximately 1.7% to the average closing price of HK$0.177 per Share in the last 10 trading days up to and including the date of the Subscription Agreement; and
(4) a discount of approximately 5.95% to the average closing price of HK$0.185 per Share in the last 20 trading days up to and including the date of the Subscription Agreement.

The Subscription Price was determined with reference to the prevailing market price of the Shares and was negotiated on an arm’s length basis between the Company and IFC.

The Directors (excluding the independent non-executive Directors who will be advised by the Independent Financial Adviser) consider that the terms of the Subscription are fair and reasonable based on the current market conditions and in the interests of the Company and the Shareholders as a whole.

The Subscription Shares

On the terms and subject to the conditions of the Subscription Agreement, IFC conditionally agrees to subscribe and pay the Aggregate Subscription Price of US$7 million (equivalent to approximately HK$54.6 million) for an aggregate number of fully paid and non-assessable Subscription Shares equal to US$8 million (equivalent to HK$62.4 million) divided by the Subscription Price (subject to adjustment in accordance with the pricing mechanism under the section headed “The Subscription Price”).

Based on the above pricing mechanism under the section headed “The Subscription Price”, the maximum number of the Subscription Shares shall be approximately 355,237,476 Shares representing (i) approximately 4.9% of existing issued share capital of the Company of 7,195,284,615 Shares as at the Latest Practicable Date; and (ii) approximately 4.7% of the Company’s issued share capital of

— 9 —

LETTER FROM THE BOARD

7,550,522,091 Shares as enlarged by the Subscription, which is calculated by reference to the minimum Effective Subscription Price (i.e. X/Y as described in the section headed “The Subscription Price” above) of HK$0.1537 (which is the Net Asset Value Per Share with reference to the Company’s 2010 annual report).

Based on the above pricing mechanism under the section headed “the Subscription Price”, the minimum number of the Subscription Shares shall be approximately 286,896,552 Shares representing (i) approximately 4.0% of existing issued share capital of the Company as at the Latest Practicable Date; and (ii) approximately 3.8% of the Company’s issued share capital of 7,482,181,167 Shares as enlarged by the Subscription, which is calculated by reference to the maximum Subscription Price of HK$0.2175 (which is 125% of the Benchmarked Price as described in the section headed “The Subscription Price” above).

Based on the Benchmarked Price, the number of the initial Subscription Shares under the Subscription will be 358,620,690 Shares, of which it exceeds the maximum number of the Subscription Shares (of approximately 355,237,476 Shares) as stated above. Hence, the maximum number of the initial Subscription Shares (approximately 355,237,476 Shares) shall be issued, representing (i) approximately 4.9% of the existing issued share capital of the Company as at the Latest Practicable Date; and (ii) approximately 4.7% of the Company’s issued share capital of 7,550,522,091 Shares as enlarged by the Subscription, assuming no further new Shares will be issued or repurchased before the completion of the Subscription. The Company will seek the grant of the Specific Mandate to allot and issue the Subscription Shares at the EGM to be convened and held by the Company.

Based on the maximum and minimum number of the Subscription Shares illustrated above, the minimum Subscription Price shall be HK$0.1757 (which is calculated by reference to US$8 million (equivalent to HK$62.4 million) divided by the maximum number of the Subscription Shares of 355,237,476 Shares) and the maximum Subscription price shall be HK$0.2175 (which is calculated by reference to US$8 million (equivalent to HK$62.4 million) divided by the minimum number of the Subscription Shares of 286,896,552 Shares) (however, the Effective Subscription Price payable by IFC is lower than the Subscription Price due to the Aggregate Subscription Price being discounted).

Moreover, the minimum and maximum net price for each Subscription Share will be approximately HK$0.1520 and HK$0.1882 respectively based on the net proceeds of approximately HK$54 million and the maximum and minimum Subscription Shares of approximately 355,237,476 Shares and 286,896,552 Shares respectively.

Ranking of the new Shares

The Subscription Shares will, upon issue, rank pari passu in all respects among themselves and with the then existing Shares including the right to receive all dividends and distributions declared, paid or made on or after the date of completion of the Subscription.

The Company will make an application to the Stock Exchange for the listing of, and permission to deal in, the Subscription Shares in due course.

— 10 —

LETTER FROM THE BOARD

Conditions of the Subscription

The obligations of IFC to subscribe for and pay for the Subscription Shares under the Subscription Agreement are conditional upon, among others:

(i) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Subscription Shares;
(ii) the Company has sent the circular in relation to the Subscription to all the Shareholders;
(iii) the Independent Shareholders or Shareholders (as applicable) have approved the entry into and performance of the Subscription in the EGM in accordance with the requirements of the Listing Rules;
(iv) the Company has delivered to IFC the Schedule in form and substance satisfactory to IFC, and the representations and warranties made by the Company, including the Schedule, and in any schedule, exhibit or certificate delivered by the Company pursuant to the Subscription Agreement, are true and correct on and as of the date of the Subscription and in form and substance satisfactory to IFC;
(v) nothing has occurred which has or may reasonably be expected to have a Material Adverse Effect; and
(vi) the Company has delivered to IFC the Financial Plan in form and substance acceptable to IFC (in its sole discretion) and has provided evidence satisfactory to IFC that the additional equity and long term debt funding mentioned in the Financial Plan have been implemented by the Company.

The Directors consider that the above-mentioned Financial Plan and Schedule delivered to IFC are not price sensitive information and they do not contain any profit forecast of the Company. Moreover, the Directors consider that the Company has fulfilled its obligation under the Rule 2.03(4) of the Listing Rules to treat all the Shareholders fairly and equally in view of the delivery of the Financial Plan and the Schedule to IFC since no price sensitive information has been provided in the Financial Plan and the Schedule.

Lock-up Undertaking

IFC hereby agrees that it will not, for a period from the date of the Subscription Agreement until one (1) year from the date of the Subscription Agreement, without the prior written consent of the Company, dispose of or transfer any of the Subscription Shares.

Termination

— 11 —

LETTER FROM THE BOARD

section headed “Conditions of the Subscription” above cannot be waived) by IFC on or before the Long Stop Date (or such other date as the parties may agree), the Subscription Agreement shall automatically terminate and neither the Company nor IFC shall have any further rights and obligations hereunder save and except any antecedent breach.

The Long Stop Date was agreed by both parties and was negotiated on an arm’s length basis between the Company and IFC, which allows sufficient time to fulfill all the relevant conditions, including but not limited to holding the EGM, as stated in the Subscription Agreement. The Company expects that the Subscription will be completed around September 2011.

Cancellation of the Subscription

IFC may, by written notice to the Company, cancel the right of the Company to request IFC to subscribe for any Subscription Shares if:

(a) at any time, in the reasonable opinion of IFC, a Material Adverse Effect has occurred or there exists any situation which indicates that performance by the Company of its obligations under the Subscription Agreement cannot be expected;
(b) the Company has breached certain of its obligations as set out in the Subscription Agreement and such breach has not been cured within thirty (30) days following receipt by the Company of notice of such breach from IFC; or
(c) in any case, upon 31 December 2011.

Completion of the Subscription

Subject to the terms of the Subscription Agreement and the satisfaction of the conditions of the Subscription, the Company may request IFC to subscribe for, and IFC is obliged to subscribe for all of the Subscription Shares by delivering to IFC, at least ten (10) Business Days prior to the Closing Day, a request in the form set out in the Subscription Agreement. On the Closing Day, IFC shall pay the Aggregate Subscription Price to the account of the Company and the Company shall deliver to IFC the Subscription Shares.

IFC may, at any time before the cancellation of the Subscription, at its option, subscribe for the Subscription Shares by providing seven (7) Business Days’ prior written notice to the Company.

— 12 —

LETTER FROM THE BOARD

REASON FOR THE SUBSCRIPTION AND USE OF PROCEEDS

Before the Subscription, both parties previously entered into another subscription agreement as per Company’s announcement dated 17 April 2009 to invest in the construction and operation of the First Phase Urea Plant, which was financed by IFC through subscription of Shares, issuing warrants and providing loan. Following the completion of the First Phase Urea Plant, the Company intended to develop the Second Phase Urea Plant and IFC also intended to continuously finance such project. According to the positive profit alert announcement published by the Company on 20 July 2011, the Company expects that a profit will be recorded in the unaudited consolidated management accounts of the Group for the six months ended 30 June 2011 due to the commence of the production of the First Phase Urea Plant and the increase of the market prices of urea and other chemical products. The net proceeds from the Subscription will be approximately HK$54 million, which is intended to be used for the development and productivity expansion in the Second Phase Urea Plant. Other than the productivity expansion for the urea product, the Second Phase Urea Plant will adopt an advanced technology (i.e. the MelaminebyDSM[TM] technology) in producing premium-quality melamine with low-energy consumption, thereby melamine will be produced at costs more competitive than the market competitors in the PRC. The Directors expect that the completion and production of the Second Phase Urea Plant will expand the Company’s scale, strengthen its competitiveness and at the same time ensure the stable and rapid growth in the Company’s business in the future. Moreover, the Directors consider that the Subscription will strengthen the capital base and financial position of the Company.

However, the beneficial interests of the Independent Shareholders will be slightly diluted. Such dilution effect is illustrated in the section headed “Effects on Shareholding Structure”.

In view of the reasons above, the Directors (excluding the independent non-executive Directors whose views will be contained in the circular to be despatched) consider the terms of the Subscription Agreement and the Subscription to be fair and reasonable and are in the best interests of the Company and its Shareholders as a whole.

Apart from raising fund by way of the Subscription, the Company has not considered to fund the whole Project by debt financing since the gearing of the Company will be at extremely high level and the interest burden to the Company will be heavy. The Company also has not considered to raise fund by rights issue since the dilution effect will be even higher for those Shareholders do not have sufficient fund. Therefore, the Company considers the Subscription to be fair and reasonable and in the interest of the Shareholders.

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LETTER FROM THE BOARD

EFFECTS ON SHAREHOLDING STRUCTURE

The table below sets out the changes to the shareholding structure of the Company based on the minimum and maximum Subscription Shares as a result of the completion of the Subscription, assuming no other Shares are issued or repurchased between the Latest Practicable Date and the completion of the Subscription:

(i) Based on the minimum Subscription Shares of 286,896,552 are issued as illustrated in the third paragraph of the section headed “The Subscription Shares”:

Shareholders Li Weiruo Yuan Bai Chi Chuan Man Au Vivian Public shareholders IFC Total	Issued share capital as at the Latest Practicable Date (shares) (%) (approximately) 2,924,440,000 40.64 366,464,000 5.09 62,640,000 0.87 31,320,000 0.44 3,010,536,000 41.84 799,884,615 11.12 7,195,284,615 100.00	Enlarged issued share capital following the completion of the Subscription (shares) (%) (approximately) 2,924,440,000 39.08 366,464,000 4.90 62,640,000 0.84 31,320,000 0.42 3,010,536,000 40.24 1,086,781,167 14.52 7,482,181,167 100.00	Enlarged issued share capital following the completion of the Subscription (shares) (%) (approximately) 2,924,440,000 39.08 366,464,000 4.90 62,640,000 0.84 31,320,000 0.42 3,010,536,000 40.24 1,086,781,167 14.52 7,482,181,167 100.00
			100.00

(ii) Based on the maximum Subscription Shares of 355,237,476 are issued as illustrated in the second paragraph of the section headed “The Subscription Shares”:

Shareholders Li Weiruo Yuan Bai Chi Chuan Man Au Vivian Public shareholders IFC Total	Issued share capital as at the the Latest Practicable Date (shares) (%) (approximately) 2,924,440,000 40.64 366,464,000 5.09 62,640,000 0.87 31,320,000 0.44 3,010,536,000 41.84 799,884,615 11.12 7,195,284,615 100.00	Enlarged issued share capital following the completion of the Subscription (shares) (%) (approximately) 2,924,440,000 38.73 366,464,000 4.85 62,640,000 0.83 31,320,000 0.42 3,010,536,000 39.87 1,155,122,091 15.30 7,550,522,091 100.00	Enlarged issued share capital following the completion of the Subscription (shares) (%) (approximately) 2,924,440,000 38.73 366,464,000 4.85 62,640,000 0.83 31,320,000 0.42 3,010,536,000 39.87 1,155,122,091 15.30 7,550,522,091 100.00
			100.00

— 14 —

LETTER FROM THE BOARD

FUND RAISING ACTIVITIES IN THE PAST TWELVE MONTHS

The Company did not conduct any fund raising activities during the past twelve months immediately preceding the Latest Practicable Date.

LISTING RULES IMPLICATIONS

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, save for IFC, no Director or Shareholder has a material interest in the Subscription. Accordingly, apart from IFC, no other Shareholder is required to abstain from voting at the EGM in respect of the ordinary resolution relating to the Subscription Agreement and the Subscription contemplated under the Specific Mandate, and no Director is required to abstain from voting on the board resolution in relation to the Subscription contemplated under the Specific Mandate in the relevant board meeting.

An Independent Board Committee (comprising of independent non-executive Directors only) has been formed to advise the Independent Shareholders as to the fairness and reasonableness of the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate. An Independent Financial Adviser has been appointed to advise the Independent Board Committee and the Independent Shareholders in this regard.

INFORMATION ABOUT THE COMPANY AND THE GROUP

The Company is an investment holding company and the principal activities of the Group consist of research and development, manufacture, marketing and distribution of chemical fertilizers and chemical products in the PRC.

SPECIFIC MANDATE

The Subscription Shares will be allotted and issued pursuant to the Specific Mandate, which will seek approval from the Independent Shareholders at the EGM. Under the general mandate granted by the Shareholders to the Board and the resolution of the Shareholders passed in the annual general meeting held on 5 May 2011, the Company was authorized to allot, issue or otherwise to deal with up to 1,439,056,923 new Shares. As at the Latest Practicable Date, the Company has not issued any new Shares pursuant to such general mandate.

— 15 —

LETTER FROM THE BOARD

THE EGM

A notice convening the EGM to be held at Suite No. 02, 31st Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong on 9 September 2011, at 3:00 p.m. is set out on pages 55 to 57 of this circular.

A form of proxy for use at the EGM is enclosed with this circular. If you are unable to attend the extraordinary general meeting in person, please complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the share registrar of Ko Yo Chemical (Group) Limited in Hong Kong, Union Registrars Limited at 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong, together with any power of attorney or other authority, under which it is signed, or a notarially certified copy of that power or authority, not less than 48 hours before the time for holding the meeting or any adjournment thereof. The completion and return of the form of proxy will not preclude you from attending and voting at the meeting in person at EGM or any adjourned meetings should you so desire.

In accordance with the Rule 13.39(4) of Listing Rules, all votes of the Independent Shareholders to be taken at the EGM must be taken by poll, and an announcement of the results of which will be published on the date of the EGM or the business day following the EGM as prescribed under Rule 13.39(5) of the Listing Rules.

4. RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on page 18 of this circular and the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in connection with the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate, and the principal factors and reasons considered by them in arriving at such advice set out on pages 44 to 46 of this circular.

The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate is fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolution approving the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate at the EGM.

— 16 —

LETTER FROM THE BOARD

In light of the above, the Directors are of the opinion that the Subscription referred to above is in the best interests of the Company and the Shareholders as a whole and accordingly recommend the Independent Shareholders to vote in favour of the ordinary resolution in relation to the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate to be proposed at the EGM.

Yours faithfully, By Order of the Board of Ko Yo Chemical (Group) Limited Li Weiruo Chairman

— 17 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 0827)

17 August 2011

To the Independent Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE

We refer to the circular of the Company dated 17 August 2011 (the “Circular”) of which this letter forms part. Unless the context required otherwise, capitalized terms used herein shall have the same meanings as defined in the Circular.

We have been appointed to form the Independent Board Committee to consider and advise the Independent Shareholders as to whether, in our opinion, the terms of the Subscription Agreement, details of which are set out in the letter from the Board contained in the Circular, are fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole.

Having considered the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate and the advice of the Independent Financial Adviser in relation thereto as set out on pages 19 to 47 of the Circular, we are of the opinion that the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Independent Shareholders and the Company as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the terms of the Subscription Agreement and the Subscription contemplated under the Specific Mandate.

Yours faithfully,

For and on behalf of the Independent Board Committee

Mr. Hu Xiaoping Mr. Woo Che-wor, Alex Mr Qian Laizhong

— 18 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter of advice to the Independent Board Committee and the Independent Shareholders from the Independent Financial Adviser which has been prepared for inclusion in this circular.

==> picture [37 x 38] intentionally omitted <==

Suites 2301-2305 & 2313, COSCO Tower 183 Queen’s Road Central Hong Kong

17 August 2011

To the Independent Board Committee and the Independent Shareholders of Ko Yo Chemical (Group) Limited

Dear Sirs,

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE

INTRODUCTION

We refer to our engagement to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Subscription, particulars of which are set out in the section headed “Letter from the Board” (the “ Letter from the Board ”) of this circular to the Shareholders dated 17 August 2011 (the “ Circular ”), of which this letter forms part. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as given to them under the definitions section of the Circular.

As set out in the Letter from the Board, on 17 June 2011 (after trading hours), IFC entered into the Subscription Agreement with the Company, pursuant to which IFC conditionally agreed to subscribe and pay the Aggregate Subscription Price of US$7 million (approximately HK$54.6 million) for an aggregate number of fully paid and non-assessable Subscription Shares equal to US$8 million (HK$62.4 million) divided by the Subscription Price (subject to adjustment in accordance with the relevant pricing mechanism).

As at the Latest Practicable Date, IFC is a substantial shareholder of the Company holding approximately 11.12% of the issued share capital of the Company. Therefore, IFC is a connected person of the Company and, accordingly, the Subscription constitutes a connected transaction of the Company and is subject to the reporting, announcement and the Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

— 19 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Circular and have assumed that all information and representations made or referred to in the Circular were true at the time they were made and continue to be true as at the date of the Circular. We have also relied on our discussion with the management of the Company regarding the Group and the terms of the Subscription, including the information and representations contained in the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors and the Company in the Circular were reasonably made after due enquiry. We consider that we have reviewed sufficient information to reach an informed view, to justify our reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Group, the Project, IFC and their respective associates nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion regarding the terms of the Subscription, we have considered the following principal factors and reasons:

Background of and reasons for the Subscription

We summarise below the shareholding structure of the Company before and after completion of the Subscription:

• Existing

Li Weiruo	Li Weiruo	Li Weiruo
40.64%		6.40%

	First Phase Urea Plant Annual capacity urea 450,000 tonnes ammonia 400,000

— 20 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Following completion of the Subscription (Based on the maximum number of Subscription Shares of 355,237,476) :

==> picture [438 x 98] intentionally omitted <==

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

Li Weiruo IFC Other Directors Public
38.73% 15.30% 6.10% 39.87%
the Company
----- End of picture text -----

		the Company	the Company	the Company	the Company

	First Phase Urea Plant Annual capacity urea 450,000 tonnes ammonia 400,000				Second Phase Urea Plant Annual capacity urea 300,000 tonnes melamine 40,000

(i) Reasons for the Subscription

The Group is principally engaged in research and development, manufacture, marketing and distribution of chemical fertilizers and chemical products in the PRC.

(1) the then subscription of new Shares raising net proceeds of approximately HK$76 million; and
(2) the then advancement of a loan of a principal amount of US$20 million (approximately HK$156 million), the repayment of which starts from 15 June 2011 and ends on 15 December 2017.

In addition, IFC was in 2009 issued the warrants at nil consideration carrying the subscription rights at the initial exercise price of HK$0.156 per new Share, thereby was in a position to raise cash proceeds of up to HK$78 million for the Company upon conversion in full within 5 years period starting from the then closing day. Upon our review of the Company’s announcements and our discussion with the Company, we note that IFC so far converted 149,884,615 units of warrants up to the date of the Subscription Agreement, raising cash proceeds of roughly HK$23 million for the benefit of the Group.

— 21 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Following the completion of the First Phase Urea Plant, the Company intended to develop the Second Phase Urea Plant and IFC also intended to continuously finance such project. In assessing whether or not it is justifiable to raise net proceeds of approximately HK$54 million from the Subscription for the development and productivity expansion in the Second Phase Urea Plant, we have the following analysis (after discussions with the Company):

(1) the nature of production of additional tonnes of urea and melamine proposed to be carried out by the Second Phase Urea Plant is in line with the Group’s core business activity, and hence the Company and its Shareholders have already been exposing to, and familiarising with, the risks and rewards of the business relating to such chemical products/ fertilizers;
(2) notwithstanding that the Company was loss-making for the latest two financial years ended 31 December 2010, the financial result of the First Phase Urea Plant itself has demonstrated a profitable track record for the latest financial year ended 31 December 2010. Further, according to the positive profit alert announcement published by the Company on 20 July 2011, as benefited by the commencement in production of the First Phase Urea Plant since October 2010, and the increase in market prices of urea and other chemical products, the Directors expect that a profit will be recorded in the unaudited consolidated management accounts of the Group for the six months ended 30 June 2011 as compared to an unaudited loss of the corresponding period of last year. The Group targets at leveraging on such kind of successful operation to expand with an additional estimated annual capacity of 300,000 tonnes urea and 40,000 tonnes melamine to reach 750,000 tonnes of urea, 400,000 tonnes of ammonia and 40,000 tonnes melamine by way of developing the Second Phase Urea Plant;
(3) in light of the expected double-digit internal rate of return of the Project, coupled with the industry overview of the urea and melamine market in the PRC (representing the target sales market of the Second Phase Urea Plant) to be elaborated in next section, completion and production of the Second Phase Urea Plant may represent a natural step forward for the Group to capture the stable and rapid growth potential in its chemical products / fertilizers business in the future; and
(4) IFC has a concrete track record to fund the First Phase Urea Plant of the Group (so far the funded amount was HK$255 million up to the date of the Subscription Agreement), and the proposed further funding from IFC by way of the Subscription (together with lock-up undertaking until one year from the date of the Subscription Agreement not to dispose of or transfer any of the Subscription Shares) may represent a vote of confidence of this member of the World Bank Group for the Second Phase Urea Plant and the Project as a whole.

Based on the foregoing, we consider it is commercially sensible for the Company to fund the Second Phase Urea Plant by way of the Subscription, especially after taking into further account of our ensuing analysis on the Subscription Price level and the shareholding dilution extent.

— 22 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(ii) Industry overview of the urea and melamine market in the PRC
Urea

According to sinofi.com, from January 2011 to April 2011,

(1) the demand for urea in the PRC grew from approximately 4,066,500 tonnes to 4,857,100 tonnes, representing a growth of approximately 19.4% during the period;
(2) the demand for urea export from the PRC decreased from approximately 346,100 tonnes to 42,100 tonnes, representing a reduction of approximately 87.8% during the period; and
(3) the total production of urea in the PRC (being the sum of (1) and (2) above) increased from approximately 4,412,600 tonnes to 4,899,200 tonnes, representing a growth of approximately 11.0% during the period.

According to sinofi.com, from January 2010 to December 2010,

(1) the demand for urea in the PRC decreased from approximately 4,660,900 tonnes to 3,029,300 tonnes, representing a reduction of approximately 35.0% during the year;
(2) the demand for urea export from the PRC increased from approximately 402,400 tonnes to 1,506,500 tonnes, representing a growth of approximately 274.4% during the year; and
(3) the total production of urea in the PRC (being the sum of (1) and (2) above) decreased from approximately 5,063,300 tonnes to 4,535,800 tonnes, representing a reduction of approximately 10.4% during the year.

According to an article namely 《2009-2013年中國尿素行業深度調查及投資決策報告》 published on 中商情報網 (www.askci.com) in October 2009, the total production capacity of urea in the PRC will reach 70,000,000 tonnes in 2011. Upon comparison, we note that there is huge gap between this expected total production capacity of urea in the PRC in 2011 and the actual total production volume of urea in the PRC in 2010. We have discussed with the Company and understand therefrom that the over-production-capacity situation

(1) is common in this urea industry;
(2) is not used to cause the manufacturers to over-produce urea into the market, because the actual total production volume of the urea in the PRC is instead driven by
the quantity level of demand for urea (which in turn is subject to seasonal factor driven by agricultural users),
the level of costs of production including coal and electricity utility (which in turn is subject to different quantity of supply quota and different degree of accessibility amongst different provinces), and

— 23 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the commodity price level of urea in the PRC market and international market (which in turn is subject to (amongst others) quantity level of demand of urea’s downstream products).

In other words, if the quantity level of demand for urea is weak, and/or if the level of costs of production including coal and electricity utility is not affordable after balancing with the market price level of urea, then the manufacturers in the PRC is used to refrain themselves from active urea production so as to avoid loss (due to marginal cost exceeding marginal benefit) (despite the over-production-capacity situation in the PRC).

In practice, it is observed that the lack of accessibility to (a) affordable level of coal cost and/or (b) adequate quantity of electricity utility has refrained a number of manufacturers from active urea production (despite the over-production-capacity situation in the PRC). According to an article namely 《煤炭供應吃緊化肥企業難敵高煤價》 published by www.cnfia.com.cn (中國氮肥網) in May 2011, the utilization rate of (1) the small sized (representing less than 150,000 tonnes of ammonia) and (2) the mid-to-large sized nitrogen fertilizer companies (to which the First Phase Urea Plant belong) in the PRC was merely about (1) 30% and (2) 70% on average since January 2011, mainly due to the continual increase in coal price which is a key production cost. The increase in such key production cost has discouraged a number of manufacturers from active urea production, thereby resulting in a reduction in total production of urea in the PRC market. Such negative impact is more severe among the small-sized manufacturers than the mid- to large-sized counterparts, which can be evidenced by the much lower utilization rate of 30% among the small-sized manufacturers (than 70% among the mid- to large-sized counterparts). This is because the mid- to large-sized manufacturers (including the First Phase Urea Plant as operated by the Company) are able to entitle to benefits of economies of scale, despite the over-production-capacity situation in the PRC.

In addition, we have discussed with the Company and understand therefrom that the Project can benefit the Company by way of further expanding the benefits of economies of scale arising from installation of additional annual capacity 300,000 tonnes of urea in the Second Phase Urea Plant. To be specific, it is expected that the unit cost of production of urea of the Company can be reduced by 3% per tonne, even after taking into account additional depreciation expenses and financing expenses arising from such new capital expenditure. Further, at present there is surplus output of about 210,000 tonnes of carbon dioxide as a residual by-product arising from the annual production of 400,000 tonnes of ammonia in the First Phase Urea Plant. Such carbon dioxide is wasted given the constraint of the existing annual capacity of 450,000 tonnes of urea which is insufficient to consume such surplus as one of the raw materials during the course of the production of urea in the First Phase Urea Plant. With the proposed installation of additional annual capacity 300,000 tonnes of urea in the Second Phase Urea Plant, such surplus output of carbon dioxide can be fully consumed and not wasted by the Company. Based on the two benefits as aforesaid, and based on the resultant lessened competition from market suppliers of urea as analysed above, we consider that there is a commercial argument for the Company to develop the Second Phase Urea Plant, which is intended to be funded partially out of the net proceeds from the Subscription.

— 24 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Urea Price Trend

==> picture [408 x 213] intentionally omitted <==

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

RMB/tonnes
2,300
2,200
2,100
2,000
1,900
1,800
1,700
1,600
1,500
National average South of China Northeast of China
ex-factory price
2010.1 2010.2 2010.3 2010.4 2010.5 2010.6 2010.7 2010.8 2010.9 2010.10 2010.11 2010.12 2011.1 2011.2 2011.3 2011.4 2011.5 2011.6
----- End of picture text -----

Source: www.sinofi.com

According to sinofi.com, the national average ex-factory price of urea increased from approximately RMB1,800/tonnes in January 2010 to approximately RMB2,150/tonnes in June 2011, representing a growth of approximately 19.4% during the period (or roughly 12.5% on annualised basis). In view of the generally upward trend of the unit price of urea from January 2010 to June 2011, and taking into account the double-digit annualised growth rate in such unit price during the same period, we consider that there is a commercial argument for the Company to develop the Second Phase Urea Plant, which is intended to be funded partially out of the net proceeds from the Subscription.

• Melamine

Melamine is the down-stream product of urea and is one of the two main products of the Second Phase Urea Plant. Applications of melamine are set out in the chart below:

==> picture [259 x 152] intentionally omitted <==

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

others
6% paint
adhesive
12%
5%
molding
12%
10%
textile &
papermaking 55%
layer plate
----- End of picture text -----

— 25 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

According to an article namely 《纖維和泡沫是三聚氰胺行業未來的出路》 published by ChemNet (中國化工網) in May 2011, the production of melamine in the PRC has been rapidly growing due to the substantial demand of melamine from the downstream industries in the PRC and the international market. In January 2011, there were 42 major suppliers of melamine in the PRC and the total production capacity of melamine amounted to approximately 1.2 million tonnes. The production volume of melamine amounted to approximately 650,000 tonnes in 2010.

Upon comparison, we note that there is a sizeable gap between the total production capacity of melamine in the PRC in 2011 and the actual total production volume of melamine in the PRC in 2010. We have discussed with the Company and understand therefrom that the over-production-capacity situation

(1) is common in this melamine industry;
(2) is not expected to cause the manufacturers to over-produce melamine into the market, because the actual total production volume of the melamine in the PRC is instead driven by
the quantity level of demand for melamine (which in turn is subject to seasonal factor driven by agricultural users),
the level of costs of production including coal and electricity utility (which in turn is subject to different degree of accessibility amongst different provinces), and
the commodity price level of melamine in the PRC market and international market (which in turn is subject to (amongst others) quantity level of demand of melamine’s downstream products).

In other words, if the quantity level of demand for melamine is weak, and/or if the level of costs of production including coal and electricity utility is not affordable after balancing with the market price level of melamine, then the manufacturers in the PRC is used to refrain themselves from active melamine production so as to avoid loss (due to marginal cost exceeding marginal benefit) (despite the over-production-capacity situation in the PRC).

On the other hand, if the quantity level of demand for melamine is stronger than urea, and/or if the level of costs of production including coal and electricity utility is more affordable (than urea) after balancing with the market price level of melamine, then the Second Phase Urea Plant can benefit from the flexibility to manufacture and sell more melamine (out of urea) to capitalise on the then favourable market situation of melamine.

According to the article namely《我國三聚氰胺行業現狀及發展趨勢》published by www.sinofi.com in June 2011, the actual production volume of melamine in the PRC increased from 130,000 tonnes in 2001 to 650,000 tonnes in 2010, whereas the estimated production volume of melamine will exceed 750,000 tonnes in 2011. The growth in the estimated production volume of melamine will be over 20% per annum from year to year, which is much higher than the growth of 5% in the international market.

— 26 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The actual export volume of melamine from the PRC increased from 30,000 tonnes in 2000 to 134,600 tonnes in 2010, the latter of which represents an increase of approximately 34.0% as compared to that in 2009. The demand for melamine in the PRC has been increasing at a rate of 10%-15% per annum from year to year. The demand for melamine in the PRC amounted to 220,000 tonnes, 300,000 tonnes and 450,000 tonnes in 2004, 2007 and 2010 respectively.

As shown from above the growing demand for melamine in spite of the over-production-capacity situation in the PRC, we consider that it is a commercial decision of the Company to develop the Second Phase Urea Plant.

According to an article headed《解决化工行業產能過剩的關鍵》published on 中國化工報 in August 2009, the over-production capacity situation of the fertiliser industry in the PRC, including the urea and melamine industry, is both (1) time-specific in nature (due to a wave of over-construction of new factories in response to a period of robust world market demand of fertiliser products during the booming years of 2003 to 2007, which capacity has now turned out to be excessive after the financial crisis in 2008 because the world market demand has not yet recovered back to its prior robust level); and (2) structural in nature (relating to unaffordable costs of production (including raw materials and utility) which discourage a number of manufacturers from active production, weak competitiveness of end products, low technology/innovation level, and high wastage due to lack of economies of scale of production for small manufacturers which represent the majority portion of market participants in the PRC).

RMB/tonnes

==> picture [426 x 201] intentionally omitted <==

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

Melamine Price Trend
12,800
12,000
11,200
10,400
9,600
8,800
8,000
2010.1 2010.2 2010.4 2010.6 2010.8 2010.9 2010.11 2011.1 2011.3 2011.4 2011.6
----- End of picture text -----

Source: www.sinofi.com

According to sinofi.com, the price of melamine increased from approximately RMB8,800/tonnes in January 2010 to approximately RMB10,400/tonnes in June 2011, representing a growth of approximately 18.2% during the period (or roughly 11.8% on annualised basis). In view of the generally upward trend of the price of melamine from January 2010 to June 2011, and taking into account the double-digit annualised growth rate in such unit price during the same period, we consider that there is a commercial argument for the Company to develop the Second Phase Urea Plant, which is intended to be funded partially out of the net proceeds from the Subscription.

— 27 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As advised by the Directors, the Second Phase Urea Plant will adopt an advanced technology (i.e. MelaminebyDSM�) in producing premium-quality melamine with low-energy consumption. MelaminebyDSM� technology is developed by DSM Melamine, which is the world’s largest producer of melamine with 40 years of experience. According to www.dsm.com, DSM

is headquartered in the Netherlands;
is listed on Euronext Amsterdam;
has locations on five continents (including China);
had annual net sales of about C= 8 billion; and
employs some 22,700 people worldwide.

In assessing whether MelaminebyDSM� technology is a proven technology, we have reviewed an article dated November 2000 as published in www.chemicalonline.com (being an internet information provider based in the United States for the worldwide chemical process industries). According to such article headed “DSM technology makes small melamine units competitive”, the process is claimed to enable the production of melamine at costs competitive with those achieved by much larger gas-phase facilities that enjoy economies of scale.

Further, according to Wikipedia (being the free encyclopedia), major manufacturers and licensors of melamine such as DSM, BASF, and Eurotecnica have developed some proprietary methods.

According to the feasibility study of the Second Phase Urea Plant, and as further updated by the Directors, the Company has approached the relevant owner of equipment MelaminebyDSM� technology for the proposed procurement of production plant and equipment possessing such advanced technology and the equipment possessing the advanced technology is available for sale to the Company. With the adoption of MelaminebyDSM� technology, the Second Phase Urea Plant is expected to reduce the cost of producing melamine more competitive than market competitors in the PRC because of lower usage of raw materials and utilities. We consider there is a supporting view that the relevant DSM technology can enable the production of melamine at costs competitive with those achieved by conventional gas-phase route. Based on such cost competitiveness, and given that melamine is the down-stream product of urea which by itself has been the core product of the First Phase Urea Plant, we concur with the Directors’ view that it is commercially sensible to develop the Second Phase Urea Plant (which Project has an expected double-digit internal rate of return) in spite of the over-production-capacity of melamine in the PRC.

(iii) Other funding alternatives

Other than raising fund by way of the Subscription, we understand that the Company has not considered to fund the whole Project by debt financing since the gearing of the Company will be at extremely high level and the interest burden to the Company will be heavy. It is unlikely to get all the funding through bank borrowings for the development of the Second Phase Urea Plant as it is the usual policy of banks to impose a “30% minimum equity capital requirement” on project financing.

— 28 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Therefore, the Company resorts to utilise a mixture of bank borrowing, equity financing and funding through internal resources to meet its funding requirement for the Second Phase Urea Plant. We further understand that the Company also has not considered to raise fund by rights issue or open offer since the dilution effect will be even higher for those Shareholders who do not have sufficient fund. Nor has the Company sought to raise fund by way of placing shares to independent third parties immediately prior to the date of the Subscription Agreement as the stock market sentiment was generally poor in June 2011. However, it does not rule out the possibility of the Company to raise equity financing subject to future market conditions. Based on the foregoing, we concur with the Directors’ view that the Subscription is fair and reasonable and in the interest of the Shareholders in light of other alternatives available.

2. Terms of the Subscription

(i) Subscription Price

The Subscription Price will be equal to the Relevant Percentage (expressed as a decimal) multiplied by the Closing Price (“Initial Subscription Price”), provided that:

(i) if the Initial Subscription Price is greater than 125% of the Benchmarked Price (the “Capped Price”), then the Subscription Price shall be equal to 125% of the Benchmarked Price (which is HK$0.2175);
(ii) if the Initial Subscription Price is less than 75% of the Benchmarked Price (the “Floor Price”), then the Subscription Price shall be equal to the Floor Price (which is HK$0.1305); and
(iii) if X divided by Y (i.e. X/Y, the “Effective Subscription Price”) is less than the Net Asset Value Per Share (of HK$0.1537 based on the Company’s 2010 annual report), then the number of the Subscription Shares shall be adjusted downwards such that the Net Asset Value Per Share shall be equal to the Effective Subscription Price;

whereas:

“X” = the Aggregate Subscription Price equivalent to approximately HK$54.6 million (which shall remain constant in the above calculations); and

“Y” = the number of the Subscription Shares calculated in the first paragraph of the section headed “The Subscription Shares” as set out in the Letter from the Board (which is

(1) 478,160,919 in case of the Floor Price of HK$0.1305; and
(2) 286,896,552 in case of the Capped Price of HK$0.2175).

— 29 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the pricing mechanism and the conditions of the issue of the Subscription Shares as set out in the Subscription Agreement, the minimum and maximum number of the Subscription Shares shall be approximately 286,896,552 and 355,237,476 Shares respectively, and the minimum and maximum Subscription Price shall be HK$0.1757 (which is calculated by reference to US$8 million (equivalent to HK$62.4 million) divided by the maximum number of the Subscription Shares of 355,237,476 Shares) and HK$0.2175 (which is calculated by reference to US$8 million (equivalent to HK$62.4 million) divided by the minimum number of the Subscription Shares of 286,896,552 Shares) respectively. However, the Effective Subscription Price payable by IFC is lower than the Subscription Price due to the Aggregate Subscription Price being discounted.

Our analysis in this letter will be focusing on the Effective Subscription Price (instead of the Subscription Price) because the Effective Subscription Price is the exact dollar amount actually receivable by the Company (before deducting expenses). We consider that it is in the interests of the Company (as an issuer) to safeguard the Effective Subscription Price on the Closing Day to be not less than the level of Net Asset Value Per Share. The minimum Effective Subscription Price is derived to be HK$0.1537 based on the Company’s 2010 annual report, which is by itself already higher than the Floor Price (which in turn is 75% of the Benchmarked Price).

On the other extreme, the maximum Effective Subscription Price is derived to be HK$0.1903. Taking into sole account that any upside potential on top of this pre-determined level is forgone, we do not consider such ceiling mechanism to be fair and reasonable to the Company as an issuer. However, as IFC and the Company were basing on the latest market Share price level prevailing on 17 June 2011 to sign the Subscription Agreement, it is understandable that the overall pricing mechanism serves to set up objectively a pre-determined range of the Effective Subscription Price on the Closing Day with an equal buffer for each of upper and lower range (of 25%) over the market Share price level prevailing on the date of the Subscription Agreement.

— 30 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For the purpose of comparing the Effective Subscription Price with the market price of the Shares, we plot the closing price level of the Shares traded on the Stock Exchange from 17 June 2010 (being 250th day preceding the date of the Subscription Agreement) to 17 June 2011 (the “Last Trading Day”) (the “Review Period”) as follows:

Share Price of the Company

==> picture [396 x 248] intentionally omitted <==

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

0.28
0.25
0.23 Last Trading Day
0.20 HK$0.1903 = maximum Effective Subscription Price
0.18
0.15
HK$0.1537 = minimum Effective Subscription Price
0.13
0.10
0.08
0.05
0.03
0.00
HK$(per Share)
17/6/2010 1/7/2010 15/7/2010 29/7/2010 12/8/2010 26/8/2010 9/9/2010 23/9/2010 7/10/2010 21/10/2010 4/11/2010 18/11/2010 2/12/2010 16/12/2010 30/12/2010 13/1/2011 27/1/2011 10/2/2011 24/2/2011 10/3/2011 24/3/2011 7/4/2011 21/4/2011 5/5/2011 19/5/2011 2/6/2011 16/6/2011
----- End of picture text -----

Source: www.hkex.com.hk

We note from the above graph that Shares were traded mostly within the range of roughly HK$0.14 to HK$0.23 per Share. No suspension of Shares ever took place during the Review Period. The Company did not conduct any fund raising activities during the past twelve months immediately preceding the date of Subscription Agreement.

During the Review Period, the lowest closing price was HK$0.130 per Share recorded on 3 August 2010 and the highest closing price was HK$0.249 per Share recorded on 26 November 2010. We consider that such significant increase in closing price per Share was

(a) incidental to, and may represent market speculation arising from, the publication by the Company around the same time period of:-
(1) a profit warning announcement dated 30 July 2010 due to the decrease of the market prices of urea and other chemical products under the impact of the global financial crisis and the drought in south western part of China;
(2) an “unusual increase in the price and trading volume” announcement dated 6 August 2010 denying the contents of an article in the “West China City Daily” that full production of the First Phase Urea Plant will realise certain amounts of sales revenue and profit to the Group;

— 31 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(3) a voluntary announcement dated 15 August 2010 that the First Phase Urea Plant has produced products of ammonia and urea on 14 August 2010; and
(4) an announcement dated 23 November 2010 on the grant of 12,000,000 Share options to three Directors;
(b) generally in line with the pattern of increase of market unit price of urea in the PRC around the same time period.

The minimum Effective Subscription Price of HK$0.1537 represents a premium of approximately 18.2% over the said lowest closing price per Share (and a discount of approximately 38.3% to the said highest closing price per Share) during the Review Period. On the other extreme, the maximum Effective Subscription Price of HK$0.1903 represents a premium of approximately 46.4% over the said lowest closing price per Share (and a discount of approximately 23.5% to the said highest closing price per Share) during the Review Period. For further comparison purpose under a series of time spectrum, we summarise the premium/(discount) of the Effective Subscription Price over/(to) closing market prices per Share and net asset value per Share below:

			Effective Subscription	Effective Subscription	Price
			minimum	maximum
			HK$0.1537	HK$0.1903
			Premium/(Discount)
		(Closing) price	over/(to) (closing)
		per Share	price per Share
(i)	On the Last Trading Day	HK$0.167	(8.0)%		14.0%
(ii)	Average for the last five trading days up to	HK$0.172	(10.6)%		10.6%
	the Last Trading Day
(iii)	Average for the last 10 trading days up to the	HK$0.177	(13.2)%		7.5%
	Last Trading Day
(iv)	Average for the last 30 trading days up to the	HK$0.192	(19.9)%		(0.9)%
	Last Trading Day
(v)	Average for the last 90 trading days up to the	HK$0.199	(22.8)%		(4.4)%
	Last Trading Day
(vi)	Average for the last 180 trading days up to the	HK$0.197	(22.0)%		(3.4)%
	Last Trading Day
(vii)	Average for the last 250 trading days up to the	HK$0.183	(16.0)%		4.0%
	Last Trading Day
(viii)	On the Latest Practicable Date	HK$0.161	(4.5)%		18.2%
(ix)	Net asset value per Share as at 31 December	HK$0.1537	0%		23.8%
	2010 (as calculated by the net assets of
	RMB894,977,000 and the then number of
	Shares in issue of 7,045,400,000)

As illustrated in the above table, the Effective Subscription Price at worst represents a discount of approximately 22.8% to the (average) closing price per Share under a series of time spectrum.

— 32 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

• Industry Comparables

In order to assess the Effective Subscription Price with respect to industry peers’ pricing level, we have identified (to our best knowledge) a total of five companies (the “Industry Comparables”) listed on the Stock Exchange which are engaged in the business of fertilizers based on a list of companies as generated by infocast, details of which are set out below:

			Market	Net profit
	Stock	Principal	capitalisation	attributable to		Net asset
Company	code	activities	(HK$)1	shareholders2	P/E	value2	P/B
					(3) =		(5) =
			(1)	(2)	(1) / (2)	(4)	(1) / (4)
China	3983	Manufacture	28,351,500,288	1,422,094,850	19.9	12,785,026,980	2.2
BlueChemical		and sale of
Ltd. - H Shares		mineral
		fertilisers
		(mainly urea)
		and chemical
		products
		(mainly
		methanol),
		manufacture
		and sale of
		phosphate
		fertilisers
Sinofert	297	Production,	23,804,006,400	648,210,310	36.7	15,251,159,440	1.6
Holdings		import and
Limited		export,
		distribution and
		retail of
		fertilizer raw
		materials and
		finished
		products, and
		technical
		research and
		development
		and services
		relating to the
		fertilizer
		business and
		products
China XLX	1866	Manufacturing,	2,220,000,000	174,930,910	12.7	1,923,282,900	1.2
Fertiliser Ltd.		sales and
		trading of urea,
		compound
		fertiliser,
		methanol,
		liquid ammonia
		and ammonia
		solution
Century	509	Production and	644,725,824	72,669,000	8.9	1,254,403,000	0.5
Sunshine Group		sale of
Holdings		agriculture-related
Limited		products, raw
		materials and
		magnesium-related
		products

— 33 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

			Market	Net profit
	Stock	Principal	capitalisation	attributable to		Net asset
Company	code	activities	(HK$)1	shareholders2	P/E	value2	P/B
					(3) =		(5) =
			(1)	(2)	(1) / (2)	(4)	(1) / (4)
China Agrotech	1073	Trading of	370,325,024	29,793,000	12.4	1,448,696,000	0.3
Holdings		fertilizers,
Limited		pesticides, other
		non-agricultural
		and
		non-agricultural
		resources
		products;
		manufacturing
		and selling of
		plant growth
		regulatory
		products,
		pesticides and
		fertilizers;
		provision of
		plant protection
		technical
		services
				*Median =*	*12.7*		*1.2*
				*Mean =*	*18.1*		*1.2*
				*Maximum =*	*36.7*		*2.2*
				*Minimum =*	*8.9*		*0.3*
The Company	827	Research and	1,105,915,2453	(30,982,050)	N/A	1,082,922,170	1.03
		development,	1,369,262,6624				1.34
		manufacture,	1,201,612,5315				1.15
		marketing and
		distribution of
		chemical
		fertilizers and
		chemical
		products in the
		PRC

Source: Bloomberg and www.hkex.com.hk

Note:

Based on the latest closing share price as published by the Last Trading Day
Based on the latest financial data (net profit/ net asset value) as published in the respective annual/ interim reports by the Last Trading Day
Based on the minimum Effective Subscription Price of HK$0.1537 and the number of Shares in issue of 7,195,284,615 as at the date of the Subscription Agreement
Based on the maximum Effective Subscription Price of HK$0.1903 and the number of Shares in issue of 7,195,284,615 as at the date of the Subscription Agreement
Based on the closing share price per Share of HK$0.167 and the number of Shares in issue of 7,195,284,615 both as at the date of the Subscription Agreement

— 34 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Upon comparison, the price/book multiple represented by the Effective Subscription Price ranging from approximately 1.0 times to 1.3 times is comparable to the median of the Industry Comparables of about 1.2 times. However, as the Company was loss-making for the latest financial year ended 31 December 2010, it would not be applicable for us to assess the Subscription Price by means of the price/earnings multiple approach. Based on the foregoing, we consider that the Effective Subscription Price is fair and reasonable so far as the Independent Shareholders are concerned.

• Placing Comparables

In order to further assess the Effective Subscription Price, we have identified four companies listed on the main board of the Stock Exchange (the “Placing Comparables”) which announced to place new shares since 1 June 2011 up to the Last Trading Day and which market capitalisation was not excessively larger or lower than that (being roughly 150% or 50%) of the Company, based on published announcements on the website of the Stock Exchange, and details of which are set out below:

						(Discount)/
						premium of
						placing/
					subscription price
						(to)/over the
					(Discount)/	average closing
					premium of	price for the last
					placing/	five consecutive
					subscription price	trading days
					(to)/over the	up to and
					closing price on	including the
			Market		the date of the	date of the
			Capitalisation	Placing/	respective	respective
			on the Last	subscription	placing/	placing/
Date of		Stock	Trading Day	price per share	subscription	subscription
announcement	Company name	code	(HK$ million)	(HK$)	agreement	agreement
15 June 2011	Luodong General Nice	988	1,863.0	1.04	(1.0)%	0.6%
	Resources (China)
	Holdings Limited
9 June 2011	China Vision Media	1060	763.5	0.4	6.7%	5.3%
	Group Limited
9 June 2011	The Hong Kong	145	726.5	0.16	(12.6)%	(15.8)%
	Building and Loan
	Agency Limited
7 June 2011	Celestial Asia	1049	730.0	0.51	(7.3)%	(1.5)%
	Securities Holdings
	Limited
				*Median*	(4.1)%	(0.5)%
				*Mean*	(3.5)%	(2.9)%
				*Highest*	6.7%	5.3%
				*Lowest*	(12.6)%	(15.8)%
The Company			1,201.6	0.15371	(8.0)%1	(10.6)%1
				0.19032	14.0%2	10.6%2

— 35 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Note:

Based on the minimum Effective Subscription Price of HK$0.1537
Based on the maximum Effective Subscription Price of HK$0.1903

Independent Shareholders should note that the industry nature, market capitalisation and financial position of the Placing Comparables are different from those of the Company. Further, the size of and the use of proceeds raised by the Placing Comparables are different from those of the Subscription. However, as the placing/subscription of the Placing Comparables took place shortly (about two weeks) up to the Last Trading Day, the Placing Comparables were subject to the market conditions/sentiments similar to those of the Subscription. Meanwhile, the market capitalisations of the Placing Comparables were not excessively larger or lower than that of the Company. Based on the foregoing, we consider that the Placing Comparables are fair and representative samples for reference purpose only. Upon comparison with the Placing Comparables for reference purpose only:-

(1) the discount represented by the minimum Effective Subscription Price of approximately 8.0% is deeper than the median of the Placing Comparables of approximately 4.1% based on their respective closing price on the date of the respective placing/subscription agreement, but is still within the range of the Placing Comparables from a discount of approximately 12.6% to a premium of approximately 6.7%;
(2) the discount represented by the minimum Effective Subscription Price of approximately 10.6% is deeper than the median of the Placing Comparables of approximately 0.5% based on their respective average closing price for the last five consecutive trading days up to and including the date of the respective placing/subscription agreement, but is still within the range of the Placing Comparables from a discount of approximately 15.8% to a premium of approximately 5.3%; and
(3) on the other extreme, the maximum Effective Subscription Price (of HK$0.1903) represents a respective premium of approximately 14.0% and 10.6% over (i) their respective closing price on the date of the respective placing/subscription agreement and (ii) their respective average closing price for the last five consecutive trading days up to and including the date of the respective placing/subscription agreement,

we consider that the Effective Subscription Price is acceptable, especially after taking into further account that:

(4) otherwise in the case of a placing of securities for cash consideration, the issuer may not issue any securities pursuant to a general mandate given under the Listing Rule 13.36 (2)(b) if the relevant price represents a discount of 20% or more to the benchmarked price of the securities, such benchmarked price being the higher of:
(a) the closing price on the date of the relevant placing agreement or other agreement involving the proposed issue of securities under the general mandate; and

— 36 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) the average closing price in the 5 trading days immediately prior to the earlier of:
(i) the date of announcement of the placing or the proposed transaction or arrangement involving the proposed issue of securities under the general mandate;
(ii) the date of the placing agreement or other agreement involving the proposed issue of securities under the general mandate; and
(iii) the date on which the placing or subscription price is fixed,

unless the issuer can satisfy the Stock Exchange that it is in a serious financial position and that the only way it can be saved is by an urgent rescue operation which involves the issue of new securities at a price representing a discount of 20% or more to the benchmarked price of the securities or that there are other exceptional circumstances.

As analysed above, the discount represented by the minimum Effective Subscription Price is approximately (a) 8.0% based on the closing price on the Last Trading Day and (b) 10.6% based on the average closing price for the last five trading days up to the Last Trading Day respectively, which are both below the 20% restriction as otherwise required under the placing of securities for cash consideration pursuant to a general mandate;

(5) the Effective Subscription Price on the Closing Day shall be not less than the level of Net Asset Value Per Share; and
(6) the size of the Subscription Shares to be issued under the Subscription Agreement represents a range of approximately 4.0% to 4.9% of the issued share capital of the Company as at the date of the Subscription Agreement, whereas the liquidity of Shares recorded an average daily turnover of about 15,228,860 Shares up to the Last Trading Day during the Review Period, representing only about 0.21% of a total of 7,195,284,615 Shares in issue as at the date of the Subscription Agreement.

— 37 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

For graphical presentation of data under point (6) above, we plot the trading volume of the Shares traded during the Review Period as follows:

Trading Volume of the Shares

==> picture [446 x 230] intentionally omitted <==

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

200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
Last Trading Day
40,000
20,000
0
17/6/2010 28/7/2010 6/9/2010 18/10/2010 25/11/2010 5/1/2011 16/2/2011 28/3/2011 12/5/2011
No. of Shares (k)
----- End of picture text -----

Source: www.hkex.com.hk

• Conclusion on the Subscription Price

In view of the added feature of offering flexibility for upward or downward adjustment of the Subscription Price depending on the actual Closing Price level which is unknown until the Closing Day, we do not consider the pricing mechanism of the Subscription Price to be overtly common for similar subscription transactions which otherwise usually fixes the subscription price level on the date of the Subscription Agreement rather than on the date of closing.

— 38 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Notwithstanding that, and based on the foregoing analysis on five positive factors which we consider are out-weighing over two negative factors in terms of importance and materiality, a summary of which are duplicated below:

Factors

positive

it is in the interests of the Company (as an issuer) to safeguard the minimum Effective Subscription Price on the Closing Day to be the level of Net Asset Value Per Share (derived to be HK$0.1537 based on the Company’s 2010 annual report), which is by itself already higher than the Floor Price (which in turn is 75% of the Benchmarked Price);

negative

the ceiling mechanism regarding the maximum Effective Subscription Price (derived to be HK$0.1903) deprives the Company of entitlement to any upside potential on top of this pre-determined level;
upon comparison, the price/book multiple represented by the Effective Subscription Price ranging from approximately 1.0 times to 1.3 times is comparable to the median of the Industry Comparables of about 1.2 times;
the “long-stop date” of 31 December 2011 to be a bit far from now, when the Effective Subscription Price was based on or around the date of the Subscription Agreement dated 17 June 2011 (to be analysed in the ensuing section);
the discount represented by the minimum Effective Subscription Price is approximately (a) 8.0% based on the closing price on the Last Trading Day and (b) 10.6% based on the average closing price for the last five trading days up to the Last Trading Day respectively, which are both below the 20% restriction as otherwise required under the placing of securities for cash consideration pursuant to a general mandate;
as IFC and the Company were basing on the latest market Share price level prevailing on 17 June 2011 to sign the Subscription Agreement, it is understandable that the overall pricing mechanism serves to set up objectively a pre-determined range of the Effective Subscription Price on the Closing Day with an equal buffer for each of upper and lower range (of 25%) over the market Share price level prevailing on the date of the Subscription Agreement; and
the Subscription Shares are subject to lock-up undertaking by IFC for one (1) year from the date of the Subscription Agreement (to be analysed in the ensuing section),

— 39 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

we consider that the Subscription Price is, on balance, on normal commercial terms and fair and reasonable so far as the Independent Shareholders.

(ii) Lock-up undertaking

Upon our review, we understand from the Company that no lock-up undertaking on new Shares nor warrants was imposed under the prior subscription agreement as per Company’s announcement dated 17 April 2009 pursuant to which IFC was to invest in the construction and operation of the First Phase Urea Plant by way of subscription of Shares, warrants and provision of loan. We consider the lock-up undertaking under the Subscription this time serves to better protect the interests of the Company as an issuer by way of avoiding short-term disposal of or transfer of any of the Subscription Shares by IFC in its capacity as the second largest Shareholder.

(iii) Termination

Both the Company and IFC shall provide their respective best efforts and assistance in fulfilling and satisfying the conditions of the Subscription. Should any of the conditions remain unsatisfied or have not been waived by IFC on or before 31 December 2011 (or such other date as the parties may agree), the Subscription Agreement shall automatically terminate and neither the Company nor IFC shall have any further rights and obligations hereunder save and except any antecedent breach.

We consider the “long-stop date” of 31 December 2011 to be a bit far from now, when the Effective Subscription Price was based on or around the date of the Subscription Agreement dated 17 June 2011. Upon enquiry, we understand from the Company it was the intention of the parties under the Subscription Agreement to allow sufficient time buffer for the relevant conditions to be fulfilled, which includes “the Company has delivered to IFC the Financial Plan in form and substance acceptable to IFC (in its sole discretion) and has provided evidence satisfactory to IFC that the additional equity and long term debt funding mentioned in the Financial Plan have been implemented by the Company”. As IFC is a multinational organisation, it may take time for IFC to go through a number of internal procedures to approve the Financial Plan, and, therefore, it is understandable that sufficient time buffer is built into the “long-stop date” under the Subscription Agreement.

Further, we note that such “long-stop date” (of 31 December as the year end date of the Company) is in line with that actually adopted previously when IFC and the Company entered into the first subscription agreement in 2009 to invest in the construction and operation of the First Phase Urea Plant, pursuant to which the then long-stop date (being 31 December 2009) is even farther apart from the date of the then subscription agreement (being 16 April 2009). As such term was actually agreed with IFC which was then an independent third party of the Company (and hence any negotiation should tend more to be on arm’s length basis and normal commercial terms), and based on the

— 40 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

aforesaid intention to allow sufficient time buffer, we upon comparison consider the “long-stop date” of 31 December 2011 under the Subscription Agreement is, on balance, fair and reasonable, taking into further account of our understanding that

(1) the Company can lock-in equity financing source at this stage from the Subscription to fund the development of the Second Phase Urea Plant, which Project has an expected double-digit internal rate of return; and
(2) the later the completion of the Subscription takes place, the greater the upside risk potential that the Effective Subscription Price on the Closing Day could increase to the maximum Effective Subscription Price level (of HK$0.1903). Despite such long time horizon which would equally exposing the Company to a downside risk potential, it has been pre-determined that the Effective Subscription Price on the Closing Day shall be not less than the level of Net Asset Value Per Share (of HK$0.1537).

Given that the Company targets to complete the Subscription in September 2011 (which is merely about one month away from the Latest Practicable Date), we consider that the sooner the completion of the Subscription can take place, the lower risk would be exposed by the Company to fluctuation of the Subscription Price level.

Financial effects of the Subscription on the Group
(i) Cashflow

According to the latest published annual report of the Company, the audited consolidated cash and cash equivalents of the Group as at 31 December 2010 were approximately RMB72.0 million (approximately HK$87.1 million).

The net proceeds from the Subscription will be approximately HK$54 million, which is intended to be used for the development and productivity expansion in the Second Phase Urea Plant.

(ii) Net asset

According to the latest published annual report of the Company, the audited consolidated net assets of the Group as at 31 December 2010 were approximately RMB895.0 million (approximately HK$1,083.0 million).

Completion of the Subscription is expected to have a positive impact on the net asset position of the Group by way of strengthening the Company’s equity capital base.

(iii) Gearing

As set out in the latest published annual report of the Company, the audited consolidated total liabilities of the Group were approximately RMB1,540.4 million (approximately HK$1,863.9 million) as at 31 December 2010.

— 41 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Given that the net assets of the Group are expected to be strengthening upon completion of the Subscription, the gearing ratio (defined as the total liabilities as divided by the net assets) of the Group is expected to be improved accordingly.

(iv) Earnings

We understand from the Company that completion of the Subscription by itself shall have not impact on the earnings of the Group. Following completion of the Subscription, the earnings of the Group shall be impacted by the actual profit and loss performance of the operation of the Second Phase Urea Plant, the development of which is intended to be funded partially out of the net proceeds from the Subscription.

4. Dilution to shareholding interests of the Independent Shareholders

The table below sets out the changes to the shareholding structure of the Company based on the maximum Subscription Shares as a result of completion of the Subscription, assuming no other Shares are issued or repurchased between the Latest Practicable Date and the completion of the Subscription:

			Enlarged issued	share capital
	Issued share capital as at the		following the	completion
Shareholders	the Latest Practicable Date		of the Subscription
		(%)		(%)
	(Shares)	(approximately)	(Shares)	(approximately)
Li Weiruo	2,924,440,000	40.64	2,924,440,000	38.73
Yuan Bai	366,464,000	5.09	366,464,000	4.85
Chi Chuan	62,640,000	0.87	62,640,000	0.83
Man Au Vivian	31,320,000	0.44	31,320,000	0.42
Public shareholders	3,010,536,000	41.84	3,010,536,000	39.87
IFC	799,884,615	11.12	1,155,122,091	15.30
Total	7,195,284,615	100.00	7,550,522,091	100.00

Upon issue of the maximum Subscription Shares as a result of completion of the Subscription, the aggregate shareholding of the public Shareholders is expected to be diluted from approximately 41.84% to approximately 39.87%.

— 42 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Despite such shareholding dilution,

(a) in light of the loss-making financial performance of the Company for the latest two financial years ended 31 December 2010 (coupled with no dividend payout to Shareholders during the same years), net proceeds from the Subscription is intended to fund the development of the Second Phase Urea Plant, which Project has an expected double-digit internal rate of return;
(b) completion of the Subscription is expected to have a positive impact on the net asset position of the Group by way of strengthening the Company’s equity capital base;
(c) the Subscription Shares are subject to lock-up undertaking by IFC for one (1) year from the date of the Subscription Agreement; and
(d) the minimum Effective Subscription Price by itself is equal to the Net Asset Value Per Share (of HK$0.1537) as at 31 December 2010, whereas the maximum Effective Subscription Price (of HK$0.1903) by itself represents a premium of approximately 23.8% over the same Net Asset Value Per Share,

we consider that the dilution to the shareholding of the public Shareholders is acceptable.

5. Risk factors

Attention of Independent Shareholders is drawn to the following key risk factors associated with the Subscription as observed during the course of our assessment:

(i) Construction of the Second Phase Urea Plant (which is intended to be funded partially out of the net proceeds from the Subscription) is yet to commence
(ii) Further sizeable CAPEX requirement on the part of the Group could arise after completion of the Subscription (for supporting the development of the Second Phase Urea Plant (amounting to a total of RMB385 million))
(iii) Revenue of the Second Phase Urea Plant could be adversely affected by any fluctuation in (a) selling prices of urea and melamine and (b) costs of their respective raw materials

However, given that the Group has been engaged in research and development, manufacture, marketing and distribution of chemical fertilizers and chemical products in the PRC, the above risk factors should already be in line with the ongoing risk exposure of the Group and the risk profile of Shareholders.

— 43 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Having considered the principal factors and reasons, in particular nine positive factors which we consider are out-weighing over two negative factors in terms of importance and materiality, a summary of which are duplicated below:

Factors

positive

it is in the interests of the Company (as an issuer) to safeguard the minimum Effective Subscription Price on the Closing Day to be the level of Net Asset Value Per Share (derived to be HK$0.1537 based on the Company’s 2010 annual report), which is by itself already higher than the Floor Price (which in turn is 75% of the Benchmarked Price);

negative

the ceiling mechanism regarding the maximum Effective Subscription Price (derived to be HK$0.1903) deprives the Company of entitlement to any upside potential on top of this pre-determined level;
upon comparison, the price/book multiple represented by the Effective Subscription Price ranging from approximately 1.0 times to 1.3 times is comparable to the median of the Industry Comparables of about 1.2 times;
the “long-stop date” of 31 December 2011 to be a bit far from now, when the Effective Subscription Price was based on or around the date of the Subscription Agreement dated 17 June 2011;
the discount represented by the minimum Effective Subscription Price is approximately (a) 8.0% based on the closing price on the Last Trading Day and (b) 10.6% based on the average closing price for the last five trading days up to the Last Trading Day respectively, which are both below the 20% restriction as otherwise required under the placing of securities for cash consideration pursuant to a general mandate;
as IFC and the Company were basing on the latest market Share price level prevailing on 17 June 2011 to sign the Subscription Agreement, it is understandable that the overall pricing mechanism serves to set up objectively a pre-determined range of the Effective Subscription Price on the Closing Day with an equal buffer for each of upper and lower range (of 25%) over the market Share price level prevailing on the date of the Subscription Agreement;

— 44 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Factors

positive negative
1. in light of the loss-making financial performance of the Company for the latest two financial years ended 31 December 2010 (coupled with no dividend payout to Shareholders during the same years), net proceeds from the Subscription is intended to fund the development of the Second Phase Urea Plant, which Project has an expected double-digit internal rate of return;
according to the positive profit alert announcement published by the Company on 20 July 2011, as benefited by the commencement in production of the First Phase Urea Plant since October 2010, and the increase in market prices of urea and other chemical products, the Directors expect that a profit will be recorded in the unaudited consolidated management accounts of the Group for the six months ended 30 June 2011 as compared to an unaudited loss of the corresponding period of last year. The Group targets at leveraging on the successful operation of the First Phase Urea Plant by way of developing the Second Phase Urea Plant;
there are commercial arguments for the Company to develop the Second Phase Urea Plant, which is intended to be funded partially out of the net proceeds from the Subscription, in view of
(a) the generally upward trend of the respective unit price of urea and melamine from January 2010 to June 2011,
(b) the double-digit annualised growth rate in such respective unit price from January 2010 to June 2011,

— 45 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Factors
positive negative
(c) With the adoption of MelaminebyDSM� technology, the Second Phase Urea Plant is expected to reduce the cost of producing melamine more competitive than market competitors in the PRC because of lower usage of raw materials and utilities; and
(d) the Project can benefit the Company by way of further expanding the benefits of economies of scale arising from installation of additional annual capacity 300,000 tonnes of urea in the Second Phase Urea Plant and the expected decrease in the unit cost of production of urea of the Company of 3% per tonne, even after taking into account additional depreciation expenses and financing expenses arising from such new capital expenditure. Further, with the proposed installation of additional annual capacity 300,000 tonnes of urea in the Second Phase Urea Plant, which can fully consume the surplus output of carbon dioxide produced as a residual by-product arising from the annual production of ammonia in the First Phase Urea Plant and not wasted by the Company.
completion of the Subscription is expected to have a positive impact on the net asset position of the Group by way of strengthening the Company’s equity capital base; and
the Subscription Shares are subject to lock-up undertaking by IFC for one (1) year from the date of the Subscription Agreement,

— 46 —

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

we consider that the terms of the Subscription are, on balance, on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned, and in the interests of the Company and the Shareholders as a whole, and the use of proceeds to be raised from the Subscription for the development in the Second Phase Urea Plant is in the ordinary and usual course of business of the Group. However, we consider the Subscription by itself is not in the ordinary and usual course of business of the Group because the principal activity of the Company is not the issue of new securities to subscriber(s). Accordingly, we recommend the Independent Shareholders, and we recommend the Independent Board Committee to advise the Independent Shareholders, to vote in favour of the ordinary resolution to be proposed at the EGM for approving the Subscription.

Yours faithfully, For and on behalf of

GF Capital (Hong Kong) Limited Danny Wan Harry Yu Managing Director and Head of Corporate Finance Director

— 47 —

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date was as follows:

Authorised: 20,000,000,000 Shares of HK$0.02 each Issued and fully paid: 7,195,284,615 Shares of HK$0.02 each	HK$ 400,000,000.00
	HK$ 143,905,692.30

3. DISCLOSURE OF INTERESTS

(a) Directors’ interests and short positions in the securities of the Company and its associated corporation

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the Shares, underlying Shares and debentures of the Company and its associated corporation(s) (within the meaning of Part XV of the SFO) which were required (i) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions in which they were taken or deemed to have under such provisions of the SFO); or (ii) pursuant to section 352 of the SFO, to be entered in the register referred

— 48 —

GENERAL INFORMATION

APPENDIX

to therein; or (iii) to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, were as follows:

(i) Long positions in the shares and the underlying shares of the Company

	Personal long	Personal long	Aggregate
	position in	position in	long position
	shares	share options	in shares and	Total interests
	(beneficial	(beneficial	underlying	in the issued
Directors	owner)	owner)	shares	share capital
Li Weiruo	2,924,440,000	6,500,000	2,930,940,000	40.73%
Yuan Bai	366,464,000	6,000,000	372,464,000	5.18%
Chi Chuan	62,640,000	23,000,000	85,640,000	1.19%
Man Au Vivian	31,320,000	23,000,000	54,320,000	0.75%
Li Shengdi	—	25,000,000	25,000,000	0.35%
Hu Xiaoping	—	6,000,000	6,000,000	0.08%
Woo Che-wor, Alex	—	6,000,000	6,000,000	0.08%
Qian Laizhong	—	6,100,000	6,100,000	0.08%

(ii) Interests in shares of an associated corporation of the Company

		Number of
		non-voting			Approximate
		deferred		Type of	interests
Name of Director	Name of company	shares	Capacity	interest	in holding
Li Weiruo	Ko Yo Development	2,100,000	Beneficial Owner	Personal	70%
	Co., Ltd (“Ko Yo
	Hong Kong”) (Note)
Yuan Bai	Ko Yo Hong Kong	420,000	Beneficial Owner	Personal	14%
Chi Chuan	Ko Yo Hong Kong	120,000	Beneficial Owner	Personal	4%
Man Au Vivian	Ko Yo Hong Kong	60,000	Beneficial Owner	Personal	2%

Note: a wholly-owned subsidiary of the Company

— 49 —

APPENDIX

GENERAL INFORMATION

(iii) Short positions in the shares of an associated corporation of the Company

		Number of			Approximate
		non-voting			interests in
		deferred		Type of	holding of
Name of Director	Name of company	shares	Capacity	interest	such class
Li Weiruo	Ko Yo Hong Kong	2,100,000	Beneficial Owner	Personal	70%
Yuan Bai	Ko Yo Hong Kong	420,000	Beneficial Owner	Personal	14%
Chi Chuan	Ko Yo Hong Kong	120,000	Beneficial Owner	Personal	4%
Man Au Vivian	Ko Yo Hong Kong	60,000	Beneficial Owner	Personal	2%

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executives of the Company had any interests and short positions in the Shares, underlying Shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), the Model Code for Securities Transactions by Directors of Listed Companies and which were required to be entered into the register required to be kept under section 352 of the SFO.

(b) Substantial Shareholder’s interest

So far as is known to the Directors, as at the Latest Practicable Date, the following persons (not being Directors or chief executive of the Company) had, or were deemed to have, interests or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or who were directly or indirectly interested 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:

(i) Long positions — Ordinary shares of HK$0.02 each of the Company

							Approximate
							percentage of
							issued share
Name	of	Shareholders	Capacity		No.	of Shares	capital
						(Note)
IFC			Beneficial	Owner	799,884,615		11.12%

Note: The figure does not include IFC’s interest in the Subscription Shares.

— 50 —

GENERAL INFORMATION

APPENDIX

(ii) Long positions in the underlying shares of the Company

The following persons in the underlying shares of equity derivatives of the Company were recorded in the register.

Long positions in Warrant Shares

Approximate Number of shareholding Name Capacity Warrant Shares percentage IFC Beneficial Owner 350,115,385 4.87%

Save as disclosed above, as at the Latest Practicable Date, so far as was known to any Director or chief executive of the Company, no person other than a Director or chief executive of the Company had any interests or short positions in the shares and the underlying shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 or Part XV of the SFO or who were directly or indirectly interested 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.

(c) Interest of other persons in the Company

(i) Interests in shares of an associated corporation of the Company

		Number and			Approximate
		description		Type of	percentage
Name	Name of company	of shares	Capacity	interest	of holding
Tang Shiguo (Note)	Ko Yo Hong Kong	300,000	Beneficial owner	Personal	10%
		non-voting
		deferred shares

Note: Mr. Tang Shiguo ceased to be a director of the Company with effect from 29th April 2004.

(ii) Short positions in the shares of an associated corporation of the Company

			Number and
Name	Capacity	Name of company	description of shares
Tang Shiguo	Beneficial owner	Ko Yo Hong Kong	300,000 non-voting
			deferred shares

(iii) Long positions in the shares of the Company

As at the Latest Practicable Date, so far as is known and save as disclosed above, none of the Director or proposed director is a director or employee of a company, which has an interest or short

— 51 —

GENERAL INFORMATION

APPENDIX

position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO and recorded in the register required to be kept under section 336 of the SFO, and who were directly or indirectly deemed to be interested in the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company.

4. COMPETING INTEREST

As at the Latest Practicable Date, none of the Directors and their respective associates was considered to have an interest in a business which competes or is likely to compete, either directly or indirectly, with the business of the Group other than those businesses to which the Directors and his/her associates were appointed to represent the interests of the Company and/or the Group.

5. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors has entered into any service agreement with any member of the Group which is not determinable by the Group within one year without payment of compensation, other than statutory compensation.

6. INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS OR ARRANGEMENTS SIGNFICANT TO THE GROUP

As at the Latest Practicable Date, none of the Directors or the expert as named in the paragraph headed “Expert and Consent” in this appendix had interest in any assets which have been, since 31 December 2010 (being the date to which the latest published audited consolidated financial statements of the Group was made up), acquired or disposed of by or leased to any members of the Group, or are proposed to be acquired or disposed of by or leased to any members of the Group.

As at the Latest Practicable Date, none of the Directors was materially interested in any contracts or arrangements, subsisting at the date of this circular, which is significant in relation to the business of the Group.

7. LITIGATION

None of the members of the Group was engaged in any litigation or arbitration or claim of material importance and no such litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened against any member of the Group, as at the Latest Practicable Date.

8. MATERIAL ADVERSE CHANGES

The Director confirmed that there has been no material adverse change in the financial or trading position of the Group since 31 December 2010, the date to which the latest published audited consolidated financial statements of the Group was made up.

— 52 —

GENERAL INFORMATION

APPENDIX

9. EXPERT AND CONSENT

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

Name Qualification

GF Capital (Hong a licensed corporation to carry out type 6 (advising on corporate finance) Kong) Limited regulated activities under the SFO

The Independent Financial Adviser has given and confirmed that it has not withdrawn its written consent to the issue of this circular with the inclusion of its letter dated 17 August 2011 and/or references to their name in the form and context in which it appears.

The Independent Financial Adviser has further confirmed that as at the Latest Practicable Date, they were not interested beneficially in the shares in any member of the Group, nor did they have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group. They are not interested in any assets which have been, since 31 December 2010 (being the date to which the Company’s latest audited financial statements were made up), acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

10. MISCELLANEOUS

(i) The registered office of the Company is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.
(ii) The principal place of business of the Company is Suite No. 02, 31st Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong.
(iii) The Company secretary is Mr. Chung Tin Ming who is an associate member of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants.
(iv) The Hong Kong share registrar and transfer office of the Company is Union Registrars Limited at 18th Floor, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong.
(v) This circular has been prepared in both English and Chinese. In the case of any discrepancy, the English text shall prevail.

— 53 —

GENERAL INFORMATION

APPENDIX

11. DOCUMENTS AVILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours from 9:00 a.m. to 6:00 p.m. (save for Saturdays, Sundays and public holidays) at the principal office of business of the Company at Suite No. 02, 31st Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong, up to and including the date of the EGM:

(i) the memorandum and articles of association of the Company;
(ii) the Subscription Agreement;
(iii) the letter from the Independent Board Committee as set out on page 18 of this circular;
(iv) the letter from GF Capital as set out on pages 19 to 47 of this circular;
(v) the written consent of GF Capital; and
(vi) this circular.

— 54 —

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 0827)

Registered Office: Principal place of business Cricket Square in Hong Kong : Hutchins Drive Suite No. 02, 31st Floor P.O. Box 2681 Sino Plaza Grand Cayman KY1-1111, 255-257 Gloucester Road Cayman Islands Causeway Bay, Hong Kong

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “EGM”) of the members of Ko Yo Chemical (Group) Limited (the “Company”) will be held at Suite No. 02, 31st Floor, Sino Plaza, 255-257 Gloucester Road, Causeway Bay, Hong Kong on 9 September 2011 at 3:00 p.m. for the purposes of considering and, if thought fit, passing the resolution set out below:

The Company and International Finance Corporation entered into a subscription agreement dated 17 June 2011 (“Subscription Agreement”) (a copy of which has been produced to the meeting marked “A” and initialled by the chairman of the meeting for identification purposes). Pursuant to the Subscription Agreement and in accordance with its terms, the Company proposes to issue International Finance Corporation an aggregate number of fully paid and non-assessable Subscription Shares equal to the fixed Hong Kong dollar equivalent of US$8 million divided by the subscription price. The aggregate subscription price payable by International Finance Corporation is US$7 million. The minimum and maximum number of subscription shares ranges between approximately 286,896,552 and 355,237,476 ordinary shares of HK$0.02 each in the capital of the Company (the “Proposed Subscription Shares”) at a subscription price ranging between HK$0.1757 and HK$0.2175 each (the “Proposed Subscription Price”) (however, the effective subscription price per share payable by International Finance Corporation is lower than the Proposed Subscription Price due to the aggregate subscription price being discounted).

— 55 —

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

ORDINARY RESOLUTION

“THAT the entry into the Subscription Agreement in relation to the Proposed Subscription Shares and the Proposed Subscription Price contemplated thereunder be and is hereby approved, confirmed and ratified and, subject to the fulfillment of the terms and conditions set out in the Subscription Agreement:

(i) the subscription for the Proposed Subscription Shares pursuant to the Subscription Agreement be and is hereby approved and the directors of the Company (the “ Directors ”) be and are hereby authorized to allot and issue the Subscription Shares pursuant to the Subscription Agreement; and
(ii) any one or more of the Directors be and is/are hereby generally and unconditionally authorized to do all such acts and things, to sign and execute all such documents which he/they consider necessary, appropriate, desirable or expedient for the purpose of, or in connection with, the implementation of and giving effect to the Subscription Agreement contemplated thereunder.”

By Order of the Board of Ko Yo Chemical (Group) Limited Li Weiruo Chairman

Hong Kong, 17 August 2011

Notes:

(1) A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and, in the event of, a poll, vote on his behalf. A proxy need not be a member of the Company but must be present in person at the EGM to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
(2) In order to be valid, the form of proxy must be deposited with the Company’s share registrar in Hong Kong, Union Registrars Limited, at 18th Floor, Fook Lee Commerical Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong, together with any power of attorney or other authority, under which it is signed, or a notarially certified copy of that power or authority, not less than 48 hours before the time for holding the meeting or any adjournment thereof. The completion and return of the form of proxy will not preclude you from attending and voting at the meeting in person at extraordinary general meeting or any adjourned meetings should you so desire.

— 56 —

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(3) Where there are joint holders of any shares in the Company, any one of such joint holders may vote, either in person or by proxy, in respect of such shares as if he were solely entitled thereto, but if more than one of such joint holders are present at the meeting, the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.
(4) In accordance with Charpter 14A of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), International Finance Corporation, a substantial shareholder of the Company is required to abstain from voting on the ordinary resolution as set out above.
(5) Pursuant to the Listing Rules, voting on the ordinary resolution as set out above will be conducted by a way of poll.

— 57 —

AI assistant

Ko Yo Chemical (Group) Limited — Proxy Solicitation & Information Statement 2011

49492_rns_2011-08-16_a2603b64-468b-49c5-b6fe-befcda56abaf.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE AND NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

THE SUBSCRIPTION AGREEMENT

Date

Parties involved

IFC

Aggregate Subscription Price

The Subscription Price

The Subscription Shares

LETTER FROM THE BOARD

Ranking of the new Shares

LETTER FROM THE BOARD

Conditions of the Subscription

Lock-up Undertaking

Termination

LETTER FROM THE BOARD

Cancellation of the Subscription

Completion of the Subscription

LETTER FROM THE BOARD

REASON FOR THE SUBSCRIPTION AND USE OF PROCEEDS

LETTER FROM THE BOARD

EFFECTS ON SHAREHOLDING STRUCTURE

FUND RAISING ACTIVITIES IN THE PAST TWELVE MONTHS

LISTING RULES IMPLICATIONS

INFORMATION ABOUT THE COMPANY AND THE GROUP

SPECIFIC MANDATE

LETTER FROM THE BOARD

THE EGM

4. RECOMMENDATION

LETTER FROM THE BOARD

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Ko Yo Chemical (Group) Limited 玖源化工（集團）有限公司

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE

CONNECTED TRANSACTION SUBSCRIPTION OF NEW SHARES BY A SUBSTANTIAL SHAREHOLDER UNDER SPECIFIC MANDATE

INTRODUCTION

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PRINCIPAL FACTORS AND REASONS CONSIDERED

• Existing

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(i) Reasons for the Subscription

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Urea Price Trend

• Melamine

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RMB/tonnes

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) Other funding alternatives

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2. Terms of the Subscription

(i) Subscription Price

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Share Price of the Company

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

• Industry Comparables

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

• Placing Comparables

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Ko Yo Chemical (Group) Limited Proxy Solicitation & Information Statement 2011